Deduction application in cash capital increase

M. Fatih Köprü

We may shortly define deduction application in cash capital increase as deduction of half of the interest calculated based on capital amount increased in cash by companies from tax assessment included in corporate tax return. This practice has been introduced in 2015 in order to promote capital increase in cash.

Only stock corporations can benefit from right to deduction. In other words, it is also applicable for joint stock and limited companies as well. However, banks, financial leasing, factoring and financing companies and entities carrying out activities in finance sector such as asset leasing companies and insurance companies and public economic enterprises cannot benefit from such deduction opportunity.

Only increases in cash

Deduction can only be applied in case of a capital increase in cash. Bank statement approved by the bank branch regarding the actual depositing of capital increase amount to the bank account of the company by the shareholders should be submitted to the tax office attached to the corporate tax return.

Capital increase made as deduction of in balance sheet items to each other is not accepted as capital increase in cash. It is not possible to benefit from deduction opportunity since a capital increase in cash shall not be a matter of question in case net profit for the period or retained earnings, extraordinary Reserves, legal reserves and inflation differences, which are included in equities of the company are used in capital increase.

If shareholder borrows

Shareholders or persons related to shareholders should fulfill their capital share paid to capital in their participations from their equities. If companies procure the capital share deposited in cash through utilizing loans or borrowing, such companies cannot benefit from deduction opportunity.

Interest rate

Interest rate, used in the calculation of deduction amount is defined In the legislation as “weighted annual average interest rate applied to TRY commercial loans opened by Banks” announced by Central Bank of Turkey at the latest for the year in which deduction is benefited.

This rate was announced as 13.47 for 2022 on the website of Central Bank of Turkey. Interest Rate which shall be used for capital increase made in 2023 shall be announced by Central bank of Turkey within the first week of 2024 as of December 29, 2023.

Deduction rate

Deduction Rate is mentioned as 50% in the legislation. Accordingly, 50% of the amount calculated after multiplying the capital amount increased in cash (portion paid in cash of the paid-in capital in newly established entities) can be taken into account as deduction in the return.

On the other hand, rates higher than 50% rate was determined for taxpayers using the increased capital in their production and industrial facility investments with investment incentive certificate.

According to legal regulation made in 2021, the above rate has been increased to 75% for the portion of capital increase in cash which is paid with the cash transferred from abroad.

Deduction period has been limited

Such deduction could be benefited during the existence of the company (provided a capital decrease is not made). However, the duration of benefiting from the deduction application is limited to 5 years according to the law.

Accordingly, the said deduction may be benefited during the accounting period in which the decision regarding the capital increase or the articles of association was registered at the initial establishment stage, and for the four accounting periods following this period. In accordance with this regulation, e.g. deduction amounts calculated separately in related periods based on cash capital increase made in 2023 can be deducted from profit of company regarding the years between 2023 and 2027.

On the other hand, it is possible for companies making capital increase or establishing for the first time before July 5, 2022, on which the law has entered into force, to benefit from such deduction practice for five accounting periods including 2022 accounting period (2026 income at the latest).

No time limitation for transferred amount

Calculated deduction amount is transferred to the following periods without being subject to any indexing in case there is loss or there is not sufficient profit in the company. There is no time limitation regarding the deduction of such transferred amounts demonstrated in attachments of the declaration in following periods. Right for deduction can be benefited as of the first year in which profit arises until the transferred deduction amount finishes.

Explanations in this article reflect the writer's personal view on the matter. EY and/or Kuzey YMM ve Bağımsız Denetim A.Ş. disclaim any responsibility in respect of the information and explanations in the article. Please be advised to first receive professional assistance from the related experts before initiating an application regarding a specific matter, since the legislation is changed frequently and is open to different interpretations.