Berkay ÖZGÜVEN – Chartered Accountant
Especially in the recent period, Eurobonds have become an important investment tool which has been preferred by companies and individuals. In other words, there is a significant increase in demand for Eurobonds. So far no problem.
One of the issues of most interest to Eurobond buyers is how interest and trading gains from Eurobonds will be taxed. Believe me, this question, curious about taxation, is among the most confusing questions in practice.
Almost everyone wonders about the current state of the taxation of Eurobonds.
What is Eurobond?
Eurobond; It is a long-term debt instrument that governments or companies offer for sale in international markets, usually in dollars or euros, in order to obtain funds outside their own country.
From the point of view of tax legislation, eurobonds exported abroad are treated as government bonds and treasury bonuses.
Eurobond income is made in two ways, the first being interest income and the second being trading income.
How is interest income from Eurobonds taxed?
Eurobonds are securities with maturities ranging from 5 to 30 years as long-term foreign debt instruments that pay interest in USD every 6 months and in Euro once a year.
Coupon or interest returns are usually fixed payments and it is known in advance how much interest will be earned at the end of the period. However, variable interest payments are also possible.
Interest income from Eurobonds is deemed to be “equity income” under Article 75 of the Income Tax Law, and interest or coupon income is subject to a withholding tax at the rate of “zero percent”. (GVK Art.94/7-a) This means that there is no withholding tax on interest income!
If the Eurobond interest income exceeds TL 70,000.00 for 2022, an annual statement is required. If the interest income is less than this amount, no statement is required.
Also, in determining whether the reporting limit has been exceeded, it is extremely important to know if there are other items of income subject to reporting. Apart from interest income from Eurobonds, if there are other income items such as profit sharing, dividends, workplace rent and the total of such income exceeds TL 70,000.00 , all income must be declared and income tax at a rate varying between 15 and 40 percent must be paid.
For example, if your work rental income is TL 30,000.00 and your Eurobond interest income is TL 47,000.00, a statement should be made on the total sum of TL 77,000.00 TL, which is the sum of the two incomes.
However, limited taxpayers have a privileged situation. In other words, people who have been in Turkey for 6 months or less in a calendar year do not need to make any declaration or notification for the interest income they have earned on Euros. -bonds, regardless of the amount. In addition, the withholding rate is “zero percent”.
With regard to corporations, interest or coupon income is not subject to withholding tax, but is subject to corporation tax.
On the other hand, we remind you that interest income from Eurobonds will be converted into TL at the CBRT purchase rate and taxed from the date of collection, and exchange rate differences will not be subject to tax.
How is the taxation on the purchase and sale of Eurobonds?
According to repetitive Article 80 of the Income Tax Law, gains from the disposal of securities and other capital market instruments are taxed as “capital gains”.
Trading income from Eurobonds is not subject to withholding tax, as is interest income. Also, there is no “annual reporting limit” application in business income. In other words, whatever the amount of income generated after the sale, it must be declared.
At this stage, it is very important to determine the income that will serve as the tax base for natural persons who are full taxpayers.
The money received in exchange for the sale of the Eurobond must first be converted into TL (VUK General Notice No. 130). Then, in order to avoid taxation of the fictitious gain resulting from inflation, an indexation on the cost value is necessary.
When determining the cost price, the D-PPI indices announced by TURKSTAT for the month preceding the date of purchase and the date of sale are determined, and if the index difference is greater than 10%, indexation may be performed. If it is less than 10%, cost indexation cannot be performed.
Revenue from the purchase and sale of Eurobonds is calculated from the TL equivalent of the sale price, deducting costs incurred for disposal and taxes and duties paid, with the value indexed cost.
In addition, there are differences in the determination of the tax base depending on the issue of Eurobonds before and after January 1, 2006. The most important detail here is that if the Eurobond you have has was issued before January 1, 2006, the taxable base will be calculated by deducting the amount of the exemption determined each year from the profits resulting from trading. The amount of the exemption will not be deducted from the profit.
Let’s walk through the example to fully understand the process:
For example, the Eurobond bought at a price of USD 100,000.00 during the period of March 5, 2019 was sold at a price of USD 110,000.00 during the period of May 12, 2022. (The rate of l USD is 5.37 on the date of purchase on March 5, 2019 and the rate of 15.35 TL on May 12, 2022 on the date of sale.)
First of all, the equivalent in TL of the price paid in foreign currency at the time of purchase and the price received at the date of sale must be found according to the rate of purchase of foreign currencies of the CBRT at the date of l buying and selling.
Purchase price; $100,000 * $5.37 = $537,000.00
Selling price; It will be calculated as follows: 110,000 USD * 15.35 = 1,688,500.00 TL.
Then, in order to avoid the fictitious profit resulting from inflation, an indexation of the costs is essential.
Since the February 2019 PPI value for the month before the purchase date is 425.26 and the April 2022 PPI value for the month before the sale date is 1,423.27, the rate of indexation or index difference increased by 234.68% and is greater than 10% increase occurred.
In this case, the indexed cost of the Eurobond; 537,000.00 + (537,000.00 * 234.68%) = 1,260,231.60 TL, and an increase in taxable value of 1,688,500.00 – 1,260,231.60 = 428,268.40 TL in reason for the profit sold by Eurobond will be earned. In short, the tax will be paid by making a declaration of more than 428,268.40 TL.
For non-resident taxpayers who stay in Turkey for 6 months or less in a calendar year, purchase and sale income will not be subject to withholding tax. However, income from the purchase and sale of Eurobonds of non-resident companies that have places of business and permanent representatives in Turkey will be subject to reporting.
With respect to corporations, as with coupon or interest income, withholding tax will not be subject, but corporation tax will be.
Well, how will the taxation be if there is a separate profit or loss from two different securities during the same period?
If you hold several Eurobonds or similar securities in the same year and you gain on the sale of some of them and lose on the sale of some, you can offset the profit and loss resulting from these operations, provided that they were carried out in the same year.
The tax administration, in a decision in which it gave its opinion on the subject, explained the following:
“In accordance with these provisions and explanations, the loss to be incurred on the sale of shares of foreign companies listed on the New York Stock Exchange purchased between 2006 and 2009 and the profit resulting from the sale of Eurobonds due 2038 will be valued together. It is possible to deduct the profit in question.”(Grab. Istanbul VDB judgment of 23.02.2012 and numbered B.07.1.GİB.4.34.16.01-GVK 88-727).
As can be seen, the process of taxation of Eurobonds, which has often been preferred by companies in recent years, is extremely important.
In particular, the determination of profit by indexation of the cost value is an issue that should not be overlooked in terms of obtaining a tax advantage.
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