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Law No. 7326 on the Restructuring of Certain Receivables and Amendments to Certain Laws (“Law No. 7326”) entered into force by being published in the Official Gazette dated 9 June 2021. In Law No. 7326, provisions regarding (i) the restructuring of finalized tax receivables, (ii) tax receivables that are not finalized or are in litigation, (iii) tax assessments in litigation before first degree courts or whose deadline for filing a lawsuit had not expired, and (iv) tax base increase mechanism are included.
Another important amendment introduced by the Restructuring Law is related to the revaluation rules. As per the added subparagraph to provisional Article 31 of Tax Procedural Code No. 213 (“TPC”), taxpayers with full liability and subject to the balance sheet principle will be able to reevaluate their immovable properties and other economic assets subject to depreciation that is registered in their legal books, provided that the scope, conditions, and provisions of provisional Article 31 are met.
The referred provision regarding revaluation of immovable properties and other economic assets subject to depreciation is important in terms of the technical insolvency and bankruptcy calculations to be made within the scope of Article 376 of Turkish Commercial Code No. 6102.
In this newsletter article, the main principles of the revaluation regulations stipulated within the scope of Law No. 7326 are summarized.
Principles of Revaluation
The law allows for revaluation of immovable property and other depreciable assets. However, participation shares/share certificates are not within the scope of the revaluation regulation. Royalties, goodwill, research and development expenses, and leasehold improvements amount may be also subject to revaluation.[1]
On the other hand, immovable properties and assets that are subject to sell-rent-buyback transactions, or to the issuance of a lease certificate, are not included within the scope of the revaluation regulation. However, immovables abroad may be revaluated.
Resident income and corporate taxpayers keeping their legal books on a balance sheet basis may revalue their immovables on their assets and depreciable other economical assets. However, the below-mentioned taxpayers cannot benefit from the revaluation provisions:
- Non-residents (limited taxpayers)
- Those who keep their accounts using the simplified method
- Banks and financial institutions
- Insurance and reinsurance companies
- Pension companies and private pension funds
- Those exclusively engaged in the manufacture, purchase and sale of gold and silver
- Those who have been permitted to keep their legal books in foreign currency
Relevant taxpayers may revalue their immovables on their assets and depreciable other economical assets as of 9th June 2021 until 31th December 2021. During revaluation, immovables and depreciable other economical assets and associated depreciations are considered with their book values as of 9th June 2021.
As a result of revaluation, value increases arising in values of depreciable economical assets and immovables are demonstrated under a special fund account within the liabilities of the balance sheet. The referred amount recorded under a special fund account within the liabilities of the balance sheet can be used for capital increase transaction.
Taxpayers revaluating their depreciable assets will be subject to a tax at the rate of 2% to be calculated on the surplus as a result of the revaluation.
Such tax shall be declared to the related tax office in terms of income or corporate tax with a return to be submitted by the end of month following the date on which the valuation transaction is made, and its first installment shall be paid within the declaration submission period. The following installments shall be paid in three equal installments during the 2nd and 4th months following the declaration submission period. Tax paid cannot be deducted from income and corporate tax and accepted as expense for the determination of income and corporate tax base.
The Link Between the Revaluation Regulation and Article 376 of the TTC
The most important advantage provided by the aforementioned regulation is that the company balance sheets will be more realistic and closer to the market values[2].
Another important advantage is related to the technical insolvency and bankruptcy calculations to be made within the scope of Article 376 of the TCC. Under Article 376 of the TCC, the legal result of the (i) loss of one-half of the total capital and legal reserves, (ii) loss of two-thirds of the capital and legal reserves and (iii) total loss of the capital and legal reserves that refers to “bankruptcy” are regulated. The referenced provision reflects the capital maintenance principle regulated within the scope of the TCC.
However, as a result of the pandemic and currency fluctuations, most of the fully liable taxpayer companies’ balance sheets have been damaged, and the referenced companies fell within the scope of the above-noted Article 376 of the TCC. Thus, in order to assist these companies, the Communiqué on the Principles and Procedures for the Application of Article 376 of Turkish Commercial Code No. 6102 (“Communique”) was published in the Official Gazette dated 26th December 2020, No. 31346.
In addition to the Communiqué, within the scope of the aforementioned revaluation mechanism, it is foreseen that company equity will also strengthen with the effect of the amount to be kept in a special fund account for liabilities.
Conclusion
An important amendment introduced by Law No. 7326 is related to the revaluation rules. As per the added subparagraph to provisional Article 31 of the TPC, taxpayers with full liability and subject to the balance sheet principle will be able to reevaluate their immovable properties and other economic assets, subject to depreciation that is registered in their legal books, provided that the scope, conditions, and provisions of provisional Article 31 are met.
The most important advantage provided by the aforementioned regulation is that the company balance sheets will be more realistic and closer to the market values. Additionally, this would be beneficial the companies during the technical insolvency and bankruptcy calculations to be made within the scope of Article 376 of the TCC.
(Authored by Canan Doksat and first published by Erdem & Erdem on July 2021)
[1]Sağlam, Erdoğan, “Taşınmaz ve amortismana tabi diğer iktisadi kıymetleri 2021 sonuna kadar yeniden değerleme imkânı”, https://t24.com.tr/yazarlar/erdogan-saglam/tasinmaz-ve-amortismana-tabi-diger-iktisadi-kiymetleri-2021-sonuna-kadar-yeniden-degerleme-imkani,31455 (Access Date: 22.06.2021).
[2]Ak, Mustafa, “Yüzde 2 Vergi Ödemeli Yeniden Değerleme, Bir Taşla Üç Kuş”, https://www.dunya.com/kose-yazisi/yuzde-2-vergi-odemeli-yeniden-degerleme-bir-tasla-uc-kus/624465, (Access Date: 22.06.2021).