Corporate Tax

Limitation of funding value deductions for revenue and corporate taxpayers

New developments

With the Presidential Decree No. 3490 (“decree“) Published in the Official Gazette on February 4, 2021 the limitation on the deduction of financing costs under Article 41 / 1- (g) of the Income Tax Act No. 193 and Article 11 / 1- (i) of the Corporate Income Tax Act No. 5520 has entered into force .

What does the decree mean?

According to the decree, the limitation of financing cost deductions is regulated as follows:

  • Companies with income taxpayers whose used foreign liabilities exceed their equity cannot deduct 10% of the total cost and cost items in connection with the used foreign liabilities, which were made under the heading of interest, commissions, delay interest, dividends, F / X differences, etc. . as an expense. The restriction only applies to amounts that exceed equity. Costs and expenses that are included in the investment costs are not subject to this restriction.
  • Companies with corporation taxpayers whose drawn foreign liabilities exceed their equity, with the exception of credit institutions, financial institutions, finance leasing, factoring and financing companies, cannot deduct 10% of the total costs and cost items in connection with the drawn foreign liabilities under the heading of interest, Commissions, delay interest, dividends, F / X differences, etc. as an expense. The restriction only applies to amounts that exceed equity. Costs and expenses that are included in the investment costs are not subject to the restriction.

The Decree on Limiting Deductions from Financing Charges has been in effect by the publication date (February 4, 2021) for all income generated within the tax period beginning January 1, 2021.

Conclusion

The new regulation to limit the deduction of financing costs encourages the use of equity from a tax point of view (also taking into account the tax incentive for cash capital contributions) by reducing debt consumption and related costs such as interest, commissions and F / X differences. We recommend income taxpayers and corporation taxpayers who use foreign liabilities in their business to determine whether they fall within the scope of the aforementioned limit on financing costs and to take appropriate action, also taking into account the secondary legislation that will be published in the coming days .

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