CIRCULAR

ACQUISITION OF INCOME FOR INCOME TAX PURPOSES

   For Income Tax purposes, acquisition of an income comprises an event giving rise to tax. At this stage, one of the most important facts is the time during which the event giving rise to tax has taken place.  Hence, during the subsequent phases, the exact period on which the event giving rise to tax should be ascertained. These determinations arise as the assessment of the conceptual counterparts and as the principle of periodicity.  There exists four separate stages in connection with the acquisition of an income.

Accrual:  Accrual refers to the finalization of the income in terms of its kind and amount.

Legal Possession:  Means that the income has become claimable by its owner.

Economic Possession:  Means that The income has been set ready for the disposal of its owner by the party who will make the payment.

Actual Possession:  Refers to the inclusion of the income among the assets of its owner in cash or in kind, or an intangible asset.

   For purposes of income tax, the method of acquisition has been determined separately for each item of income and proceeds. In commercial earnings, acquisition is determined on accrual basis.

The tax legislation does not provide any definition regarding accrual basis. As defined in most of the tax studies and in the generally accepted definitions, accrual refers to the finalization of the income item in terms of its nature and amount.

In Article 39 of the Income Tax Code, it is stated that “Commercial earnings based on a trading account shall be the positive difference between proceeds acquired during an accounting period and expenses.” In the subsequent paragraph, it is stated that “Proceeds acquired shall mean monies collected and accounts receivable while expenses shall mean amounts which have been paid and outstanding debts.” Besides the foregoing, the Turkish Income Tax Code does not contain any other regulations pertaining to the accrual basis. 

Hence, in commercial earnings, the fact that all transactions that give rise to such commercial income have reached maturity, will be adequate for the   acquisition of the income.  However, according to the accrual basis, it is also possible that the income that has been taxed might, in the subsequent periods, not enter into the possession of its owner, depending on the status and the statement of the counter party. 

By taking this issue into consideration, in the event that the possession of the income that was subjected to tax previously by its legal owner is restricted depending on the status of the counter party,  the recognition of the said total as loss as doubtful receivable or as bad debt, has been considered.

 ACQUISITION OF EARNINGS AND REVENUES IN TURKEY

 The determination of the acquisition of earnings and revenues in Turkey where persons with a limited liability are concerned shall be made according to the following conditions: 

a) In commercial earnings: possession by the owner of the earnings of a place of business in Turkey or his maintenance of a permanent representative here, and derivation of the earnings in such places or through such representatives. (Even if they fulfill these prerequisites, the earnings of those lacking a principle place of business in Turkey which arise from the operations of those who send to foreign countries goods which they have purchased or manufactured in Turkey for exportation without their being sold in Turkey, shall not be considered as having been acquired in Turkey.) 

The intention of "being sold in Turkey" is that the buyer or the seller or both of them are present in Turkey, or that the sales contract is concluded in Turkey. The intention of "a principle place of business" on the other hand is the center at which business operations are actually concentrated and managed. 

The place of business is determined according to the provisions of the Tax Procedures Code.  

The permanent representative is a person who is associated with the person being represented by means of a service agreement or power of attorney, and in whose name and account he is authorized to conduct a variety of commercial transactions or commercial transactions for a definite or indefinite period. 

The persons listed below shall be considered permanent representatives of their principals without the need for other prerequisites.

·         Commercial representatives, mercantile proxies and officers, as well as those in the position of agent in accordance with the provisions of the Commercial Code.

·         Those whose expenses (with the exclusion of advertising expenses belonging to the principal) are paid on a continued basis by the principal whether in whole or in part.

·         Those who maintain goods for sale in their stores or warehouses on a continued basis on consignment to the account of the principal. 

The fact that a person represents several persons simultaneously shall not affect his status as permanent representative.

b) In agricultural earnings: Performance of the agricultural activities in Turkey. 

c) In wages: Earnings derived from the performance or the continuation of  the service in Turkey, or derivation of benefit from it in Turkey.  Derivation of benefit from daily attendance allowances, remuneration, bonuses and the like pertaining to chairmen and members of boards of directors of institutions located in Turkey, or to their auditors or liquidators, are considered as earnings acquired in Turkey.  

d) In the case of independent professional earnings: Deriving of earnings from the performance of independent professional activities in Turkey, or derivation of benefit from them in Turkey. 

e) In the case of earnings from immovable property (Rental Income) : presence of the immovable property in Turkey, as well as employment of such goods and rights in Turkey, or derivation of benefit from them.

f)  In the case of capital gains: In the case of investment of the capital in Turkey, the earnings generated are considered as earnings acquired in Turkey. .

g) Other earnings and revenues: Conduct in Turkey of the business or transaction giving rise to the earnings or revenues, or derivation of benefit from them in Turkey. 

Full and Limited Liability in the Income Tax Code

For purposes of Income Tax Code, tax liables are divided into two groups, namely, resident (full liable) taxpayers and non-resident (limited liable) taxpayers.
Full taxpayer real persons are taxed over their earnings and revenues acquired in Turkey and abroad. Limited liables (i.e. real persons not settled in Turkey) are taxed solely upon their earnings and revenues they have acquired in Turkey..
Accordingly, real persons settled in Turkey are taxed on full liability basis, and they are called “resident taxpayers” those who have their legal residence in Turkey and who reside in Turkey for a continuous period of more than 6 months within one calendar year, are considered to be settled in Turkey.
. Businessmen, scientists, experts, officials, press correspondents, and other individuals whose situations resemble these, as well as those who have arrived for purposes of education, or of medical treatment, or of rest, or of travel, and those who are detained or have remained in Turkey for reasons not under their control such as arrest, conviction for crimes, or illness, shall not be considered as settled in Turkey, even if they have remained for more than six months in the country. Therefore, they are not considered as full liable.
Moreover, Turkish citizens who are associated with government offices and institutions or with organizations and enterprises whose headquarters are located in Turkey and who reside in foreign countries as a result of the business of such offices, institutions, organizations and enterprises. (Of such persons, those who are held liable to an Income Tax or to a similar tax because of earnings and revenues which they have acquired in the country in which they are located, shall not separately be taxed on such earnings and revenues.)

Real persons not settled in Turkey shall be taxed solely upon the earnings and revenues they have acquired in Turkey, and such persons are considered as non-resident taxpayers and are taxed on the basis of limited liability. Such persons are taxed upon the earnings and revenues they have acquired in Turkey, and are therefore subject to limited liability.

Commercial Earnings

According to Article 37 of the Income Tax Code, earnings arising from all types of commercial and industrial activities are commercial earnings.
The most distinctive characteristics of commercial activities are, the activity’s being based on an organization consisting of capital and labor, and the fact that the transactions of this organization are conducted on a continued basis. The determination of whether an activity is performed on a continued basis and/or whether or not this activity is performed within the structure of a specific organization, may sometimes become rather difficult.
According to the generally accepted application results, a given transaction is deemed to have been performed on a continuous basis, if it is performed on more than one occasion within one year.
Meanwhile, the basic generally accepted criteria that indicate the existence of a commercial organization include applications such as the allocation of capital to the organization, recruitment of employees, registration of the organization in the trade registry. Moreover, the performance of a transaction on continuous basis is also accepted as a criterion regarding the existence of the commercial organization.
The gains that are derived from commercial activities performed on incidental basis are taxed as other gains and proceeds.
The partnership shares received by partners in unincorporated companies, or by silent partners in ordinary partnerships in commendam or in those limited by shares shall have the same effect as personal commercial earnings.

Independent professionals operating private schools, hospitals and other similar enterprises, may transfer their independent professional earnings to the records of the enterprise.
For income tax purposes, taxpayers who generate commercial earnings can be classified according to various criteria.
According to the Income Tax Code, the initial classification is based on whether or not the recipient of the commercial earning is an income tax liable. The classification based on this criterion, is applied as follows:
1. Those who are entitled to the exemption granted to the minor tradesmen and artisans, and who are not subject to income tax.
2.Those who are entitled to the exemption granted to the minor tradesmen and artisans, and who are subject to income tax.
The second classification envisaged in the Income Tax Code is based on the method of determination of commercial earnings. This classification is applied as follows:
1. Those who are subject to income tax on simple earnings basis,
2. Those who are subject to income tax on actual earnings basis.
Another method of classification is applied in the determination of income on actual earnings basis. In this classification, taxpayers are also divided into two groups, namely
1.Taxpayers subject to balance sheet basis
2. Taxpayers subject to trading account basis.