Tax System for Foreign Businesses in Turkey
Turkey is a dynamic and growing G20 economy that links the east and the west through unmatched beauty. In addition to being one of the world’s fastest-growing economies, Turkey also supports international investors’ growth via a business-friendly agenda and through access to a large domestic market and neighboring global markets.
Turkey’s location, at the crossroads of Europe, Central Asia, and the Middle East, provides easy access to the European, Middle Eastern, North African, Central Asian, and Gulf markets. These markets comprise more than 1.6 billion people and account for a total GDP of USD 28 trillion. More than half of the world’s trade takes place within a four-hour flight radius of Turkey. All of this makes it a key reason why multinational companies have chosen Turkey as a strategic regional hub for their operations.
Corporations with legal or business centers located in Turkey are qualified as residents, and are subjected to taxation on their income derived in Turkey and other countries. If both the legal and business centers are not located in Turkey, then these corporations are qualified as non-residents and subjected to taxation only on their income derived in Turkey.
The guidelines mentioned below do not apply to real estate owners who earn money through their real estate, if they are living abroad. They are free to transfer through the banks any revenues earned from sale amounts collected from the sales of real properties or property rights of the real properties that they acquired in Turkey.
The Uniform Accounting System is applied in Turkey under the Tax Procedure Law No. 213. Such a system is compulsory for real persons and legal entities keeping books based on balance. These enterprises and corporations must comply with the methods and principles set forth under these amendments.
Stamp duty applies to a wide range of documents including but not limited to contracts, agreements, notes payable, letters of credit and letters of guarantee, financial statements, and payrolls. Stamp duty is levied according to the type of documents at different tax rates (between 0.189%- 0.948%) or lump-sum amount listed in Annex I of the Stamp Duty Law.
Filing Taxes in Turkey as a Foreign Business
In Turkey, Corporate Income Tax, Provisional Corporate Income Tax, VAT, Withholding Tax, and BA-BS form filings are required for Corporations (for Ltds, JSCs, and branches). BA-BS forms show the monthly purchases and sales of Companies.
In Turkey, the corporate tax rate levied on business profits is 20%. (The rate for corporate tax has been increased to 22% for the tax periods 2018, 2019, and 2020. However, the President is authorized to reduce the 22% rate down to 20%)
A Corporate Tax Return is submitted from the first day of the 4th month following the month when the accounting period was closed to the evening of the 30th day (end) of the same month, and is to be paid by the end of the month when the return is submitted.
Which Companies Must Pay Taxes?
Corporate taxpayers as per Article 1 of the Law on Corporate Tax No. 5520 are;
Public Economic Enterprises
Foundations and Associations Owned Economic Enterprises
and Joint Ventures
What Income is Exempted from the Corporate Tax?
75% of the profits arising from the sales of the participation stocks included in the assets of the corporations for at least two full years, and their founders’ share certificates, dividend certificates, and preemption rights that they hold for the same period, and 50% of the profits arising from the sales of the immovables held in their assets for the same period, are exempted from Corporate Tax.
The sales price must be collected by the end of the second calendar year following the year when the sale is made. Taxes not accrued in due time due to the exemption applicable to the sales price and not collected within this period are considered as a loss.
Profits produced by corporations from their participation in the capital of another corporation that is a fully accountable taxpayer; the dividends that they obtain from founders’ share certificates which allow participation in the profits of another corporation that is a fully accountable taxpayer and other dividend certificates, and the dividends they obtain from participation stocks of venture capital investment funds that are fully accountable taxpayers and from share certificates of venture capital investment partnerships are exempted from Corporate Tax.
Profit of the foreign affiliate bears a total tax burden of at least 15% consisting of taxes such as income and corporate tax according to the tax laws of the country where the company participated in carries on business, including the taxes paid over the profits that are a source for the dividend distribution; in the case that the main field of activity of the company participated in is the provision of financing including financial leasing, or provision of insurance services or investment on securities, bears a total tax burden consisting of taxes such as income and corporate tax that is at least equal to the corporate tax rate applied in Turkey under the tax laws of the country where the company participated in carries on business.
Profits of venture capital investment funds or partnerships, real estate investment funds or partnerships, pension investment funds, housing financing, and asset financing funds are exempted from Corporate Tax.
How to Benefit from a %5 Tax Deduction on a Company based in Turkey?
The taxpayers who satisfy the following conditions may benefit from a tax deduction by deducting 5% of the tax calculated over their annual income or corporate tax returns, from the income and corporate tax to be paid. Corporates that operate in finance and banking sectors, insurance and reinsurance companies, pension companies, and pension investment funds may not benefit from this deduction.
1) They must have submitted in due legal time their tax returns for the year when the deduction will be calculated and the last two years preceding that year, and paid in due legal time the taxes accrued on these returns.
2) There must be no tax assessment made additionally, ex officio or by the administration against them as of the tax types subjected to tax return, in the year when the deduction will be calculated and the last two years preceding that year
3) As of the date when the tax return for which the deduction will be calculated is submitted, they must have no overdue tax liabilities, the principal amount of which is above TRY 1,000 (including tax penalties).
What Company Income is Taxed in Turkey?
Personal income tax is levied on the income of individuals. The term “individuals” refers to the real persons. In the application of income tax, partnerships are not deemed to be separate entities, and each partner is taxed individually on their share of profit. An individual’s income may consist of one or more income elements. Such as;
From Independent Personal and Professional Services: The term includes services offered by such independent professionals as lawyers, accountants, doctors, consultants, and engineers. Revenues received from independent professional services within a year as well as expenses paid are recorded in a simple accounting book. In general, all expenses related to independent professional services may be deducted from revenues. But, the scopes of those expenses are narrower than those specified for the commercial and business activities.
Business Profits: A person must have a permanent establishment or permanent representation voice in Turkey and income must result from business carried out in this permanent establishment or through such representation voices.
Salaries and Wages: This income comprises such income from all kinds of employment in both public and private sector as salaries and wages, as well as associated supplementary income such as allowances, bonuses, anniversary gifts, gratuities, commissions, premiums, compensations, and other wage and salary-related remunerations including benefits in kind at market value.
Income from Capital Investments: Any income such as interest, dividend, rent, and such income derived from capital in cash or. Income from business activities, agricultural activities, and independent services does not count as income from capital investment. Profits from shares and stocks, participation shares, payments made to the board directors, and the chairmen, as well as interests of any kind, are written as income from capital investments.
VALUE ADDED TAX (KDV) in Turkey
VAT applies when goods or services are imported to Turkey, or a person or entity performs commercial, industrial, agricultural services in Turkey. VAT is applied to the supply and the importation of goods and services. VAT is levied at each stage of the production and distribution process. However, while liability for the tax is levied on the person who supplies or imports goods or services, the real VAT burden is on the final consumer. The Turkish VAT system employs multiple rates and the President is authorized to adjust the VAT rates within certain limits.
Those import or export goods and services, corporations supplying postal services, as well as TV/Radio, and organizers of gamble and entertainment are counted as VAT taxpayers.
While the standard rate of VAT on taxable transactions is set at 18% in the VAT Law, entities who provide the goods and services are divided into two other lower tax rates.
Applies to basic goods and services, such as delivery of vehicles, houses, and raw agricultural products.
Anything from non-required human needs, such as entertainment, private education, and commercial foods.