New optional tax regime: revaluation of depreciable assets

In brief

The revaluation option is a one-time mechanism for Turkish resident individuals and companies to revalue for tax purposes their depreciable assets, including immovable properties. The mechanism requires payment of a one-time, 2% tax on the revaluation surplus. The deadline for applying the revaluation option is 31 December 2021

In detail

Law No. 7326, published on 9 June 2021, added a temporary provision to Article 31 of the tax procedural code, establishing an optional tax regime for the revaluation of depreciable assets.

The revaluation option is intended to address and partially correct distortions in taxpayer financial statements caused by inflation. Under this new provision, Turkish taxpayers are given the option to update the tax base of their depreciable assets and to enjoy a higher depreciation deduction for the remaining useful life of the asset. In addition, revaluation reduces taxable capital gains when revalued assets are sold.

Taxpayers who choose to revalue their depreciable assets will be subject to a special tax of 2%, which will be levied on the surplus calculated as a result of the revaluation.

Revaluation options are not new to Turkey. The country launched a similar program in 2018, albeit of a more limited scope. The revaluation mechanism introduced in 2018 was limited to the revaluation of immovable property (versus revaluation of all depreciable assets including immovable property as in the current, new regulation).

Who can benefit from the provision?

The provision is available to both income taxpayers and corporate taxpayers. However,

• banks and financial institutions,
• insurance and reinsurance companies,
• pension companies and private pension funds,
• those exclusively engaged in purchase and sale of gold and silver,
• those who have been permitted to keep their legal books in foreign currency,
• those who keeps their accounts using the simplified method,
• non-residents

cannot benefit from the revaluation option.

Which assets can be revalued?

The law allows for revaluation of immovable property and other depreciable assets.

However, immovable property and other depreciable assets that are subject to sale and leaseback transactions and those for which a lease certificate is issued cannot be revalued.

Calculations

Revaluation under this provision must consider the “revaluation factor” prescribed in the law.

The new value of the depreciable asset is calculated by multiplying the revaluation factor by the book value of the asset. The asset’s accumulated depreciation will be restated using the same revaluation factor.

Taxpayers may choose which depreciable asset they want to revalue and may conduct a partial or complete revaluation. This allows them to choose the specific depreciable asset to be revalued to achieve the optimum tax benefits.

Revaluation surplus: how is it accounted for?

The revaluation surplus (which is the difference between the net book value before revaluation and that after revaluation) goes directly into the equity section of the balance sheet under the revaluation reserve fund heading.

Tax payable on revaluation

Taxpayers who choose to revalue their depreciable assets will be subject to a 2% tax which will be calculated on the revaluation surplus.

The tax must be declared to the tax office by the end of the month following the revaluation date. The payment can be made in 3 equal instalments, the first one due by the date on which the revaluation is declared.

Depreciation after revaluation

Depreciation shall be calculated based on the asset value after revaluation. In other words, the revaluation will result in higher depreciation charges.

Sale of an asset after revaluation

The basis for calculating the capital gains from the sale of a depreciable asset shall be the asset value after revaluation.

Distribution of the revaluation surplus to shareholders

If the amounts recorded in the revaluation reserve account are withdrawn from the company or transferred to an account other than the share capital account, they will be subject to income or corporate tax.

Deadlines

This is an optional regime. Taxpayers who would like to

make use of this option must apply the revaluation by 31 December 2021 at the latest.

In making a decision as to whether to use the revaluation option or not, taxpayers need to compare the future tax benefits with the current tax payment of 2%. The improvement on equity should also be considered.

It is expected that the Ministry will soon issue a communiqué to better explain the implementation details of the new provision.