JOINT-STOCK COMPANY IN TURKEY

TAX ADVANTAGES IN TURKEY

Companies may tend to do a lot of irregular transactions to increase their competitiveness or to raise profitability rates. One of these irregular transactions is the trading of goods which have not existed. In other words, fake billing. This irregular procedure is severely sanctioned by law. According to the VUK (Tax Procedure Law) m.359/a-2; the administrative fine is applied by the tax authorities for those who issue and use fake documents. An administrative fine is a tax-wasting fine which is equivalent to 3 times of lost tax. Also, the lost tax is calculated separately for taxes lost such as corporate tax, income tax, VAT. Furthermore, due to irregularities, the special irregularity fines and delays are also taken with the delay interest. Besides all these administrative fines, the tax office can file a criminal complaint against the taxpayer to the Public Prosecutor's Office, requesting a prison sentence of 3 years to 5 years.

Additionally, these irregular transactions can be used as a threat by company employees or managers. While leaving the company's owners helpless; the company's non-real trading transactions threatens the accuracy of company reporting. Instead of doing such transactions against law and regulations, it would be safer to reduce taxes with tax avoidance methods permitted by laws and regulations. Additionally, we will have the opportunity to take our precautions in advance, as all transactions made in a recording will reflect company reporting more accurately which is vital for many companies.

Additionally, these irregular transactions can be used as a threat by company employees or managers. While leaving the company's owners helpless; the company's non-real trading transactions threatens the accuracy of company reporting. Instead of doing such transactions against law and regulations, it would be safer to reduce taxes with tax avoidance methods permitted by laws and regulations. Additionally, we will have the opportunity to take our precautions in advance, as all transactions made in a recording will reflect company reporting more accurately which is vital for many companies.

The New Year is the last period in which companies will cut taxes through tax avoidance methods because it is the month in which they close their books and issue their financial statements.

Compliant Taxpayers Are Given A 5% Corporate Tax Deduction.

By Income Tax Law repeating article 121, income and corporate taxpayers who pay their taxes regularly have been given the advantage to cut their taxes which must be paid through income and corporate tax returns by 5%.

You can find out if you are a tax-compliant taxpayer from the Interactive Tax Office.

Who Will Benefit From The 5% Tax Deduction:

-      Income taxpayers due to their commercial, agricultural or professional activities

-      Corporate taxpayers (excluding banking activities, insurance activities, pension companies, insurance companies)

-      Those who are taxed through small business taxation can also benefit.

Conditions:

-      Declarations due in the period to be calculated and the previous two years were issued and paid on time. (Underpayments up to $250 will not be taken into consideration). In addition, there should be no additional ex officio or administrative assessment in the relevant periods.

-      Tax and tax penalties should not be overdue debt over 1,000 TL as of the declaration date on which the tax deduction will be calculated.

-      Smuggling crimes should not have been committed in the past 4 accounting periods, including the period in which the deduction will be calculated.

-      Tax deduction cannot exceed 1,200,000 TL

Other Issues

-      If the amount to be deducted is greater than the amount to be paid, it may be subtracted from other payable taxes within 1 year.

-      If it is later realised that the terms of the tax cut are not met, the tax cut is returned without applying the tax penalty.

-      Declarations issued after the legal period and declarations of correction or remorse do not prevent the benefit of the tax cut.

 

Important Note: If companies aren't stamp duty payers, they're better off opening it from the tax office. Because, in some cases like custom declarations, we can face an assessment in our name without our knowledge.

 

Tax benefits arising from Mergers

If two SME companies that do manufacturing works, have industrial registration certificates, have actual production are united, it is exempted from 75% of corporate tax for 3 years after the merging. (Corporate Tax Law, No. 5520, Article 32, Item 5.)

If the merger SMEs have income other than their production activities, they will not benefit from the 75% corporate tax exemption. Therefore, the companies must keep their accounting records in a way that makes this distinction.

Which companies have SME status? Companies that employ less than 250 workers per year in the accounting period before the merging date and companies that annual net sales amount declared in the income statement during the same period or the active totals of the balance sheet for this period do not exceed 40 Million TL have SME status.

It is not for the company to benefit from the tax exemption if the company loses SME status after the merging.

As a result of the merger of companies with accumulated losses and companies with profits, it is possible to deduct the losses from the profits by adhering to the time and amount stipulated by the tax laws.

Through the merger or acquisition of companies with low-tax and high-tax payer corporate centres, the company may be moved to a low-taxing country. In this way, there will be fewer tax payments. The merger of Pfizer and Ireland-based Allergen companies could be exemplary.

Showing expense by starting legal proceedings of receivables that become impossible to collect

If the commercial receivables have become impossible to collect for any reason, the legal process must be initiated by litigation. Once the litigation process has begun, the entire amount subject to the case can be shown as expenses until their collection. When the amount is collected, we need to add it back to our tax base.

In addition, the law that allows you to reduce VAT as a result of becoming worthless of your receivables came into force on 01.01.2019. According to Turkish Tax Procedure Law 322, VAT on worthless receivables (According to a judicial judgement or a judgemental record, collection of your receivables becomes impossible) can be discounted during the taxation period of the loss if it is calculated and declared.

Trading real estate in the company

Companies that do not have real estate trading as a main subject of activity, companies can benefit from the corporate tax exemption for the 50% of the sale and VAT exemption for the entire sale of real estate after 2 years following the purchase. However, the amount exempted must be added to the capital within 5 years.

Buying or renting a car in the company

According to the new regulation, vehicles rented up to 5,500 TL per vehicle can be shown as expenses. In passenger cars, the total amount of STV and VAT taxes up to 115,000 TL can be shown as expenses.

In new vehicle purchases up to 250.000 TL including special consumption tax and VAT, It can be recorded directly in expenses for 115,000 TL and allocated depreciation for 135,000. Depreciation cannot also be reserved for amounts exceeding 250,000 TL. For second-handed vehicle purchases, depreciation can only be allocated up to 250,000 TL.

Benefiting from Young Entrepreneur's Exemption

For the first time entrepreneurs who are under the age of 29 and income taxpayers, have been exempted from income tax for earnings of up to 75,000 TL for 3 years. Also, SSI payment will be made by the Turkish Employment Agency for one year.

Deferring taxation of depreciable economic assets through using fund accounts for their sales

Instead of adding profits from the sale of depreciable economic assets to the tax base of the corresponding period, following in "renewal funds" will defer the tax that may occur, provided that the same kind of economic asset (board decision) will be purchased within three years. The implementation of this method is recommended due to excessive profit in the economic assets sold after the depreciation share ends.

Declining balance method of depreciation

The economic asset of 100,000 TL must be depreciated for 10 years.

Normal depreciation method:

100.000/10: 10.000 TL related to the economic asset; 10,000 TL depreciation share per year can be written as an expense.

Declining balance method of depreciation:

100/10: 10%*2: 20%

Year 1: 10,000* 20%: 20,000

Year 2: 80,000 * 20%: 16,000

3rd year: 74,000 * 20%: 14,800

As it continues.

As can be seen, we can show more depreciation expense in the first years when we prefer the declining balances method, although we can show a depreciation expense of TL 10,000 each year with the normal depreciation method.

Tax advantage through the method of the cash capital increase

To encourage companies to use equity rather than borrow money, through cash capital increases or cash-paid capital in newly established capital companies; based on the weighted average interest rate applied to commercial loans announced by the CBRT(Central Bank of the Republic of Turkey), 50% of the amount calculated by the end of the relevant accounting period may be deducted from the relevant accounting period corporate tax base.

For example: Let's assume that x company has increased its capital by 500,000 TL in 2018. Let's consider the average loan interest of CBRT at 18%. Amount to be deducted from corporate tax: The amount of the cash capital increase * CBRT interest rate * Duration (Month) * Deduction rate: 500.000 * 0,18 * 50%: 45.000 TL. Net return 45,000 TL * 22%: 9,900 TL. (Capital raising has been taken into account as it was made at the beginning of the year. If capital raising is made in the middle of the year, only the relevant months should be taken into account.)

Exemption in Research and Development Activities

Taxpayers that are subject to corporate tax can show all of their R&D expenditures for the search for new technology and information as expenses.  The law on technology development and law no 5746 are regulated on the support of research and development activities. According to this law, R&D costs can be shown as expenses from the tax base, it also offers various incentives.

Transfer pricing method

In companies that want to avoid taxes, discretionary income transfer known as the transfer of company profits out of the company without taxing profits is determined differently from arm’s length price. In companies with discretionary income transfer through transfer pricing method, the company's earnings are transferred to other related companies and consequently, the tax base is reduced.

For those who want to make discretionary profits with transfer pricing method in Turkey, article 13 of the corporate tax code has stated that: in the event of purchase or sale of goods or services at the cost or price that companies have determined contrary to arm's length principle, the profit shall be deemed discretionary distribution in whole or in part through transfer pricing.

The transfer pricing method of international companies, especially the prices used in commercial activities that are not associated with company activities in America, is lower for exports and higher for imports than the prices used for company activities. There are three factors in the transfer pricing method in the UK: First, because the taxation of large multinational corporations is applied more regionally than global, it is seen that goods are priced differently from the arm’s length price. Second, misleading transfer pricing is common in companies with a lot of research and development activities. Third, the mispricing of tangible assets is seen intensely in exports to countries that are not tax havens.

Discretionary Capital

Companies are under the obligation to pay interest for financing obtained from various sources during their activities. Tax laws allow companies to show the interest they pay for their financing needs as expenses. To lower the tax base, companies that want to use the method of tax avoidance use the method of making it look as if they have borrowed from partners, instead of evaluating the amounts received from partners as equity capital.

According to the article 12 of the corporate tax in Turkey, the portion of any debt directly or indirectly from its partners or people in relation to partners, which exceeds three times the company's equity during the accounting period, that companies use for the company has been considered discretionary capital.

Tax avoidance through the discretionary capital method in multinational companies: The company, which operates in a country with a high tax liability, can avoid tax by borrowing from the company operating in the tax haven and paying interest in return.

Another method implemented by multinational companies is that companies in countries with high tax payments in the form of capital payments to subsidiaries operating in countries with low tax liability without changing the debt/equity ratio can benefit from tax relief as a result of interest payments.

Use of Intangible Assets

The tangible assets owned by group companies are given to companies operating in a less-taxing country. Later, the company operating in a low-taxing country issues a license invoice to the original company in the high-taxing country. In this way, the expense item that will be deducted from the tax base of the high tax-paying company is revealed. The income-generating company will pay fewer taxes because it operates in a less-taxing country or a country with no taxation at all. In total, the same group company will pay fewer taxes.

Especially multinational companies are tech-intensive companies, so their intangible assets are worth a lot.

Operating in Tax Havens

According to the OECD, the tax haven country is a country with no taxes or very low taxes, no effective exchange of information, and no transparency.

About 72 trillion of world trade are in offshore centres. Three key elements enable the global industrial organizations to spread more worldwide, acting with an extremely privacy element: Presence of the (Firstly) Visa, Master Card, Cirrus, Axxess; (Secondly) International banks such as HSBC, Barclays, Standard; (Lastly) Major audit companies such as PwC, KPMG, E&Y, Deloitte and consulting companies established in centres such as London providing legal and financial consultancy services on offshore companies or in offshore countries. (Ekovizyon, May 2016).

With the dummy companies established in countries such as Belgium, the Netherlands, Ireland and Sweden, which receive very little tax on dividends and capital gains, tax can be avoided as an intermediary companies without actually any trade, production or distribution or through using financing, licensing, or management centre.

Companies engaged in brokerage activities are used to invest and to invest in another country before the revenues from investments come to the main country (avoiding taxes). 70% of foreign direct investments in China go to Hong Kong and the Caribbean. Then these investments return to China as a foreign investor. Thus, the Chinese state's tax relief to foreigners, cheap land, cheap credit facilities are used.

Mergers or acquisitions in offshore areas; to carry out company production abroad or to supply goods and services purchased from abroad through the means of offshore centres belonging to the group company; could be seen as tax avoidance methods.

Managing fuel and food expenses under a single invoice

The food price per person to be exempted from income tax in 2019 is 20.52TL, including vat. By agreeing with companies such as Ticket or Sodexo, we may track our employees' food or fuel expenses(According to the newly published communiqué, we can only calculate 70% of the vehicle costs as expenses.) with a single invoice instead of tracking separate vouchers and show expenses with a record of being limited to the amounts specified in the law.

Foreign affiliation privilege

To take advantage of the tax exemption, the company must be a Joint Stock company or a Limited company; the legal and business centre of the affiliated institution should not be located in Turkey; the paid capital of the participatory institution must have at least 10% of the paid capital and the revenues must be held continuously for 1 year backwards from the date obtained; at least 15% tax should be applied in the country where participation gains are obtained. Finally, it is exempt from the corporate tax provided that the revenues are brought to Turkey until the date of issuance of the corporate tax declaration for the period of income.

And what’s more,

In cases where a separate company is required for construction, repair and assembly work abroad, the foreign affiliation privilege will be applied without any conditions for the proceeds obtained as a result of the affiliation with the relevant company.

Fully-liable Joint-stock companies' sales tax exemption for overseas affiliation shares

Revenues arising from the disposal of the foreign affiliation shares that are in the assets for at least 2 years, of the fully-liable Joint-Stock Companies which at least ten percent of its capital consists of affiliations, of the institutions that are Joint-Stock or limited companies whose business centre and 75% or more of the active totals excluding cash amounts for at least 1 year period as of the date the profit was obtained is not in Turkey, are exempt from the corporate tax.

Sales Tax exemption as a result of Leasing contracts of Immovables

With the "sell-rent-buyback" method of real estate in the assets of companies with financial difficulties, The purchase and sale of real estate sold as a result of an agreement with leasing companies and then taken back are exempted entirely from VAT and CORPORATE TAX.

Example: Let's say that the property worth 500,000 TL in company assets is determined by leasing companies as appraisement value 3,000,000 TL. Real estate will be invoiced to the leasing company as 3.000.000 TL and the difference in between will be evaluated as income and vat exemption.

At the end of the contract debt, the leasing company will re-evaluate the property and issue an invoice to the company. In other words, if the value of the real estate at the end of the debt is 5.000.000 TL, the invoice will be issued on this amount and will be included in the company's assets. Likewise, the gain and vat that may occur in the repurchase of the relevant property will be exempted.

In the end, the company will start depreciating over 5,000,000 TL for its real estate, which is 5,000,000 TL in its assets and will be able to show it as an expense.

Other Tax Avoidance Methods

The use of lump-sum expense rights of export companies up to 5 per thousand of the annual export sales amounts

50% of the relevant earnings of software, design, architecture and services to companies that do not have an activity area in Turkey are exempt from corporate tax, provided that they meet the requirements of the law.

Establishing a company in areas where tax benefits are provided, such as free zones or techno-cities

Reconsidering expenses that are not legally accepted

Recalculation of shrinkage rates in production companies

Using the LIFO method in production costs during periods when inflation is high

To make sure that the products of export companies are not calculated as income if the customs exit of products has not taken place

Rereview of exchange rates (especially import and export intensive companies)

Declaration of the incomes extending to years, of companies engaged in construction by considering the completion of the work

Instead of calculating the amounts received for the apartment sales as income without the construction delivery record; keep them in advance accounts, save it to income accounts when the apartment is completed

Borrowing from group companies abroad

If possible (the invoice must be prepared within 8 working days after packing slip) to issue an invoice of the sales after temporary periods

To perform commercial activity among group companies, to reconsider joint expenses

Keeping profits in export and import transactions in countries where tax is low

There may be a 10% difference between the provisional tax base and the Corporate tax base.

 

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