Tax Exemption for Employees of Tech-Initiative Companies, But a New Tax Base for Employers
The Law No. 7524, which was published in the Official Gazette and brought amendments to the tax legislation, included a notable regulation (“Regulation”) in the Income Tax Law No. 193.
According to this Regulation, the portion of the market value of the shares given by "tech-initiative" companies to their employees free of charge or at a discount, which is considered as part of their salary, that does not exceed the annual gross salary for that year, will be exempt from income tax. The Regulation draws attention by relating to stock options, commonly known as stock options in the market.
So, which companies are considered tech-initiative companies? Therefore, which companies' employees will benefit from this exemption?
When examining the literature, a tech-initiative is defined as an initiative that includes innovative, high value-added, technological business ideas. Entrepreneurs who engage in this endeavor are referred to as "tech-entrepreneurs." However, under current legislation and the documents and regulations published by relevant institutions, there is no definition of "tech-initiative," "tech-entrepreneur," or "tech-initiative company."
Like other regulations made following the National Artificial Intelligence Strategy 2024-2025 Action Plan, the Regulation reflects a technology-focused approach. At this point, it is expected that the Ministry of Industry and Technology will define "tech-initiative company" and its criteria to clarify the application area of the Regulation.
Tech-entrepreneurs, on the one hand, must conduct research and development to develop their technological ideas, while on the other hand, they must establish a financially sustainable business as an entrepreneur.
The number of tech-entrepreneurs in our country is estimated to increase by 800-1000 each year. The primary driving force behind this increase is the technology grants or repayable technology supports provided by TÜBİTAK and KOSGEB. Thanks to these support programs, those interested in new technologies across our country have the opportunity to access the resources needed to start their ventures.
If we examine the Regulation in detail…
The first paragraph of the Regulation stipulates that shares given to employees by companies that make a difference in the technological field and are considered entrepreneurs, either free of charge or at a discounted price, will be exempt from income tax. Two important elements are present in this paragraph:
• Firstly, the shares given must be considered as part of the salary.
• Secondly, the portion of the shares that are considered part of the salary and do not exceed the gross annual salary for that year, based on their market value at the time they were given, will be exempt from income tax. For example, if the shares received that year are valued at 100,000 TL when sold, and your annual gross salary is 240,000 TL, then the 100,000 TL received will be exempt from income tax since it does not exceed the gross annual salary for that year.
The Regulation continues by specifying how the shares acquired will be taxed when disposed of. This will be analyzed in three parts:
• If the shares are disposed of within three full years from the acquisition date, the tax exemption will be nullified, and the employer will be required to pay the entire amount of the exempted tax.
• If disposal occurs within four to six years, the employer will have to pay 75% of the exempted tax.
• If disposal occurs within seven to twelve years, the employer will have to pay 25% of the exempted tax.
Employers who qualify as tech-initiative companies will not be subject to a tax loss penalty. However, in addition to the amounts mentioned above, they will also be required to pay late payment interest when the taxes are collected.
Returning to our example, if the tax on the 100,000 TL worth of shares is assumed to be 40,000 TL and the acquisition date is February 1, 2024, then in the first case, if a sale occurs before February 1, 2027, the employer will be required to pay 40,000 TL plus late payment interest.
In the second case, if a sale occurs between February 1, 2028, and 2030, the employer will have to pay 30,000 TL plus late payment interest.
In the final case, if a sale occurs between February 1, 2031, and 2036, the employer will be required to pay 10,000 TL plus late payment interest.
The Regulation also envisages a statute of limitations. Accordingly, it is foreseen that the statute of limitations for the shares given to employees free of charge or at a discount will begin from the beginning of the calendar year following the date the shares are disposed of by the employee.
When evaluating the regulations published in the Official Gazette following the National Artificial Intelligence Strategy 2024-2025 Action Plan, it is evident that Turkey is taking various actions to support technological innovation and play an active role in digital transformation. However, rather than supporting technological innovation, the Regulation essentially invoices it. The Regulation has negative implications for the employer tech-initiative company since the tax burden is placed on the employer if the shares acquired are disposed of. Given the expectation of a binding definition of a tech-initiative company to clarify the scope of the Regulation, it is clear that these actions will continue.