The Revenue Administration Presidency of Republic of Türkiye published the Tax Procedure Law ("TPL") Circular No. VUK-167/2024-5 ("Circular") titled "Extension of the Corporate Tax Return Filing Period" on 26 April 2024.
This Circular extends the filing deadlines for the 2023 accounting period Corporate Tax Declarations, initially due by 30 April 2024, as well as the payment periods for taxes accrued on these declarations, to the end of Monday, 6 May 2024.
As required by Article 298/Ç of the TPL, for the fiscal year 2023, balance sheets prepared both before and after the inflation adjustments must be attached to the Corporate Tax Returns and to the declarations of taxpayers who have commercial income and are taxed based on actual profits and losses (under the real system).
Within this context, the Public Oversight Accounting and Auditing Standards Board ("POA") announced on 24 November 2023 that financial statements for the annual reporting periods ending on or after 31 December 2023, adhering to Turkish Financial Reporting Standards ("TFRS") and the Financial Reporting Standard for Large and Medium-Sized Enterprises ("BOBI FRS"), shall be subject to inflation adjustments.
The Banking Regulation and Supervision Agency ("BRSA") has stated that financial statements dated 31 December 2023 from banks, financial leasing companies, factoring, finance, savings financing, and asset management companies will not be subject to inflation accounting.
Additionally, on 28 December 2023, the Capital Markets Board ("CMB") also declared that the provisions of Turkish Accounting Standard 29 ("TAS 29") would apply to the annual financial reports of capital market institutions and issuers governed by CMB's financial reporting regulations.
This regulatory environment necessitated substantial adjustments for companies subject to independent audit, resulting in two distinct inflation adjustments by the end of 2023 based on different indices such as the Consumer Price Index ("CPI") and the Producer Price Index ("PPI"). Consequently, audited companies prepared three separate balance sheets:
- A balance sheet under TAS 29,
- A pre-tax inflation adjustment balance sheet,
- A post-tax inflation adjustment balance sheet.
In addition to above, the CMB specified in the Resolution No. 14/382 dated 07.03.2024, published in Bulletin No. 2024/14, an important update to dividend distribution policies. Under that Resolution, publicly traded companies must consider inflation-adjusted TAS/TFRS profits in their dividend distributions, but the distributable profit must not exceed the pre-inflation TPL profit.
As established by the Turkish Commercial Code ("TCC"), the fundamental principles governing profit distribution and reserve fund allocation are well-defined. However, subsequent to the tax inflation adjustments in 2023, there remains a lack of explicit regulation detailing which profits capital companies in Turkey should use for dividend distributions. Neither the Ministry of Trade nor the POA has not issued specific regulations on this matter up to now, and the Revenue Administration does not have the authority to issue regulations or provide clarifications in this context.
Recent reports in the economic press indicate that the Ministry of Trade is drafting a communiqué addressing these issues. The draft bill outlines the following criteria for determining which balance sheets and profits from 2023 will be considered:
- Companies required to align their financial statements with POA standards must base their calculations on inflation-adjusted financial statements prepared according to Article 88 of the TCC (in compliance with independent auditing standards).
- For companies not covered under the aforementioned provision, financial statements adjusted for inflation under Provisional Article 33 of the TPL and General Communiqué No. 555 of the TPL, along with unadjusted financial statements, should be considered collectively.
This arrangement prompts a nuanced application of the regulations, where non-inflation-adjusted financial statements are to be utilized for the distribution of profits and dividends, allocation of reserve funds, and dividend advances during the period, with net period profit taken as the basis in accordance with the law or company bylaws. Inflation-adjusted financial statements are to be used for distributions from free reserves and other distributable resources after loss deduction, capital transactions including increases and decreases, mergers, demergers, type changes, capital loss, and insolvency determinations.
Given that the Ministry of Trade has yet to publish this communiqué, discrepancies and differences in practice may arise for companies that distributed advance profit shares or conducted dividend distributions before the communiqué's release. It is critical to note that the application of non-inflation-adjusted financial statements for certain transactions under subparagraphs (a) and (b), while applying inflation-adjusted statements for others, is likely to lead contentious outcomes and significant disputes.
We will continue to monitor these developments closely and provide updates on the evolving legal landscape regarding profit distribution and reserve allocation following inflation adjustments.
You can access the full text of the Circular via the following link:
https://www.gib.gov.tr/node/176287/pdf
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