Is Tax Advantage Possible For Activities Not Considered “R&D”?
EY Türkiye Vergi Bölümü Şirket Ortağı ve Teşvik Hizmetleri Lideri
Incentives and supports related with R&D activities are now commonplace. R&D and innovation activities are supported with various incentives and exemptions in Turkey, just like almost everywhere else in the world. Then what is the meaning of providing tax advantage to activities not deemed as R&D? We have tried to explain this situation below.
As known, under the Temporary Article 2 of the Law no. 4691 on the Technology Development Zones (the “Law”), the gains derived by income and corporate taxpayers operating in the zone exclusively from the software, design and R&D activities in this Zone are exempt from income and corporate tax until 31/12/2023. In other words, in case enterprises that operate in the zone generate gains in relation with software, design and R&D activities, they do not pay income or corporate tax over such gains.
There are naturally certain conditions and restrictions prescribed in the Law and the Regulation on Technology Development Zones Application (“Regulation”) relating to the Law for applicability of the exemption. These conditions and restrictions are briefly as follows;
- The exemption is applied only for the gains generated from the software, design and R&D activities carried out in the Zone. Gains generated from other activities within the zone are subject to tax.
- Exemptions cannot be benefited from for software, design and R&D activities performed outside of the zone without the managing company’s approval.
- The gains derived from the sale, transfer or leasing of intangible rights for projects commenced in the Zone after the date of 19 October 2017 can be exempt from tax, on the condition that a patent or document functionally equivalent to patent is issued for these rights upon an application to the authorized institution.
- Even if a patent or a document functionally equivalent to patent is obtained for projects again commenced after 19 October 2017, the ratio of “Qualified Expenditures” incurred in relation with the activity to the total expenditures shall be taken into account and the part of the total gains corresponding to this ratio can benefit from partial exemption.
The conditions mentioned above need to be fulfilled in order to be able to apply income or corporate tax exemption to the gains that will be generated from the software, design and R&D activities carried out in the Zone. Why have we mentioned these here?
In the last paragraph of the article 5 of the Corporate Tax Law, it is stipulated that corporations’ expenses relating to their gains exempt from corporate tax or losses arising from their activities within the scope of exemption, except financing expenses relating to the acquisition of participation shares, shall not be deductible from the non-exempt corporate profits. This provision particularly concerns taxpayers who operate as a branch instead of a separate legal entity in Technology Development Zones and who do not generate any gains as a result of this activity (use of the software, R&D or intangible right obtained within the enterprise without selling or leasing them).
Since these taxpayers operate as branches in the Zone, the expenses they incur for the activities they perform here end up as branch losses, in addition to the fact that they do not perform any sales or leasing activities. At this point, the deduction of such loss at the headquarters which generates profits due to other activities is not possible due to the provision above. This is due to the fact that such activities are actually in the nature of activities “that would have been exempt from corporate tax if profits had been generated.” Therefore, the expenses incurred in relation with these activities, in other words, the losses arising from activities under exemption, cannot be deducted from non-exempt corporate profits.
However, the following point should not be missed. The reason why the expenses or losses in question are not deductible from gains generated from other non-exempt activities is that such expenses or losses are related with exempt activities. There are no restrictions on their deduction from other non-exempt profits, if these expenses or losses contain some expenses or losses pertaining to activities that do not fulfill the conditions concerning exempt profits. In other words, such expenses are deductible from other profits.
Given this situation, if the conditions concerning exempt profits we have explained in the first part of our article cannot be fulfilled, expenses pertaining to these activities would become deductible from other profits.
To put it more clearly, if a profitable Turkish resident company has a branch operating in the Technology Development Zone and losses are generated in this branch, the part of the loss corresponding to the following activities would be deductible from the Turkish resident company’s profit.
- Expenses pertaining to activities that are carried out in the zone and that are not deemed as R&D, software or design activities (e.g. project expenses not deemed as R&D by the managing company)
- Software, design or R&D activities carried out outside of the zone and not approved by the managing company,
- Expenses pertaining to projects that are commenced after 19 October 2017, but that cannot be patented or
- Expenses relating to expenditures that are not deemed as qualified expenditures, although they are commenced after 19 October 2017 and patented
If you have a branch in the Technology Development Zone and profits are not generated in this branch, the branch activities not deemed as R&D may provide you with corporate tax advantage compared to activities deemed as R&D.