Advantages of Spending Increased Foreign Cash Capital within the Scope of the Investment Incentive Certificate

With Article 59 of Law No. 7338 on the “Amendment of the Tax Procedure Law and Certain Laws,” published in the Official Gazette dated 26.10.2021, amendments were made to the regulation on the “cash capital increase deduction incentive” stipulated under Article 10/1-ı of the Corporate Tax Law No. 5520 (CTL).

Accordingly, with the paragraph added after the first paragraph of Article 10/1-ı of the CTL — “For the portion of cash capital increases financed with cash brought from abroad, this rate shall be applied as 75%.” — it was stipulated that instead of the general rate of 50% (applied without distinction between domestic and foreign capital), a 75% rate would apply to the portion of cash capital increases financed with cash brought from abroad. This amendment entered into force for cash capital increases made as of the publication date of the Law. Furthermore, in the records of the Plan and Budget Commission discussions of the draft law, it was stated that due to the 25-point increase, an approximate tax impact of 200 million TL was expected.¹

In addition, Article 280/A of the Tax Procedure Law (TPL) No. 213 introduced a special application regarding the valuation of foreign currencies brought from abroad and contributed as capital. Under this provision, positive foreign exchange differences arising from the valuation of funds brought in foreign currency from abroad for the purpose of making direct investments within the scope of an investment incentive certificate shall be excluded from taxation, provided that the conditions specified in the article are met. This aims to finance the investment and, in a sense, preserve the capital.²

According to Article 13 titled “Other Matters” of General Communiqué No. 495 on the Tax Procedure Law, this application essentially applies to the portion of the committed capital amount in the articles of association of fully liable capital companies that is paid within the fiscal year following the commencement of operations. However, it is also possible to benefit from this application for foreign currencies falling within the scope of the article that are contributed to the company within the framework of capital increases made in accordance with Law No. 6102 during this period.

On the other hand, the fourth paragraph of Article 10/1-ı of the CTL grants the Council of Ministers (now the President) the authority to increase or decrease the deduction rate under certain circumstances. The Council of Ministers (the President) exercised this authority with the Council of Ministers Decree dated 26.06.2015 and numbered 2015/7910. Accordingly, deduction rates were explained in section 10.6.4.1 of General Communiqué No. 1 on Corporate Tax. It was stipulated that: “If the cash-increased capital is used in production and industrial facilities holding an investment incentive certificate, and/or in the machinery and equipment investments of these facilities, and/or in land and property investments allocated for the construction of these facilities, an additional 25 points will be added, limited to the fixed investment amount specified in the investment incentive certificate, and the said deduction shall apply.” In this way, taxpayers wishing to benefit from the cash capital deduction may apply the 75% rate (50% general rate + 25 points) if they use their increased cash capital in fixed investment expenditures under the investment incentive certificate.

With the amendment introduced by the new law, an additional 25-point deduction opportunity arises for cash capital brought from abroad and contributed as capital. Furthermore, if this capital is used in fixed investment expenditures under an investment incentive certificate, both the special valuation mechanism under the TPL comes into play, and thanks to the additional 25-point deduction decided by the Council of Ministers Decree No. 2015/7910 in cash capital increases, a 100% deduction opportunity (75% + 25% = 100%) is considered to be available.

¹ https://www5.tbmm.gov.tr/develop/owa/komisyon_tutanaklari.goruntule?pTutanakId=2825
² The Ministry of Treasury and Finance has been authorized to determine the procedures and principles regarding the implementation of this article, and the Ministry exercised this authority with General Communiqué No. 495 on the Tax Procedure Law, published on 25.05.2018.

Author: M. Baturhan Gençaslan