Key Differences Between the 20-Year Income Tax Exemption, the Asset Peace and the Tax Base Increase

The 20-Year Income Tax Exemption

Article 4 of Law No. 7582 added Repeated Article 20/D, titled "Tax exemption for income and earnings derived from abroad," to Income Tax Law No. 193 ("ITL").

Under this provision, income and earnings derived from outside Turkey by individuals deemed to be resident in Turkey shall be exempt from income tax for 20 years, provided that such individuals did not have a residence or tax liability in Türkiye during the last three calendar years prior to being deemed resident in Turkey.

No annual tax return shall be filed for income and earnings within the scope of the article; even where a return is filed due to other income, such income shall not be included in the return. The fact that such individuals had tax liability in Turkey in respect of rental income, investment income or capital gains prior to falling within the scope of this article shall not constitute an obstacle to benefiting from this exemption.

Should it subsequently be established that the conditions for the exemption were not met, the taxes that were not accrued shall be deemed to have been evaded.

Accordingly, by way of a summary of the key points considered to be sources of confusion based on inquiries received:

• The 20-year income tax exemption has been granted to specific individuals whose eligibility criteria are set out in the law.
• In order to benefit from the exemption, such individuals must not have had a residency or tax liability in Turkey during the last three calendar years prior to being deemed resident in Turkey.
• The exemption covers only income and earnings derived from abroad.
• This regulation is forward-looking in nature; it constitutes a commitment for the future, not the past.
• This regulation does not constitute a tax base increase or an asset peace.

In this context, in order to determine whether this exemption may be relied upon in a given case, the individual's residency status must first be assessed. This assessment must be carried out pursuant to both domestic legislation and the residency provisions of the relevant Double Taxation Avoidance Treaties. Furthermore, the concept of "income derived from abroad" will need to be examined on a case-by-case basis. Additionally, although this is a change to tax legislation, it would be prudent to comprehensively assess the points at which this regulation may interact with other laws (such as foreign exchange legislation and banking regulations).

Asset Peace

Law No. 7582 also introduced a new Asset Peace regime through Provisional Article 19 added to Corporate Tax Law No. 5520 ("CTL").

Under this Asset Peace, regulations have been introduced regarding the declaration, repatriation and recording of assets held abroad and within Turkey. In this regard, the matter may be addressed under two headings: assets held abroad and assets held within Turkey.

• Declaration of Assets Held Abroad:

Natural and legal persons may declare their cash, foreign currency, gold, shares, bonds and other securities held abroad to banks or brokerage institutions. Such declaration must be made by 31 July 2027.

The declared assets must be transferred to accounts opened in their names at banks or brokerage institutions in Turkey within 2 months of the declaration date, or, in the case of physical importation, deposited into such accounts. Physically imported assets may be evidenced by documents relating to the declaration made to the Customs Administration.

• Declaration of Domestic Assets:

Cash, gold, foreign currency, securities and other capital market instruments held in Turkey but not recorded in the statutory books of income tax or corporate taxpayers may be declared to banks or brokerage institutions by 31 July 2027. The declared assets must be evidenced by being deposited with banks or brokerage institutions as of the declaration date.

Individuals who do not have income or corporate tax liability may benefit from the provisions of the article provided they bring their declared assets to Turkey within 2 months of the declaration date and evidence their domestic assets by depositing them with banks or brokerage institutions as of the declaration date.

A tax rate of 5% is generally applied on declared assets. However, differentiated tax rates have been determined based on the maturities of the investment instruments in which the declared assets are committed to be held, and on the declaration timeframes.[1]

No tax inspection or tax assessment shall be carried out in respect of the amounts corresponding to the declared assets. This constitutes the legal protection afforded by the Asset Peace.

Accordingly, by way of a summary of the key points considered to be sources of confusion based on inquiries received:

• The Asset Peace is not an instrument serving the same purpose as the 20-year income tax exemption described above.
• Whereas the 20-year income tax exemption aims to provide an exemption over the next 20 years in respect of income and earnings from foreign sources for individuals meeting the above-mentioned conditions, the Asset Peace aims to bring off-the-books or foreign assets onto the record and to channel them into the national economy.
• Whereas the 20-year income tax exemption constitutes a forward-looking "commitment," the Asset Peace provides, in a sense, a backward-looking "guarantee."
• The tax base increase, on the other hand, was established as a tax assurance mechanism that allows taxpayers to voluntarily declare and pay additional tax within the minimum increase rates set out in the relevant laws, driven by concern that their declarations for past tax periods may have been incomplete or erroneous. Through this mechanism, taxpayers eliminate the risk of inspection and assessment for the relevant year and type of tax, in other words, they bring their potential tax liability to a definitive conclusion.
• The Asset Peace addresses a fundamentally different problem. This regulation aims to bring assets held abroad or kept off the record domestically onto a legal footing in exchange for a certain tax burden, thereby integrating such assets into the national economy and official records.
• Accordingly, although the protection afforded by the Asset Peace in the form of "no tax inspection being carried out" may resemble a tax base increase, the regulation introduced by Law No. 7582 does not constitute a tax base increase.

Assessment and Conclusion

It is clear that Law No. 7582 has introduced substantial and far-reaching regulations aimed both at attracting foreign investors and at bringing off-the-books and overseas assets into the system. The most notable of these regulations are the Asset Peace and the 20-year income tax exemption.

The 20-year income tax exemption constitutes a forward-looking commitment for individuals meeting the statutory conditions, offering a long-term tax advantage in respect of their income and earnings derived from abroad. The Asset Peace, on the other hand, is a mechanism, backward-looking in character, that allows assets held abroad or kept off the record domestically to be brought onto a legal footing in exchange for a certain tax burden. The tax base increase is neither an asset legalization tool nor a forward-looking exemption regime; it is a distinct tax peace mechanism that allows taxpayers to voluntarily close gaps in declarations for past tax periods and eliminate the risk of inspection and although the Asset Peace introduced by Law No. 7582 may be compared to it in terms of "no tax inspection being carried out," it does not constitute a tax base increase.

Determining which regulation may be relied upon in a given case will require (i) an assessment of the individual's residency status under both domestic law and the applicable Double Taxation Avoidance Treaties, (ii) a correct identification of the nature and location of their assets, and (iii) full compliance with the procedural and time-related requirements prescribed for each regulation.