The essential Tax Law in Turkey

Turkey has one of the most competitive corporate tax rates in the OECD region and the Turkish tax regime may be classified under three headings as follows:

Income tax

The Turkish tax legislation includes two main income taxes, namely individual income tax and corporate income tax. Individual income tax is governed by the Personal Income Tax Law (PIT Law) no. 163 and the corporate income tax is governed by the Corporate Income Tax Law (CIT Law) no.5520.

Individual income tax

Pursuant to the PIT Law, the real persons’ income is subject to individual income tax. Income is defined as the net amount of all earnings and revenues derived by an individual within a single calendar year. Partnerships are not deemed to be separate entities and each partner is taxed individually on his/her share of profit.

For determining tax liability for residency criterion is applied which is subject to certain exceptions. Within this scope, an individual whose domicile is in Turkey is liable to pay tax for his/her worldwide income (unlimited liability). In addition, any person who resides in Turkey more than six months in one calendar year is also deemed as a resident of Turkey.

In terms of foreigners, any foreigner who stays in Turkey for six months or more for a specific job or business or particular business which are specified in the Law on Income Tax are not treated as residents. Therefore, liability for worldwide income shall not be applied to them. Non-residents are only liable to pay tax on their income derived from their incomes in Turkey.

Within the scope explained above, the income may consist of the elements listed below:

• Business profits
• Agricultural profits
• Salaries and wages
• Income from independent personal services
• Income from immovable property and rights (rental income)
• Income from movable property (income from capital investment)
• Other income and earnings

Corporate Income Tax

The corporate tax is levied on the income and earnings derived by corporations and corporate bodies. The income elements of CIT Law are the same as those covered in the PIT Law. Therefore, many rules and provisions of PIT Law is also applied to CIT Law. The following are specified as tax payers under the CIT regime:

• Capital companies and similar foreign companies,
• Cooperatives,
• Public enterprises,
• Enterprises owned by foundations societies and associations,
• Joint ventures.

According to the CIT Law, the legal entities covered by the law are the ones with a registered head office in Turkey, or the centre of all business transactions being in Turkey. These entities will be taxed on their world-wide income (unlimited liability). The terms registered office is used as to include head office of the taxable corporations as determined within their laws and rules on their incorporation or their articles of association.

In general, the net corporate income is defined as the difference between the net worth of assets owned at the beginning and at the end of the fiscal year. Expenses such as general expenses made for earning and maintaining business profit, insurance and pension premiums, expenses for vehicles which are part of the enterprise and used in the business, depreciations set aside according to the provisions of the Tax Procedure Law, etc., can be deducted from the revenues.

The corporate income tax rate levied on business profits is 20%.

A 15% withholding tax is applied when dividends are paid to shareholders of resident corporations. However, no withholding tax is applied in case of a payment of a dividend by a resident corporation to another resident corporation. For non-resident corporations, a 15% withholding tax will be applied to remittance of profits to headquarters.

Capital gains derived by a company generally are taxable as ordinary income. However, 75% of capital gains derived from the sale of domestic participations are exempt from corporation tax subject to certain conditions which include sale of property and transfer of shares.

The annual corporate tax return is used for reporting of net corporate profits realized in the course of one accounting period. It shall be submitted to the tax office, which the taxpayer is affiliated to, starting from the first day until the evening of the 25th day of the 4th month following the closing month of fiscal period. The corporate income tax must be paid by the end of the month that the tax return is submitted. Non-resident foreign corporations use special tax return for reporting certain profit and earnings. Special tax return must be given within 15 days from the obtainment of earnings and profit.

Taxes on Expenditure

Apart from the income tax on personal and corporate income, there are various taxes on expenditure under the Turkish tax regime which may be classified in general as follows:

Value Added Tax (VAT)

The general VAT rate is set at 1%, 8%, and 18%. Commercial, industrial, agricultural, and independent professional goods and services, goods and services imported into the country, and deliveries of goods and services as a result of other activities are all subject to VAT.

Exemptions on VAT include exports of goods and services, petroleum exploration activities, transit transportation, services rendered at harbors and airports for vessels and aircrafts, etc.

Special Consumption Tax (SCT)

There are four main groups of goods which are subject to SCT on different rates:

• Petroleum products, natural gas, lubricating oil, solvents, and derivatives of solvents
• Automobiles and other vehicles, motorcycles, planes, helicopters, yachts
• Tobacco and tobacco products, alcoholic beverages
• Luxury products

Stamp Duty

Stamp duty is applied to documents, including contracts, notes payable, capital contributions, letters of credit, letters of guarantee, financial statements, and payrolls. It is levied as a percentage of the value of the document which range from 0.189% to 0.948% and is collected as a fixed price (a pre-determined price) for some documents.

Banking and Insurance Transaction Tax

Banking and insurance company transactions are exempted from VAT but are subject to a Banking and Insurance Transaction Tax. This tax applies to income earned by banks, such as loan interest. The general rate is 5%, however some transactions, such as interest on deposit transactions between banks, are taxed at 1%.

Double Taxation Relief

Foreign shareholders of companies incorporated in Turkey can benefit from double taxation agreements. Turkey signed double taxation agreements with over 80 countries which include EU members and other countries such as USA, Norway, Qatar, Denmark, Malta.