LAW OF INTERIA AND TAX SYSTEM IN TURKEY

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LAW & TAXATION 

Residents of Turkey are required to pay income tax on their worldwide earnings. A person is considered to be a resident of Turkey if their domicile is there or if they spend more than six months there in a given year. 

Companies that have their corporate or administrative headquarters in Turkey are referred to in the law as full liability taxpayers and are subject to corporate tax on their worldwide income. Limited liability taxpayers who do not have their legal or corporate headquarters in Turkey are only taxed on their income earned there. 

Turkish indirect taxes, such as value added tax, special consumption tax, banking and insurance transaction tax, special communication tax, stamp tax, customs tariff and fees, are in addition to direct taxes. 

Taxation 

In Turkey, corporations must file BA-BS forms, VAT, provisional corporate income tax, and corporate income tax (for Ltds, JSCs, and branches). The monthly purchases and sales of the companies are displayed on BA-BS forms. This form allows for the cross-checking of taxpayers' purchase and sale amounts. The months when the business receives pertinent invoices or agreements are when the Reverse Charge on VAT and Stamp Tax returns are invoiced. 

Different legal formats are provided by regulations for conducting business activities in Turkey. International investors and businesspeople can pick from a variety of Turkish companies to meet their needs. The two most common types of legal entities are the limited liability company (LLC) and the joint stock company (JSC). An alternative is for a foreign person or business to work in Turkey through a branch or liaison office. 

A flexible and liberal framework for the organization of businesses or branches is provided by the Turkish Commercial Code. No particular limitations apply to foreign investors conducting business in Turkey. 

Turkey has implemented reforms to make doing business easier, improve the investment climate, remove red tape for incorporating a business, and minimize costs and procedures. To this end, the process of forming a company is now only done at Trade Registry Offices, which are "one-stop shops" housed in Chambers of Commerce. One day is needed to complete the process.

Taxation Authorities 

The Revenue Administration and Tax Inspection Board are the two main divisions of the Turkish tax authorities. In the administrative structure of Turkey, these two authorities are positioned under the Ministry of Treasury and Finance of the Turkish Republic. While the Revenue Administration is in charge of levying and collecting taxes through tax offices, the Tax Inspection Board is in charge of conducting inspections by its tax inspectors for the taxpayers. 

Financing a corporate subsidiary 

Equity financing 

Capital increase 

Joint stock companies and limited liability companies can raise their share capital by issuing additional shares or by raising the share price per share. 

Since July 1, 2015, "Notional interest deduction" has been applied to cash capital increases. Turkish capital corporations will be able to deduct 50% of the interest (annual weighted average interest rate last announced for the year benefited from the deduction by the Central Bank of Turkey for TL denominated commercial loans) calculated over cash capital increase amounts that are registered in the Turkish Trade Registry or the interest calculated over the cash capital increase amounts that are not registered in the Turkish Trade Registry from their taxable income (with the exception of those that operate in the finance, banking, and insurance sectors). As of October 26, 2021, the deduction rate will be applied at 75% rather than 50% for capital increased with foreign cash. 

Debt financing 

Thin capitalization and transfer pricing 

If at any point during the applicable year, the ratio of borrowings from shareholders or people connected to shareholders exceeds three times the shareholders' equity of the borrower company, the excess borrowing will be treated as disguised capital. Half of the borrowings from related parties that are banks or other financial institutions are taken into account when determining disguised capital. 

When determining the corporate tax base, interest that has been paid or accounted for as well as foreign exchange differences related to disguised capital are considered non-deductible expenses. Dividend withholding tax is applied to interest pertaining to fictitious capital because it is treated as a dividend distribution.

The arm's-length principle should be used to determine the interest rate for loans taken out from connected parties. If the arm's-length principle is violated, the excessive portion would be viewed as a disguised profit distribution through transfer pricing and would not be deductible for corporate tax purposes. Additionally, in accordance with local tax law, the distribution of deemed profits would be subject to a 10% dividend WHT. However, the rate could be lowered in accordance with the relevant DTT. 

Financing expense limitation 

According to the Presidential Decree dated February 4, 2021, 10% of the financing costs for businesses (other than financial institutions) whose liabilities exceed their equity will be deemed non-deductible. 

In other words, as of the 2021 fiscal year, 10% of the financing expenses corresponding to the excessive portion will not be deemed as deductible for the determination of the corporate tax base for the companies whose liabilities exceed their equity, as per the balance sheet at the end of the relevant fiscal period. 

Withholding tax implications 

Withholding tax is charged on interest payments made to non-resident entities at rates ranging from 0% to 10%. Under a relevant DTT, the withholding tax rates might be decreased. 

Resource utilization support fund (RUSF) 

Depending on the maturity, foreign exchange and gold loans made to Turkish citizens from other countries (banks and financial institutions are exempt) are subject to RUSF. 

Value-added tax (VAT) for financing services 

Turkey's 18% VAT would apply to any financing services rendered there by the shareholder or a group company. The interest payments are not subject to VAT if the financing is provided by a third-party loan from a resident or non-resident financial institution or bank. 

Banking and Insurance Transaction Tax (BITT) 

The interest payments will be subject to BITT at 5% if the loan is given by a Turkish bank. 

Stamp tax 

Stamp taxes do not apply to documents pertaining to loans made by banks, foreign credit institutions, and international institutions, their securities, repayments, transfers, and assignments of receivables derived from the loans, as well as the annotations made on these documents (with the exception of loans used for a specific purpose).

Corporate income tax 

Income tax rate 

Companies that have their legal or corporate headquarters in Turkey, as well as operations that are focused and managed there, are subject to corporate tax on their worldwide earnings. In Turkey, the standard corporate income tax rate is 20%. The applicable corporate tax rate, however, was raised to 23% for income earned in 2022. Unless the law is changed, the rate that will be in effect starting in 2023 will remain 20%. 

Capital gains 

Every company's capital gains are counted as ordinary income and are therefore subject to corporate tax. The sale of immovable property owned by a corporation for at least two (2) years results in capital gains that are 50% and 75% of which are exempt from corporate tax provided that the gains from the sale are held in a special account until the end of the fifth year following the year of the sale. Subject to certain restrictions, capital gains from the sale of foreign participations that a holding company resident in Turkey has held for at least two years are exempt from corporate tax. 

Branch tax 

Branches are treated as non-resident entities for Turkish tax purposes, so they are only subject to tax on the income they receive from operations in Turkey. Branch profits are subject to Turkish corporate income tax at a rate of 23% for 2022; if the law is not changed, a rate of 20% will be applied for 2023 and subsequent years. Dividend withholding tax at a rate of 10% is applied to branch profits that are transferred to headquarters; however, this rate may be lower depending on any applicable DTT. 

Computation of taxable income 

Taxable base 

The revenue of a company is subtracted to get the tax base for corporations. Deductions 

All costs incurred for business purposes are deductible. The law contains a number of exceptions, including the following: 

● Interest on shareholder equity or shareholder advances 

● Interest, exchange rate fluctuations, or similar costs that are calculated or paid on disguised capital 

● Using transfer pricing to cloak profit distribution 

● Deposits made with profits

● Corporate tax, along with any related fines, tax loss penalties, and interest ● Discounts or other losses due to the sale of company securities at a price below par 

Income tax reporting 

Annual corporate income tax and quarterly advance corporate income tax returns must be filed by resident and non-resident entities with a permanent establishment in Turkey (on a calendar year basis unless permission to the contrary is specifically obtained from the Ministry of Treasury and Finance). The 25th day of the fourth month after the end of the fiscal year is the deadline for filing a corporate income tax return. There will be a total of three advanced tax returns submitted in quarterly periods for the first nine months of the year, and they must be submitted by the 14th of the second month after the quarter period at the latest. 

Tax consolidation is not possible in Turkey; each business in a group must submit its own corporate tax return. 

Cross border payments 

Transfer pricing 

In accordance with the recommendations of the Organisation for Economic Co-operation and Development (OECD), Turkey's transfer pricing regulations, which include the arm's length principle and the need for related party transaction documentation, are outlined in the Corporate Tax Law. On February 25, 2020, a three-tier transfer pricing documentation system that consists of a master file, local file, and country-by-country reporting was adopted. 

Taxpayers have a number of options for determining the arm's length price, including I the comparable uncontrolled method, (ii) the cost plus method, (iii) the resale price method, (iv) the profit split method, and (v) the transactional net margin method. With the tax authorities, advance pricing agreements can be made. 

Payroll taxes 

Income tax 

Employers are required to deduct income tax from employees' paychecks at graduated rates ranging from 15% to 40%.

Social security contributions 

Between January 1, 2022, and December 31, 2022, social security premiums are based on salary ceilings of TL 5,004.00 and TL 37,530.00 per month, and are split equally between the employee and the employer at rates determined by labor categories. For Turkish nationals, the standard rates for premiums—which are calculated as a percentage of gross salary based on a range—are 20.5% for the employer and 14% for the employee. 

Unemployment insurance 

The employer must withhold the unemployment insurance premiums and declare them each month along with the social security premium contributions. Employer rates are 2%, and employee rates are 1%. 

Indirect taxes 

Digital services tax (DST) 

The tax on digital services went into effect on March 1st, 2020. DST is applied to revenues from digital services provided in Turkey, including all forms of advertising services, sales of audio, visual, or digital content through digital media, and services such as the provision and operation of digital media that allow for user interaction. DST is also applied to intermediation services offered by digital service providers through digital media. 

On the income obtained from services covered by the DST during the applicable taxation period, a 7.5% tax is applied. The rate may be increased to a maximum of 15% by the president of Turkey, or it may be decreased to 1% separately, for each service type, or collectively. The companies that offer digital services are the relevant taxpayers. The tax liability is unaffected by the digital service providers' tax residency status (i.e., whether they are regarded as full taxpayers or non-residents carrying out business in Turkey through a permanent establishment or permanent representative). 

Value-added tax (VAT) 

The provision of goods and services for commercial, industrial, agricultural, and self-employed purposes in Turkey as well as the import of goods and services into Turkey are all subject to VAT. The reduced rates vary depending on the delivery of specific goods and services, and range from 1% (for items like newspapers and magazines, except for online sales, and staple foods), to 8% (for items like plastic and plastic-made products, books, except for e-books), cotton, fibers, leather, and processed goods, and homes with a net area of up to 150m2).

Taxpayers deduct the input VAT they paid on purchases from the output VAT they paid on sales. If input VAT is higher than output VAT, the difference is carried forward to the following months to be used as a credit against future output VAT rather than being refunded (unless there is a special delivery that permits a VAT refund, such as an export exemption). These VAT carry forwards are not subject to any time restrictions. On their supplies to customers who are not Turkish VAT taxpayers, non-resident electronic service providers are responsible for Turkish VAT. As of January 1, 2018, these suppliers are required to register for VAT, collect VAT, and send VAT to the Turkish tax authority. 

Special consumption tax (SCT) 

A tax called the SCT is imposed on specific goods and services. At the time of manufacture, import, or initial acquisition, SCT is taken as either an exact value or a specific ratio and charged only once. 

The four primary product lists covered by SCT are as follows: 

● Petroleum products, unleaded gasoline, diesel fuel, jet fuel, distillate marine fuels, hydraulic oil, etc. are included in List I. 

● List II includes vehicles such as cars, motorcycles, semi-trailer tow trucks, buses, minibusses, special purpose vehicles, excursion ships, cruise ships, etc. ● List III includes items like cola drinks, soft drinks, sparkling wines, alcohol-free beers, and tobacco, cigarette, and cigar products. 

● List IV: Additional consumer goods (caviar, furs, cosmetic products, glassware, small home appliances, microphones, speakers, guns, armaments, white goods and other electrical household machines etc.). 

Stamp tax 

A wide variety of documents, including but not limited to agreements, deeds of assignment, deeds of undertaking, and payrolls, are subject to stamp tax. Stamp taxes come in two varieties: proportional stamp taxes and fixed stamp taxes. Depending on the type of document, the proportional stamp tax rates range from 0.189% to 0.948%, with a total cap of TL 4,814,234.00. (for 2022). 

Real estate tax 

Depending on the property's classification, buildings and land owned in Turkey are subject to real estate tax on the tax value of the property at varying rates between 0.1% and 0.6%. The property tax is due twice a year in March through May and November.

Valuable house tax (VHT) 

Regardless of whether they are a natural person or a legal entity, owners, usufruct right holders, or those selling residential immovable property without an owner or a usufruct right holder who are located inside Turkey's borders and whose building tax value exceeds TL 6,173,000 (for 2022) will be considered VHT taxpayers. Depending on the building tax value of the property, progressive VHT rates range from 0.3% to 1%. 

If the owner of an immovable property has just one immovable property and the building tax value exceeds TL 6,173,000, then that immovable property is exempt from VHT. Additionally, if a person owns more than one residential immovable property subject to VHT, the exemption will also apply to the property with the lowest value. VHT will be accumulated annually, and taxpayers must file tax returns every year after the first. VHT must be paid in two installments by the end of the relevant year's February and August. 

Legal Environment 

Turkey has a civil law system that is heavily influenced by continental European models. The dual separation of public and private law serves as the foundation for Turkey's legal system. The Grand National Assembly of Turkey has sole authority to pass laws. Turkey's three-tiered judicial system is composed of the Supreme Court, Regional Courts of Appeal, and First Instance Courts. 

Branches 

A branch is typically a permanent location where a company conducts business operations. A branch also lacks a legal personality. The branches do not have to adhere to any particular restrictions under the Turkish Commercial Code. 

Branches can only be formed with the same objectives as their parent company and can only operate in those industries. Although there is no minimum capital requirement for branches, the parent company may allocate additional capital to the branch. 

The branch manager(s), who are chosen by the parent company, represent the branches. Additionally, branch managers may be both Turkish nationals and foreigners, but residency in Turkey is a requirement.

Corporations 

The Turkish Commercial Code makes distinctions between a number of corporate entities, all of which are entitled to legal personality. Consequently, one typical feature of a corporation is that the owner is not personally responsible for the corporation's debts. Instead, a corporation's liability is limited to the value of its share capital. The joint stock company (JSC) and the limited liability company (LLC) are the two most common types of corporations in Turkey (LLC). 

The JSC might be a different option for investors looking to launch large businesses. To incorporate this kind of company, at least one shareholder is required, and the minimum share capital is 

TRY 50,000. A board of directors and a supervisory board work together to oversee the company's management. 

For small and medium-sized businesses, the limited liability company (LLC) is more practical. The minimum share capital requirement for this business is 10,000 TRY, and there must be at least one shareholder. A board of directors is in charge of leading the business. 

The two companies have different management and representation. According to this structure, an LLC is managed and represented by a manager or board of directors, whereas a JSC is managed and represented by a board of directors, which must consist of at least one member. 

A JSC and an LLC differ significantly from one another in terms of the type of activity they engage in. This is why only JSCs are permitted to work in the banking, insurance, and other specialized industries. 

Liaison Offices 

Foreign investors might prefer not to enter the Turkish market by creating a JSC or an LLC right away because they might not be familiar with the Turkish market. Another choice is to open a liaison office, which enables the business to adapt to the market and attract a variety of clients. A capital company or a branch are not regarded as being part of the liaison office structure. 

The Foreign Direct Investment Law states that the Ministry of Industry and Technology must give its approval before a liaison office can be established. 

One very crucial point is that a liaison option is a business type that is permitted to conduct certain activities but not commercial ones. These include:

➔ Market analysis 

➔ Promotion of the parent company's products and services 

➔ Hosting and presenting 

➔ Control of Turkish suppliers' quality and standards, their management, and supplier selection 

➔ Technical assistance 

➔ Transfer of communication and information 

➔ Local management office 

A liaison office representative who has been given authority by the parent company via a power of attorney will represent liaison offices in Turkey. Either a Turkish citizen or a foreigner may serve as the representative. The Ministry of Industry and Technology may issue an establishment license that is valid for two to three years and may be renewed at the end of that time. The Ministry of Industry and Technology has the authority to revoke the establishment license of a liaison choice whenever any type of legal violation is discovered, but the activity period of the liaison choices established to engage in activities on market research and promotion of parent company products or services cannot be extended. By the end of May of each applicable year, liaison offices must submit an annual report to the Ministry of Industry and Technology outlining their previous years' operations. 

International investors are also permitted to set up a liaison office as a regional management center. These kinds of regional management centers may be established in order to organize management and coordination with regard to developing investment and management strategies, planning, promotion, sales and post-sales services, brand management, technical support, R&D, external supply, testing newly developed products, laboratory services, research analysis, and training and education of staff members of the parent company's various units.