ON THE TAX TREATMENT OF AMOUNTS İN THE SPECİAL FUND ACCOUNT WHERE INFLATİON ADJUSTMENT DİFFERENCES OF THE WORK-İN-PROGRESS ACCOUNT ARE TRACKED

TAX PROCEDURE LAW CIRCULAR /196

1. Introduction

Pursuant to subparagraph (10) added to Article 298(A) of the repeated Article 298 of the Tax Procedure Law No. 213 by Law No. 7529 dated 24/10/2024 on the Protection of Consumers and Amendments to Certain Laws, this Circular sets out the principles regarding the transfer of adjustment differences arising from the inflation adjustment of the work-in-progress account to a special fund account without taking them into account in the determination of period profit, the increase of the amounts recorded in such fund account at the revaluation rate, and the inclusion of such amounts in the determination of period profit in the period in which the investment is capitalized.

2. Legislation

Article 11 of Law No. 7529 dated 24/10/2024 on the Protection of Consumers and Amendments to Certain Laws, published in the Official Gazette dated 30/10/2024 and numbered 32707, added subparagraph (10) to Article 298(A) of Law No. 213, which provides as follows: “10. Adjustment differences arising from subjecting the amounts tracked in the work-in-progress account under the accounting standards within the scope of this Law to inflation adjustment, and monitored in a sub-account of this account, shall be shown in a special fund account on the liabilities side of the balance sheet and shall not be taken into account in the determination of period profit.

These amounts recorded in the special fund account shall be taken into account in equal installments in the determination of period profit in the period in which the investment is completed and the relevant economic asset is required to be capitalized, and within the four accounting periods following such period.

The amounts monitored in the special fund account pursuant to this paragraph and not taken into account in the determination of period profit shall be increased each year at the revaluation rate determined under this Law for the preceding year. No additional inflation adjustment shall be applied to the amounts monitored in these accounts.

In cases where the activity is discontinued during the investment period or after the capitalization of the economic asset, or where part or all of the relevant amounts monitored in the special fund account are transferred to another account or withdrawn from the business, the amounts not taken into account in period profit pursuant to this paragraph shall be taken into account in the determination of corporate income for the period in which the activity is discontinued or in which the special fund account is used, in whole or in part, in violation of the provisions of this paragraph.” This provision entered into force on the date of its publication, effective from 1/1/2024 and, for taxpayers assigned a special accounting period, from the accounting period commencing in 2024.

In this context, explanations regarding the regulation introduced by the subparagraph added to the aforementioned article of the Law, together with sample calculations, are provided in the following sections.

3. Increasing the amounts tracked in the special fund account at the revaluation rate during the investment period

Subparagraph (10) of Article 298(A) of Law No. 213 stipulates that the amounts included in the special fund account under the said paragraph and not taken into account in the determination of period profit shall be increased each year at the revaluation rate determined for the preceding year and shall not be subject to inflation adjustment.

The amounts recorded in the special fund account within this scope shall be increased by taking into account the revaluation rate determined for the relevant year, both during the investment period and in subsequent periods.

Example-1: At the end of the 2024 accounting period, Company (A) Inc. subjected its work-in-progress account to inflation adjustment and calculated an inflation adjustment difference of TRY 4,000,000.

The taxpayer shall transfer the relevant inflation adjustment difference to a special fund account without relating it to income accounts and shall not take this amount into account in the determination of period profit.

In addition, it is self-evident that the TRY 4,000,000 transferred to the special fund account shall not be increased at the revaluation rate at the end of the 2024 accounting period.

Company (A) Inc. shall increase this amount in the special fund account at the revaluation rate at the end of the 2025 accounting period, during which the investment continues. For the 2025 accounting period, the revaluation rate of 25.49%, as determined by Tax Procedure Law General Communiqué Serial No. 585 published in the Official Gazette dated 27/11/2025 and numbered 33090, must be applied.

Revaluation Rate (A) = 25.49% (1.2549)

Inflation Adjustment Difference Transferred to the Special Fund Account (B) = TRY 4,000,000

Special Fund Account Amount Increased at the Revaluation Rate = (A)x(B) = TRY 4,000,000 X 1.2549 = TRY 5,019,600

4. After capitalization of the investment, increasing the amounts tracked in the special fund account at the revaluation rate and determining the amount to be taken into account in the determination of profit

An example regarding the increase, at the revaluation rate, of the amounts transferred to the special fund account in the periods following the capitalization of the investment, and their inclusion in the determination of period profit in equal installments during the period in which the investment is completed and the relevant economic asset is required to be capitalized and the four accounting periods following such period, is provided below.

Example-2: Company (A) Inc. referred to in Example-1 completed its investment in 2026 and recorded the economic asset in the company’s assets. Assuming that the revaluation rate in 2026 is 20%, the amount in the special fund account will be taken into account as (TRY 5,019,600 X 1.20 =) TRY 6,023,520, and one-fifth of this amount, i.e. (6,023,520 / 5 =) TRY 1,204,704, shall be taken into account in the determination of profit in the 2026 accounting period in which the economic asset is capitalized.

If the balance of the special fund account (TRY 6,023,520 - TRY 1,204,704 =) is TRY 4,818,816, this amount shall be increased at the revaluation rate in the subsequent accounting period, and one-fourth of the amount increased at the revaluation rate shall be taken into account in the determination of profit for that period; in the following years, one-third, one-half, and finally the remaining amount in the last year shall respectively be taken into account in the determination of profit for the relevant accounting periods. A summary table of the calculation is set out below.

* The revaluation rates for the years 2026, 2027, 2028, 2029 and 2030 are assumed.

** Decimal fractions have not been taken into account in the calculations.

Company (A) Inc. shall, following the capitalization of the investment, increase the amounts transferred to the special funds account under subparagraph (10) of Article 298(A) of Law No. 213 (including the amounts increased at the revaluation rate during the investment period and transferred to the special funds account) at the revaluation rate, as shown in the table above, and shall take the relevant installment amounts into account in the determination of period profit in the 2026, 2027, 2028, 2029 and 2030 accounting periods.

5. Other Considerations

5.1. Taking the amounts in the special fund account into account in the determination of profit during interim tax periods

Subparagraph (10) of Article 298(A) of Law No. 213 stipulates that the amounts transferred to the special fund account shall be increased at the revaluation rate in the periods following the capitalization of the investment and shall be taken into account in the determination of period profit in equal installments during the period in which the investment is completed and the relevant economic asset is required to be capitalized and the four accounting periods following such period. Such gains shall also be taken into account in the determination of profit during interim tax periods.

Accordingly, the portion corresponding to the relevant interim tax period shall be taken into account in the determination of profit during interim tax periods.

5.2. Whether differences arising from the increase of special funds at the revaluation rate may be allocated to cost

Pursuant to the aforementioned paragraph, it is not possible to allocate to the cost of the economic asset the portions of the amounts transferred to the special fund account that arise from increases at the revaluation rate.

Hereby announced.