PRACTICE AREAS

Tax Law

The Comprehensive Guide to Taxation in Turkey

Taxation is an essential aspect of any country's economic system, and Turkey is no exception. The Turkish tax legislation has clear provisions that align with international standards, making it an attractive destination for investors. In this comprehensive guide, we will dive deep into the intricacies of taxation in Turkey, including income taxes, taxes on expenditure, taxes on wealth, and various business vehicles. Let's explore the tax landscape of Turkey and gain a comprehensive understanding of its tax laws.

Income Taxes

1. Personal Income Tax

In Turkey, personal income tax is levied on an individual's net earnings and revenues within a single calendar year. The income elements subject to personal income tax include agricultural profits, business profits, salaries and wages, income from independent personal services, income from immovable property and rights, income from movable property, and other income and earnings.

The Turkish income tax scale follows a progressive system, meaning that tax rates increase as income grows. Individual income tax rates range from 15% to 40%. It's important to note that wages up to the minimum wage, daily meal allowances, and transportation allowances are exempt from income tax.

2. Corporate Income Taxes (CIT)

When corporations derive income elements specified in the Income Tax Law, they are subject to corporate income tax. The corporate tax rate for general business income in Turkey is set at 25% for 2023. However, for specific entities such as banks, financial institutions, and exporters, different tax rates may apply.

Banks, financial institutions, electronic payment institutions, and money institutions are subject to a higher tax rate of 30%. Exporters, on the other hand, benefit from a reduced corporate tax rate of 5% for their export income.

Taxes on Expenditure

1. Value Added Tax (VAT)

Value Added Tax (VAT) is a consumption tax applied to various goods and services in Turkey. The generally applied VAT rates are set at 1%, 10%, and 20% as of July 2023. Commercial, industrial, agricultural, and independent professional goods and services, as well as imported goods and services, are subject to VAT.

2. Special Consumption Tax (SCT)

Special Consumption Tax (SCT) is levied on specific product groups at different tax rates. These groups include petroleum products, natural gas, lubricating oil, solvents, derivatives of solvents, automobiles, tobacco products, alcoholic beverages, and luxury products. Unlike VAT, which is applied to each delivery, SCT is charged only once.

3. Banking and Insurance Transaction Tax

Banking and insurance company transactions are exempt from VAT but subject to a Banking and Insurance Transaction Tax. This tax is levied on the income earned by banks, such as loan interest. The general rate for this tax is 10%, but certain transactions, such as consumer loans, are taxed at 15% as of July 2023. Additionally, interest generated on interbank deposits is taxed at a lower rate of 1%.

4. Stamp Duty

Stamp duty is applicable to various documents, including contracts, financial statements, and payrolls. The duty is either based on a percentage of the document's value or collected as a fixed price. The rates range from 0.189% to 0.948%, depending on the document type.

Taxes on Wealth

The Turkish taxation system also includes taxes on wealth, which consist of property taxes, motor vehicle tax, and inheritance and gift tax. Property tax is levied on buildings, apartments, and land owned in Turkey at rates ranging from 0.1% to 0.6%. Motor vehicle taxes vary based on the age and engine capacity of the vehicles. Inheritance and gift taxes are imposed at rates ranging from 1% to 30%.

Business Vehicles

Turkey offers various business vehicles for foreign investors looking to establish a presence in the country. The options include joint stock companies, limited liability companies, branches, and liaison offices.

1. Joint Stock Companies & Limited Liability Companies

Joint stock companies and limited liability companies are the most commonly chosen business vehicles by foreign investors. These entities require a minimum number of shareholders and a specified capital amount. Joint stock companies have a minimum capital requirement of TL 50,000, while limited liability companies can be established with a minimum capital of TL 10,000. Shareholders are not personally liable for the company's debts.

2. Branches

Foreign investors can establish branches in Turkey to conduct business activities within the country. Branches are required to have a representative residing in Turkey and are subject to all taxes applicable to corporate entities. Branches are treated as non-resident limited liability companies for tax purposes, and only profits generated in Turkey are subject to corporate tax.

3. Liaison Offices

A liaison office serves as a representative office for a foreign entity in Turkey. It is primarily responsible for gathering information, market research, and promoting the goods and services of the parent company. Liaison offices are not allowed to engage in profit-generating activities and are subject to tax liability if they violate this restriction.

Financing a Corporate Subsidiary

Financing a corporate subsidiary in Turkey can be done through equity financing or debt financing.

1. Equity Financing

Equity financing involves increasing the share capital of a company through issuing new shares or increasing the value of existing shares. Turkish capital corporations can benefit from a notional interest deduction for cash capital increases, allowing them to deduct a percentage of the interest calculated on the capital increase amounts.

2. Debt Financing

Debt financing involves borrowing funds to finance a corporate subsidiary. Turkey has regulations in place to prevent excessive borrowing and ensure compliance with the arms' length principle for interest rates on borrowings from related parties. The financing expense limitation restricts the deductibility of financing expenses for companies with liabilities exceeding their equity.

Cross-Border Payments and Withholding Taxes

Cross-border payments made to non-residents are subject to withholding tax in Turkey. The withholding tax rates vary based on the type of income and instruments involved. It is important to consider any applicable double taxation treaties (DTTs) that may reduce the withholding tax rate on certain types of income.

Payroll Taxes and Social Security Contributions

Employers in Turkey are responsible for deducting payroll taxes and social security contributions from their employees' salaries. The rates and thresholds for these taxes and contributions are subject to periodic updates by the relevant authorities.

Tax Disputes and Compliance

In the event of tax disputes, taxpayers can file objections and appeal the decisions made by tax authorities. Compliance with tax regulations is crucial, and taxpayers must maintain accurate records and submit timely tax returns and payments to avoid penalties and legal consequences.

FAQ

Q: Can non-residents be subject to personal income tax in Turkey?

A: Non-residents are only taxed on Turkish-source earnings. Personal income tax is levied on residents' worldwide income.

Q: Are there any local taxes on personal income in Turkey?

A: No, there are no local taxes on personal income in Turkey.

Q: What is the corporate income tax rate in Turkey?

A: The standard corporate income tax rate in Turkey is 25%. However, financial sector companies may have a higher tax rate of 30%.

Q: Are there any tax incentives for companies in Turkey?

A: Yes, companies that offer at least 20% of their shares via their first initial public offering (IPO) on the Istanbul stock exchange can benefit from a reduced corporate income tax rate for five years.

Q: How is value-added tax (VAT) applied in Turkey?

A: VAT is applied at rates of 1%, 10%, and 20% on various goods and services in Turkey.

Conclusion

Understanding the tax landscape in Turkey is crucial for individuals and businesses operating in the country. This comprehensive guide has provided an overview of the various aspects of taxation in Turkey, including income taxes, taxes on expenditure, taxes on wealth, and different business vehicles. By staying informed about the tax regulations and compliance requirements, individuals and businesses can manage their tax obligations effectively and contribute to the growth of Turkey's economy.

Remember, tax laws can change, and it's always advisable to consult with legal and tax professionals to ensure compliance with the latest regulations.