New tax exemption: Conversion to Turkish Lira time deposit accounts

In detail

On 21 December 2021 the Central Bank of the Republic of Turkey (CBRT) published a new communiqué applicable for those who convert their foreign currency deposits into Turkish Lira (TRY).

The Communiqué provided that, upon the depositor’s request, foreign currencies in deposit accounts may be converted to TRY and deposited in a TRY account that, in a nutshell, would work as follows:

• The interest accrued on a TRY-denominated time deposit account will be compared with the change in the foreign exchange rate on the maturity date and if the exchange rate increase is higher than the deposit interest on the maturity date, the depositor will earn a return equal to the exchange rate increase.
• If the exchange rate increase at maturity is lower than the deposit interest the depositor’s return will be equal to the deposit interest.

On 11 January 2022, the “foreign currency protected lira deposit” scheme that had been available only to resident individuals was made available to all companies resident in Turkey. Accordingly, the foreign currencies in corporate deposit accounts as of the end of 2021 may be converted to TRY and deposited in TRY deposit accounts with maturities of six months to a year under the scheme explained above.

The tax exemption

Now, law number 7352 published on 29 January 2022 adds a temporary provision to the Corporate Income Tax Law, establishing a tax exemption for gains derived under the concerned scheme.

According to this provision, if the foreign currencies which are available on the balance sheet of 31 December 2021 are converted into TRY until the submission date of the Q4/2021 advance corporate tax return (i.e. 17 February 2022) and if these amounts remain in a TRY deposit account for at least 3 months, following income shall be exempt from corporate income tax:

• F/X gains in relation to the period from 1 October 2021 to 31 December 2021
• F/X gains arising from the conversion of such foreign currencies
• Interest, profit shares and other earnings derived from the TRY deposit account.

If the conversion to a TRY deposit account takes place in 2022 but after the filing of the Q4/2021 advance tax return (i.e. 17 February 2022) the tax exemption is still possible, however it would include the following income:

• F/X gains corresponding to the period between the last day of the relevant quarterly tax period and the date on which foreign currencies are converted into a TRY account
• Interest, profit shares and other earnings derived from the TRY deposit account.

In this situation, the F/X gains accruing between 1 October 2021 and 31 December 2021 are not covered within the scope of the tax exemption.

Other notes

1. Aside from conversion of the foreign currencies, the tax exemption applies also to the income from conversion of the gold accounts.

2. According to the regulation of the CBTR, the concerned foreign currency protected TRY deposit accounts must have a maturity of 6 months in the case of corporations. In order to be able to benefit from the corporate tax exemption, it is understood that the Turkish Lira that will avail after conversion (from foreign currency or gold) must stay in the TRY time deposit account for a period of 6 months at a minimum. This matter needs clarification in the Communiqué to be published in relation to the corporate tax exemption in the coming days.

3. If the money in the TRY time deposit account is not held until maturity, the taxes that were not paid due to the exemption will be collected from the taxpayer together with penalties and late interest.

4. In addition to corporate taxpayers, the exemption applies for income taxpayers who keep accounting books using the balance sheet method.

It is expected that the Ministry will soon publish a Communiqué to guide the taxpayers on the implementation details of this new exemption. We will keep you updated.