On 2 April 2015, Turkey’s Prime Minister Ahmet Davudoğlu announced a 11-step new incentive package to secure investment financing for the country. The incentive package aims at promoting employment, industrial investments and real economic growth.
Prime Minister Davudoğlu announced that in terms of investment incentives tax deductions will be increased for investments in 2015 and 2016. Investments in advanced technology will be fully supported, being considered preferential investment and benefiting from higher tax deductions from their revenues.
Along with other incentives, Prime Minister Davudoğlu announced that the government will strongly support companies’ access to funding and lower taxation for equity contributions in companies. As a part of the economic incentive package, share capital contribution will be introduced to the corporate taxation system. Funding companies through equity contributions will be fully supported. The government submitted an Omnibus Bill on 9 March 2015 to the Planning and Budget Commission of Turkey’s Grand National Assembly with the intention of incentivizing equity contributions versus the funding of companies through loans. The Omnibus Bill, which the Assembly accepted on 25 March 2014 and which was announced in the Official Gazette on 7 April 2015, also seeks to encourage foreign direct investment, as well as to prevent local investment from exiting the domestic economy. The share capital amortization is one of the fundamental elements of the incentive package per se the certain amount of the capital contribution made in case will be deductable from the tax payable. This will promote equity contribution vs funding the companies though loans.
Given that share capital amortization is one of the fundamental elements of the incentive package, we would like to briefly summarize how that matter is regulated under the Omnibus Bill.
What is regulated under the Omnibus Bill?
The Omnibus Bill regulates an addition to Article 10 of Corporate Tax Law, which regulated tax reductions. Pursuant to Article 11 of the Omnibus Bill, capital depreciation will be made over the paid-in or issued capital of the companies, which will be deducted from the taxable income.
Who will benefit from the capital depreciation?
Capital depreciation will only be applicable to capital companies such as limited liability companies and joint stock corporations and other corporate taxpayers, namely cooperatives and corporations of associations and foundations. However, it is not applicable to individuals and corporations active in the finance (e.g. financial leasing, factoring etc.), banking and insurance sectors, as capital adequacy is a performance criteria for institutions in such business areas.
How will the depreciation amount be calculated?
The capital depreciation will be applied to the paid-in or issued share capital of the companies registered to the trade registry in a fiscal year. Pursuant to the Omnibus Bill, the depreciation will be calculated only from the cash contributions and therefore it is not applicable to capital in kind contributions.
Pursuant to Article 11 of the Omnibus Bill, 50% of the interest rate to be calculated will be depreciated from the taxable corporate income. The interest rate will be determined based on the annual weighted average of the interest rate applicable to commercial loans announced by the Central Bank of the Republic of Turkey on an annual basis (“IR“).
Thus, the IR of the total amount of the capital increase in cash/paid-in capital of the newly incorporated companies divided by two will be deductable.
As per Article 12 of the Omnibus Bill, the Council of Ministers (“CM“) is authorized to decrease the 50% rate down to 0%, as well as increase it up to 100%, in certain occasions. The CM is also authorized to increase the 50% up to 150% for publicly traded companies.
Using its discretion, the CM will take into consideration the asset volume of the companies, the number of persons they employee, annual net turnover and where the capital contribution is utilized. The CM may decrease the 50% amount down to 0% based on the regions, field of industry, or business line.
What will happen if a company makes loss in fiscal year in which a capital increase is exercised?
Pursuant to the Omnibus Bill, the depreciation amount may be carried forward to the next fiscal year if a company makes loss in the relevant fiscal year.
Is capital depreciation applicable to capital increases due to merger, acquisition or demerger of the companies?
The Omnibus Bill explicitly regulates that capital increases made on the basis of a merger, acquisition or demerger of companies will not benefit from the capital depreciation.
What will happen to capital increases exercised before the enactment of the Omnibus Bill?
The Omnibus Bill does not regulate whether the capital depreciation will be applicable to capital increases exercised or to companies incorporated before the enactment of the Omnibus Bill. Unless explicitly referred to in the Omnibus Law to be enacted, it is generally accepted that the capital depreciation will not be applicable to capital increases exercised before the enactment of the Omnibus Bill.
With the enactment of the Omnibus Law, companies’ financing model is expected to alter from loan financing to equity capital. This development will see the economy’s idle resources being regained. Companies’ capital structure will improve by way of converting assets in kind to cash, while incorporating new companies and public offerings will be encouraged.