REPUBLIC OF TÜRKİYE
REVENUE ADMINISTRATION
Istanbul Tax Office
Income Laws, Income, and Corporate Tax Group Directorate
Number: E-62030549-125[11/2022]-….
Date: 08.05.2024
Subject: Whether Exchange Rate Losses on Foreign Currency-Denominated Service Purchases are Considered in the Financing Expense Restriction Calculation
In your request for a private ruling, it is stated that your company operates in international transportation. In this context, you have inquired about:
- Whether exchange rate losses that accrue monthly on the “320. Suppliers” account for foreign currency-based service purchases and those occurring at the time of payment are subject to the financing expense restriction.
- Whether exchange rate gains of the same nature can be offset against exchange rate losses.
Article 11 of the Corporate Tax Law No. 5520, titled “Non-Deductible Expenses,” states:
“(1) The following deductions are not accepted in the determination of corporate income:
…
i. Except for credit institutions, financial institutions, leasing, factoring, and finance companies, in enterprises where the foreign liabilities exceed the equity capital, financing expenses, such as interest, commissions, deferred payment interest, profit shares, exchange rate differences, and similar expenses related to the used foreign liabilities, which are not added to the investment cost, are subject to a limitation of up to 10% of the total cost, as determined by the President. The President is authorized to differentiate the percentage by sectors and to determine the procedures and principles for implementing this clause…”
In Corporate Tax General Communiqué No. 1, which provides explanations regarding this subject:
- In the section titled “11.13. Financing Expense Restriction,” it states:”In the application of the expense restriction:
- Financing expenses refer to costs incurred under various names such as interest, commission, deferred payment interest, profit shares, exchange rate differences, and similar expenses that arise due to the use of foreign liabilities.
- Foreign liabilities refer to the total of short-term and long-term foreign liabilities on the balance sheet.”
- In the section “11.13.4. Expense Items Included in the Expense Restriction for Foreign Liabilities,” it states:”…In cases where financing expenses are not calculated for accounts such as ‘suppliers’ monitored in the balance sheets of taxpayers in accordance with the Tax Procedure Law for payments to be made at a specific time, no additional separation will be made, and a portion of the sale price will not be subject to expense restriction. On the other hand, exchange rate losses that may arise from the valuation of amounts in these accounts under Article 280 of the Tax Procedure Law will be considered within the scope of expense restriction…”
- In the section “11.13.8. The Presence of Financing Income Alongside Financing Expenses,” it states:”It is not possible for taxpayers who have both financing expenses and financing income to compare and offset these income and expenses in the application of expense restriction. Therefore, the total of financing expenses must be subject to expense restriction.
Exchange rate losses arising from foreign liabilities obtained as of 01/01/2013, including the determination of 2021 income, will be subject to the financing expense restriction at their actual amounts calculated based on changes in exchange rates.
Due to decreases or increases in foreign exchange rates, exchange rate income or losses may occur for interim taxation periods. However, exchange rate income and losses related to the same source in the same or different interim taxation periods within an accounting period can be offset. If net exchange rate losses occur as of the transaction date or period-end, this amount will be considered within the financing expense restriction.
Even if within the same period, it is not possible to jointly evaluate exchange rate income and losses related to different foreign liabilities.
Furthermore, exchange rate income resulting from the valuation of the foreign liability in forms such as deposits will not be offset against exchange rate losses related to the foreign liability since it results from the valuation of an asset on the active side of the company’s balance sheet…”
Based on these provisions and explanations:
- In cases where the foreign liabilities used by your company exceed your equity, up to 10% of the total interest, commissions, exchange rate differences, etc., related to the portion exceeding the equity will be treated as non-deductible expenses in determining corporate income.
- It is not possible for taxpayers who have both financing expenses and financing income to compare and offset these income and expenses. Therefore, it will not be possible to offset exchange rate income and losses related to service purchases from different suppliers in the financing expense restriction.
- However, it is possible to offset exchange rate income and losses related to the same supplier in the financing expense restriction.
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.
