Legal Basis for Loss Offsetting

Legal Basis for Loss Offsetting

In companies, losses from commercial activities can be offset against profits in future periods under the following conditions:

1. Previous Year Losses: Losses from previous years, as shown in tax returns, can be deducted from corporate profits if they are reported separately for each year and not carried over for more than 5 years. If a loss from a specific period cannot be offset within the next 5 accounting periods, the opportunity to offset it will be lost.
2. Offsetting in Case of Transfer or Split:
   • Transfer: Acquiring institutions can offset the losses of the transferred institutions, up to the amount of the transferred institution’s equity as of the transfer date.
   • Split: In a full split, losses of the splitting institution can be offset only up to the equity amount and proportional to the transferred assets.

2.1 Equity Amount: Equity is the difference between total assets and liabilities as defined by the Tax Procedure Law. If the equity of the transferred or split institution is zero or negative, offsetting losses is not possible.

2.2 Conditions for Offsetting in Transfer and Split:

• Tax returns for the last 5 years must be submitted within legal deadlines.
• The acquiring institution must continue the same activity for at least 5 years from the date of transfer or split.

2.3 Order and Non-offsettable Losses: Acquired losses can be offset within 5 years from the period they were incurred. Losses exceeding the equity limitation will be canceled.

3. Foreign Losses:
   • Foreign losses can be deducted from corporate profits under specific conditions. However, losses from activities exempt from corporate tax in Turkey cannot be offset.
   • Documentation of foreign losses must be verified by authorized bodies in the foreign country, and translated reports must be submitted to the Turkish tax office.

3.1 Verification of Foreign Losses: Foreign losses must be supported by annual tax reports and financial statements audited according

to the laws of the foreign country.

3.2 Audit Requirement: Institutions must submit reports for the last 5 years to the tax office to offset foreign losses.

3.3 Offsetting Abroad: If foreign losses are offset or deducted abroad, they should be reported in Turkey before such adjustments.

3.4 Past Activity Results: The rules for offsetting foreign losses in previous years apply.

3.5 Reporting Time for Results: Profits and losses from foreign activities must be reported in the same currency used for general results in Turkey.