Amendments to investment incentive legislation
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.