Turkey amends notional interest deduction rule

In detail

As of 1 July 2015, Turkish resident companies (other than those carrying out business in the finance, banking and insurance sectors) are entitled to claim notional interest deductions on their equity capital contributed on or after 1 July 2015. This allows them to deduct from their taxable income notional interest calculated based on the capital contributed in cash.

The deduction is equal to 50% of the notional interest calculated on the capital increase (net of decrease). The deduction rate is 75% for capital contributions sourced from abroad. The notional interest rate is determined based on the interest rates Turkish Central Bank announces annually in relation to commercial bank credits.

Amended provision

With Law no. 7417 published in the official gazette on 5 July 2022, the right to claim notional interest deductions, which was available for an indefinite period under the previous legislation, has been limited to the fiscal year in which the decision on the capital increase is registered and the following four fiscal years.

For newly established companies and for companies that increased their capital before the amending law was published on 5 July 2022, the 5-year limitation will start in 2022.

If the taxpayer does not have sufficient taxable income to claim notional interest deduction in full, the amount of notional interest exceeding the net taxable income of the relevant fiscal year may be carried forward and used to offset the taxable income in following years even after the expiry of the concerned 5-year period. In other words, the amendment does not impose any limitation on the number of years the notional interest can be carried forward.