Tax measures of law number 7524

In detail

Introduction of Pillar Two provisions

In general, the Turkish Pillar Two provisions introduced by law number 7524 do not differ significantly from the EU Minimum Tax Directive.

Very briefly, the Turkish Pillar Two regulations introduce the global minimum top-up taxation rules by providing for the main interlocking measures, i.e. the Income Inclusion Rule (IIR) – translated in Turkish as “gelire dahil etme kuralı” – and the Undertaxed Payment Rule (UTPR) – translated in Turkish as “düşük vergilendirilmiş ödeme kuralı” – as well as a Qualifying Domestic Top-Up Tax (QDMTT) under the safe-harbor OECD standards – translated in Turkish as “nitelikli yerel asgari vergi.” The new rules are effective for fiscal years starting from 1 January 2024, except for the UTPR provisions which apply to fiscal years starting from 1 January 2025.

A separate PwC Tax Bulletin, entitled Türkiye publishes draft legislation on implementation of Pillar Two rules effective from 2024, dated 23 July 2024, highlights Pillar Two rules set out in the Bill. 

Implementation of a domestic minimum corporate tax regime

In addition to the global minimum top-up taxation explained above, the new law introduces a domestic minimum tax regime that aims to ensure the corporate tax is not less than 10% of corporate income before certain exemptions and deductions.  

In Türkiye, the standard corporate income tax rate is 25%. However, the effective tax rate of a company may be lower if they benefit from deductions and exemptions. Under the new rule, the corporate taxpayers will compute their tax liability under both the standard tax regime (i.e. 25% tax on taxable income after deductions and exemptions) and a parallel regime (i.e. 10% tax on taxable income before certain deductions and exemptions). The larger amount is then payable.

Certain exemption items are excluded from the base for the 10% tax (in other words, these specific exemptions will not be added to the base for the 10% tax). These exemptions include:  

• Participation exemption for dividends from Turkish-resident entities
• Exemption for emission premiums
  
• Exemption provided under the Law on Technology Development Zones
  
• Allowances granted for qualifying R&D and design activities. 
  

The investment incentive program in Türkiye includes a reduced corporate tax rate on income generated from qualifying investments. Companies benefitting from reduced corporate tax rates through investment incentive certificates obtained before the law change have been grandfathered from the application of 10% minimum tax (i.e. these companies will continue to enjoy the reduced corporate tax rate available to them before law number 7524 came into effect). 

The article does not specify whether fiscal losses from previous periods can be deducted when calculating the minimum corporate tax base. It is expected that further clarification will be provided by the Ministry of Treasury and Finance on this matter.

The domestic minimum tax regime will apply to fiscal years starting from 1 January 2025. The president is authorized to reduce the minimum tax rate to zero or to increase it one time, separately or together, by sector, field of activity, business line or production area. 

Amendment to the corporate tax exemption available for investment funds and companies

Article 5 paragraph 1 (d) of the Corporate Tax Law provides tax exemption on income generated by various investment funds and companies (including private equity investment funds, real estate investment funds, real estate investment companies, pension investment funds and the like).

With the new law, the exemption rule has been amended for investment funds and companies (other than pension investment funds) that are involved in real estate investments. To qualify for the exemption, they will be required to distribute a minimum of 50% of their earnings from real estate investment as dividends under the new rule. If this profit distribution requirement is not met by the end of the second month following the submission of the annual corporate tax return, the exemption is recaptured with interest and penalties. 

The profit distribution requirement applies only to earnings from real estate investments. As such, the new rule does not impact investment funds and companies deriving income from sources other than real estate. The new rule is effective at the publishing date of law number 7524 and applicable to income generated as from 1 January 2025.

Tax hike for companies carrying out projects under the build-operate-transfer model

The corporate tax rate for companies operating projects under the build-operate-transfer model according to law number 3996 and the public-private partnership model according to law number 6428 is increased to 30% from 25%. The new tax rate will apply to fiscal years starting from 1 January 2025.

Introduction of 5-year time limit on the utilization of carry forward VAT

With the new law, a 5-year limit is introduced for deducting carry forward input VAT. After 5 years, the concerned VAT amounts are booked to a special account and cannot be expensed directly. Taxpayers can request a tax audit within 3 years and based on the audit findings the VAT amount can be claimed as an expense when calculating the corporate income tax. The effective date of this new rule is 1 January 2030. 

Identification of “tax audit” as the primary method for VAT refunds

Claims for VAT refunds will be processed based on the outcome of tax audits to be performed on the company accounts for this purpose. The new rule is effective as from the month following the publication date of the law (i.e. 2 August 2024).

Amendment to the rule related to transfer of carry forward VAT in mergers and spin-offs

Carried forward VAT of taxpayers that go through a merger or spin-off can only be utilized by the acquiring company based on the outcome of a tax audit. The new rule became effective on the publishing date of the law (i.e. 2 August 2024).

Income tax exemption for benefits provided to employees of tech startups through share-based incentive plans

To support employee retention and growth in tech startups, benefits provided to their employees through share-based incentive plans will be exempt from income tax, up to the annual gross salary of each employee.

If the shares acquired under such incentive plans are disposed of before a holding period of 12 years, the exemption is subject to recapture (with interest but without penalties) from the employer at different rates (100%, 75%, or 25%) depending on the duration of the holding period.  

Withholding tax requirement for certain e-commerce activity payments

Starting from 1 January 2025, intermediary service providers and e-commerce intermediary service providers become withholding tax agents for their payments to the service providers in the ordinary course of business as regulated under the Turkish E-Commerce Law number 6563.  

Narrowing of the corporate tax exemption for companies in free trade zones

The corporate tax exemption for income generated by companies engaging in production activities in free trade zones will only be applied to their income generated from sales to customers in foreign countries.

Previously, the exemption applied irrespective of whether the customer was in Türkiye or abroad. The new rule applies effective from 1 January 2025.

Changes to the Tax Procedural Law

Under the Tax Procedural Law, taxpayers may request a settlement (reconciliation) for various taxes and penalties assessed by the tax administration. With the new law, the principal tax amount is removed from the scope of settlement.

Penalties for various tax offenses have been increased. New penalties are introduced for non-compliance with e-commerce regulations and misuse of POS terminals.