Changes in the tax system often come into the spotlight to promote economic growth and maintain fiscal balance. In Turkey, the enactment of Law No. 7524 in 2024 introduced several innovations for taxpayers. This law contains regulations that directly impact both local and multinational corporations. Key changes include the introduction of a global minimum corporate tax, limitations on tax advantages in free zones, and updated tax rates for public-private partnership projects. This article takes a closer look at the innovations brought by Law No. 7524.
What is Law No. 7524?
Law No. 7524 represents comprehensive reforms to Turkey’s tax system. Published in the Official Gazette on August 2, 2024, and enacted thereafter, this law aims to update tax practices and strengthen fiscal policies. It introduces significant changes in the tax laws and by Decree Law No. 375. Regulations such as the introduction of a global minimum corporate tax, setting the domestic minimum corporate tax rate at 10%, and limiting tax exemptions in free zones have significant impacts on both large international firms and local businesses.
The Main Purpose of Law No. 7524
Law No. 7524 has introduced several new regulations to the tax laws in 2024. These regulations aim to reshape the tax obligations of both local and global businesses. Along with the law, a wide range of adjustments has been made from corporate tax to value-added tax (VAT), from income tax to free zones.
Focus Areas:
Global Minimum Corporate Tax
Domestic Minimum Corporate Tax
Tax Rates in Public-Private Partnership Projects
Regulations for Investment Funds
Scope of Tax Exemptions in Free Zones
Who Does Law No. 7524 Affect?
Law No. 7524 brings comprehensive changes in tax regulations, directly affecting many sectors. These include multinational corporations, companies operating in free zones, investors in public-private partnership projects, investment funds, and individuals earning commercial and professional income.
Multinational corporations: With the global minimum corporate tax regulation, these companies will be taxed at a certain minimum rate in every country they operate. This limits their tendencies to lean towards countries with low tax rates.
Companies in free zones: This law limits tax exemptions in free zones to only apply to export incomes, which removes tax advantages on domestic sales.
Investors and public-private partnership projects: The corporate tax rate applied to public-private partnerships has been raised to 30%. Especially companies investing in large infrastructure and service projects will need to do careful financial planning against rising tax rates.
Investment funds: New regulations for investment funds, particularly those affecting real estate gains, limit tax advantages. This might prompt fund managers to re-evaluate their strategies.
Individuals earning professional income: The introduction of a requirement to accurately declare earnings promotes compliance and allows for tax assessments when discrepancies are detected.
Key Innovations Introduced by Law No. 7524
Global Minimum Corporate Tax Regulation:
A significant step towards taxing multinational corporations, aiming to prevent them from gaining advantages by operating in low-tax countries. Each country will set a minimum tax rate, and companies will be taxed based on this rate. This aims to prevent tax evasion and ensure international tax justice.
Domestic Minimum Corporate Tax Rate:
The domestic minimum corporate tax rate has been set at 10% with this law. This regulation limits companies' attempts to reduce their tax liabilities through deductions and exemptions. The new rate calculated on company profits is a significant step towards maintaining fiscal discipline and increasing public revenues in Turkey.
Tax Rates in Public-Private Partnership Projects:
Public-private partnership projects and the build-operate-transfer model have been significant areas of investment in Turkey in recent years. The corporate tax rate for these projects has been updated to 30% by Law No. 7524. This rate might increase the costs for investors in infrastructure and public service projects, but it is also important for increasing the government's revenue and ensuring the sustainability of these projects.
This regulation has become an important financial aspect for investors, especially in large projects, as tax rates have been reshaped considering the economic contributions and long-term benefits of public-private partnership projects.
New Regulations for Investment Funds and Partnerships
Regulations aimed at investment funds intend to increase fiscal discipline by limiting tax advantages. With Law No. 7524, some exemptions applied to real estate gains have been limited. This contextually requires that 50% of real estate gains be distributed as profit sharing. This regulation encourages investment funds to manage their gains more efficiently and transparently while also increasing tax revenues.
Limiting Tax Exemptions in Free Zones
Free zones in Turkey offer significant tax advantages for export-oriented activities. However, Law No. 7524 has limited tax exemptions in free zones to export revenues. This regulation removes tax exemptions on profits from domestic sales. Businesses operating in free zones will now be subject to these new tax regulations, particularly for domestic sales, potentially necessitating a greater focus on exports.
New Tax Deduction Authority and Explanation Request Practice
Another significant regulation introduced by Law No. 7524 is the authority to deduct taxes from certain payments made to income and corporate tax payers. This authority aims to reduce revenue losses and enhance tax compliance, particularly for professional and commercial earnings. This regulation ensures that taxpayers fulfill their tax obligations more accurately.The explanation request practice draws attention as an application that encourages taxpayers to accurately declare their revenues. If discrepancies are found between declared revenues and those identified, taxpayers will be invited to explain. Insufficient explanations may lead to tax assessments.
Tax Advantages for Technology Startups
Tax advantages for technology startups, which have become an important part of Turkey’s entrepreneurship ecosystem, were also considered under Law No. 7524. Providing tax advantages on stock options in these companies aims to encourage investment and development in this field. This regulation will help technology and innovation-focused companies breathe more financially.
Explanation and Tax Assessment Authority
The authority to invite explanations if discrepancies are detected between declared revenues and monitored revenues over certain periods has been introduced. This contributes to more systematic and transparent tax audits, encouraging taxpayers to accurately declare their taxable incomes.
VAT Declaration and Non-deductible VAT Amounts
The regulation concerning non-deductible VAT amounts, if not deducted within five years, being removed from records is among the innovations. This arrangement allows for the consideration of non-deductible VAT as an expense after five years, aiming to reduce ambiguities in VAT application and make the tax system more predictable.
VAT Transfer in Mergers and Transfers
Mergers, transfers, and splits allow the transferred VAT amounts to be transferred to the new company, regardless of the five-year rule or statute of limitations. This enables companies to use tax advantages more effectively during restructuring processes. Such conveniences in the tax system help companies place their growth and expansion strategies on a healthier footing.
Special Consumption Tax (Excise Tax) and Customs Duty Exemptions
Certain VAT and Excise Tax exemptions in the customs law have been expanded under Law No. 7524. Particularly, clarifications made for sea transportation vehicles facilitate tax advantages for companies operating in the transportation and logistics sector.
Combatting the Informal Economy: Increasing Penalties for Irregularities
Regulations introduced as part of the fight against the informal economy aim to increase the transparency of the tax system. Under Law No. 7524, penalties for irregularities and special irregularities have been increased. This regulation will subject taxpayers involved in informal activities to more severe penalties. Enhancing tax compliance and minimizing the informal economy are considered significant steps in this regard.Law No. 7524 marks the beginning of a new era for both local and international companies by making radical changes in Turkey’s tax system. From the global minimum corporate tax regulation to limitations introduced in free zones, these innovations aim to ensure tax justice and increase public revenues. Companies must adapt to these changes by revisiting their financial planning and creating new opportunities. How these regulations contribute to economic growth will be closely monitored by all stakeholders in the future.
