CORPORATE INCOME TAX (Law No:5520)

1. CORPORATE INCOME TAX (Law No:5520) M. Çağrı BAYARState Revenue Expert Turkish Revenue Administration

2. CORPORATE INCOME TAX (CIT) CONTENTS 1- Subject  Exceptions 2- Taxpayers  Exemptions 3- Tax Base 4- Payment 5- Liquidation and Restructuring of Companies

3. 1- SUBJECT OF CIT • Subject of CIT is net corporate income earned in one fiscal year. • Corporate income consist of income elementswhich are counted in Personal İncome Tax (PIT) law. • The provisions of the PIT Law regarding commercial income shall be applied in calculating the net corporate income.

4.  Exceptions A. Exceptions in CIT Law: The following gains are excepted from corporate tax ifspecific conditions are met: • Dividends from a resident subsidiary. • Dividends from a foreign subsidiary. • Profits derived from foreign branches. • Gains derived by international holding companies from the sale of participation shares.

5.  Exceptions • Premium on shares issuedby joint stock companies during establishment or capital increase. • Gains concerning mutual funds and trust companies, real-estate investment funds and trusts, venture capital funds and trusts, retirement funds, housing funds provided that these institutions are established in Turkey. • Revenues derived from the sale of immovables and participation sharesunder legal prosecution due to their debts to banks, to be credited from such debts to these banks or; 75% of gains derived from the sale of such assets which the banks acquired by these means.

6.  Exceptions • 75% ofgains from the sale of immovables and participation shares. • Profits derived from construction, maintenance and assembly worksabroad. • Returns derived from cooperatives. • Gains derived from the pre-school education, primary education, special education and private secondary schools as well as those derived from rehabilitation centers operating under foundations which are recognized for tax exception by the Council of Ministers or societies working for public interest are except from corporate tax for five taxation periods.

7.  Exceptions B. Exceptions in other laws Free Trade Zones Law No.3218 • Only, the earnings generated from manufacturing activities are excepted from the PIT and CIT until the end of the taxation period of the year Turkey becomes a full member of the EU. • Users who obtained operating licences before February 6, 2004; • are exempted from PIT and CIT within the validity period of their operation licence, • shall pay income tax on the wages paid to workers and indirect taxes generated from their activities related to their free zone operations beginning from 2009. However, if the duration of users’ existing operation licence ends earlier, this exemption applies until the end of duration of the operation licence.

8.  Exceptions Technology Development Zones Law No.4691 • Earnings from software and R&D activities carried out in the determined zones are excepted from PIT and CIT until 31.12.2023. • Wages paid to researchers, programmers and R&D staff employed in these zones are excepted from PIT until 31.12.2023. • Earnings derived by administrator companies of technology development zones within the scope of this Law are excepted from PIT and CIT until 31.12.2023.

9. 2- TAXPAYERS OF CIT (Art.2) a. Capital Stock Companies(Joint Stock Companies, Limited Companies, foreign corporations of the same nature, Investment funds) b. Cooperatives(Cooperatives founded under Cooperatives Law or their special law and the foreign cooperatives of the same nature) c. Public Economic Enterprises(Commercial, industrial and agricultural undertakings belonging to the State, to provincial administrations, municipalities and other public administrations and establishments which have continuous activity and are not included in paragraphs a and b) d. Economic Enterprises of Foundations and Associations(Commercial, industrial and agricultural undertakings belonging to societies and foundations and foreign investments of the same nature having continuous activity, and are not included in paragraphs a and b) e. Joint Ventures(Among the corporations above, those who have founded among themselves or personal partnerships or natural persons with a view to undertake and realize a given work together and share the profit and requested from the tax office to establish tax liability in this manner are joint ventures.)

10. Types of Liability (Art.3): 1.FULL LIABILITY (Residents): Among the corporate bodies indicated in the Law, those whose legal or business centers are located in Turkey are taxed over worldwide profits. • Legal center means the center of the taxpayer corporations denoted in their foundation law or contract. • Business center is the place where the transactions are actually conducted. 2. LIMITED LIABILITY (Non-Residents): Among the corporate bodies indicated in the law, those whose legal and business centers are both located outside Turkey shall only be taxed over the profits received in Turkey.

11.  Exemptions Corporations specified in the law are exempted from corporate income tax. Most of the exemptions are related to economic enterprises of public administrations and economic enterprises of foundations and associations. There are also other exemptions regarding cooperatives, exhibitions and fairs, social security institutions, scientific R&D institutions,etc. • Establishments operated by public administrations and establishments with a view to teach, disseminate, improve and foster agriculture, cattle breeding, science and fine arts (schools, conservatoires, libraries, theaters, museums, etc.), • Establishments operated by public institutions and enterprises for social purposes and to protect general human and animal health (such as hospitals, libraries, workshops of the day nurseries, home for the elderly, dormitories, dispensaries, boarding home for animals, etc.),

12.  Exemptions • Establishments operated by public administrations and establishments for social objects (charity, pawning and assistance funds, kitchens for the poor, prison and penitentiary workshops, social insurance institutions, student homes etc.), • Local, national or international exhibitions and fairs opened by public administrations and establishments with the permission of the responsible administrations, • Baby nurseries, guest houses and canteens at military zones owned by the departments of general budget serving only the members of public administrations and operated for a non-profit seeking purpose without being rented to third parties, • Retirement funds and social security institutions established by law,

13.  Exemptions • Public establishments that charge levies and duties in consideration of the work or services rendered, • Privatization Administration and Fund, Housing Development Administration, National Lottery Administration, • Mint and Stamp Printing House, military factories and workshops, • Following enterprises and establishments operated by local public administrations: • water supply facilities, • passenger transportation enterprises withinmunicipal boundaries, • slaughter houses,

14.  Exemptions • Agricultural enterprises of village or village unions; public baths, laundries and mills operated by these for common needs of villagers as well as qualifying passenger transportation enterprises thereof. • Enterprises of sports clubs carrying on training and sports activities. • Qualifying cooperatives. • Institutions established solely for the purpose of providing guarantee for SME loans. • Associations and institutions engaged in scientific research and development activities. • Enterprises established jointly by public organizations and other persons for the construction of infrastructure in organized industrial zones and respond to the common needs therein.

15. 3- TAX BASE • Corporate Income Tax is calculatedon the net corporate profit earned in the course of one fiscal year. The provisions of the PIT Law regarding commercial income shall be applied in calculating the net corporate profit.

16.  Deductible Expenditures PIT Law No.193 (Art.40) The following expenses can be deducted from gross income to determine the net business income. According to CIT Law (Art.6) this provision is also applied upon calculation of corporate profit. • Overhead expenses for the derivation and continuation of business income, • Following expenses of the workers: • Treatment and medicine expenses, • Insurance premiums and pension contributions, • Lodging and food expenses in the work place,

17.  Deductible Expenditures PIT Law No.193 (Art.40) (Cont’d) • Provided that they are related to the business; losses, damages and compensations paid in accordance with a contract, court decision or legal order, • Travel and accommodation expenses related to business, • Expenses of vehicles which are leased or already included in the business and used for business purposes. • Taxes, fees and duties in kind such as building taxes, stamp duties, municipal taxes etc.; provided that they are related to the business,

18.  Deductible Expenditures PIT Law No.193 (Art.40) (Cont’d) • Depreciations, • Contributions of employers to unions, • Contributions by employers to private pension funds on behalf of their employees, • Donations to associations and foundations working for the purpose of aiding the poor people.

19.  Deductible Expenditures CIT Law No.5520 (Art.8) The following expenses are also deductible. • Expenses of issuing securities, • Start-upcosts and incorporation expenses, • Expenses incurred for the general meetings and expenses in connection with merger, liquadition and division, • In commandite companies, share of profit of active partner, • Share of profit paid in return for profit and loss sharing account by the participation banks, • For the insurance and reinsurance companies, suspended claim and amend reserves related to insurance contracts in effect on the balance sheet date.

20. Deducting Losses (Art.9) • When establishing the corporate income, taxpayers may also deduct the following losses provided thatthe amount of each year is shown separately on the corporate tax return: • The losses indicated in the past years’ returns can be carried forward up to five years, • The losses suffered as a result of the activities abroad canbe carried forward up to five years (excluding those related to income excepted from corporate tax in Turkey).

21. Deducting Losses Loss Carry Forward on Merger And Division • On a merger or division, losses of transferring company not exceeding the equity capital of transferring company as of the date of transfer may be carried forward by the receiving company. (Art.9/1-a) • Conditions for loss carry forward; • Limited to 5 years, • Corporate Tax Returns should have been filed in due time for the last 5 years, • Operations of transferringcompany shall be carried on at least for 5 years.

22. Allowances (Art.10) • Research and Development expenditures realized inside the business insearch of new technology and information, • 100% of sponsorship expenses for amateur sport branches and 50% for professional branches, • The amount of donations and aids to public administrations, foundations which are qualified for tax exemption by the Council of Ministers; societies working for public interest and institutions engaged in scientific R&D activities,

23. Allowances • Expenses as well as aids and donations in respect of activities which are realized by the above mentioned institutions or supported by the Ministry of Culture and Tourism for the promotion, development and preservation of cultural, artistic and historical values, • Donations and aids made through the Prime Ministry in respect of natural disasters for which the Council of Ministers adopts a resolution of aid.

24. Non Deductible Expenses(Art.11) • Interest paid or calculated on equity capital, • Interest, foreign exchangelosses and such expenses paid or calculated on thin capital, • Hidden profit distribution through transfer pricing, • Reserve funds, • Corporation tax, all fiscal penalties and default interests,

25. Non Deductible Expenses • Losses resulting from the sale of securities below their nominal values and expenses paid related to these securities, • Depreciations and expenses of motorized seacrafts and aircrafts leased or registered in the corporation and not related to the main field of operations of the enterprise, • Advertisement of alcoholic drinks and tobacco products.

26. Tax Security Institutions in CIT CONTROLLED FOREIGN COMPANY (CFC) LEGISLATION Pursuant to Article 7 of CITL No. 5520, foreign corporations in whichresident corporations and individuals directly or indirectly hold at least 50% of the capital or dividends or voting rights by means of separate or joint participation are considered as CFC. In the determination of a CFC, the highest ratio of participation held in that corporation at any time during the relevant fiscal year will be taken into account as the control ratio.

27. 25% or more of the total gross income of the CFC should consist of passive income, • Total tax burden (of the taxes which are similar to PIT and CIT) on the CFC’s balance sheet profit should be less than 10%, • Total gross income of the CFC in the relevant fiscal year should exceed the equivalent of 100.000 Turkish Lira in a foreign currency.  CFC’s profit will be included in the corporate income tax base of the controlling resident corporation in proportion to its shares in the CFC as of the fiscal year which covers the closing month of the CFC’s fiscal year.

32. Secondary Adjustments Except for the foreign exchange losses; interest and similar payments made or calculated on the thin capital will be treated as; • Constructive dividendif the related party is a resident; or • Remittance if the related party is a non-resident. Those amounts calculated on the thin capital will be subject to a witholding tax. However, pursuant to Article 5(1)(a) of the CITL No. 5520, if the related party (creditor) is a resident corporate taxpayer, this amount will be evaluated within the context of “participation exemption”. Accordingly, no witholding tax will be imposed and adjustment will be made on the tax return.

35. 4- PAYMENT • Corporate income tax rate is 20%, • Tax is calculated on the basis of self assessment(Tax return includes the results of the related fiscal year). • Taxpayers do not file separate tax returns for branches, agencies, purchase and sale offices and stores, factories or other business sites attached to themselves even if they have separate bookkeeping or allocated capital. • Every three-month terms of the year taxpayers pay advance tax at corporate tax rate.At the end of the relevant fiscal year, they offset it from the corporate income tax.

36. Payment • Taxpayers must file their annual tax return until the 25th of the fourth month after the end of fiscal year and pay the tax until the end of that month. • Advance tax returns must be filed until the 14th of the second month after the end of three-month period and tax must be paid until the 17th of that month.

37. Offsets From CIT (Art.33-34) • CIT withholdings, • Advance taxes (must have been paid), • Corporate tax or similar taxes paid abroad and entered into general final accounts in Turkey, can be credited against the corporate tax calculated over these earnings in Turkey, • The amount to be creditedagainst the income received abroad from the tax which is calculated in Turkey can not exceed the amount found by applying the corporate tax rate applied in Turkey to income earned abroad, under no circumstances.

38. 5- LIQUIDAITON AND RESTRUCTURING OF CORPORATIONS 1- Liquidation 2- Merger 3- Division “Split-Up” 4- Partial Division “Split-Off” 5- Exchange of Shares 38

39. Liquidaiton • A company in liquidation is a company in the process of being dissolved. • If any assets remain, after the payment of the debts, they are distributed to the shareholders. (Art.17) • When taxing a company in liquidation, liquidation period shall be taken into consideration instead of fiscal year. • Liquidation period begins with the registration of the general meeting’s decision on liquidation. 39

40. Merger • Merging of one or more corporations with another corporation is considered as liquidation for the corporation dissolving due to the merger. (Art.18) • On a merger if the below conditions are met, only the profits of dissolving company accruing until the date of merger are taxed. But gains arising from the merger are not taxed. • Both transferring and receiving corporations must be full liable. • Assets and liabilities at the date of transfer must be transferred exactly and as a whole. • Changing type of corporations under above-mentioned conditions is also deemed as merger. 40

41. Division “Split-up” • A full-liable capital stock companytransfers all of its assets and liabilities at book value to two or more existing or new full-liable capital stock companies, and in exchange for this, the shareholders of the transferring company acquire the share representing the capital of the receiving company. (Art.19/3-a) 41

42. Partial Division “Split-Off” • Partial division is an operation whereby a full liable capital stock company or a permanent establishment or permanent representative of a foreign capital stock company transfers as capital in kind at book value its participating shares with a minimum holding of two years and fixed assets or branch of production or service activity to another existing or new full-liable capital stock company. (Art.19/3-b) • Shares in exchange for the capital in kind are either kept by the transferring company or issued to its shareholders. 42

43. Exchange of Shares • Exchange of shares is an operation whereby a full liable capital stock company acquires a holding in the capital of another capital stock company such that it obtains the majority in the management and capital stock of that company, in exchange for the proportional issue to the shareholders of the latter company securities representing the capital of the former company. (Art.19/3-c) • Gains arising from the exchange of shares shall not be taxed. (Art.20/3)

44. M. Çağrı BAYARcbayar@gelirler.gov.tr T H A N K Y O U