Englısh Translatıon
Ernst&Young Türkiye
AMENDMENTS MADE IN THE CONDITIONS OF ENTITLEMENT OF COOPERATIVES TO TAX EXEMPTION WITH THE NEW CORPORATE TAX CODE
As known, pursuant to the definition in the Cooperatives Statue, cooperatives are organizations with variable members and variable capitals which are established by real and legal persons as well as private administrations, municipalities, villages, societies and associations with a view to maintain and protect certain economic interests and especially occupational and subsistence needs of their members with legal entity through mutual assistance, cooperation and guarantee. Approximately 5 million people try to realize the purposes we have stated above in cooperatives half of which are active and number of which reaches up to 80.000.
In new Corporate Tax Code, cooperatives have been regarded as liables of tax, as they were in the previous Code. The fundamental reason for subjecting the earnings of cooperatives establishment of which is for social reasons rather than economic reasons is to prevent unfair competition in economy. Moreover, the cooperatives considered as liables of corporate tax are not limited with those cooperatives established in our country. In Article 2 of the Code titled as “Taxpayers”, it has been stipulated that earnings of foreign cooperatives are also subject to corporate tax as well as of those cooperatives established pursuant to Cooperatives Statue or special codes. Within this context, consumers’ cooperatives, transportation cooperatives, production cooperatives, loan cooperatives, sales cooperatives and construction cooperatives and foreign cooperatives of the same nature are corporate tax liables.
In this article, we will handle the status and liability conditions of cooperatives in terms of corporate tax in light of the provisions of the new Corporate Tax Code and in comparison with the previous Code.
Cooperatives In Light of the Provisions of New Corporate Tax Code
A. Corporate Taxpayer Cooperatives
As we have noted in Introduction section of our article, the Lawmaker has regarded cooperatives as one of the corporate taxpayers in the new Code.
However, some amendments in the relevant provisions of the new Code are at issue. In the new Code, cooperatives have been defined as “cooperatives established pursuant to Cooperatives Statue No. 1163 or special codes and foreign cooperatives of similar nature” without being listed one by one; unlike the previous Code (Corporate Tax Code No. 5422 applied until 31.12.2005).
In the Rationale of the Article it has been stated that whether or not a foreign corporation is cooperative will be determined pursuant to the relevant provisions of the Cooperatives Statue.
In the same Rationale, it has been emphasized that school cooperatives which are not established according to the Code No. 1163 or are not economic enterprise of an association are excluded from the scope of taxation.
B. Cooperatives exempted from Corporate Tax
While stipulating in the first Article of the new Code that cooperatives are corporate taxpayers, the Lawmaker exempts those fulfilling the conditions specified hereby from corporate tax.
There are differences between the previous and new Codes concerning the determination of the cooperatives under the scope of exemption. In other words, while all cooperatives fulfilling the conditions specified are exempted from corporate tax in the previous Code, consumers’ cooperatives and transportation cooperatives have been excluded in the new Code. Consumers and transportation cooperatives will not be exempted from corporate tax even though they fulfill the conditions specified.
After making this determination, we can move onto necessary conditions for exemption:
Cooperatives other than consumers’ and transportation cooperatives are to include provisions stipulating the following conditions in their main articles of association in order to benefit from corporate tax exemption:
1) profit will not be distributed over the capital,
2) shares should not be granted to the head and members of the board of directors,
3) reserve funds should not be distributed to the shareholders and
4) business should be made with only shareholders
Since inclusion of these conditions in the main articles of association was not sufficient for the Lawmaker, a provision necessitating that these conditions be fulfilled actually to be entitled to corporate tax exemption has been inserted in the Article.
As can be seen, the conditions specified with the new Code differ from the conditions specified in the previous Code in one point; which is related to the membership of cooperatives to a union. In more explicit words, in the previous Code it was stipulated that for tax exemption the condition of being a member to a union would sought in addition to these conditions. A provision in brackets concerning this issue has been included in Article 7 of Corporate Tax Code (paragraph No. 17) with the Law No. 4369 taking effect in 1998. However, this condition is not included in the new Code.
Although deleted from the text of the Article in the new Code, the issue of whether or not a condition for exemption from corporate tax such as membership to a union will be sought is still in dispute since it is a provision included in the Cooperatives Statue. In more explicit words, after it is stated in paragraph 3 of Article 93 of Cooperatives Statue that “cooperatives, cooperative associations, central cooperative associations and National Turkey Cooperatives Union benefit from exemption from Corporate Tax under the scope of the principles in paragraph 16 of Article 7 of Corporate Tax Code No. 5422 amended with the Law No. 199”; in paragraph 4 of the same Article it is stipulated that if cooperatives, cooperative associations and central cooperative associations don’t affiliate with a union in operation, they won’t be entitled to exemptions stated in paragraphs except subparagraph b of paragraph 1 and subparagraph 2 of Article 93.
In Temporary Article 1 of the new Code, while following the provision that “references made to the Code No. 5422 with Other Codes are deemed to be referred to this Code for the relevant Articles”, it is stated that the provision at issue will be in effect in terms of the new Corporate Tax Code; stating in paragraph 9 of the same Article that “Article 35 does not apply for exemption, exclusion and reductions in other codes concerning the corporate tax before the enforcement of this Code” it is maintained that the provision in Cooperatives Statue is not affected from the provisions of “The provisions concerning exemption, exclusion and reductions in other codes are invalid in terms of corporate tax” inserted in Article 35 of the new Corporate Tax Code and to take effect as from 2007.
While the condition of “being affiliated to a union” has been removed from the Corporate Tax Code in line with the decision of the Lawmaker, will this condition stated in another Code continue to be sought? Different answers can be given to this question. At this point we would like to present hereby the decision of Council of State Tax Law Divisions dated 11.12.1998 thinking that this would help those implementing the provisions.
In this decision taken concerning the period before the condition of being affiliated with a union was introduced in the Article 7 of the Corporate Tax Code No. 5422 for the cooperatives to benefit from tax exemption (1997) it was stated briefly that
“Since in paragraph 16 of Article 7 of the Corporate Tax Code it is stipulated that Cooperatives, providing that in their articles of association there exist provisions to the effect that earnings shall not be distributed on the basis of capital, that shares shall not be distributed to the chairman and members of the board of directors on the basis of earnings, that the reserve funds shall not be distributed to members, and that they shall engage in business solely with their members are exempted from corporate tax; moreover, in Article 93 of Cooperatives Statued titled “Exemptions” it is stated that cooperatives, cooperative associations, central cooperative associations and National Turkey Cooperatives Union will not be entitled to benefit from exemption provisions of the Corporate Tax Code if they don’t affiliate with unions; it is understood that the provision of paragraph four which requires the membership to a union for the entitlement to exemption from corporate tax is included in the Code to strengthen the cooperative system; cooperatives are not obliged to affiliate with a union pursuant to Cooperatives Statue; membership to a union is not compulsory; a condition in form is introduced with the provision in Article 93 of Cooperatives Statue in terms of exemption from corporate tax and the basic condition for exemption consists of the conditions stated in paragraph 17 of the Article 7 of the Corporate Tax Code No. 5422. Essentially, cooperatives which engage in business solely with their members, don’t distribute earnings on the basis of capital, don’t distribute share to the chairman and members of the board of directors on the basis of earnings; don’t distribute reserve funds to members and which have provisions concerning these in their articles of association will perform their activities aiming to have their members reach to the purpose of establishment as soon as possible and at the lowest cost; they won’t be able to acquire taxable corporate income. In such case, it is not possible for the cooperatives not violating the conditions foreseen in the paragraph 16 of the Article 7 of the Corporate Tax Code to be considered as corporate taxpayers solely on the grounds that they are not members of unions in operation and without determining that they derive taxable income.
… Cooperatives which are not corporate taxpayers cannot be net active taxpayers.”
Another difference of provisions of the new Corporate Tax Code concerning the exemption of cooperatives from corporate tax from the provisions of the previous Code is that new conditions are introduced for construction cooperatives as well as those specified above. Undoubtedly, the purpose of this amendment is to prevent the exclusion of commercial activities currently performed under the name of cooperative from the scope of taxation. In other words, it is aimed to levy tax over the establishments which perform activities under the name of construction cooperative, but in fact lead to unfair competition and tax loss by being engaged in “Construct-Sell Construction” in fact and which are engaged in activities which don’t meet social purposes of cooperative system. As known, today, business enterprises which organize under the name of cooperative although they are not in fact, show their customers as cooperative members and benefit from many tax advantages including corporate tax exemption granted to cooperatives have become common.
After new regulations, construction cooperatives which persons getting together for cooperation and mutual assistance establish to meet housing needs will undoubtedly continue to benefit from exemption.
Accordingly, construction cooperatives shall meet the conditions that real persons and legal persons representatives undertaking the said construction works partially or wholly or persons considered to be related with these pursuant to Article 13 of the Code or those engaged in employee and employer relation with the persons stated above are not included in their board of directors and supervisory boards and that construction license and land title is registered in the name of cooperative legal person will be sought beginning from 2006 as well as the conditions that in their articles of association there exist provisions to the effect that earnings shall not be distributed on the basis of capital, that shares shall not be distributed to the chairman and members of the board of directors on the basis of earnings, that the reserve funds shall not be distributed to members, and that they shall engage in business solely with their members. It is clear that the Lawmaker prohibits not only the contractors working for construction cooperatives but also persons related to them to serve in board of directors and supervisory boards.
The persons under the scope are specified in Article 13 of the new Corporate Tax Code. In the Article at issue, related person is defined as the companies’ own partners, real or legal persons with which companies or partners have an association and real persons or legal entities directly or indirectly associated with it or having an influence over from the standpoint of management, supervision or capital. Partners’ spouses, lineal ancestors and children of the partners or their spouses and siblings and affinities by marriage including third degrees are also deemed related party.
In the event that construction cooperatives sell their real estate to non-members; since they will have breached the condition of “engage in business solely with their members” in act although there are provisions in articles of association concerning that business will be performed solely with members, they will lose their right to tax exemption and they will file annual corporate tax return and pay tax due to their earnings derived from this sale.
Another situation which causes forfeiture of the exemption right, is that construction cooperatives sell the real properties they own to those who are not members. In such a case, even if there are provisions in the articles of association, stating that business can be conducted exclusively with members, the cooperative will lose its corporate tax liability.
However, in case construction cooperatives have dwellings or business places constructed by selling their land to a contractor, this transaction will not be considered transaction not performed with members and cooperative will not be considered to have lost exemption conditions on condition that a dwelling or business place is acquired for each share.
The Legislator has granted a transition period in the application of the conditions summarized above and introduced especially for construction cooperatives, for the construction cooperatives established before the year 2006, since the tax exemption is abused from time to time and leads to tax loss consequently, and with the Temporary Article 1 annexed to the Corporate Tax Code, a period has been granted until 31.12.2006 in order for the construction cooperatives which are in this situation, to make their statuses compliant with the new conditions. Within this period, cooperatives will exclude the representatives of real persons and legal persons who partially or wholly undertake construction work, or those deemed having an association with these persons pursuant to Article 13 of the Code or those persons having an employee and employer relationship with these persons, from the board of directors or supervisors; if there are no such persons, they will register the building license and the land title deed under the name of the legal entity of the cooperative.
In the same article, it is stipulated that the exemption of the cooperatives which are not made compliant with the newly determined conditions will be deemed to have ended as of 01.01.2006. This is a significant point with regard to cooperatives. The construction cooperatives which do not meet the necessary conditions until 31.12.2006 and lose their liability, will be deemed as corporate taxpayers as of 2006, not as of 2007 and will file the corporate tax returns relating to this year in April 2007.
THE CONCEPT OF "EARNINGS OF CONTROLLED FOREIGN CORPORATIONS" IN LIGHT OF THE NEW CORPORATE TAX CODE
The concept of “Earnings of Controlled Foreign Corporations” was introduced to our tax regime with the Article 7 of the new Corporate Tax Code No. 5520 for the first time. The purpose of this arrangement is to levy tax over the income that the taxpayers who direct their investments to countries with low tax rates abroad through their participations derive under certain conditions in these countries, without waiting for them to be transferred to
In this article, we will provide information about the conditions required for subjection of the earnings of controlled foreign corporations to tax in
Conditions for Taxation in
The conditions specified in the Article are enumerated below:
· Resident taxpayers should participate directly or indirectly, separately or collectively at least 50% rate in the capital, profit share or voting right in companies that have been established abroad,
· 25% or more of the total gross revenue of the company should be comprised of passive income such as interest, profit share, rent, license fee, capital gains from activities other than commercial, agricultural or independent professional activities performed through capital, organization and employment of staff pro rata the activity
· The company abroad should be levied a total tax burden over the balance sheet profit such as income and corporate tax,
· Annual gross revenue of the foreign company should exceed a foreign currency amount corresponding to TRY 100.000.
We should explain these conditions to render the issue be understood more clearly.
a. The Condition of Minimum 50% Participation Rate
As it has been explicitly stated in the Code, other conditions being fulfilled, in the event that a resident corporation participates in other corporations in a foreign country at least 50% rate; the presence of a control factor over the foreign corporation is accepted. Whether participation is in direct or indirect form or whether taxpayers participate in the foreign corporation separately or collectively should be taken into consideration in the determination of total participation rate.
b. The Condition of Passive Income
Second condition required for the taxation of the earnings of a controlled foreign corporation in Turkey without making profit distribution to its shareholder resident in Turkey is that 25% or more of the total gross revenue of the controlled foreign company
· should not emerge from commercial, agricultural or independent professional activities performed through capital, organization and employment of staff pro rata the activity, or
· should be comprised of passive income such as interest, profit share, rent, license fee, capital gains.
c. The Condition That Tax Burden of the Controlled Foreign Company Be Less Than 10%.
Tax burden will be calculated basically as follows:
Given that;
TTB is Total Tax Burden,
AT is Total Tax Accruing Over Income
DCI is Distributable Corporate Income;
AT
TTB = ----------------
DCI + AT
Distributable earnings should be understood as the amount to be calculated by deducting accruing taxes from the trade balance profit of the foreign company.
d. The Condition that Annual Gross Revenue of the Company Exceed Foreign Currency Corresponding to TRY 100.000
According to the explanation made in the rationale of the Code concerning the calculation of foreign currency corresponding to TRY 100.000; the earnings of foreign company should be converted to TRY taking into consideration the Buying Rate of the Central Bank of Republic of Turkey which is effective in the last day of the fiscal year of the company during the insertion of earnings of the foreign company to the accounts of the company in Turkey.
Taxation Period in
In the Article 7 of Corporate Tax Code No. 5520, it has been stipulated that if all conditions aforementioned are satisfied, the profit that the company established abroad has acquired will be included in the corporate tax base of resident corporations pro rata their shares as of the fiscal period covering the month when the fiscal period ends. For example, as of December 2006, the earnings of foreign company pertaining to 2006 should be included in the tax base of the corporation in
Presence of Differences in the Participation Rate within the Year
In Article 7 of Corporate Tax Code regulating the issue, it has been stated that the highest rate at any date within the fiscal period will be taken into consideration in the determination of the control rate. However, it has been stipulated that the profit that the company established abroad has acquired will be included in the corporate tax base of resident corporations pro rata their shares as of the fiscal period covering the month when the fiscal period ends. Pursuant to these provisions, the profit should be included in the corporate base of resident corporation at the rate which the company participates in the foreign company at the end of the fiscal period. The highest participation rate within the year should be taken into account during the determination of whether or not the conditions of the control factor have been satisfied.
Disposal of Shares before the End of Taxation Period
It has been stated in the rationale of the Code that if shares are disposed without any fictitious transactions before the end of period, the condition for taxation is deemed not to have emerged even though the participation rate has reached more than 50% rate within the period. These fictitious transactions can be defined as the transactions performed to avoid paying tax such as disposal of shares before the end of period and repurchase of the shares after taxation period.
Taxes Paid Abroad
For the prevention of double taxation, taxes paid by the foreign company to abroad over its earnings will be deducted from the tax calculated in Turkey pursuant to the provisions concerning “deduction of the taxes paid in abroad” regulated in Article 33 of Corporate Tax Code.
Subsequent Subjection of Earnings to Profit Distribution by Affiliates
In the last paragraph of the Article 7 of Corporate Tax Code, it has been stated that if the income taxed in Turkey pursuant to the provisions of this article is subjected to profit distribution subsequently by the foreign company, the portion of the profit shares acquired over which tax is not levied will be subject to corporate tax in Turkey. This provision aims to prevent double taxation in the event that the income previously taxed in line with the provisions concerning the earnings of controlled foreign company is subjected to actual distribution at a later date.
In the Presence of A Double Taxation Treaty Signed Between
Whether or not there is a double taxation treaty with the country of residence of the company does not make any difference in terms of the implementation of this Code. On the other hand, it has been stipulated in some treaties signed with Turkey (such as the Netherlands and Belgium) that dividend income which resident corporate taxpayers established in Turkey will acquire from the companies in these countries are exempt from corporate tax in Turkey; which means that this income will not be taxed in Turkey even if the companies in these countries make dividend distribution to their shareholders in Turkey. Therefore, we are in the opinion that the provisions concerning controlled foreign corporations will not apply over the companies in these countries.
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