Income Tax General Communiqué Regarding the Taxation of Share Certificates Granted to Employees of Technopreneurship Companies Published

As known, with the Law No. 7524 on Amendments to Tax Laws and Certain Other Laws and the Decree Law No. 375 (“Law”), which includes amendments to tax laws, a provision was added to Article 17 of the Income Tax Law No. 193 (“ITL”). This regulation stipulates that the share certificates granted free of charge or at a discount to employees by employers that qualify as technopreneurship companies are exempt from income tax under certain conditions.

The procedures and principles regarding the implementation of the related regulation were explained with the Income Tax General Communiqué No. 326 (“Communiqué”) published in the

Official Gazette dated 27.09.2024 and numbered 32675. The explanations made in the Law and the Communiqué regarding the subject are summarized below for your information.

Income Tax Exemption Regulation

According to Article 17 of the ITL, the share certificates granted free of charge or at a discount by technopreneurship companies to employees, which are considered wages, are exempt from income tax, provided that the market value of the share certificates on the date of the grant does not exceed the employee's annual gross salary.

If the share certificates acquired by employees are disposed, from the date of acquisition;

– within 3 full years: the full amount of the exempted tax,

– within 4 to 6 years 75% of the exempted tax,

– within 7 to 12 years: 25% of the exempted tax,

will be collected from the employers along with late payment interest without any tax loss penalty. If the share certificates are held by the relevant employer for more than 12 years and disposed after this period, the exemption will be fully utilized.

Communiqué Regulation on Exemption

In line with the Law, the Communiqué elaborates on the relevant provision and regulates the procedures and principles for the implementation of the exemption. The explanations in the Communiqué can be summarized as follows:

Granting of the Share Certificates Free of Charge/Discounted Purchase Rights: According to the Communiqué, if share certificates are granted free of charge to employees by technopreneurship companies, it is considered that the employee has received a benefit as of the date the share certificates are granted. On the other hand, if the employer grants the employee a discounted share purchase right, it is considered that the income is obtained on the date this right is exercised.

Fair Market Value and Wage Consideration: If technopreneurship companies grant share certificates free of charge to employees, the fair market value of these share certificates are considered as the employee’s wage. In the case of discounted purchase rights, the difference between the fair market value on the date the right is exercised and the discounted amount of the share certificates is also considered as wage.

Income Tax Exemption: The portion of the fair market value of free of charge or discounted share certificates granted to employees by technopreneurship companies that does not exceed the employee's annual gross salary on the date of granting is exempt from income tax. When

determining the fair market value, current market values must be based on, in accordance with Article 266 of the Tax Procedure Law.

Conditions for Benefiting from the Exemption: Certain conditions must be met in order to benefit from the exemption. These conditions can be listed as follows:

Technopreneurship Company Qualification: Companies granting share certificates to their employees must qualify as technopreneurship companies. Although there is no regulation in our legislation regarding the definition of technopreneurship companies, in the Technopreneurship Strategy Booklet published by the Ministry of Industry and Technology the term of technopreneurship is technically defined as “a maximum of 10 years old venture company with a scalable business idea that carries out technology and innovation-oriented activities and has a rapid growth potential” Limit of Benefit Provided to Employees: The portion of the benefit that is exempt must not exceed the employee's annual gross salary for that year. If the employee’s annual gross salary cannot be precisely determined, the employee's monthly gross salary at the time the share certificates are granted is multiplied by 12 and accepted as the annual gross salary. At the end of the year, if there is a difference between the actual annual gross salary and the amount considered under the exemption, necessary adjustments must be made. In such cases, excess paid taxes can be refunded, while underpaid taxes will be collected with interest but without a tax loss penalty.

Employee's Holding Period of Share Certificates: Holding the share certificates for the specified period is a critical condition for the exemption. If the employee disposes of the share certificates during this period, the exemption will be voided according to the rates explained above, and the taxes that were not collected due to the exemption will be collected from the employer with interest. In the case of the employee leaving from the company, the period during which the employee holds the share certificates after leaving the company, as well as the period during which the share certificates are held by the heirs in case of the employee's death, will be considered in calculating the holding period.

Notification Requirement

According to the Communiqué, employers who wish to exempt the benefits provided by granting share certificates to employees must fill out the “Notification Regarding Wage Exemption Provided by Granting Share Certificates to Employees,” which is attached to the Communiqué, and submit it along with the monthly withholding and premium service declaration for the month in which the share certificates are granted.

Moreover, the employer is also required to notify the tax office, using the petition attached to the Communiqué, if the employee disposes of the share certificates.