Are interest income subject to provisional tax?

Are interest income from companies’ term deposit accounts added to the income statement in provisional tax periods?

Yes, they are added. Interest income and withholding deductions obtained in three-month provisional tax periods are taken into account in the calculation of the corporate provisional tax and are included in the tax base.

In addition, income accrual must be made for interest income that falls on the provisional tax period in which term accounts that start within the provisional tax period and extend to subsequent provisional tax periods begin.

Withholding amounts paid on interest income and tracked in the 193 Prepaid Taxes and Funds accounts can also be offset from the calculated corporate provisional tax.

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What is provisional tax?

Provisional tax is an advance tax application calculated and paid on the income and corporate tax of commercial profit owners, freelancers and corporate taxpayers taxed in the real method, based on their three-month earnings as a deduction from the income and corporate tax of the current taxation period.

Which earnings are included in the scope of provisional tax?

Commercial profit owners, freelancers and corporate taxpayers taxed in the real method are required to pay provisional tax to be deducted from the income and corporate tax of the current taxation period. Ordinary partnerships, collective companies and ordinary limited partnerships are not provisional taxpayers since they are not subject to income or corporate tax as partnerships. However, the earnings obtained by partners in ordinary partnerships and collective companies, and limited partners in limited partnerships are subject to provisional tax.

Who does not pay provisional tax?

In the liquidation period, corporate taxpayers, income taxpayers taxed under the simple method, those who do construction and repair work spanning years, those who earn wage income, owners of movable and immovable capital income, owners of agricultural income, those who earn other income and income, freelancers whose income is exempt from tax and those who are liable to perform notary duties do not pay provisional tax. However, those who are stated not to pay provisional tax must pay provisional tax for their commercial or professional income other than the income they earn from these businesses.

How is the income subject to provisional tax determined?

First of all, taxpayers will determine the provisional tax period income based on the 3, 6, 9 and 12-month financial statements of the relevant accounting period in accordance with the provisions of Article 120 of the Income Tax Law. In determining the income related to provisional tax, the periodicity principle must be followed and the provisions of the Tax Procedure Law regarding valuation must be taken into consideration.

What is the provisional tax rate for Income Taxpayers and Corporate Taxpayers?

The provisional tax rate is applied at a rate of 25% for Income Taxpayers, starting from the second provisional tax period of the 2021 accounting period starting from 1/1/2021 for corporate taxpayers, the rate included in the first slice of the income tax tariff (15%).

It is applied at a rate of 23% starting from the second provisional tax period of the 2022 accounting period.

The following paragraphs have been added to Article 32 of Law No. 5520.

“(7) The corporate tax rate shall be applied with a 1 point discount on the earnings of exporting institutions obtained exclusively from exports.

(8) The corporate tax rate shall be applied with a 1 point discount on the earnings of institutions that have an industrial registry certificate and are actually engaged in production activities obtained exclusively from production activities. No additional discount shall be applied for the portion of these earnings corresponding to exports, in accordance with the provision of the seventh paragraph.

(9) The reduced rates in the seventh and eighth paragraphs shall be applied to the corporate tax rate after the other reductions within the scope of this article are applied.”

How will the provisional tax be calculated?

For income taxpayers, provisional tax shall be calculated by applying the rate in the first bracket of the income tax tariff (15%) to the three-month earnings of the relevant accounting period.

For corporate taxpayers, the provisional tax rate valid in 2024 shall be applied at a rate of 25% on net corporate income.

If any, provisional tax paid previously for the same accounting period and taxes paid through withholding regarding the earnings subject to provisional tax shall be offset from the calculated provisional tax, and the remaining amount after offset shall be declared as the provisional tax to be paid.

Which exemptions and discounts are taken into account when preparing the provisional tax return?

Taxpayers may benefit from all the reductions and exceptions they may take into account in their income or corporate tax return during the determination of their provisional taxable earnings.

What shall be done in case of under-declaration of provisional tax?

In case of under-declaration of provisional tax for previous periods exceeding 10%, tax loss penalty and delay interest will be applied to the assessment to be made ex officio or additionally for the under-declared part. The 10% margin of error should be calculated based on the provisional tax base that should be declared (not the declared one).

Is a late payment interest calculated in case of non-payment of provisional tax?

Provisional tax amounts that have been accrued but not paid and therefore cannot be offset from the tax calculated on the annual return are cancelled. A late payment interest is applied for the provisional tax amount that is cancelled from the due date until the start date of the legal period for submitting the annual return, which is the date on which it should be cancelled.

Is unpaid provisional tax offset from the income tax calculated on the annual return?

It is not possible to offset provisional tax that has been accrued but not paid from the income or corporate tax calculated on the annual return. In order for the offsetting process to be carried out, the accrued provisional tax must be paid.

What is the provisional tax rate for Income Taxpayers and Corporate Taxpayers?

The provisional tax rate is applied at a rate of 25% for Income Taxpayers, starting from the second provisional tax period of the 2021 accounting period starting from 1/1/2021 for corporate taxpayers, the rate included in the first slice of the income tax tariff (15%).

It is applied at a rate of 23% starting from the second provisional tax period of the 2022 accounting period.

The following paragraphs have been added to Article 32 of Law No. 5520.

“(7) The corporate tax rate shall be applied with a 1 point discount on the earnings of exporting institutions obtained exclusively from exports.

(8) The corporate tax rate shall be applied with a 1 point discount on the earnings of institutions that have an industrial registry certificate and are actually engaged in production activities obtained exclusively from production activities. No additional discount shall be applied for the portion of these earnings corresponding to exports, in accordance with the provision of the seventh paragraph.

(9) The reduced rates in the seventh and eighth paragraphs shall be applied to the corporate tax rate after the other reductions within the scope of this article are applied.”

How will the provisional tax be calculated?

For income taxpayers, provisional tax shall be calculated by applying the rate in the first bracket of the income tax tariff (15%) to the three-month earnings of the relevant accounting period.

For corporate taxpayers, the provisional tax rate valid in 2024 shall be applied at a rate of 25% on net corporate income.

If any, provisional tax paid previously for the same accounting period and taxes paid through withholding regarding the earnings subject to provisional tax shall be offset from the calculated provisional tax, and the remaining amount after offset shall be declared as the provisional tax to be paid.

Which exemptions and discounts are taken into account when preparing the provisional tax return?

Taxpayers may benefit from all the reductions and exceptions they may take into account in their income or corporate tax return during the determination of their provisional taxable earnings.

What shall be done in case of under-declaration of provisional tax?

In case of under-declaration of provisional tax for previous periods exceeding 10%, tax loss penalty and delay interest will be applied to the assessment to be made ex officio or additionally for the under-declared part. The 10% margin of error should be calculated based on the provisional tax base that should be declared (not the declared one).

Is a late payment interest calculated in case of non-payment of provisional tax?

Provisional tax amounts that have been accrued but not paid and therefore cannot be offset from the tax calculated on the annual return are cancelled. A late payment interest is applied for the provisional tax amount that is cancelled from the due date until the start date of the legal period for submitting the annual return, which is the date on which it should be cancelled.

Is unpaid provisional tax offset from the income tax calculated on the annual return?

It is not possible to offset provisional tax that has been accrued but not paid from the income or corporate tax calculated on the annual return. In order for the offsetting process to be carried out, the accrued provisional tax must be paid.

*(With the amendment made by Law No. 7338, the fourth provisional taxation period return will not be submitted for the earnings obtained as of 1/1/2022.)

How will provisional tax be applied to taxpayers who start a new business, quit their business and enter liquidation?
Taxpayers who start a new business will start paying provisional tax as of the provisional tax period that includes the date they started their activities. In case of termination of business, provisional tax returns will not be submitted for the periods after the period that includes the date the business was terminated. Institutions that are registered in the trade registry and enter liquidation will pay provisional tax on the provisional tax period profits that include the date they entered liquidation, and will not submit provisional tax returns in the liquidation periods after this period.

Do private construction companies submit provisional tax returns?
All construction companies, except for companies that do construction and repair work spanning years, submit provisional tax returns.

Can income and corporate taxpayers who keep books according to the balance sheet principle offset their previous year losses from the provisional tax?

In calculating the provisional tax base, previous year losses that can be deducted will be taken into account in determining the income/corporate tax bases.

Legal Notice: The information in this article is intended for information purposes only. It is not intended for professional information purposes specific to a person or an institution. Every institution has different requirements because of its own circumstances even though they bear a resemblance to each other. Consequently, it is your interest to consult on an expert before taking a decision based on information stated in this article and putting into practice. Neither Karen Audit nor related person or institutions are not responsible for any damages or losses that might occur in consequence of the use of the information in this article by private or formal, real or legal person and institutions.