Revaluation of immovables: Have you completed your analysis?

In May 2018, a new law added a temporary provision to the tax code which establishes an optional tax regime for the revaluation of immovable properties. The revaluation option is intended to address and partially correct distortions in taxpayers’ financial statements caused by inflation. Under this provision, Turkish taxpayers are given the option to update the tax base of their immovable property and to enjoy a higher amortization deduction for the remaining useful life of the asset. In addition, the revaluation reduces the capital gains tax when revalued assets are sold. On the other hand, the mechanism requires payment of a 5 percent, one-time tax on the amount of the revaluation surplus. Therefore, taxpayers need to carefully weigh the tax costs and benefits before taking the decision of whether or not to utilize the provision. Aside from the analysis on the tax side, the decision making process should also consider the impact on financial structures (e.g. the improvement on the equity).

The life time of provision, a onetime exercise, is coming to an end at the end of September, so if you haven’t already, you’d better act fast if you want to take advantage of it. Here is a brief overview of the revaluation option.

Am I eligible for the revaluation? The revaluation option is available to both individuals and companies. However, those who cannot benefit are:

►banks and financial institutions

►insurance and reinsurance companies

►pension companies and private pension funds

►those exclusively engaged in the purchase and sale of gold and silver

►those who have been permitted to keep their legal books in foreign currency

►those who keeps their accounts using the simplified method

- non-residents

Which of my assets can I revalue?

The law only allows for revaluation of immovable property. “Immovable property” is defined in article 704 of the Turkish Civil Code as “land, independent and permanent rights registered on separate pages of a land registry, and independent sections in a registered condominium registry.”

On the other hand, immovable property that is subject to sale and leaseback transactions, and those for which a lease certificate is issued, cannot be revalued.

How do I calculate the new value of the asset?

The revaluation of the immovable property must be made by considering the “revaluation coefficients” prescribed in the law. The new value of the immovable property is calculated by multiplying the revaluation coefficient with the book value of the asset as of May 25, 2018. The asset’s accumulated depreciation will be restated using the same revaluation coefficient.

Taxpayers may choose which immovable property they want to revalue and may conduct a partial or complete immovable revalua- tion. This allows them to choose specific immovable properties to be revalued to achieve the optimum tax benefits.

How do I book the revaluation surplus?

The revaluation surplus (the difference between the net book value before and after revaluation) goes directly into the equity section of the balance sheet, under the revaluation reserve fund heading. The Communiqué issued on July 6, 2018 on the subject explains that the account should reflect the change in value of each property separately and in detail.

When is the 5 percent tax due?

Taxpayers who choose to revalue their immovable property will be subject to a 5 percent tax which will be calculated on the amount of revaluation surplus. The tax must be declared to the tax office by October 25 at the latest and must be paid within the same period.

Depreciation after revaluation

Depreciation shall be calculated based on the asset value after revaluation. In other words, the revaluation will result in higher depreciation charges.

Sale of the immovable after revaluation

The basis for calculating the capital gains from the sale of an immovable shall be the asset value after revaluation. As the practice increases the cost base of the immovable, the taxpayer realizes smaller taxable capital gains when the revalued asset is sold.

Distribution of the revaluation surplus to shareholders

If the amounts recorded in the revaluation reserve account are withdrawn from the company or transferred to an account other than the share capital account, they will be subject to income or corporate tax.

Ask the important questions now

Taxpayers need to carefully plan their responses to this important provision. The revaluation may be of benefit to companies through increasing the tax depreciable value of their immovable properties, thereby reducing their future tax payments. If the asset will be sold, it may also reduce the taxable capital gains. In making their decision to utilize the revaluation option or not, taxpayers need to compare the future tax benefits with the current tax payment of 5 percent.

In addition, they should take into consideration the short- and longterm impact of such a revaluation on the company’s financial structure. Some important questions that taxpayers perhaps need to ask themselves in the decision making process might be: What are the impacts of revaluation on the financial structure (e.g. debt to equity ratio)? How does it affect the performance and ability to pay dividends in the current and future years?

These are key questions, and with the September 30 deadline fast approaching, taxpayers need to resolve them quickly.