EARNINGS EXEMPTION PROVIDED TO TAXPAYERS OPERATING IN TECHNOLOGY DEVELOPMENT ZONES
Pursuant to the first paragraph of the Provisional Article 2 of Law No. 4691, income and corporate taxpayers operating in a Technology Development Zone are exempt from income and corporate tax on their earnings derived exclusively from software, design and R&D activities in the Zone.
Öte yandan, anılan maddenin ikinci fıkrası ise aynen aşağıdaki gibi hüküm altına alınmıştır:
“In the event that the income and corporate taxpayers operating in the zone derive these earnings from the sale, transfer or lease of intangible rights, to condition the utilization of the exemption on the condition that these rights, according to their nature, are obtained as a result of R&D activities and are registered or registered or notified within the framework of the relevant legislation, to allow the taxpayer to benefit from the exemption starting from the taxation period in which the transactions giving rise to these gains are carried out, provided that the application has been made to the authorized institution for registration or registration until the end of the period in which the declarations for the taxation period in which the income is obtained, to subject the taxpayer to the certification procedure without the condition of registration according to the intangible rights income and, if any, the sales revenue of the group to which the taxpayer is affiliated, to limit the income to benefit from the exemption; The President of the Republic is authorized to define qualified and total expenditures, and the Ministry of Treasury and Finance and the Ministry of Industry and Technology are authorized to determine the procedures and principles regarding the fulfillment of the registration, registration or notification requirement and the implementation. In the event that the registration, registration or notification requirement is not fulfilled within the framework of the determined principles, the tax not accrued on time shall be collected together with the default interest without applying a tax loss penalty.”
The procedures and principles regarding the implementation of the second paragraph of the Provisional Article 2 of the Law No. 4691 were determined by the Decree of the Council of Ministers dated 11/9/2017 and numbered 2017/10821 and the Presidential Decree dated 30/8/2018 and numbered 54.
Accordingly, as a rule, earnings from software, design and R&D activities carried out in the Zone are exempt from income and corporate taxes. However, in some cases, the scope of the exemption has been narrowed or some procedures and principles regarding the exemption have been introduced by the Council of Ministers / Presidential Decree based on the authority granted by the Law, and the information summarizing these situations is given in the table below.
| Income Earned in the Region (Software, Design, and R&D Activity) | Exemption of Income | Cabinet/Presidential Decision |
| Sale, transfer, or lease of intangible rights (software, R&D) | Exempt | Subject |
| Sale, transfer, or lease of intangible rights (design) | Not exempt | – |
| Income earned in cases where no intangible rights are created in favor of the performing party (software, design, and R&D) | Exempt | Not subject |
| Income not related to the sale, transfer, or lease of intangible rights (software, design, and R&D) | Exempt | Not subject |
On the other hand, taxpayers operating in the Zone cannot benefit from the exemption even if the earnings from the activities carried out outside the Zone are derived from software, design and R&D activities.
1. Procedures and Principles to be Complied with Regarding the Earnings Subject to Exemption within the Scope of the Council of Ministers/Presidential Decree
Pursuant to the authorization granted by the Provisional Article 2 of the Law No. 4691, the procedures and principles determined in the Decree of the Council of Ministers dated 11/9/2017 and numbered 2017/10821 and the Presidential Decree dated 30/8/2018 and numbered 54 must be complied with for the earnings subject to the exemption within the scope of the Council of Ministers / Presidential Decree. Accordingly;
- In order for the earnings from the sale, transfer or lease of intangible rights that are within the scope of the Council of Ministers / Presidential Decree to benefit from the Provisional Article 2 of the Law No. 4691; according to the nature of these rights, applying to the institution authorized to register or record within the framework of the relevant legislation and binding to a patent or functionally equivalent to a patent,
- Calculation of the portion to benefit from the exemption by using the ratio of qualified expenditures incurred within the scope of the activity giving rise to the income to total expenditures,
is required. These procedures and principles are explained below under headings.
1.1 Patent or Functionally Equivalent Documents
In order for the earnings within the scope of the Council of Ministers / Presidential Decree to benefit from the exemption within the scope of the Provisional Article 2 of the Law No. 4691, it is necessary to apply to the institution authorized to register or record within the framework of the relevant legislation according to the nature of the intangible rights and to be linked to a patent or functionally equivalent to a patent.
The following documents are considered to be functionally equivalent to patents.
a) Utility model certificate
b) Design registration certificate (obtained as a result of R&D activities)
c) Copyright registration certificate
d) Integrated circuit topography registration certificate
e) Breeder’s right registration certificate for new plant varieties
f) and similar documents
Within the framework of the Law on Intellectual and Artistic Works No. 5846 dated 5/12/1951 and numbered 5846, earnings from software activities that are linked to the copyright registration certificate can benefit from the exemption without seeking any other document.
Project Completion Certificate²
Taxpayers whose annual gross revenues from intangible rights, taking into account the average of the last 5 accounting periods, do not exceed 140 million Turkish liras (2023) and the total annual net sales revenue of the group of companies to which it belongs (itself, if not included in any group) does not exceed 940 million Turkish liras (2023),
Earnings from intangible rights that meet the patentability criteria (such as innovation, inventive step, industrial applicability) for R&D activities, obtained from the Ministry of Industry and Technology project completion certificate is utilized from the exemption.3 In this case, a patent or another document functionally equivalent to a patent is not required.
In this calculation, the average of the 5 accounting periods prior to the accounting period in which the income subject to the exemption within the scope of the Council of Ministers / Presidential Decree is obtained will be taken into account. For taxpayers operating for less than 5 accounting periods, the average of the accounting periods in which they have been operating will be taken into account.
In this application:
a) Annual gross revenue from intangible rights; the amount of revenue obtained from new products resulting from R&D activities (excluding the revenue obtained as a result of mass production and use in the production process),
b) Annual net sales revenue; the amount of “net sales” in the income statement,
c) Group of companies; companies considered as a group of companies within the framework of Article 195 of the Turkish Commercial Code No. 6102,
refers to.
Requirement to Apply to the Competent Authority
Taxpayers may benefit from the exemption starting from the taxation period in which the transactions giving rise to these gains are carried out, provided that the application is made to the authorized institution for registration or registration until the end of the period in which the declarations for the taxation period in which the gain is obtained.
Example: The project information of (A) Ltd. operating in (ABC) Technology Development Zone within the scope of the Decree of the Council of Ministers / President of the Republic, coded 01, is as follows
| Project Code 01 | Condition 1 | Condition 2 |
| Taxation period in which the income was earned | 2021 | 2021 |
| Patent or equivalent document application date | 15.03.2022 | 15.06.2022 |
| Patent or equivalent document acquisition date | 10.10.2022 | 01.09.2022 |
| Income obtained | Eligible for exemption | Not eligible for exemption |
Accordingly, in the 1st case, since the application is made to the authorized institution until the end of the deadline for the submission of the corporate tax return for the taxation period in which the gain is obtained, the gain exemption is benefited. In the 2nd case, the exemption cannot be benefited from since the application is not made to the authorized institution until the end of the period in which the said declaration should be submitted.
In the event that the registration, registration or notification requirement is not fulfilled or the application is made in due time but this request is rejected, the tax not accrued on time shall be collected together with the default interest without applying a tax loss penalty.
1.2. Qualified Expenditure/Total Expenditure Ratio (The Part of Earnings to Benefit from Exemption)
Within the scope of the Decree of the Council of Ministers/President, the part of the earnings arising from intangible rights that are linked to patents or functionally equivalent to patents, which will benefit from the exemption, is calculated by using the ratio of qualified expenditures realized within the scope of the activity that gives rise to the earnings to total expenditures. This calculation is made for each project. Accordingly, the portion of the income from each project carried out in the region that will benefit from the exemption will be calculated by applying the ratio of qualified expenditures related to the relevant project to total expenditures.
In this context, the expenditures to be taken into account in the numerator (qualified expenditure) and denominator (total expenditure) of the ratio to be calculated for each project are shown in the table below.
| Type of Expenditure | Qualified Expense | Total Expense |
| Expenses directly related to the intangible asset made by the taxpayer and benefits and service costs of the same nature obtained from unrelated persons (Expenses that need to be capitalized and amortized will also be considered in this calculation with their pre-amortization amounts in the period they are incurred.) | Considered | Considered |
| Cost of benefits and services obtained from domestic related parties | Considered4 | Considered |
| Cost of benefits and services obtained from foreign related parties | Not Considered | Considered |
| Intangible asset purchase costs (including license and similar fees) | Not Considered | Considered |
| Type of Expenditure | Qualified Expense | Total Expense |
| Any cost elements not directly related to the ongoing software and R&D activities, such as interest expenses and building costs (Therefore, financing expenses such as interest, and depreciation, rent, heating, lighting, water, cleaning, security, maintenance, repair, taxes, duties, and fees related to buildings, as well as general administrative expenses not directly related to ongoing software and R&D activities, will not be considered in the calculation.) | Not Considered | Not Considered |
| *If externally provided benefits and services are used in multiple projects, the share of these benefits and services allocated to each project will be determined proportionally to the total expenditure for each project. **If purchased intangible assets are used in multiple projects, the share of the cost of these intangible assets will be allocated to each project proportionally based on the amortization calculated for each project. ***Until the end of the taxation period that includes the date of full membership to the European Union, in case of transfer, merger, or division with another institution operating in technology development zones, previously incurred expenses by the transferred, merged, or divided institution will be considered. |
Pursuant to the Decree of the Council of Ministers dated 1/9/2017 and numbered 2017/10821, taxpayers may increase the qualified expenditure amount up to 30%. Provided that the amount of qualified expenditure so increased shall not exceed the total amount of expenditure.
Example:5 (A) Ltd. R&D initiated in the technology development zone on 22/11/2017
made by him/her within the framework of the project and directly linked to the intangible right
105,000 TL was spent. In addition, the Company incurred expenses amounting to TL 30,000 for building rent and loan interest that are not directly related to the project, purchased an intangible right to be used in the project for TL 35,000, and provided engineering services amounting to TL 10,000 from a related person abroad.
The Company has sold the intangible right related to this project and realized a gain of TL 1.000.000 from this sale.
In this case, the expenditure of TL 30.000, which is not directly related to the project, will not be included in the total expenditures and qualified expenditures in the calculation of the exempt part of the gain arising from the sale of the intangible right. In addition, in this calculation, the cost of the intangible right purchased by the company and the amount of benefits and services provided from the related person abroad will be included in the total expenditure, but will not be included in the qualified expenditure amount.
According to this;
- Qualified expenditure = 105.000 TL
- Total expenditure = 105.000 TL + 35.000 TL + 10.000 TL = 150.000 TL
- exemption rate = Qualified expenditure / Total expenditure
= 105.000 TL / 150.000 TL
= %70
In this case, an exemption will be applied for 70% of the gain from the sale of the intangible right related to this project, which is (1.000.000 TL x 70%=) 700.000 TL.
In addition, if the 30% increase rate specified in the Council of Ministers Decree is applied, the exemption rate will be calculated as follows.
- Qualified spending = 105.000 TL
- %30 Incremental amount = 105.000 TL + (105.000 TL x %30)
= 136.500 TL
- Total expenditure = 150.000 TL
- exemption rate = Qualified expenditure / Total expenditure
= 136.500 TL / 150.000 TL
= %91
In this case, as a result of increasing the qualified expenditure amount by 30% within the scope of the Council of Ministers Decree, 91% of the taxpayer’s income from the sale of the intangible right related to this project (1.000.000 TL x 91% =) 910.000 TL will be able to benefit from the exemption.
2. Determination of the Exempt Earnings Amount
The exemption in the Provisional Article 2 of Law No. 4691 is an income exemption and the income to be found as a result of deducting the expenses and cost elements incurred due to these activities from the revenue obtained from the activities within the scope of the exemption will be exempt from income and corporate tax.
In terms of determining the exempt income and in this context the income and corporate tax base, Revenue, cost and expense elements that are and are not within the scope of the Law should be monitored separately and revenue, cost and expense elements of the activities within the scope of the exemption should not be associated with other activities and records should be kept in a way to ensure this distinction.
In the event that the exempted activities within the scope of the Law result in losses, it is not possible to deduct these losses from the earnings related to other activities that are not within the scope of the exemption.
Example: The activity of (A) A.Ş. operating in the (ABC) Technology Development Zone in 2020 within the scope of the exemption in this region resulted in a gain of 150.000 TL. In the same year, this organization has a gain of 200.000 TL due to its activities outside the region.
In this case, the corporate tax base of the said corporation will be calculated as follows.
| 2020 Accounting Period | Amount (TRY) |
| Income outside the technology development zone (A) | 200,000 |
| Income within the technology development zone (B) | 150,000 |
| Commercial balance profit (C=A+B) | 350,000 |
| Technology development zone income exemption (D) | 150,000 |
| Corporate tax base (E=C-D) | 200,000 |
On the other hand, if the income obtained in the technology development zone consists of the income within the scope of the Decree of the Council of Ministers/President of the Republic and the ratio of qualified expenditure/total expenditure is 90% (with a 30% increase), the corporate tax base will be calculated as follows (It is assumed that the income obtained in the zone is obtained from a project. If it is obtained from more than one project, the exempt income amount will be determined by taking into account the qualified expenditure/total expenditure ratio of each project).6
| 2020 Accounting Period | Amount (TRY) |
| Income outside the technology development zone (A) | 200,000 |
| Income within the technology development zone (B) | 150,000 |
| Commercial balance profit (C=A+B) | 350,000 |
| Technology development zone income exemption (D=B*%90) | 135,000 |
| Corporate tax base (E=C-D) | 215,000 |
Example: The activity of (A) A.Ş. operating in the (ABC) Technology Development Zone in 2020 within the scope of the exemption in this region resulted in a gain of 150.000 TL. In the same year, this organization has a gain of 200.000 TL due to its activities outside the region.
In this case, the corporate tax base of the said corporation will be calculated as follows.
| 2020 Accounting Period | Amount (TRY) |
| Income outside the technology development zone (A) | 200,000 |
| Loss incurred in the technology development zone (B) | -150,000 |
| Commercial balance profit (C=A-B) | 50,000 |
| Non-deductible expenses (Loss incurred in the technology development zone) (D) | 150,000 |
| Corporate tax base (E=C+D) | 200,000 |
t is not possible for taxpayers operating in the region to evaluate their income from commercial transactions outside the scope of Law No. 4691 and their extraordinary income within the scope of the exemption. In this context, interest income arising from the utilization of cash, exchange differences arising from foreign currency denominated assets and income from the disposal of economic assets will not be considered within the scope of the exemption.
Since the aids provided to income and corporate taxpayers operating in the zone as capital support with the condition of repayment from other institutions are in the form of debt, it will not be possible to include these aids in commercial income.
On the other hand, taxpayers operating in technology development zones may be granted an exemption for their projects that benefit from the exemption., The support amounts provided by TÜBİTAK and similar institutions in the form of grants within the framework of the relevant legislation and all kinds of donations and aids of this nature by other institutions will be included in the corporate income and will benefit from the exemption.
2.1 Allocation of Joint Overhead and Depreciation
In the event that the activities within the scope of the exemption are carried out together with the works that are not included in this scope, the joint overhead expenses should be distributed based on the ratio of the costs incurred in the current year in relation to these activities.
The depreciation of the installations, machinery and transportation vehicles used jointly in the activities within and outside the scope of the exemption should be distributed according to the number of days they are used in each business. Depreciation of fixed assets, which cannot be determined for how long they are used in which business, will be subject to distribution together with joint overhead expenses.
2.2. Earnings from Mass Production
In the event that taxpayers engaged in software and R&D activities in technology development zones market the products they find as a result of these activities by subjecting them to mass production, the part of the earnings from the marketing of these products corresponding to intangible rights such as licenses and patents will be able to benefit from the exemption by separating them according to the transfer pricing principles. However, it is natural that the earnings obtained from activities such as adaptation, placement, development, revision, additional software, although they are not linked to intangible rights such as licenses and patents, will be evaluated within the scope of the exemption. In addition, taxpayers who market the products they find as a result of design activities in technology development zones by subjecting them to mass production will be able to benefit from the exemption by separating the part of the earnings from the marketing of these products corresponding to the design according to the transfer pricing principles. The other part of the income arising from the production and marketing organization will not be considered within the scope of the exemption.
For example; the earnings of the company engaged in software activities in the technology development zone from the license sales or leasing of the software produced by the company will benefit from the exemption, but the earnings obtained from the marketing of the software in disc, CD or electronic media (except for the part corresponding to the license) will not be able to benefit from the exemption.
Likewise, the earnings to be obtained from the lease or transfer of the intangible right belonging to the cancer drug resulting from the R&D activity carried out by a pharmaceutical company in the region will benefit from the exemption, and if the drug is produced and sold personally, it will not be possible to benefit from the exemption except for the part of the earnings from this activity corresponding to the intangible right.
2.3 Distribution of Exempt Earnings
In the event that the corporations operating in the zone distribute the profits obtained in these zones, they are required to withhold tax on the dividends distributed in accordance with the subparagraph (b) of paragraph (6) of the first paragraph of Article 94 of the Income Tax Law and the second paragraph of Article 15 of the Corporate Tax Law and the third and sixth paragraphs of Article 30 of the Corporate Tax Law.
3. Earnings from Projects Started Before the Commencement of Operations in the Region
It is not possible for taxpayers to evaluate the earnings to be obtained from the projects they have completed as of the date they started operating in the region within the scope of the exemption.
On the other hand, the taxpayers’ earnings from the projects that they started before starting operations in the region and continued in the region are only recognized if the project is carried out in the region. The amount corresponding to the portion realized will be eligible for exemption.
The proportion of the gain related to the work carried out in the region will be determined by using the ratio of the cost incurred after the start of the activity in the region to the cost incurred in the period from the start of the project to its completion. It is possible for taxpayers to make this distinction by using another method (such as the amount of direct labor used) if it will provide a healthier result.
4. Where Notification and Declaration Should Be Made According to the Provisions of the Technology Development Zones Implementation Regulation
Income and corporate taxpayers operating in the zone are required to apply to the tax office to which they are affiliated in terms of income or corporate tax in order to benefit from the exemption exclusively due to their earnings from software, design or R&D activities in this zone, and documents showing that the taxpayer is located in the zone and the taxpayer’s fields of activity, which will be obtained from the managing company, are also attached to this application. A copy of these documents must also be submitted to the tax office in terms of withholding tax return. It is not possible for the tax offices to issue any document to the taxpayers regarding the exemption application.
Source
– Law No. 4691 on Technology Development Zones
– Technology Development Zones Implementation Regulation
– Decree of the Council of Ministers dated 11/9/2017 and numbered 2017/10821
– Presidential Decree dated 30/8/2018 and numbered 54
– General Communiqué on Corporate Tax
– Revenue Administration Privileges
Sincerely,
BİLGENER8
