Subject: Law No. 7352, postponing inflation adjustment and providing tax exemption to the gains on conversions from foreign currency or gold deposits to Turkish Lira time deposit accounts, was published.
Law No. 7352 Amending the Tax Procedure Law and the Corporate Tax Law ("Law No. 7352"), was published in the Official Gazette dated January 29, 2022.
Accordingly, the Law postpones inflation adjustment and provides a corporation tax exemption for gains on conversions of the foreign currency or gold accounts to Turkish Lira (TRY) time deposit accounts.
Postponement in the inflation adjustment
With Article 1 of the Law numbered 7352, Temporary Article 33 has been added to the Tax Procedures Code. As per the relevant article, financial statements for the fiscal years 2021, 2022 and 2023 (with respect to advance tax periods only) and also for the fiscal years ending in 2022 and 2023 for those assigned a special accounting period shall not be subject to inflation adjustment, regardless of the inflation adjustment conditions have been met. On the other hand, financial statements dated 31.12.2023 will be subject to inflation adjustment regardless of the inflation adjustment criteria.
Corporation tax exemption for gains on conversions to Turkish Lira time deposit accounts
With Article 2 of the Law numbered 7352, Temporary Article 14 has been added to the Corporate Tax Law. As per the relevant article, if the USD, EUR and GBP denominated foreign currency deposits in a Turkish bank or in a foreign bank account of a Turkish entity based on the balance sheet dated 31 December 2021, are converted into FX protected TL deposit/participation accounts until 17 February 2022 (the submission date of the Q4/2021 advance corporate tax return) based on the conversion rate announced by TCMB and put in TL deposit/participation accounts with a maturity of at least three months (According to the CBRT Communiqué, domestic legal persons are required to open a Turkish lira time deposit or participation accounts with a maturity of 6 months or 1 year);
- F/X gains resulting from their valuation for the period 1 October-31 December 2021,
- F/X gains realized due to their conversion for the period between 1 January 2022-conversion date,
- Interest or dividend income accrued at quarter-ends until the end of the last quarter prior to the maturity date of the account and
- The interest, dividend income and other income earned at the maturity date will be exempt from Corporation Tax.
If the conversion is made after 17 February 2022 but until 31 December 2022, the aforementioned exemptions will still be available with the exception of F/X gains exemption for the period 01 October-31 December 2021.
On the other hand, F/X losses incurred will be deductible from CIT base.
In case the time deposit is withdrawn from the said TL deposit/participation account prior the maturity, the CIT exemptions will be lost and the tax lost due to exempted F/X gains in scope of this conversion regime will be charged with tax loss penalty and delay charge interest.
As concluding remarks it may be said that receivables or advances given in foreign currency will not benefit from the exemption.
To identify the amount of foreign currencies sitting in the bank accounts, the value in the balance sheet dated 31 December 2021 will be taken into consideration. In other words, if there is a reduction or an increase in the amount until the conversion date, the reduced amount and the amount in the balance sheet dated 31 December 2021 will be taken into consideration, respectively.
The CIT exempt F/X gains resulting from the valuation of the foreign currencies for the last quarter of 2021 should be computed based on the numerical examples provided in the communiqué especially if there is a partial conversion or if there are various foreign currency buy - sell transactions at different dates.
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