Comprehensive Amendments Regarding Income Tax, Corporate Income Tax And VAT Under Law No. 7524

New Developments

Within the framework of the 2024-2026 Medium-Term Economic Program, Law No. 7524 on Amendments to Tax Laws, Certain Laws and Decree No. 375 ("Law No. 7524"), which introduces comprehensive amendments to tax legislation, was published in the Official Gazette dated 2 August 2024 and numbered 32620.

Law No. 7524 includes various regulations such as domestic minimum corporate income tax, local and global minimum corporate income tax, income tax exemption for employee share plans for tech initiatives, inclusion of the payments for e-commerce activities into the scope of withholding tax on income tax and corporate income tax, limitation on the carryforward value-added tax (VAT) practice and limitation of certain exemptions related to income tax, corporate income tax and VAT.

This alert covers the key amendments regarding income tax, corporate income tax and VAT under Law No. 7524. We will publish separate alerts containing comprehensive explanations for the local and global minimum corporate income tax regulation and the amendments made to the Tax Procedural Law by Law No. 7524.

Tax Amendments in Law No. 7524 Regarding Income Tax, Corporate Income Tax and VAT

a. Domestic minimum corporate income tax

Pursuant to Article 32/C added to the Corporate Income Tax Law by Law No. 7524, the corporate income tax to be paid by corporate income tax taxpayers cannot be less than 10% of the business income before deductions and exemptions.

In this context, the domestic minimum corporate income tax will be calculated as 10% of the business income determined by adding nondeductible expenses to the business profit in the balance sheet prepared at the end of the fiscal year.

In this calculation, the following exemptions will continue to apply: (i) exemption for the participation income derived from resident corporations; (ii) share premium exemption; (iii) patronage dividend exemption in cooperatives; (iv) exemption applied to profits from sale and leaseback transactions with financial leasing companies and asset leasing companies; (v) exemption related to profits from lease certificate transactions; (vi) exemption applied to profits from the operation and transfer of ships registered in the Turkish International Ship Registry; (vii) corporate income tax exemption under the Free Trade Zone Law; (viii) deduction of 10% of the declared income for the amounts allocated as a venture capital fund; (ix) sheltered workplace discount applied to sheltered workplaces established according to the Law on Disabled Persons; and (x) R&D and design deductions provided under Law No. 4691 for those operating in technology development zones.

If the calculated domestic minimum corporate income tax is higher than the calculated actual corporate income tax for the relevant period, the domestic minimum corporate income tax will be declared and paid instead of the calculated actual corporate income tax.

Additionally, when calculating the payable domestic minimum corporate income tax amount, the taxes not collected due to the reduced corporate income tax rate application under Article 32 of the Corporate Income Tax Law for (i) companies that are listed on the Istanbul Stock Exchange for the first time and for at least 20% of their shares, (ii) corporations engaged in export activities and (iii) corporations holding an industrial registry certificate and actively involved in production activities, can be deducted from the domestic minimum corporate income tax. Similarly, taxes not collected due to the use of the investment contribution amount, in the related period, included in the investment incentive certificates obtained before the effective date of Law No. 7524, can also be deducted from the domestic minimum corporate income tax.

The domestic minimum corporate income tax will also apply to advance corporate income tax periods. For corporations that start operations for the first time, the domestic minimum corporate income tax will not apply for three fiscal years starting from the fiscal year in which their operations started.

The domestic minimum corporate income tax came into force to be applied to profits obtained in 2025 and subsequent fiscal years.

b. Other key regulations regarding income tax and corporate income tax

• Income tax exemption for employee share plans for the employees of tech initiatives:

Under Article 17 of the Income Tax Law, as amended by Law No. 7524, shares granted to employees for free or at a discount by companies considered as tech initiative, according to the criteria determined by the Ministry of Industry and Technology, which are deemed as wages, are exempt from income tax. The exemption is capped up to the amount of the annual gross wage for the relevant year at the fair value of the shares on the date they are granted.

If employees dispose of the shares they are granted, the following amounts will be collected from the employer:

• In case of disposal within three full years from the date of acquisition — the entire amount of the exempted tax
• In case of disposal within four to six years from the date of acquisition — 75% of the exempted tax
• In case of disposal within seven to 12 years from the date of acquisition — 25% of the exempted tax

In this case, no tax loss penalty or delay interest will be applied to the employer for the collected tax. The statute of limitations for taxes not collected in time because of the exemption will start from the calendar year following the year in which the shares are disposed.

The regulation regarding the taxation of employee share plans granted by tech initiatives entered into force with the publication of Law No. 7524 on 2 August 2024.

• Determination of the daily revenue to confirm the income tax base:

According to Article 69 of the Income Tax Law, as amended by Law No. 7524, self-employed professional service providers generating income from commercial or professional activities will be subject to an inquiry at least three times a month and not less than 12 times in a calendar year, and their revenue amounts at the date of inquiry will be determined. A monthly revenue amount will be calculated over the average of the revenue amounts found at the inquiries, and an annual revenue amount will be calculated over the average of calculated monthly revenue amounts.
Taxpayers, whose gross sales amounts, revenue amounts or gross revenue amounts in their financial statements as per the books they keep differ by more than 20% from the revenue amounts found as a result of inquiries, will be requested to clarify the reason for the difference under the "invitation to explain" mechanism.
The regulation regarding the use of daily revenue inquiries in confirming the income tax base will also apply to corporate income tax taxpayers.

This regulation on determination of the daily revenue to confirm the income tax base will come into effect as of 1 January 2025.

• Inclusion of payments for e-commerce activities into the scope of income tax and corporate income tax withholding:

Payments made by intermediary service providers and e-commerce intermediary service providers, subject to the provisions of Law No. 6563 on the Regulation of Electronic Commerce, to service providers and electronic service providers in relation to the activities carried out under the mentioned law are included in the scope of tax withholding. The President has been authorized to determine withholding tax rates for payments subject to withholding.
The regulation regarding the inclusion of payments for e-commerce activities in the scope of tax withholding will come into effect on 1 January 2025.

• Dividend distribution requirement for exemption from corporate income tax on profits from real estate by investment funds and partnerships:

For the profits obtained by funds and partnerships investing in real estate (except for retirement investment funds) to benefit from the corporate income tax exemption under Article 5/1-d of the Corporate Income Tax Law, 50% of the profit generated from the real estate must be distributed as a dividend by the end of the second month following the month in which the corporate income tax return for the relevant fiscal year is filed. If the dividend distribution is not made, it will be considered that there is a tax loss for the amount of the corporate income tax exemption applied for the income generated from real estate.
The regulation introducing the dividend distribution requirement for the exemption from corporate income tax on profits from real estate by investment funds and partnerships entered into force on the publication date of Law No. 7524 (2 August 2024) and will apply to profits obtained from 1 January 2025.

• Increase in corporate income tax rate for projects under the build-operate-transfer model and public-private partnership projects:

Pursuant to the provision added to Article 32 of the Corporate Income Tax Law by Law No. 7524, the corporate income tax rate applicable to the income of companies that are parties to contracts for (i) projects carried out within the framework of the build-operate-transfer model under Law No. 3996 on the Undertaking of Certain Investments and Services within the Build-Operate-Transfer Model and (ii) projects carried out under the public-private partnership model under Law No. 6428 on the Construction, Renewal and Procurement of Services within the Public-Private Partnership Model by the Ministry of Health and Amendments to Certain Laws and Decrees, has been increased to 30%.
The regulation increasing the corporate income tax rate for projects under the build-operate-transfer model and public-private partnership projects came into effect on the publication date of Law No. 7524 (2 August 2024) and will apply to income generated in 2025 and subsequent fiscal years.

• Limitation of income tax and corporate income tax exemption applied in free trade zones with the sales abroad:

Pursuant to the provision added to the provisional Article 3 of the Free Trade Zones Law by Law No. 7524, the income tax and corporate income tax exemption applied to the earnings obtained from the products manufactured by entities operating in free trade zones will be limited to the income generated from the sale of the manufactured products to abroad.
The regulation limiting the income tax and corporate income tax exemption applied in free trade zones with the sales abroad entered into force on the publication date of Law No. 7524 (2 August 2024) and will apply to earnings obtained as of 1 January 2025.

c. Key regulations regarding VAT

• Exclusion of services provided to vehicles used for noncommercial purposes from the scope of VAT exemption for sea and air transport vehicles:

As per the amendment to the exemption regulated in Article 13/b of the Value Added Tax Law, the VAT exemption for the services provided to sea and air transport vehicles at ports and airports will not apply to vehicles used for activities such as tourism, entertainment, sports and amateur fishing, as well as private boats and yachts.

This regulation will come into effect at the beginning of the month following the publication date of Law No. 7524 (1 September 2024).

• Deduction at the acquiring taxpayer of VAT carried forward by a taxpayer ceasing to exit, as a result of a merger, transfer, demerger and change of company type, will be subject to a tax audit:

VAT incurred by taxpayers who cease their activities, divide or are dissolved as a result of the transfer of the business, change of company type, or transfer and division transactions carried out in accordance with the Corporate Income Tax Law, can only be deducted by the acquiring taxpayer after the conclusion of a tax audit to be carried out regardless of the statute of limitations.

This regulation is effective as of the publication date of Law No. 7524 (2 August 2024).

• Five-year time limit has been introduced for the deduction of VAT carried forward:

According to the amendments under Law No. 7524, VAT carried forward to subsequent periods and not deducted for five calendar years must be removed from the carried forward VAT account and recorded in a special account. VAT recorded in the special account can be considered as an expense in determining the income tax or corporate income tax for the year in which the tax audit is concluded, which is conducted within one year following the taxpayer's request that has to be made within three years. VAT recorded in the special account cannot be considered an expense without the request of the taxpayer.

The regulation introducing the five-year time limit for the deduction of VAT carried forward will come into effect on 1 January 2030.

• Main procedure in VAT refunds is changed to be based on a tax audit:

To ensure that VAT refunds are made correctly and to prevent unjust VAT refunds, the main procedure in VAT refunds is changed to be carried out as a result of a tax audit, without any limitation to be applied to certain refund requests. This regulation will come into effect at the beginning of the month following the publication of Law No. 7524 (1 September 2024).

Conclusion

Significant amendments have been made in the tax legislation regarding income tax, corporate income tax and VAT with Law No. 7524. Taxpayers should carefully evaluate the amendments and take the necessary steps carefully to comply with the regulations.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.