Key Points to Observe in the Taxation of Technopark Earnings in Advance Tax Periods

Under Technology Development Zones Law No. 4691, which was published in the Official Gazette of 06.07.2001 and thereby entered into force, significant tax advantages such as corporate income tax, personal income tax, VAT and social security incentives have been granted to companies engaged in software, design and R&D activities, with the aim of increasing the international competitiveness of the country's industry and, in order to give it an export-oriented structure, of producing technological knowledge, developing innovation in products and production methods, raising product quality or standards, increasing productivity, reducing production costs, commercialising technological knowledge, and supporting technology-intensive production and entrepreneurship.

Under Law No. 4691, a Technology Development Zone; is defined as “a site in which firms using high/advanced technology or oriented towards new technologies produce/develop technology or software by making use of the facilities of a particular university or high technology institute or R&D centre or institute, in which they operate in order to transform a technological invention into a commercial product, method or service, and thereby contribute to the development of the region, and in which the academic, economic and social structure is integrated, located within or in the vicinity of the area of that same university, high technology institute or R&D centre or institute; or a technopark having these characteristics”.

What Support and Exemptions Are Listed in Law No. 4691?

It is also possible to benefit, in respect of advance corporate tax periods, from the corporate income tax exemption, which is one of the incentives provided to zone companies under Technology Development Zones Law No. 4691. 

• Corporate Income Tax Exemption:

This is governed by Provisional Article 2 of Law No. 4691. Under that article, the earnings that personal and corporate income taxpayers operating in the zone derive exclusively from software and R&D activities in that zone are exempt from personal and corporate income tax until 31.12.2028. Earnings obtained from services rendered after the production of such software — such as installation, testing, repair, training, technical services and consultancy — may not, however, be brought within the scope of the exemption.

The earnings that taxpayers operating in the zone derive from activities they carry out outside the zone also cannot benefit from the exemption, even if those earnings arise from software and R&D activities.

The Technology Development Zones exemption, which is to be shown in the Corporate Income Tax Return and in Advance Tax Returns among the exemptions and deductions to be applied even where there is a loss, is by its nature an earnings exemption; the whole of the earnings determined by deducting the expenses and costs relating to those activities from the revenue derived from the activities falling within the scope of the exemption is exempt from personal and corporate income tax. In order for the exempt earnings to be calculated correctly, the revenue, cost and expense items relating to activities within the scope of the exemption and to other activities outside that scope must be monitored separately from one another.

Where the activities carried out within the scope of the exemption result in a loss, such losses may not be offset against earnings derived from non-exempt activities.

• Allocation of Joint General Expenses:

Where activities falling within the scope of the exemption and activities falling outside that scope are carried out together, joint expenses (rent, electricity, IT infrastructure, management expenses) must without fail be allocated according to an objective and consistent key; it is also possible to allocate them on the basis of the ratio of the costs incurred in the current period to one another.

The depreciation of installations, machinery and vehicles used jointly in activities falling within and outside the scope of the exemption must be allocated according to the number of days for which they are used in each activity.

• Interest, Foreign Exchange Differences and Other Extraordinary Income:

Extraordinary income such as interest and foreign exchange differences that taxpayers operating in a technopark zone obtain other than from technopark sales revenue cannot be treated as falling within the scope of the exemption. Accordingly, interest income arising from the investment of cash, foreign exchange differences arising on assets denominated in foreign currency, and income arising from the disposal of economic assets cannot be treated as falling within the scope of the exemption. 

• Earnings Derived from Mass Production:

Where taxpayers themselves subject the products arising from software and R&D activities carried out in technology development zones to mass production and market them, the portion of the earnings derived from marketing those products that is attributable to intangible rights such as licences and patents may benefit from the exemption, provided that it is separated in accordance with transfer pricing principles. The whole of the earnings derived from these activities may not be treated as falling within the scope of the exemption.

For example, a company engaged in software activities in a technology development zone will benefit from the exemption on the earnings it derives from the sale of licences for, or the leasing of, the software it produces; however, earnings derived from marketing that software on disk, on CD or in electronic form (other than the portion attributable to the licence) will not be able to benefit from the exemption.

Qualifying Expenditure / Total Expenditure Ratio

In order for earnings derived from the transfer, sale and leasing of intangible rights arising from R&D and software activities carried out in technoparks to be brought within the scope of the exemption, a requirement has been introduced that those rights be secured by a patent or by a document functionally equivalent to a patent. The portion eligible for the exemption of earnings arising from intangible rights secured by a patent or by a document functionally equivalent to a patent will be calculated using the ratio of the qualifying expenditure incurred within the scope of the activity generating the earnings to the total expenditure relating to that activity.

The portion eligible for the exemption of earnings arising from the sale, transfer or leasing of intangible rights will be calculated by applying, to the earnings derived from each project carried out in the zone, the ratio of the qualifying expenditure relating to that project to total expenditure. The qualifying expenditure to be taken into account in this calculation for each project is the total of the expenditure incurred by the taxpayer itself in order to obtain the intangible right and directly connected with that intangible right, together with the amounts paid for benefits and services of the same nature obtained from unrelated persons.

In accordance with these explanations;

The Portion of Earnings Arising from Intangible Rights Eligible for the Exemption

=Qualifying expenditure/Total Expenditure

will be calculated according to the above formula. Taxpayers may increase the amount of qualifying expenditure by up to 30 per cent. However, the amount of qualifying expenditure so increased may not exceed the total amount of expenditure.

In this context, the qualifying expenditure and the total expenditure to be taken into account in calculating the ratio are as follows:

• Reporting Technopark Exempt Earnings in the Tax Return:

Taxpayers operating in the zone will report their earnings falling within the scope of the exemption on the line “Earnings Derived in Technology Development Zones” in the “Exemptions Deductible Even Where There Is a Loss” section of their corporate income tax / advance corporate tax returns. Where an activity subject to the exemption results in a loss, the amount of the loss will be added to the amount of legally non-deductible expenses and reported on the line for losses arising from exempt activities in the legally non-deductible expenses section.

In Conclusion; Under Law No. 4691

Companies satisfying the conditions below will be able to benefit, until 31/12/2028, from the personal and corporate income tax exemption on the earnings that personal and corporate income taxpayers operating in technology development zones derive exclusively from software, design and R&D activities in those zones.

• The company or its branch must be physically located within the boundaries of a declared Technology Development Zone (technopark).

• The project carried out must have been approved by the technopark managing company.

• Care must be taken that only the income derived from the approved project will be treated as falling within the scope of the exemption, and that the company's routine commercial activities outside the technopark do not fall within that scope.

• Personnel working times must be evidenced by entry-exit turnstile systems (PDKS) or approved time-tracking software.

Accordingly, in order not to suffer a loss of entitlement, companies that will deduct their earnings falling within the scope of the exemption in the advance tax returns they prepare must make their tax calculations having regard to whether they satisfy the conditions listed above.

Yours faithfully.