Republic of Türkiye
REVENUE ADMINISTRATION
ISTANBUL TAX OFFICE DIRECTORATE
Taxpayer Services Procedure Group Directorate
Date: 13/02/2015
Reference: 11395140-105[229-2012/VUK-1- . . .]–255
Subject: Offsetting liquidation losses against previous years’ profits and how to deduct various fixed assets that have not been fully depreciated from the records.
In the private ruling request submitted by your company, it is understood that the company entered liquidation on [date] and is still undergoing liquidation. You have requested our opinion on whether the liquidation loss can be offset against previous years’ profits and how to deduct fixed assets that have been recorded on the company’s balance sheet but have either completed their useful life and been fully depreciated or have not yet been fully depreciated at the end of liquidation.
I. IN TERMS OF CORPORATE TAX LAW:
According to Article 6 of the Corporate Tax Law, corporate tax is calculated on the net corporate income obtained by the taxpayers within an accounting period, and the provisions of the Income Tax Law regarding commercial income are applied in determining the net corporate income.
Article 38 of the Income Tax Law, titled “Determination of commercial income on a balance sheet basis,” states in its first paragraph that commercial income, according to the balance sheet method, is the positive difference between the value of net capital at the end of the accounting period and the value of net capital at the beginning of the period. During this period, the values added to the business by the owner or owners are deducted from this difference, and the values withdrawn from the business are added to the difference.
In Article 94 of the same Law, it is stipulated that the persons and institutions specified in the article must withhold tax from payments made (including advances) in cash or on account to income owners as advances on their income tax.
In the application of the Income Tax Law, the taxable event arises upon the realization of the income. Income realization is based on accrual for commercial and agricultural earnings, cash receipt for independent professional income, rental income, and other earnings, and the occurrence of legal and economic disposition for dividend income and wage income.
For dividend income, the realization of the taxable event regarding legal and economic disposition consists of two stages: legal disposition, which means the income becomes demandable by the owner, and economic disposition, meaning the income is payable to the owner upon request. The actual collection or non-collection of the dividend income does not affect its realization.
According to Article 509 of the Turkish Commercial Code, which regulates the principles of profit distribution for joint-stock companies, profit shares can only be distributed from net period profits and free reserves; in limited liability companies, as per Article 608, profit shares can only be distributed from net period profits and reserves allocated for this purpose.
Article 17 of the Corporate Tax Law states:
- Liquidation period: The liquidation period replaces the accounting period in the taxation of institutions entering liquidation for any reason.
a) Liquidation begins on the date of registration of the general assembly’s decision to enter liquidation and ends on the date of registration of the liquidation decision. The period from the start date to the end of the same calendar year, and for subsequent periods each calendar year until the end of the liquidation period, is considered an independent liquidation period.
b) If liquidation ends within the calendar year in which it began, the liquidation period continues from the date of entry into liquidation until the date of its completion.
c) In the event of a loss at the close of liquidation, the liquidation result is corrected retrospectively for previous liquidation periods, and any excess taxes paid during those periods are refunded to the taxpayer.
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- Liquidation profit: The tax base for institutions in liquidation is the liquidation profit. The liquidation profit is the positive difference between the asset value at the end of the liquidation period and the asset value at the beginning of the liquidation period.
a) In calculating liquidation profit:
- All kinds of payments made to shareholders or institution owners as advances or in other forms during liquidation are added to the asset value at the end of liquidation;
- Payments made by shareholders or owners in addition to existing capital and profits and incomes obtained during liquidation that are exempt from tax are added to the asset value at the beginning of liquidation.
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- Asset value: The asset value at the beginning and end of the liquidation period is the equity shown in the institution’s balance sheet at the beginning and end of the liquidation period. In liquidations lasting more than one year, the asset value at the beginning of the subsequent liquidation periods is the asset value shown in the final balance sheet of the previous period.
According to these provisions and explanations, there is no cash or on-account payment in the process of offsetting the liquidation loss of your company against past years’ profits and/or legal reserves. Therefore, the process of offsetting past years’ profits and/or legal reserves against past year losses will not be considered a dividend distribution, and no tax withholding will be required based on dividend distribution.
II. IN TERMS OF TAX PROCEDURE LAW:
According to the Tax Procedure Law No. 213:
- Article 161 defines ceasing business as the complete cessation and termination of taxable transactions, and temporary cessation for any reason does not constitute a cessation of business.
- Article 162 states that in cases of liquidation and bankruptcy, liability continues until all tax-related transactions have been fully completed.
- Article 227 states that unless otherwise provided, it is obligatory to substantiate records kept under this law with respect to relations and transactions with third parties.
- Article 229 defines an invoice as a commercial document issued by the seller or service provider showing the amount owed by the customer for the sold goods or services rendered.
- Article 267 states that the fair value of a good, whose actual value is unknown or cannot be determined accurately, is the value it would have if sold on the valuation date. The fair value is determined by applying either the average price method, cost method, or appraisal method.
- Article 328 states that when amortizable economic assets are sold, the difference between the sales price and their book value is included in the profit and loss account. For taxpayers keeping records on a cash basis or using a simple ledger for professional income, this difference is treated as revenue or expense, and for assets with accumulated depreciation, the remaining amount after deducting the accumulated depreciation is used.
For a taxpayer to be considered to have ceased business, in addition to halting procurement transactions related to business activities, the stock of goods and other circulating and fixed assets in the business must also be disposed of or withdrawn by the business owner.
Accordingly, fixed assets recorded in the assets of your company in liquidation must be deducted from the records either by being sold under the conditions set out in Article 328 of the Tax Procedure Law and invoiced based on the sales price, or by being withdrawn from the business and invoiced based on the fair value determined under Article 267 of the Law. …
Source: Revenue Administration
Legal Notice: The information in this article is intended for information purposes only. It is not intended for professional information purposes specific to a person or an institution. Every institution has different requirements because of its own circumstances even though they bear a resemblance to each other. Consequently, it is your interest to consult on an expert before taking a decision based on information stated in this article and putting into practice. Neither MuhasebeNews nor related person or institutions are not responsible for any damages or losses that might occur in consequence of the use of the information in this article by private or formal, real or legal person and institutions.
