Vital Tax Amendments Made By Legislation No. 7394 – Gross sales Taxes: VAT, GST

26 April 2022

Esin Attorney Partnership

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Law No. 7394 made significant amendments related to tax

legislation. These amendments cover: an effective repentance

mechanism for tax crimes and penalties; a successive offense

mechanism in tax crimes and penalties; an increase of the upper

limit on prison sentences for tax fraud crimes; VAT exemption for

certain goods and services obtained within an investment incentive

certificate; corporate income tax exemptions regarding investment

funds and partnerships; and an increase of the corporate income tax

rate applied to certain financing entities.

New developments

Law No. 7394 on Certain Amendments to Utilization of Immovable

Properties Belonging to the Treasury and to the Law on Certain

Amendments to Value Added Tax Law and to the Law on Amendments to

Certain Laws and Statutory Decrees (“Law No.

7394“) introduced various amendments related to the

tax legislation. This alert covers the significant amendments made

by Law No. 7394.

What do the amendments made by Law No. 7394 mean?

Amendments regarding tax crimes and

penalties

With the amendment made to Article 359 of Tax Procedural Law

No. 213 (TPL), Law No. 7394 increased the upper

limit of prison sentences for tax fraud crimes to five years for

crimes with an upper limit of three years, and to eight years for

those with an upper limit of five years.
Meanwhile, an effective repentance mechanism was provided for

tax fraud crimes to be applicable in the investigation, prosecution

and execution stages as follows:
i. If a tax loss was incurred due to the actions covered under

Article 359 of the TPL, the prison sentence would be

written off by half if the following is paid

during the investigation stage:
- All of the assessed tax, delay interest and late payment
  
  interest
- Half of the imposed tax loss penalty and late payment interest
  
  pertaining to it
If the indicated amounts are paid during the prosecution stage

and before the decision is rendered, one-third of

the prison sentence to be imposed will be

written off.
The abovementioned repentance provisions would also apply to the

cases in the investigation and prosecution stage at the date when

Law No. 7934 was published. In that case, the amounts should be

paid until the decision is rendered.
ii. If no tax is assessed or a tax-related penalty is imposed,

the prison sentence to be imposed would be written off by half.
iii.Those who are sentenced and at the execution stage can

benefit from the repentance provisions if they pay all of the

assessed tax, delay interest and late payment interest, together

with the half of the imposed tax loss penalty and late payment

interest pertaining to it. The payment should be made within one

year following the entry into effect of Law No. 7394 (i.e., until

14 April 2023). In that case, the prison sentence would be

decreased by half.
iv.The cases that were at the first or final appellate stage

when Law No. 7394 was published should be reversed if they require

favorable consideration due to the amendments made by Law No.

7394.
For the application of the repentance provisions, which rely on

the taxpayers’ discretion to be availed of, no lawsuit should

be filed for the assessed taxes and penalties. If a lawsuit was

filed, the lawsuit should be withdrawn. In addition, no appellate

application should be made; if an appellate application was made,

this application should be withdrawn.
Article 43 of the Turkish Criminal Code No. 5237 regarding the

“successive offenses” would apply if a tax crime

regulated under Article 359 of the TPL is committed within more

than one calendar year or taxation period and is within the scope

of the execution of the decision on the same crime. Accordingly, in

the case of crimes committed within more than one calendar year or

taxation period, separate sentences will not be imposed for each

crime; instead, one sentence would be imposed and increased

by one quarter to three quarters. Before the

amendment, the successive offense provisions used to apply only to

crimes committed within the same calendar year or taxation

period.

With the amendment made to Article 367 of the TPL, Law No. 7394

provided that if it is found during investigation or prosecution

that another person committed the crime under Article 359 of the

TPL, or that the crime was committed together with another person,

no separate tax crime report or report evaluation committee opinion

would be sought for them.

Amendments regarding VAT

i. Exemption for investment

incentive certificates regarding the manufacturing industry and

tourism

With Temporary Article 37 amended to Value Added Tax Law No.

3065 (VAT Law), Law No. 7394 introduced a VAT

exemption for the goods and service deliveries for construction

works within the scope of the investment incentive certificates

related to the manufacturing industry and tourism.
This exemption applies until 31 December 2025.

ii.Exemption for engineering

services provided for the manufacturing of electrical motor

vehicles

With Temporary Article 42 amended to the VAT Law, Law No. 7394

provided a VAT exemption for the taxpayers who avail of the

project-based incentives under Law No. 6745 and manufacturing

electrical motor vehicles developed as a result of the R&D

activities realized exclusively in Turkey in order to develop

technologies for completely eliminating exhaust oscillation causing

greenhouse gas.
The exemption applies only to the engineering services provided

for the development of the mentioned vehicles and that are included

in the investment incentive certificate. The exemption applies

until 31 December 2023.

Regarding both of the exemptions provided under the

abovementioned Temporary Articles 37 and 42 of the VAT Law, if the

investment subject to the investment incentive certificate could

not be completed, taxes that are not collected in time would be

collected as a tax-loss penalty imposed and delay interest applied.

The statute of limitations for these taxes starts running as of the

calendar year following the date when the event caused the

imposition of the assessment and penalty (i.e., when the investment

was not completed).

In addition, taxes incurred during the goods and service

deliveries that are subject to the incentive can be deducted from

the calculated taxes; it can also be refunded if it could not be

deducted.

Amendments regarding corporate income

tax

With the amendment made to Article 32 and Temporary Article 13

of Corporate Income Tax Law No. 5520 (CITL), Law

No. 7394 increased the corporate income tax rate to 25% for

companies within the scope of Law No. 6361 on Financial Leasing,

Factoring, Financing and Saving Financing Companies, electronic

payment and money institutions, authorized currency entities, asset

management companies, capital market institutions, insurance and

reinsuring companies, and retirement companies. This amendment came

into effect with the publishing of Law No. 7394. The amendment is

applicable for returns to be filed as of 1 July 2022 and to the

business income pertaining to the taxation period starting on 1

January 2022.
With the amendment made to Article 5 of the CITL, Law No. 7394

provided that the following would be covered by the corporate

income tax incentive:
- Income generated from the refund of the participation shares
  
  from full taxpayer venture capital funds and other investment
  
  funds
- Gains from appreciation of the investment fund participation
  
  shares as securities
Income of funds and partnerships whose main fields of activity

are management of real estate, real estate projects and rights

depending on the real estate are excluded from the scope of the

exemption for 2023.
At that point, both the abovementioned funds and partnerships

whose main fields of activity are management of real estate, real

estate projects and rights depending on real estate, are excluded

from the scope of the exemption. The increase of the corporate

income tax to 25% for the mentioned financing institutions has

given rise to various discussions as to their effective dates

because, although these amendments were meant to be permanent, the

wording of Law No. 7394 within the provisions on the effective

dates thereof indicates that these provisions apply only for

2023.
Meanwhile, sales of the investment fund shares are included in

the scope of the exemption provided for the income generated from

the sales of participation shares, promoters’ stocks, dividend

shares and rights of priority that are held for at least two years.

Accordingly, 75% of the income generated from the sale of the

investment fund participation shares that are held for two years

would be exempt from the corporate income tax.

Conclusion

Law No. 7394 includes an effective repentance mechanism for the

implementation of tax crimes and penalties, successive offense

practice regarding tax crimes and penalties, an increase in the

upper limit of the prison sentence subject to tax fraud crimes, VAT

exemption for certain goods and services purchased based on an

investment incentive certificate, corporate tax exemptions for some

investment funds and partnerships, and an increase in the corporate

income tax rate applied to certain financial institutions. We are

of the opinion that Law No. 7394 — which has given rise to

discussions regarding the effective dates of some of its articles

— should be carefully evaluated and tax practices should be

guided by it accordingly.

The content of this article is intended to provide a general

guide to the subject matter. Specialist advice should be sought

about your specific circumstances.