Pursuant to Article 347 of the Turkish Commercial Code ("TCC"), joint stock companies can issue their shares with a value higher than their nominal value through the capital increase. In this case, the increasing value of the shares is defined as an "emission premium". The emission premiums shall not be considered as corporate income and are essentially capital items that are kept as capital reserves pursuant to the Article 519/2/a of TCC. Additionally, the Turkish Revenue Administration has issued an opinion by declaring several special notices that the emission premiums cannot be deemed as corporate incomes. In relation to this, they are not subjected to corporate tax, as prescribed in Article 5/1/ç of the Corporate Income Tax Law.
However, the Law numbered 7440 on Restructuring of Certain Receivables and Amendments to Certain Laws ("Law No. 7440") was published in the Official Gazette on March 12, 2023, in order to fund the damages caused by the earthquake in Southeastern Turkey dated 06.02.2023. Accordingly, the Law No. 7440 obliges certain corporate taxpayers to pay an additional one-time earthquake tax on certain exemptions and deductions of the corporate income and capital items. One of the exemptions that this one-time earthquake tax with 10% rate imposed on is "emission premiums" and it shall be paid in two installments. Accordingly, the first installment should be paid within the corporate tax payment period (due in the end of April 2023) and the second installment should be paid four months later (due in August 2023).
Capital increase through share issuance with emission premiums is considered convenient and preferrable especially for start-ups by providing a strong financial structure to companies and protecting the rights of the shareholders. Therefore, the above-mentioned additional tax prompts concerns that it would cause hesitance among venture capitals and investors and will eventually harm startups and entrepreneurial activities in Turkey. This one-time earthquake tax also violates constitutional taxation principles of equality, predictability, and non-retroactivity. Considering all of these, we recommend corporate taxpayers to declare the corporate tax returns pertaining to the financial year of 2022 and then litigate for the tax refund.
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