CORPORATE TAX LAW (CTL)

 

History

It was first started to tax corporations with a seperate law at 1949 via Corporate Tax Law numbered 5422 constructed from German Corporate Tax Law.

After staying in effect for 55 years, 5422 numbered CTL was fall into desuetude with official gazette print dated 21.06.2006 publishing new CTL numbered 5520 as a replacement.

New law's provisions are applied as of 01.01.2007.

Facts behind Corporate Tax

Corporations are subject to tax as well as real person shareholders who are subject to income tax over dividends earned from those corporations.

Some reasons of taxing corporations could be described as;

- Having a legal identity other than real persons
- Benefiting from public services like real persons
- Ability to pay principal, etc.

Scope

The subject matter of the Corporate Tax Law consists of the corporate earnings that are listed in Article 1 of the Corporate Tax Law.

- Earnings derived by share capital (incorporated) companies
- Cooperatives
- State owned economic enterprises
i.e. Central Bank of Turkey whose 54% share is owned by national treasury is a corporation and subject to corporate tax as well.
- Economic establishments belonging to Associations and Charitable Foundations.
i.e. Associations and Charitable Foundations without having a business concern does not subject to corporate tax.
- Joint Ventures
i.e. partnerships of corporations or with real persons or real person partnerships for the purpose of jointly undertaking a business concern for sharing earnings

Determination of tax base at Corporate Tax

Subject of Corporate Tax is the earnings of corporations.
Corporation earnings are essentially composed of commercial earnings as per field of activity.

On the other hand, in addition to essential earnings, there could be other income from non-operating activities like real estate capital revenue or stock and bond returns.

Tax base value is calculated over balance sheet for those keeping legal books as per balance sheet basis.
For tax base determination at Corporate Tax, below listed items are evaluated in order:

1. Profit of specific year calculated from commercial balance sheet of the enterprise with capital stock comparison method. (Commercial profit before tax)
2. Expenses made subject to discount at determination phase of commercial profit must be added to the commercial profit as non-deductable expenses in case of being not accepted as expense by tax laws' restrictive awards.

What are those non-deductable expenses ?

a) Interest paid or calculated over capital stock,
b) Profit shifted via transfer pricing method,
c) Interest, foreign exchange differences and other similar expenses paid or calculated over thin capitalization
d) Reserve funds set aside in any manner or form whatsoever.
e) Monetary fines,tax penalties and fines paid in accordance with the provisions of the Law concerning the procedures fir the collection of Public Receivables and delay interest paid in accordance with the relevant provisions of the Tax Procedures Law,
f) Reserving the limits determined by the law or based on authority granted by law, losses arising from the sale of securities below their nominal value as well as commissions paid and other similar expenses,
g) Expenses and depreciation allowances set a side for motorized sea vehicles such as yachts,cutters,boats,speed boats and aircraft such as planes and helicopters which are acquired through leasing or which are capitalized by the enterprise but that are not relevant to the main field of activity of the enterprise.
h) With the exception of the indemnifications that are incorporated in the agreements as penll conditions, tangible or intangible damage indemnity expenses imposedas a result of a faulty action of the corporation herself, her partners, managers and employees.
i) Indemnity expenses arising from the tangible and intangible damages that have incurred due to illegitimate actions committed via press or radio and TV broadcast.
j) 50% of notice and advertising expenses for all kinds of alcohol and alcoholic beverages, tobacco and tobacco products.

3. Expenses allowed by tax laws failed to be included as discount at determination phase of commercial profit must be deducted from the commercial profit at the calculation phase of profit.

What are those deductable expenses allowed by Law ?

a) Expenses of issuing a bond and stock,
b) Expenses of association and establishment,
c) Expenses of board meetings, mergers, dossolution and liquidation.
d) Technical reserves applicable for insurance companies detailed in CTL, Article 14.
e) Acting partners dividend at limited partnerships association.
"Other deductions" as;
a) Tax payers research and development expenses for new technology and information analysis within own legal body,
b) Sponsorship expenses; 100% for amateur sport branches, 50% for professional branches
c) donations in return of a receipt towards some universities, associations and charitable foundations, state owned institutions (Amount deductible shall not exceed 5% of the same years profit to be declared.On the other hand, 100% of the donation amount could be deducted at such conditions like subjected to education,health,student hostel or cultural art supporting)

4. From the profit calculated after above 3 conditions, if present, subsidiary earning from associating another company and exception items must be deducted as well. Subsidiary earnings are exempted from Corporate Tax Law under "Subsidiary Earning Exemption".

What are those exemptions ?

a) Earnings from associating another full liability tax payer corporations capital
b) Returning earnings of subsidiaries at abroad to Turke (CTL, Article 5)
c) 75% of earnings added on entities capital acquired by sale of subsidiary shares, real estate properties which are recorded under assets for a continues period of 2 complete years.
d) Earnings of corporations, acquired via business place or permenant representative at abroad, taxed as income and corporate earning with a minimum rate of 15% at abroad which were transferred to Turkey
e) Exemption of earnings returned back to Turkey acquired at abroad for construction,erection,repair works and technical services.
f) Earnings from portfolio management by bond and stock investment partnerships
g) Earnings from the management of private schools giving preschool,primary school,special education and private secondary school education are exempted from income tax for 5 taxing periods under the procedures and principals determined by the Ministry of Finance by means of getting concerned ministries opinion. Exemption starts at the period of taxation when the schools go into operation.
h) others listed at CTL, Article 5

5. Corporation earning left after completing four items listed above, corporations can deduct past year losses - if present. Losses allowed to be deducted must be present at the commercial balance sheets of past years and must not be deferred for a period longer than 5 years. (CTL, Article 9)


6. At final stage, some exemptions and deductions listed above must be deducted.

Pure Corporation Earning =

Commercial Balance Sheet Profit + Non Deductable Expenses - (Exemptions,Deductions + Losses)

In order to prevent delay at taxation and reduce the monetary load from contractor, 3% tax deduction is applied on payments related with construction and repair works passing a calendar year.

Those obliged to make tax deductions must apply 3% (withholding) tax deduction from payments processed towards contractors performing construction and repair works extended to years.

Those tax cuts (3%) in total will be deducted from Corporate Tax.
(Offsetting of total withholding tax from corporate tax)

Construction ad Repair Works Passing a Calendar Year (Extended to years)

Defining Work Completion Date:

As per Income Tax Law - Article 44, at construction and repair works, work is regarded as completed to start Corporate Tax process at when:

Cases at which temporary and final acceptance applies:
- Approval date of temporary acceptance document by Owner (Directorate)

Other cases:
- Actual dismissal or completion date of works.