Effective July 1, Turkey will introduce a new tax benefit for companies that increase their share capital in cash.
Under the new rule, 50% of the deemed interest on a capital increase paid in cash as paid-in or issued capital, as well as contributions paid in cash to the share capital of newly-established companies until the end of the fiscal year, can be deducted from the corporate income tax base. The Central Bank of Turkey's most recent "annual average weighted interest rate applied to commercial loans in Turkish lira extended by banks" is used to calculate the amount of deductible deemed interest.
Companies operating in the banking, finance and insurance sectors and public economic enterprises, however, are ineligible for this tax benefit.
Companies are permitted to deduct 50% of the interest amount from the corporate income tax base each financial year, starting with the financial year in which the capital increase decision or, in the case of a newly-established company, the articles of association are registered.
The deduction is calculated for the remaining months in the financial year after the capital increase, including the whole month in which the cash capital is paid. Amounts that cannot be deducted due to an insufficient tax base are rolled over to the following year.
Capital increases through the transfer of non-cash assets, merger, acquisition and spin‑off, or by adding the shareholders' equity items to the share capital, or by shareholder loans or related-party loans, are not included in the deduction calculation.
If a company later decreases its capital, the amount of the decrease is excluded from the calculation of the deduction.
The Council of Ministers is entitled to make certain amendments to this rule, e.g., to change the percentage of interest which may be deducted.
Actions to consider
As this provision will enter into force on July 1, companies planning to increase their share capital may wish to consider postponing a capital increase until after this date.