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Patent Restriction to Technology Development Zones in Turkey

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EY - Serdar Altay Serdar Altay

EY Türkiye Vergi Bölümü Şirket Ortağı ve Teşvik Hizmetleri Lideri


As known, incentives granted to R&D (“Research, Development, Software and Design”) activities in Turkey are basically regulated within the scope of two different legislations.

The first one is the Law no. 5746 on the Supporting of Research, Development and Design Activities. In this law and its related legislation, incentives that may be benefited from by taxpayers on the basis of expenditures in relation with R&D activities are regulated.  What these incentives have in common is that they are granted to taxpayers in the stage during which the R&D activity is carried out and before the completion of the R&D projects. For example, in the period when project expenditures are incurred, these expenditures are deducted from the corporate tax base in the name of “R&D Deduction” on the tax return, or a certain part of the income tax withholding and social security premium employer’s shares that must be deducted from the remunerations of the personnel assigned to project activities is paid by the state.

The second main law concerning incentives granted to R&D activities is the Technology Development Zones Law no. 4691. Under this law, which regulates the incentives granted to R&D activities carried out in Technology Development Zones, the gains derived by taxpayers operating in the zone from their R&D activities carried out are exempt from income and corporate tax until 31/12/2023. While some incentives regulated under this law (incentive for the income tax withholding applied to employees’ remunerations, social security premium employer’s share support, etc.) are provided in the period the project is conducted, the incentive concerning income and corporate tax is applied as a profit exemption in the period the related projects are completed and generate income (through sales or leasing).

Both legislations briefly mentioned above did not prescribe the condition for patenting of or issuing of an equivalent document for intangible rights arising from the R&D activity, among the conditions required to benefit from these exemptions.  For example, if the taxpayer creates a software at the end of a project conducted in the Technology Free Zone and if this software is sold, the software did not have to be patented or subject to an equivalent document in order for the gains derived to benefit from corporate tax exemption.

At the report published by OECD titled as “Harmful Tax Practices ‑2017 Progress Report on Preferential Regimes”, which related with the “OECD/G20 Base Erosion and Profit Shifting (BEPS) Project / Action 5)”, an update was presented on the status of regimes listed in the 2015 BEPS Action 5 Report (OECD, 2015).  According to that update, Technology Development Zone regime in Turkey was presented as “Potentially Harmful (1)” since the current regime is assessed as it is not consistent with the “Nexus Approach (2)” as regards qualifying IP assets and grandfathering provisions. It was noted in the report that a reassessment will take place in 2018 as Turkey is considering amendments to the definition of qualifying IP assets.

As an action in line with the situation discussed in the aforementioned report regarding Turkey, the Law no. 4691 was amended in 2016 and the Council of Ministers was authorized to determine certain conditions for the exemption application.  According to the Decision published on 19.10.2017 within the scope of this authority (“The Council of Ministers Decision no. 2017/10821”), there are two important conditions which must be fulfilled in order to apply corporate tax exemption to gains derived from R&D activities carried out in Technology Development Zones.   The first condition is that the intangible right derived from the R&D activity carried out is patented or a document that is functionally equivalent to patents is drawn up for the right; the other condition requires that the part of the gains that will be exempt should be determined in proportion with the share of the “Qualified Expenditures” within “Total Expenditures”.  Exemption may be applied to the gains derived in return for the sale, transfer or leasing of the relevant intangible right, only if these conditions are met. Let us provide brief information regarding these two conditions.

The intangible right should be patented or a document that is functionally equivalent to patents is drawn up for the right.

To benefit from this exemption, an application must be made to the institution authorized to registration or recording and a patent or document functionally equivalent to patent must be issued within the framework of the relevant legislation depending on the nature of these rights, effective for projects commenced after the date of 19.10.2017. This condition shall not be required for gains derived until 30.06.2021 for intangible rights obtained from projects that commenced before this date.

Within the framework of the decision, utility model certificates, design registration certificates, copyright registration certificates, integrated circuit topography registration certificates, breeder registration certificates pertaining to new plant species, etc. shall be deemed as documents functionally equivalent to patents.

In cases where there are no intangible rights arising in favor of the party performing the activity, such as works performed on order basis where all intangible rights that may arise belong to the party placing the order within the framework of the contractual provisions, it is not necessary to obtain a patent or another document equivalent to patent in order to benefit from the exemption.

Furthermore, taking into account the average of the last 5 fiscal periods, taxpayers whose annual gross revenues from intangible rights do not exceed TL 30 million and whose group of companies has an annual net sales revenue not exceeding TL 200 million in total (its own annual net sales revenue, if the company does not belong to a group), should only obtain a “Project Completion Certificate” from the Ministry of Science, Industry and Technology, in order to benefit from the exemption.

Determining the part of the profits that will be exempt, in proportion with the share of “Qualified Expenditures” within “Total Expenditures”.

Qualified expenditures are defined as the sum of the expenditures that are incurred by the taxpayer himself in order to derive the intangible right and that are directly connected with the intangible right, and costs of the benefits and services that are obtained from third parties and that have the aforementioned characteristics. Within the scope of the decision, the whole amount of the profit generated from the sale, transfer or leasing of the intangible right may not be treated as exemption and the profit may be exempted at the rate of the “Qualified Expenditure / Total Expenditure”.  The Qualified Expenditures, Total Expenditures and Other Expenditures in the calculation of the part of the profits to be exempted are defined according to the explanations in the following table in the Decision.

 Patent Restriction to Technology Development Zones in Turkey

Taxpayers may increase the qualified expenditure amount up to 30% in the calculation of the exempt profits; however, the qualified expenditure amount increased in this way may not exceed the total expenditure amount. For example, in case the taxpayer has 50 units of qualified expenditures within 100 units of total expenditures relating to intangible rights patented as a result of R&D activities, the taxpayer would have the opportunity to apply its qualified expenditure amount with 30% increase, although 50% (50/100) of the profits to be derived could benefit from the exemption under normal conditions.  Accordingly, since the qualified expenditure amount would be 65 (50 x 1,3 =) , 65% of the profit may benefit from the exemption.

(1) “Potentially Harmful” means the features of the regime implicates one or more of the criteria, but that an assessment of the economic effects has not yet taken place to make a determination as to whether the regime is “harmful.
(2) “Nexus Approach” only allows a taxpayer to benefit from an IP regime to the extent that it can show that it itself incurred expenditures, such as R&D, which gave rise to the IP income.