Important Decision From the Constitutional Court on One-Time Additional Tax

New Development

The Constitutional Court of the Republic of Türkiye (“Constitutional Court“), through Decision No. E. 2023/169, K. 2024/82, dated 14 March 2024 (“Constitutional Court Decision” or the “Decision“), ruled that Article 10/27 of the Law No. 7440 on the Restructuring of Certain Receivables and Amendment of Certain Laws (“Law No. 7440“), published in the Official Gazette dated 12 March 2023 and containing a regulation on a one-time additional tax, is in conformity with the Constitution. The Constitutional Court thus unanimously rejected the annulment request of the related article. The Decision was published in the Official Gazette No. 32522 on 19 April 2024.

One-time Additional Tax

The one-time additional tax applies under Article 10/27 of Law No. 7440, to corporate income taxpayers by being declared in the corporate income tax return for 2022:

- 10% on exemption and deduction amounts applied on the business income under the Corporate Income Tax Law (“CITL“) and other laws, and on the tax base within the reduced corporate tax rate under Article 32/A of the CITL, without being associated with the business income of the period

- 5% on income subject to the participation income exemption under Article 5/1-a of the CITL, and on exempt income obtained from abroad and certified to bear a tax burden of at least 15%

Many corporate income taxpayers had filed their 2022 corporate income tax returns with reservations and had lawsuits demanding the refund of the additional tax paid with interest, claiming that the relevant regulation was unconstitutional. With the exception of cases concerning the additional tax related to share premiums, most of the lawsuits were concluded against the taxpayers at the first-degree tax courts. However, as indicated below, in one case, the first-degree tax court found the claim of unconstitutionality regarding the regulation to be serious and referred the matter to the Constitutional Court for evaluation. In a few cases, the first-degree tax courts decided to await Constitutional Court decision on the matter before issuing a decision for their own.

What Does the Decision Say?

The Istanbul First Tax Court, considering the allegations of the additional tax’s unconstitutionality put forward in a lawsuit to be serious, requested that the Constitutional Court annul Article 10/27 of Law No. 7440 on the grounds that it is contrary to articles 13, 35, and 73 of the Constitution. After its review, the Constitutional Court decided that the additional tax regulation is in compliance with the Constitution based on the following justifications:

- Considering that the corporate tax accounting period is closed as of the date of the entry into force of the regulation on the additional tax and that the additional tax is provided for the discounted amounts of the closed accounting period, the regulation is considered retroactive, but it is possible to apply the laws retroactively with the legal regulations to be enacted due to events that deeply shake society, such as unexpected natural disasters.

- There is a legitimate public interest in imposing additional tax obligations with the aim of compensating for the losses caused by extraordinary events such as earthquakes and ensuring social solidarity.

- The related regulation meets the necessity criterion since imposing taxes to compensate for the losses incurred is one of the most legitimate instruments of the state and is within the scope of the state’s discretionary power in taxation.

- Considering that it imposes a rate much lower than the current corporate income tax rate on the amounts to be deducted in case of profit, exempts corporate income taxpayers in earthquake zone from this tax, and has a temporary and one-time nature, the additional tax does not create an excessive burden on taxpayers.

- Taking into account that only 10% of the advantage obtained from the deductions, which constitute the subject of the additional tax, is taxed, it is argued that taxpayers will pay different amounts according to their corporate income, thus avoiding an unfair tax burden. Therefore, the additional tax regulation is not in conflict with the principles of taxation based on ability to pay, fair distribution of tax burden and equality.

- In accordance with previous Constitutional Court decisions, imposing additional taxes, provided that they are proportional, during periods of extraordinary events such as earthquakes, for the purpose of compensating for economic losses, is not contrary to the principles of taxation based on ability to pay and fair distribution of tax burden.

What Will be the Effects of the Decision?

The Constitutional Court’s decision will undoubtedly have consequences against the plaintiff taxpayers in additional tax cases other than those related to share premiums. Moreover, the majority of these cases were already being decided against the taxpayers in the first-degree tax court and Regional Administrative Courts.

However, we believe that the aforementioned Constitutional Court decision should not have any effect on lawsuits filed against additional tax assessments related to share premiums. This is because:

- In lawsuits filed against additional taxes paid on share premiums, the reasons for the lawsuit go beyond the violation of the Constitution. These reasons include that,: (i) share premiums do not constitute an “income” item but a “capital” element, (ii) considering the additional tax is levied on the amounts of deductions and exemptions and on the corporate income forming the discounted corporate income tax base, it is clear that share premiums, which are not income in nature, do not fall within the scope of the additional tax, and (iii) therefore, the imposition of additional tax on share premium is unlawful (without even the need for a constitutional assessment).

- Accordingly, in lawsuits concerning share premiums, the first-degree tax courts and Regional Administrative Courts decided that the additional tax assessments are unlawful primarily focus on the nature of share premiums as a capital element rather than income, and hence, they should not be subject to additional tax.

- Although the Constitutional Court’s decision did not specifically address the additional tax regulation related to share premiums, the reasoning in the decision,  “The amounts obtained through deductions from corporate income, resulting in a tax advantage, is an indicator of income-based financial strength. As a rule, an additional tax of 10% has been imposed on the advantages obtained to the extent of the deduction amounts made from corporate income.” (Paragraph 45), indicates that the purpose of the additional tax is to tax taxpayers benefiting from tax advantages. However, since share premiums are not income but rather a capital element, the exemption of share premiums does not provide any tax advantage to taxpayers.

In light of the above, we believe that the Constitutional Court’s decision should not lead to unfavorable outcome for taxpayers in additional tax cases related to share premiums, which are different in nature from other additional tax cases.