Amendments to investment incentive legislatio­n

Dünya Executive - - BUSINESS BY LAW - SERDAR ALTAY TAX PARTNER, EY TURKEY [email protected]

Three significan­t amendments have been made in the investment incentive system through Laws numbered 7103 and 7104, publicly known as the “Bag Bill”. This article goes over the changes and how they affect foreign investors and the investment environmen­t.

Valuation of foreign currency which is transferre­d from abroad and invested as capital

Foreign currency fluctuatio­ns in our country may constitute a significan­t burden in terms of exchange difference­s emerging due to foreign currency which is transferre­d to newly-establishe­d companies which have not begun operations in return for capital. In this respect, the amendments have introduced several special provisions with respect to these kinds of investment­s aimed at eliminatin­g the corporate tax burden on foreign investors.

Article 208/A, including new arrangemen­ts for the valuation of foreign currency invested as capital through overseas transfers, has been added through article 11 of Law 7103. According to this amendment, exchange difference­s emerging in the portion invested as capital through overseas transfers in the scope of the investment incentive certificat­e, and which is utilized for resident taxpayer stock companies, may be filed under a special fund account for liabilitie­s until the end of the following accounting period. In this case, positive exchange difference­s shall be recorded as receivable­s while negative exchange difference­s shall be recorded as payables.

The portion of such foreign currency which is invested as capital, and not utilized under any circumstan­ces until the end of the following accounting period, shall be valued based on the investor’s carrying (book) values until the end of that taxation period, in accordance with article 280 of the TPL.

The amendment aims to eliminate corporate tax payments on investment­s based on exchange rate difference­s emerging due to the depreciati­on of TRY relative to the foreign currency utilized in the investment up to the date on which the investment is made. Thus, investors can avoid paying taxes on projected income with respect to newly establishe­d companies.

To qualify, taxpayers are required to make an applicatio­n to obtain an investment incentive certificat­e by the end of the third month following the registrati­on date listed on the trade registry and must receive their certificat­e by the end of the following accounting period in which the business is engaged. Related foreign currencies shall be valued in accordance with article 280 of the TPL.

Calculat ng deprec at on on certa n newly-purchased mach nery and equ pment

According to another amendment to Law 7103, depreciati­on rates and periods applied to certain newly-acquired machinery and equipment used in accordance with the investment incentive certificat­e until the end of 2019 calendar year will be calculated based on half their projected lifespans, as determined by the Ministry of Finance in accordance with article 315 of the Tax Procedure Law. If the outcome of such a calculatio­n includes a fraction, the figure will be rounded up to the next whole number.

Making use of this calculatio­n is optional and it is also possible not to benefit from it for the purpose of liquefying contributi­on amounts, obtained during the investment period, at higher rates.

VAT exempt on dur ng the del very of certa n new mach nery and equ pment

According to an amendment to article 31 of Law 7103, the following machinery and equipment deliveries will be temporaril­y exempt from VAT:

Deliveries of new machinery and equipment utilized exclusivel­y in the production industry by those who hold an industrial registry certificat­e. The exemption is valid until December 31, 2019 in accordance with the Industrial Registry Law numbered 6948.

If the machinery and equipment acquired in the scope of the exemption is used for other purposes or disposed of within three years as of the beginning of calendar year following date of delivery, overdue taxes will be collected from the purchaser, including late fees. Other machinery and equipment eligible for exemption will be determined through a Cabinet Decree, numbered 2018/11674, overseen by the Ministry of Finance. As of writing, the communique on Making Amendments to VAT, in which the procedures and principles will be determined, is still in the process of approval as a draft on the website of the Turkish Revenue Administra­tion.

In light of the series of incentives launched in 2018, the expectatio­n is the new regulation­s will favour taxpayers going forward with the hope of attracting new investment­s.

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