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Vergide Gündem
English Translation

Should tax be paid on default interest?

The formation of a product or service in economic activity depends on the
combination of production factors. Inherently, the factors used in the production
process take a share from the production according to their types. For example,
while the return on capital used as a debt or loan in the production process is called
“interest”, the return of the capital owner from production may differ depending on
the way the capital is used.

According to Turkish Income Tax Law, income from movable capitals including
payment is defined as “dividend, interest, rent and similar income” obtained by the
capital owners consisting of values represented by cash capital or money.
So, what is the default interest and why is it paid? In the dictionary of the Turkish
Language Institution, the term of “default” is described as “resisting to pay the debt
without any reason”.

When looking through the Constitutional Court (“AYM”) annulment decision
regarding the “Law on Legal Interest and Default Interest” dated 4.12.1984
and numbered 3095, E: 1997/34, K: 1998/79; interest is described as a civil
"consequence or equivalent" in favour of the owner of the capital against the cash
capital allocated to the use of individuals or institutions.

Both the will of the legislator and in court decisions regarding the disputes that are
reflected in the judiciary; the default interest is based on the understanding that
the “creditor's loss” is due to the fact that the money debt representing the capital
is not paid in the due period as it’s not “an income or revenue” and this loss will be
at a certain rate by taking into account the economic conjuncture of the country.
Therefore, the justification for the payment of the “default interest” consists
essentially of the compensation of the loss incurred by the creditor.

On the other hand, the Revenue Administration tends to tax the default interest
payments based on court decisions within the scope of the “interest receivable”.
However, as understood from the will of the legislator mentioned above and the
reasons of the decision of the Constitutional Court, the “default interest” is paid for
the loss provision that the person suffers due to the failure to receive the money in
the ownership on time. For those reasons, we are of the opinion that default interest
is not an income included in the tax base. Naming the payment as “default interest”
should not result in taxation of it.

We recommend that owners of default interest consider this issue with their own
tax advisors against the administration's approach to consider default interest
payments as “interest receivable”.

This is the summary of the article published in the Ekonomist magazine’s issue
2020/23, dated 26.07.2020.

8 August 2020