01.10.2024/50
In the Light of the Recent Regulations, the Status of Earnings of Corporations from Investment Funds and Partnerships against the Exemption for Participation Earnings
According to Article 5/1-d of the Corporate Tax Law, the earnings of investment funds and partnerships established in Turkey are exempt from corporate tax.
With the amendment made by Law No. 7524, at least 50% of the earnings of the funds and partnerships (except pension investment funds) from the immovable properties they own must be distributed as dividends until the end of the second month following the month in which the corporate tax return for the accounting period in which they are obtained. If these earnings are not distributed until the specified rate, the exemption will not be fully utilized.
For the application of the exemption, it is necessary and sufficient to distribute only the earnings from immovable properties, and there is no requirement to distribute other earnings.
On the other hand, Article 5/1-a of the Corporate Tax Law regulates the exemption for participation gains.
According to the aforementioned article
a) Institutions;
1) Earnings from participation in the capital of another fully taxpayer corporation,
2) Dividends from founders’ shares and other usufruct shares that allow participation in the profits of another corporation subject to full taxation,
3) Dividends from the participation shares of venture capital investment funds subject to full taxpayer liability and dividends from the shares of venture capital investment trusts and income arising from the return of the participation shares to the fund and the value increase gains arising from the valuation of the participation shares of these funds within the scope of Article 279 of the Tax Procedure Law No. 213
exempted from corporate tax.
As seen in the text of the Article, the exemption for participation gains is not applied to the gains derived from funds and partnerships other than venture capital .
The exemption for participation gains, which was introduced to prevent double taxation, is also applicable to the gains derived from other investment funds and partnerships due to the condition of distributing the gains derived from real estate. Funds and partnerships that do not distribute at least 50% of their earnings until the end of the second month following the month in which the corporate tax return for the accounting period in which they are obtained will be subject to corporate tax and there will be no re-taxation for the institutions that obtain dividends from them later.
In this context, subparagraph (4) of Article 5/1-a was amended as follows by Law No. 7524
“4) Dividends derived from other investment fund participation shares and shares of investment trusts, except those derived from funds and partnerships that do not benefit from the exemption in paragraph (d), cannot benefit from this exemption.”
As it is understood from this provision, corporations that receive dividends from funds and partnerships that do not fulfill the profit distribution requirement will be able to benefit from the exemption for participation earnings. In other words, if the fund or partnership’s own earnings are exempt, the participation earnings exemption can be applied, otherwise it will not be applicable.
Explanations on the subject are given in the Corporate Tax General Communiqué Serial No. 23 published in the Official Gazette dated 28.09.2024 and numbered 32676. In the Communiqué, the issue is explained and examples are given in the above-mentioned manner.
Accordingly, dividends obtained from funds and partnerships that meet the profit distribution requirement and benefit from the exemption will not be subject to the participation income exemption. Dividends derived from funds and partnerships that do not meet the profit distribution requirement and cannot benefit from the exemption will be subject to the participation income exemption.
On the other hand, according to the domestic minimum corporate tax practice introduced by Law No. 7524, the earnings of funds and partnerships from immovable properties will be taken into account in the minimum tax calculation. In other words, even if the funds distribute 50% of their earnings, they will pay minimum corporate tax on the earnings from immovable properties according to Article 32/C of the Corporate Tax Law.
In this case, on the one hand, institutions that obtain participation income from funds or partnerships whose earnings are exempt due to Article 5/1-d should not be able to apply the exemption in Article 5/1-a, but it is possible to apply the exemption to the participation income corresponding to the income subject to minimum tax.
Accordingly, it is possible to benefit from the participation income exemption for the portion of the minimum corporate tax paid by investment funds and partnerships, which corresponds to the dividends obtained by corporate taxpayers, calculated by taking into account the corporate tax rate.
The example in the aforementioned Communiqué on the subject is given below:
“Example 3: (C) Real Estate Investment Trust A.Ş. benefited from the exemption within the scope of subparagraph (d) of the first paragraph of Article 5 of the Law for its earnings obtained in the 2025 accounting period. In this period, the Partnership paid a minimum corporate tax of TL 500.000 at a rate of 10% on TL 5.000.000 of income from immovables. In addition, the Partnership distributed 50% of the immovable income to its shareholders.
(D) A.Ş., a shareholder of (C) Real Estate Investment Trust A.Ş., has obtained a dividend of TL 1.000.000 from this Partnership.
In this case, (D) A.Ş. will be able to subject [(minimum tax rate / corporate tax rate applied) x dividend income] [(10/25)x1.000.000=] 400.000 TL dividend income to the exemption of participation earnings.”
You can access the relevant Communiqué here .
Sincerely,
BİLGENER
