Republic of Türkiye
Ministry of Treasury and Finance
Istanbul Tax Office (Taxpayer Services, Income Taxes Group Directorate)
Date: 06/01/2012 Number: B.07.1.GİB.4.34.16.01-KVK 8-57
Subject: Compensation Payments Pursuant to Court Rulings
In the special ruling request form on file, it is requested that our Presidency provide an opinion on how payments made to an employee, in cases where a labor court rules in favor of the employee in reinstatement lawsuits filed against the employer, such as payment of up to 4 months’ wages for the period the employee did not work and non-reinstatement compensation equal to at least 4 and at most 8 months’ wages, should be considered in determining the corporate income.
Article 61 of the Income Tax Law No. 193 states that, “Wages are the money and goods given as remuneration for services to employees who are subject to an employer and are attached to a specific workplace, as well as benefits that can be represented by money. The fact that wages are paid in the form of allowances, compensation, indemnity (financial liability compensation), appropriations, increases, advances, dues, seniority pay, premiums, bonuses, expense reimbursements, or under any other name, or that they are determined as a certain percentage of the profit, provided that it is not in the nature of a partnership, does not change its nature…”
The first paragraph of Article 94 lists those who are obligated to withhold taxes on their payments, and the first clause of the aforementioned paragraph states that “income tax shall be withheld in accordance with Articles 103 and 104 from wages paid to service providers and payments deemed to be wages as stated in Article 61 (except those benefiting from exemptions).”
Clause 1 of Article 25 states that “compensations and assistance given due to death, disability, illness, and unemployment (including non-reinstatement compensation)” are exempt from income tax.
The temporary Article 77 states, “Non-reinstatement compensations paid to employees by employers pursuant to Article 21 of the Labor Law No. 4857 dated 22/5/2003 for periods prior to the entry into force of this article shall not be subject to any taxes except stamp duty. Taxpayers who have had income tax withheld on non-reinstatement compensation for the aforementioned periods; upon application to the competent tax offices and provided that they do not file a lawsuit or withdraw from any pending lawsuits, the income tax collected pursuant to the provisions of the Tax Procedure Law No. 213 shall be rejected and refunded. The Ministry of Finance is authorized to determine the procedures and principles for the application of this article.”
The necessary explanations have been made in the Income Tax General Communiqué No. 272, published in the Official Gazette dated 12/08/2009, regarding this matter.
According to these regulations, non-reinstatement compensations paid by employers to employees pursuant to Article 21 of the Labor Law No. 4857, as determined by a court decision ruling that the termination of the employment contract is invalid, are exempt from income tax except for stamp duty. The amount covered by the exemption is limited to the amount of compensation to be paid to the employee due to non-reinstatement, as determined by the court decision ruling that the termination of the employment contract is invalid.
On the other hand, Article 6 of the Corporate Income Tax Law No. 5520 states that corporate income tax shall be calculated on the net corporate income obtained by taxpayers in an accounting period, and that the provisions of the Income Tax Law regarding commercial profits shall be applied in determining the net corporate income, and clause (3) of the first paragraph of Article 40 of the Income Tax Law also stipulates that losses, damages, and compensations paid pursuant to a contract, judgment, or legal order, provided that they are related to the business, shall be deducted as an expense in determining the corporate income.
Accordingly, the non-reinstatement compensation ordered to be paid by the court can be considered as an expense in determining the net corporate income in accordance with clause (3) of the first paragraph of Article 40 of the Income Tax Law, while the four months’ wages paid for the period during which the employee was not employed can be considered as an expense in determining the net corporate income in accordance with clause (1) of the first paragraph of the same article.
On the other hand, since the non-reinstatement compensation given by the Labor Courts after the termination of the employment contract for an unjustified reason is included within the scope of exemption with Article 25 of the Income Tax Law, income tax withholding shall not be made on this amount, but stamp duty shall be withheld.
However, the amount paid for the 4-month period during which the employee was not employed until the decision becomes final must be taxed as wages in accordance with Articles 61, 63, 94, and 103 of the Income Tax Law.
Source: Revenue Administration
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