Income Tax Exemption Has Been Introduced for Technopreneurship Companies (Startup, Scaleup) Issuing Shares to Their Employees

The Law No. 7524 on “Amending Tax Laws and Certain Laws and the Decree Law No. 375”, which was published on the Official Gazette numbered 32620 on 02 August 2024, provides an exception regulation that Technopreneurships and their employees have been waiting for years has been introduced.

According to the new exemption regime;  As per the criteria determined by the Ministry of Industry and Technology, the part of the fair value of the shares given to employees free of charge or at a discount by employers that qualify as Technopreneurship companies and considered as wages, on the date of issue not exceeding the amount of one annual gross wage in that year, is exempt from income tax. However, some taxation criteria are introduced to ensure that employees hold their shares for a long period of time:

As per the new rule introduced;

• - If an employee disposes of the share certificates within 3 full years: the entire amount of exempted tax,
• - If an employee disposes of the share certificates within 4 to 6 years: 75% of the exempted tax,
• - If an employee disposes of the share certificates within 7 to 12 years; 25% of the exempted tax,

will be collected from the employers along with late payment interest without any penalty for tax loss.

Income tax status of giving shares to employees, before the new regulation became effective:

According to Article 61 of the Income Tax Law, money and benefits that can be represented by money provided to employees, in exchange for services rendered while working for a specific workplace under the employer’s authority, is considered as wage and therefore subject to income tax.  It is also stipulated that the fact that wages have been paid under the name of allowances, compensation, cashier compensation, allocation, increment, advance payment, dues, peace allowance, bonus, premium, expense compensation, or under other names or that they have been determined as a certain percentage of earnings, without being like a partnership relationship, will not create any change in its status as wages. Therefore, the shares given to employees free of charge were considered to have been earned on the date when they could be legally and economically disposed of by the employees, and the benefits provided in the form of the right to purchase shares were considered to have been earned as wage income on the date on which this right was actually used. If the share certificate was given free of charge, the current price of the share certificate was considered as a wage, and if the right to purchase shares was granted, the difference between the current price at the time the right was exercised and the cost incurred by the employee was this time considered as a wage and subject to tax.

Conclusion

Thus, an important incentive program that Technopreneurship companies have been waiting for a long time and which is included in global practices, has also entered Turkish tax law.  However, it can be argued that forcing employees to hold shares for periods of up to 12 years and placing tax liability on employers in case of sale may prevent this new incentive program from reaching its aim.