Executive summary

Based on an individual application¹ made to the Turkish Constitutional Court regarding the taxable nature of the withholding tax imposed on the investment allowance, it was ruled that the right to property was violated and a retrial should be granted.

In this individual application decision dated 26 October 2017 and no. 2014/13518, the Turkish Constitutional Court stated that there are different case laws regarding the nature of the withholding tax applied on profits subject to the investment allowance and there is lack of uniformity in the interpretation of the tax provision notwithstanding that the provision is not newly enacted. Therefore, in the current case, the intervention to the property right through taxation is not based on a law that provides the criteria of predictability and certainty.

Detailed discussion

The nature of the withholding tax on the investment allowance and the tax rate to be applied have been controversial issues for many years.

The opinion of the Tax Authority is that the nature of the withholding tax on the investment allowance is taxation of corporate income and therefore the tax rate to be applied is 19.8%.²

In the litigation process prior to the individual application, the position is that the nature of the withholding tax on the investment allowance is a tax on dividend income and that the reduced rate provided in the respective Double Taxation Treaty should be applied if the profit subject to the investment allowance is distributed to a nonresident shareholder.

Based on the position that the withholding tax on the investment allowance constitutes "dividend taxation," the claim was made against the administrative act on behalf of the nonresident entity for the excessive amount of the withholding tax at 19.8% on the profits subject to the investment allowance exemption.

The opinions of the 3rd and 4th Chamber of the Council of State regarding the issue up to 2013 was that the withholding tax on the investment allowance constituted dividend taxation, but the 4th Chamber of the Council of State reversed its opinion after 2013.

Even if unification of case law is requested, the case was finalized against the nonresident entity without any decision on this claim. The final decision was rendered in 2014 and an individual application was filed before the Constitutional Court, claiming that the right to property and the non-resident shareholder's right to a fair trial was violated.

According to the Constitutional Court decision dated 26 October 2017 and no 2014/13518, the Court ruled that:

• The difference in opinions regarding the nature of the taxation on the investment allowance results in the application of two different withholding tax rates on taxpayers located in different cities.
• The relevant article is not a new provision, instead, there is a decade of implementation of the provision as of the decision date of 4th Chamber of the Council of State.
• The fact that there are two different interpretations of the same provision and there is no unification of case law damages the predictability and certainty of the law.
• Therefore, the intervention to the property right through taxation is not based on a law that provides the criteria of predictability and certainty.

This Decision constitutes a precedent for individual application requests that are pending before the Constitutional Court on the same issue, since this is the first individual application decision established in relation to the cases regarding the nature of the withholding tax on the investment allowance.

In addition, the fact that the decision to be established by the 4th Chamber of the Council of State as a result of the retrial could also have a direct impact on ongoing proceedings on the same issue.

When assessed in terms of tax disputes in general, the decision indicates that "individual application" to the Constitutional Court can also be used as an effective remedy in tax disputes.

As a result of the Constitutional Court's technical and legal explanations, nonresident corporations, who have already received or will receive dividend payments from profits subject to the investment allowance in Turkey, should assess their positions and consider a claim for refund or application of a reduced withholding tax rate as per the provisions of Double Taxation Treaties.

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ENDNOTES

¹ The claimant was represented by EY Turkey.

² According to Provisional Article 61 of the Income Tax Law No. 193.

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CONTACTS

For additional information with respect to this Alert, please contact the following:

Kuzey Yeminli Mali Müsavirlik A.S. Istanbul, Turkey

• Mehmet Küçükkaya, Tax & Law
  mehmet.kucukkaya@tr.ey.com
• Gökçe Sarisu Kanmaz, Tax Controversy
  gokce.sarisu@tr.ey.com
• Gamze Durgun, International Tax Services
  gamze.durgun@tr.ey.com

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ATTACHMENT

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