The Inward Funding and Worldwide Taxation Evaluate: Turkey


There are various ways to set up a business within the Turkish tax system. One of these is investment incentives. The main purposes of investment incentives are to reduce regional development disparities, to increase foreign direct investments, to support advanced technology investments, and to make investment planning based on economies of scale.

Insurance premiums, employers’ share support, tax deductions or tax exemptions and exceptions (such as customs tax exemptions, and VAT exemptions), investment location allocation are determined as government incentives that cover non-resident business owners.

Common forms of business organisation and their tax treatment

Business entities are generally divided into two: ordinary partnerships and commercial companies. The most common types of commercial companies are joint-stock companies, limited companies, limited liability companies, cooperatives and collective companies. The income items of capital companies, cooperatives and business partnerships that are subject to income tax are subject to corporate tax as corporate income. The total earnings of joint-stock and limited companies are subject to corporate tax.

In a limited partnership whose capital has divided into shares, corporate tax is collected only on the dividend of the limited partner. The dividend belonging to active partners is declared as business income by these partners, and income tax arising from consumption, production, credit, sales, building, transportation, etc. is paid. Cooperatives are corporate taxpayers.

i Corporate

Businesses generally adopt a corporate form. A company is formed by one or more real or legal persons by combining their labour and capital to gain profit. The company definition mainly leans on the capital. Companies are mainly regulated by the provisions under the Turkish Commercial Code (TCC), the Turkish Code of Obligations (TCO) as well as by special laws.

Joint-stock companies and limited liability companies, which are among the capital companies regulated under the TCC, are separated from each other in terms of the responsibilities of their partners, capital, company organs, and share transfer transactions. Because a limited liability company also has some of the features of private companies, it is a bit more flexible than the capital partnership structure of a joint-stock company. The minimum capital required for the establishment of a limited liability company is 10,000 Turkish lira, while the minimum capital essential for a joint-stock company is 50,000 Turkish lira. The maximum number of partners in a limited liability company can be 50, while in a joint-stock company there is no limit in terms of the number of partners.

In principle, in both types of companies, company partners are not liable for company debt; however, in limited liability companies, company partners are responsible for the company’s public debts with their assets at the rate of the capital they have committed. On the other hand, in joint-stock companies, partners do not have any responsibilities for public debts.

In limited liability companies, at least one shareholder must have the right to manage and represent the company; while in a joint-stock company, a member of the board of directors is sufficient to have full representation authority, whether they are partners or not.

Share transfers may be prohibited in limited liability companies. However, share transfers cannot be prohibited in joint-stock companies but may be limited in some cases.

ii Non-corporate

One of the entity types that we can mention in this regard is an ordinary partnership. The ordinary partnership is regulated under the TCO. This partnership has no legal personality. The ordinary partnership is a prevalent type of company in practice as there is no formal obligation for its establishment, and the arrangement in its internal relations are left to the contract provisions to be prepared by the partners. Besides, while it also allows the parties to pursue a specific goal by undertaking certain parts of a project (construction, financing, management, etc.), it does not oblige individuals to establish a trading company.

In addition, investment partnerships can be given as an example for companies operating in specific sectors. It is one of the entities regulated under the Capital Market Law. The most used types of investment trusts are securities, real estate, and venture capital investment trusts. These partnerships have legal personality. The difference from the other partnerships is that their field of activity is limited to capital market instruments and the operation of a portfolio of gold and other precious metals. On the other hand, venture capital can be defined as a long-term investment made by investors with surplus funds to establish and operate small and medium-sized enterprises (SMEs) with high development potential.

Some of the partnerships listed above are ‘fiscally transparent’. Within this framework, ‘ordinary partnerships’ are fiscally transparent.

In the ordinary partnership, at the end of the fiscal period, the partners share the profit or loss in the ordinary partnership account in proportion to their shares in the partnership. Additionally, partners are jointly and severally liable for unpaid debts of the partnership as VAT and Income Tax Withholding.

However, funds subject to the regulation and supervision of the Capital Markets Board and foreign funds similar to these funds are fiscally opaque. Because investment trusts are established as joint-stock companies, they are corporate taxpayers as capital companies. For the profits derived from investment funds and partnerships in Turkey, the earnings are taxed at the stage of payment to investors on a participant basis by banks and intermediary institutions that mediate the refund of their returns to the investor. Within the scope of the Turkish Income Tax Law (TITL), the method of taxation through the withholding tax is valid (except for investment trust stock dividends), and the income of investment partnerships does not need to be declared.

Direct taxation of businesses

The tax regime applied to businesses is corporate tax. The subject of corporate tax is corporate income. Corporate income consists of business profits, agricultural earnings, self-employment earnings, real estate capital gains, capital gains, and other earnings and revenues. The event that constitutes the tax is the acquisition of corporate income.

Capital companies, cooperatives, public economic institutions, economic enterprises belonging to associations and foundations, business partnerships, funds subject to the regulation and supervision of the Capital Markets Board (including foreign funds) are capital companies in terms of corporate tax application and are subject to corporate tax. As of the 2020 taxation period, the tax rate is 22 per cent.

Tax on profits

Determination of taxable profit

Corporate income in corporate tax consists of taxable income elements. Elements of income are business profits, agricultural earnings, self-employment earnings, real estate capital gains, capital gains, and other earnings and revenues. Wages are excluded from the determination of corporate income.

There are differences between limited taxpayers and full taxpayers in terms of the determination and taxation of corporate income. Fully responsible taxpayers are corporates where their legal or business centres are both in Turkey, and they are taxed on all income derived in and out of Turkey. Resident taxpayers are corporates whose headquarters are not in Turkey, and they are taxed only for the income derived in Turkey. The legal headquarters of a company is the place indicated in the established laws, statutes, main statuses, or contracts of taxable corporates. The business headquarters is the place where transactions are collected and managed.

Full taxpayers are subject to a declaration basis. These corporates determine their earnings according to the principles in the Turkish Corporate Tax Law (TCTL) and declare the earnings in an annual return. Corporate tax is calculated over the net corporate income earned by taxpayers within an accounting period. In the determination of the net corporate income, regardless of the income elements included in the income, the provisions of the TITL on commercial income are applied to all. The earnings of all standard taxpayers should be determined based on the balance sheet. If non-resident taxpayers earn income from earnings and revenues other than commercial and agricultural earnings, the name of the income will be corporate income, and the determination of the net amounts related to them will be made by the provisions of the TITL.

The TCTL and TITL provide guidance on deductible expenses. In determining net corporate income, firstly, the expenses included in the TITL will be subject to deduction, then the expenses included in the TCTL will be deducted from the revenue.

Accordingly, the expenses to be deducted in accordance with TITL are:

a. general expenses for obtaining and maintaining commercial income;

b. maintenance and accommodation expenses;

c. treatment and medicine expenses;

d. insurance premiums and retirement dues of servants and workers in the workplace or in the premises of the workplace;

e. loss, damage and compensation paid pursuant to contract or court order or legal order;

f. provided that they are business related, travel and residence expenses related to the work and according to the magnitude and extent of the work performed;

g. the expenses of vehicles acquired through rental or included in the business and used in the business;

h. in-kind taxes, duties and charges, such as building, land, expense, consumption, stamp, municipal taxes, fees and registrations, provided that they are related to the business;

i. depreciations allocated according to the provisions of the Turkish Tax Procedure Law (TTPL);

j. dues paid by employers to trade unions;

k. contributions paid by employers to the private pension system on behalf of wage earners;

l. cost of food, cleaning, clothing and fuel donated to associations and foundations; and

m. the amounts actually paid to those who benefit from on-the-job training programmes by the employers running the programme.

Expenses to be deducted under TCTL are:

a. securities issuance expenses;

b. establishment and organisation expenses;

c. expenses incurred for general assembly meetings, and expenses for merger, transfer, division, termination, and liquidation of the dividend of the active partner in limited partnerships whose capital is divided into shares;

d. dividends paid by participation banks against participation accounts; and

e. technical provisions about insurance contracts whose provision continues on the balance sheet date in insurance and reinsurance companies and specified in the law.

Non-deductible expenses are as follows:

a. interest paid or calculated on equity;

b. interest, exchange differences and similar expenses paid or calculated on disguised capital;

c. disguised earnings distributed through transfer pricing;

d. reserves allocated in whatever form and under whatever name;

e. corporate tax and all kinds of fines, tax penalties, delay increases and interests;

f. controlled foreign institution earnings;

g. losses arising from the issuance of securities below their nominal value and commissions paid for these securities and all kinds of similar expenses;

h. expenses and depreciations of motor vessels such as yachts, cottages, boats, speedboats and aircraft such as aircraft, helicopters that are not related to the main field of activity of the business;

i. pecuniary and non-pecuniary damages;

j. compensation expenses arising from the crimes of the corporation itself, its partners, managers and employees, excluding the compensations imposed as penal clause in the contracts;

k. compensation expenses because of pecuniary and non-pecuniary damages arising from acts committed through the media or radio and television broadcasts; and

l. maximum 10 per cent of the total expense and cost elements incurred under the names of interest, commission, maturity difference, profit share, exchange difference and similar foreign resources used in the enterprise, excluding those added to the cost of the investment, excluding those added to the amount of the investment, excluding those added to the investment the part decided by the Presidential Decree.

The amortisation application is essential because it is a cost factor and a significant expense method in determining the taxable profits of businesses. Amortisation is a cost factor rather than a fund accumulation function. Amortisation is an accounting process that shows the loss of value of economic assets and aims to restore this. Amortisation is subject to certain conditions for businesses according to the TTPL. The provisions are the economic asset should be used in the enterprise for more than one year, the fixed asset must be subject to wear, tear, or depreciation for other reasons, the fixed asset must be included in the company’s assets and its value must exceed 1,400 Turkish lira (for the year 2020). Taxpayers will redeem their economic assets subject to depreciation according to the amortisation rates determined and announced by the Ministry of Treasury and Finance. The tax depreciation methods are specified as normal amortisation, amortisation through decreasing balances, amortisation in mines, and extraordinary amortisation. Amortisation has a decreasing effect on the tax base, and the differentiation in amortisation methods also can be used as a tax planning tool. Businesses should choose the right way to implement amortisation management that will provide a tax advantage for their short or medium-term planning. Because amortisation is an expense account, it must be transferred to the profit or loss account and closed at the end of the year.

Capital and income

According to our legislation, half of the dividends obtained from full taxpayer institutions are exempted from income tax and all of the tax withholding made by the company over the total dividend, including the exempted amount, is deducted from the tax calculated on the declared income of 50 per cent.


According to the TCTL, the losses in the declarations of previous years can be offset from the corporate income, provided that the amounts for each year are shown separately in the corporate tax return and are not transferred for more than five years. The corporate tax base is reached by adding add-back expenses to business profit and deducting discounts and exceptions. The corporate tax base is also qualified as ‘financial profit’. Financial loss is calculated with the same formula as financial profit. A joint-stock company with business profit may have a financial loss because of its activities exempt from corporate tax. The previous year’s loss that must be deducted in the corporate tax return is financial loss, not a commercial loss. Previous year losses should also be shown in the current year declaration of the loss. In the case of current year earnings, previous year losses can also be deducted in the temporary tax return. In case more than one period results in a loss, offsetting must be made starting from the loss of the oldest year. Elimination of previous year losses using capital decrease does not eliminate the possibility of loss offset. It is not possible to deduct the losses of corporations arising from their activities of exemption from corporate tax from the corporate income excluding exception. For example, income arising from manufacturing activities in the free zone are exempt from corporate income tax. Because of this, it is not possible for a taxpayer operating in these regions within the scope of the exception to deduct his or her loss related to this activity from income arising from his or her business outside the free zone.


Income tax rates for 2020 to be applied are as follows:

a. up to 22,000 Turkish lira, 15 per cent;

b. 3,300 Turkish lira for 22,000 Turkish lira of 49,000 Turkish lira, 20 per cent for excess;

c. 8,700 Turkish lira for 49,000 Turkish lira of 120,000 Turkish lira, 27 per cent for excess;

d. 27,870 Turkish lira for 120,000 Turkish lira of 600,000 Turkish lira, 35 per cent for excess; and

e. 195,870 Turkish lira for 600,000 Turkish lira of more than 600,000 Turkish lira, 40 per cent for excess.

The income tax tariff for 2020 for wage earners is as follows:

a. 15 per cent for the 0 to 22,000 Turkish lira tax bracket;

b. 20 per cent for the 22,000 to 49,000 Turkish lira tax bracket;

c. 27 per cent for the 49,000 to 180,000 Turkish lira tax bracket;

d. 35 per cent for the 180,000 to 600,000 Turkish lira tax bracket; and

e. 40 per cent for the over-600,000 Turkish lira tax bracket.

The corporate tax rate to be applied for 2020 is 22 per cent.


According to the Value Added Tax Law, the rate is 10 per cent. The President of Turkey is authorised to reduce this rate up to 1 per cent and increase it up to 40 per cent. The authority to make amendments was exercised, and the basis value added tax rate was determined as 18 per cent. Apart from this rate, some goods and service groups are subject to 1 per cent or 8 per cent.


Corporate tax is levied on the declaration of the taxpayer or tax responsible. The return includes the results of the relevant accounting period. The annual corporate tax return is submitted to the tax office to which the taxpayer is affiliated from the first day of the fourth month following the end of the accounting period until the evening of the 25th day. Corporate tax is paid by the end of the month in which the declaration is submitted. The annual income tax return is submitted from the beginning of March to the evening of the last day of the following year. The first instalment of the annual income tax is paid by the end of March, and the second instalment by the end of July. The VAT return is submitted and paid until the evening of the 26th day of every month.

In Turkey, there is a multi-tax system, and there is more than one tax collected from more than one source. Taxes on income are income tax and corporate tax. Taxes on expenditures are very diverse. The most well-known are value added tax, special consumption tax, stamp tax, games of chance tax, banking and insurance transactions tax, special communication tax, entertainment tax, environmental cleaning tax, customs taxes, fees, etc. Along with globalisation in Turkey, during the 1980s, import tax was reduced gradually, income and corporate tax rates were reduced gradually, and various tax incentives were introduced, especially for corporations.

The tax offices in Turkey are the basic administrative units in terms of providing services to taxpayers. The tax office in which the taxpayers will receive services is normally determined through their residence and workplace addresses. However, the Ministry of Treasury and Finance is authorised to determine the tax office to which taxpayers will be affiliated in terms of jurisdiction of tax offices, tax types, professions, and business groups. Administratively, the tax offices are subordinated to the tax office presidencies, which are the provincial organisations of the Revenue Administration.

Tax audit is the whole process of determining whether the financial administration itself and the taxpayers comply with the tax legislation, correcting the errors, if any, and deterring tax evasion by applying the prescribed penalties in case of tax loss. The function of tax auditing is mainly to investigate the accuracy of the taxes to be paid, to determine the situations, and to eliminate any inaccuracies and deficiencies. In this process, tax amounts will be investigated through tax audits, negativities will be prevented and corrected. Types of tax audit can be divided into four groups: tax inspection, poll, search and information gathering. The majority of these audits are done on notice or suspicion. However, sometimes tax authorities need to check whether the legal books, records and statements of the taxpayer are recorded as required by the legislation. In these cases, the authorities request the necessary documents from the taxpayer or make an on-site inspection when necessary.

Turkey has established the Turkey Financial Reporting Standards (TFRS) community to be equivalent to the International Financial Reporting Standards (IFRS) in the process of harmonisation with the European Union. Accordingly, if there is an uncertainty in income tax transactions, how to measure deferred and current tax assets and liabilities is regulated in TFRS. It is unclear whether the tax office will accept these transactions in uncertain tax transactions. International Financial Reporting Interpretations Committee (IFRIC) 23 is applicable on income tax accounting in transactions with uncertainty and applies to matters such as the taxation of assets and liabilities, taxation of profit or loss, and tax losses or receivables and tax rates. Businesses can recognise and measure current or deferred tax assets or liabilities, based on taxable profit, tax base, unused tax losses, unused tax benefits and tax rates, by applying the requirements of Turkish Accounting Standards (TAS) 12.

Tax grouping

The consolidation of tax bases is a method that enables group companies to consolidate their tax base and pay taxes on a single tax base. In practice, many countries allow the consolidation of corporate tax bases. Some countries also allow value-added tax consolidation. Unfortunately, this is not possible pursuant to our legislation.

Other relevant taxes

Value added tax (VAT) is the tax paid by the deliverer of goods and services to the delivery of goods and services. Both sole proprietorships and other companies have to submit VAT returns every month.

Stamp tax is collected on the papers specified in the Stamp Tax Law. If the business has rented a workplace, a lease is signed, and if it will work with a financial adviser, a service contract is signed with it. These two contracts are subject to stamp tax and the stamp tax liability of a newly established business begins with the signing of these two contracts.

Special Consumption Tax (SCT) is an expenditure tax charged on certain goods or products on a fixed or proportional basis. Businesses that trade transactions subject to excise tax must declare the SCT on a monthly basis.

The document that shows the payment made by the employer for the work done to the employee together with all taxes and deductions and which is prepared systematically and periodically during the employee’s work is called the payroll. The documents that must take place in payroll according to the Tax Procedure Law are:

a. the name and surname of the service person;

b. a signature or stamp indicating that the fee has been received;

c. the date and number of the tax card, if available;

d. the unit fee (monthly, weekly, daily, hourly or piece rate);

e. working time or period to which the wage belongs; and

f. amount of taxes calculated on wage.

Tax residence and fiscal domicile

i Corporate residence

The event that creates tax for businesses is the acquisition of corporate income. In the determination of this corporate income, taxation is made by applying the commercial income provisions of the income tax, and the collection and accrual principles apply to the acquisition of corporate income. Accrual means that the transaction is finalised in terms of quality and amount and can be claimed as a receivable, and collection is the actual acquisition of income.

Foreign entities that derive income in Turkey but do not have offices in Turkey are taxed only on the income derived in Turkey and they are called non-resident taxpayers. If non-resident taxpayers derive income outside of Turkey, they do not need to inform tax authorities in Turkey. Foreign entities make an annual declaration regarding their fiscal period incomes to be taxed. This is the case mainly for incomes obtained through the workplace or permanent representative. Apart from this, if the taxable income of foreign entities consists of other incomes and revenues written in the TITL, the foreign entity or anyone acting on behalf of the foreign entity in Turkey must notify the relevant tax office with a declaration within 15 days.

ii Branch or permanent establishment

A foreign entity that plans to make an inward investment in Turkey may prefer not to incorporate a subsidiary but rather to establish a branch in Turkey. Branches might be considered the most suitable alternative for foreign entities that need a permanent establishment (PE) in Turkey.

Branches are considered as non-resident entities in Turkey, and they are taxed only on income derived from activities in Turkey. Branch profits are subject to Turkey Corporate Tax (CIT) by 22 per cent. Branch profit transferred to the headquarters is subject to a 15 per cent withholding tax dividend rate, and the rate can be reduced if there is a bilateral tax treaty between Turkey and the country where the headquarters are located. As Turkey is a broad network of a double tax treaty, PE provisions of treaties are implemented in domestic law. In this regard, apart from the branch of a foreign entity, fixed places such as offices, factories, workshops, mines, oil or gas wells can also create a PE. Besides, people acting on behalf of the foreign entity and authorised to conclude contracts under the provisions of domestic law and the PE provisions of the treaties can also be considered as workplaces. Therefore, a foreign entity’s branch and other fixed places forming a PE will cause a limited liability in terms of corporate tax. However, the foreign entity can avoid workplace provisions by establishing a fixed place with a ‘preparatory or auxiliary character’ such as a liaison office.

Tax incentives, special regimes and relief that may encourage inward investment

i Holding company regimes

Since they were established as a joint-stock company, holding companies are accepted as a corporate taxpayer as a capital company in Article 1 of the TCTL. On the other hand, holding companies have some tax advantages and conveniences that they can provide.

In the case of profit distribution of participating companies, there is no income tax withholding related to dividend distribution over the dividends distributed to the holding. However, when the holding company is distributed to its real person partners after one year, the tax is paid with a delay of one year. Therefore, the tax is used by the group for one year as financing.

The essential taxation advantage of holding companies is the participation earnings exception in Article 5 of the TCTL, which aims to prevent double taxation in corporate tax. The participation earnings exemption is applied to the distributed dividends.

In the event of the sale of affiliate shares of affiliated companies in the assets of the holding company, 75 per cent of the earnings from this sale are exempt from corporate tax.

In a holding company, the expenses related to the services provided directly for the affiliated companies can be transferred to the relevant companies, and the expenses can be written in those companies.

The sale of participation shares held in the holding company assets for two years is exempt from VAT.

The borrowings made by the holding from banks and financial institutions and made available to its subsidiaries under the same conditions are not considered disguised capital.

Because this transaction of the shareholders who put their shares belonging to other companies as capital in kind to the holding company is like the sale of their stocks, the income from this sale is the ‘value increase’ earnings. However, in the TITL, if the shares are disposed of after being held for two years, the earnings obtained are not considered as ‘value increase’ income and are not taxed.

ii IP regimes

The first regulation regarding the patent box regime in Turkish tax law was made in 2014 with the addition of an article titled Exemption to Industrial Property Rights to the TCTL. Subsequently, with the additions to some other laws, an exception has been introduced for the lease, transfer, or sale of intangible rights including the scope of VAT.

Earnings will be considered under the patent box regime in Turkey.

Inventions resulting from R&D, innovation, and software activities carried out in Turkey, is 50 per cent of the following:

a. incomes and revenues obtained as a result of its lease;

b. incomes obtained as a result of the transfer or sale;

c. incomes obtained in cases where they are marketed subjected to mass production in Turkey; and

d. the result of using the production process of the gains made in Turkey patented products produced from the sale of the part attributed to the invention or a utility model certificate.

The calculated tax rate is applied to net revenues from qualified intellectual property. Qualified intellectual property includes licences, patents, adaptation, development, revision, distribution, and compatible derived software or products developed as a result of R&D activities in technology development zones. This exemption is also applied for the earnings obtained as a result of the violation of the rights regarding the invention and for the insurance or other compensation received because of the invention.

To apply an exception, it must be an invention that is protected by giving a patent or utility model certificate and a utility model certificate must be obtained as a result of the patent or research report. It is also necessary to have the authority to develop the patent or the invention, and the ownership of the patent or the document belonging to the invention or a special licence like a monopoly on the document.

iii State aid

State aid in investments is the support provided by the state to reduce inter-regional development disparities, increase investment in underdeveloped and developing regions, and encourage employment. Accordingly, Turkey is divided into regions in terms of development rankings, which will be encouraged regarding the investments to be made in every region and sector by encouraging investment tools to be determined. It is possible to obtain state aid by fulfilling precise requirements in the agriculture and agricultural industry, manufacturing industry, and services sectors.

The regional incentive system is the system in which the sectors to be supported and the investment amounts are determined based on regions. Within this scope, Turkey is divided into six regions according to their development level.

Support provided under regional incentives include VAT exemption, customs duty exemption, tax reduction, insurance premium employers’ share support and investment place allocation. Additionally, interest support is applied for investments in the third, fourth, fifth and sixth regions, income tax withholding support, and insurance premium support is applied for investments in the sixth region.

However, all kinds of investments were not evaluated within the scope of regional incentives. Investment areas are introduced for incentives. In other words, except for: (1) investments that are not encouraged or do not meet the conditions determined for incentives; (2) investments in energy production; (3) infrastructure and service investments to be made by public institutions and organisations; and (4) investments with a moving (motor or moving element) character, all other investments are within the scope of regional incentives. The listed investments are not encouraged or are within the scope of general incentives.

In addition to these, there is also state aid provided for large-scale investments. Large-scale investments are investments with a minimum fixed investment amount of more than 50 million Turkish lira, which will increase technology and R&D capacity, and provide a competitive advantage in the international arena. The sectors to be encouraged for large-scale investments are as follows:

a. manufacture of refined petroleum products;

b. manufacture of chemical substances and products;

c. port and port services investments;

d. investments in the manufacture of motor vehicles;

e. railway and tram locomotives or wagon manufacturing investments;

f. transport services investments with transit pipeline;

g. electronics industry investments;

h. investments in medical equipment, precision, and optical equipment manufacturing;

i. drug production investments;

j. investments in air and space vehicles or parts manufacturing;

k. machinery (including electrical machinery and devices) investments; and

l. investments in metal production.

iv General

The importance of foreign direct investment is well recognised in Turkey and the importance of both domestic and direction of tax cuts are available to encourage foreign investors. In addition, there are some indirect and direct tax incentives granted to companies. Tax incentives granted to business entities within the framework of corporate tax are direct tax incentives.

Direct tax incentives can be classified into two main groups: regulations for the taxation of corporate profits at a lower tax rate than the normal rate, and regulations that include provisions to reduce investment costs more than those recognised by current corporate tax practices.

The purpose of all corporate tax incentives is to reduce the effective tax burden on investments. Indirect tax incentives include full or partial exemption (i.e., zero rate application in VAT) from sales taxes on inputs purchased by businesses that qualify for tariffs, incentives or both. These incentives are generally provided to export-oriented sectors or other selected but not export-oriented sectors. Such incentives and facilities make it easier for someone to buy and run a business in Turkey.

Withholding and taxation of non-local source income streams

i Withholding outward-bound payments (domestic law)

The Turkish tax system applies the method of declaration and deduction at the origin. In the withholding process, real and legal persons who make a payment to the stakeholder pay the net amount remaining after the tax withholding to the beneficiary and make a notification to the relevant tax office with the withholding tax return within the periods specified in the law regarding the income subjected to withholding and the withholding amounts they have made on these revenues.

In the withholding tax return, withholding tax is levied on payments made to self-employed, mostly wage and salary payments, rent payments, interest, and dividend payments. Dividend distributions are subject to 15 per cent withholding tax when distributed to individual and non-resident corporate shareholders. This rate can be reduced for non-resident shareholders through a tax treaty. However, dividend distributions to resident entities and branches of non-resident entities are not subject to withholding tax dividend payments. Royalties such as patents, copyrights, or licences are subject to a 20 per cent withholding tax. The withholding tax rate of interest is 10 to 18 per cent. However, these rates may also change with tax treaties or in some special cases.

ii Domestic law exclusions or exemptions from withholding on outward-bound payments

There are a number of tax treaties between Turkey and other countries. These treaties allow for the reduction of withholding tax rates, and in this context, separate agreements are made with countries.

For example, with the provisions of the treaty, the rate may be reduced to 10 per cent for the Netherlands and Belgium, as long as, under the provisions of the Netherlands and Belgian laws and future amendments, a company that is resident in the Netherlands and Belgium does not receive tax for dividends received from a company that is resident in Turkey.

For Ireland, the rate may be reduced to 5 per cent, under the condition that the beneficial owner is a company that directly owns at least 25 per cent of the voting power of the company that pays the dividends. Otherwise, the rate is 15 per cent in all other cases.

As can be understood from these examples, rates and conditions are determined according to the treaty made with that country.

iii Double tax treaties

As mentioned above, Turkey has an extensive double-tax agreement network that enables the avoidance of double taxation. The double-tax agreement network of Turkey includes 99 countries. Both in Turkey and other signatory countries, income-generating people and companies take advantage of the discounted tax rates and withholding tax. The taxes covered by the Turkish double tax treaties are generally determined individually for each country. Double tax avoidance agreements allow for the reduction of withholding taxes on dividends, interest, and royalties for signatory states. The tax application of double taxation treaties in Turkey includes income tax, capital tax, and other taxes that may be charged instead of or in addition to these two after the double tax treaty is signed. Generally, Turkish double-tax agreements cover taxes such as personal income tax imposed on citizens of state parties, the corporate income tax applied to companies in Turkey and the other country, taxes on different types of income such as dividends and interest payments, and taxes covering income arising in an individual’s country of residence for a limited period.

Under these double-tax agreements, income and capital are exempt from tax if the company pays the same taxes in the treaty country. Double taxation in treaties is prevented either by granting the taxation authority exclusively to one of the contracting states or by applying one of the exemption or credit methods regulated in treaties. If the regulations in the double-tax agreements are not followed, the company can demand a refund of the taxes paid. This way is only possible after proving that the taxes are already paid in the treaty country. In addition to these, double-tax agreements, also require treaty countries to provide taxpayer lists or any information that could lead to tax fraud avoidance.

iv Taxation on receipt

Half of the dividends obtained from fully responsible corporations are exempt from income tax. All of the withholding tax on the total dividend including the exempted amount is deducted from the tax calculated over the declared 50 per cent dividend.

Taxation of funding structures

i Thin capitalisation

The scope of the debt to be taken into account in the determination of the thin capitalisation consists of debt obtained directly or indirectly from partners or related persons and used in the entity. The part that exceeds three times the equity capital of the entity at any date during the accounting period is considered as ‘thin capitalisation’ for the relevant accounting period.

However, it has been stated by the legislator that some borrowings obtained from the partners or related persons and used in the entity will be excluded or will be taken into account at the rate of 50 per cent in the determining of the thin capitalisation.

ii Deduction of finance costs

Using an essential financial resource that businesses need in the form of equity or debt has different results in the taxation process. In the provision of resources by borrowing, it is possible to expense the elements of the financing cost such as interest, delay interest, and foreign exchange differences that are incurred as financing costs during the borrowing period. Therefore, regarding the foreign resource used elements such as interest, maturity difference, and exchange rate difference will be deducted from the earnings of the business by considering them as expenses and will reduce the taxable base of the company’s incomes. The operating income will be taxed less than the costs of liabilities incurred and deducted in return for the allocation of the foreign resource to the enterprise, interest, maturity difference, exchange difference, etc. In terms of the party obtaining the amounts in the form of income, these values will be considered as income and will be taxable.

iii Restrictions on payments

Joint-stock companies are not under the obligation to distribute profit every period. First of all, joint-stock companies should make a profit within the relevant period. This profit should exceed the company’s expenses and losses, if there are losses from previous years, these losses should be recovered, and then the reserves foreseen to be set aside by law and articles of association set aside. Afterwards, the remaining amount can be kept under the responsibility of the company or distributed in whole or part to the shareholders of the company as dividends. As can be seen, first of all, some items should be allocated by fulfilling legal and essential contractual obligations. Distribution of the dividend and the shareholder’s access to this unavoidable right shall depend on the decision of the General Assembly. If the General Assembly decides not to distribute profits, the reasons should be present. Also, the General Assembly proves that there is no action to consciously debar the shareholders from the company profit and not act outside the rules of good faith.

iv Return of capital

The capital of a company can be reduced in order to (1) return some of the capital to the shareholders and (2) cover the company losses. In the first case, when the current capital is higher than the company’s operations require, the idle capital can be repaid to the shareholders to be used in more efficient areas. In the second case, there is a reduction in the capital to amortise the losses caused by the activities of the company. Payment to shareholders because of capital reduction is principally tax-free.

In accordance with the current legislation, in the case of companies distributing profit to their partners, the amounts distributed are subject to 15 per cent withholding tax without prejudice to the exceptions in the law. It is essential whether the capital reduction by repaying the capital to shareholders is a dividend. Essentially, to reach a full judgment on this issue, it is necessary to examine the components of the company’s capital because the capital of the company may consist of some other elements such as previous year profits and various funds, in addition to the amounts paid in cash by the shareholders. Besides, it is necessary to determine whether capital repayments made through capital reduction are subject to tax deduction related to profit distribution and whether this reduction will result in corporate tax by evaluating the elements of the capital within the scope of their own regulatory law articles.

Acquisition structures, restructuring and exit charges

i Acquisition

Foreign institutions can operate with the status of limited taxpayers as the institution’s branches are in Turkey or with the status of fully responsible by directly establishing an institution with headquarters in Turkey. The use of credits from domestic or foreign banks or financial institutions, or lending to companies by the shareholders can be possible by financing the establishment of the company. Subject to the characteristics of the company, it is also possible to use loans by issuing equity securities (bonds).

In Turkey, earnings arising from the disposal of stocks are subject to tax. In terms of foreign real persons who need to be taxed as limited taxpayers, earnings arising from the disposal of shares belonging to fully responsible non-public joint-stock companies and held for more than two years are excluded from tax. In case of disposal of shares belonging to public joint-stock companies, this period is three months. If the said stocks are sold through banks and intermediary firms within three months, the relevant institution will deduct a tax of 15 per cent on the income generated and this deduction will be the final taxation. If the shares belong to a foreign institution, gains to be derived out of these earnings will be considered as gains from appreciation and will be subject to corporate tax in Turkey. If these shares belong to a fully responsible institution, 75 per cent of the earnings obtained within the institution are exempted from corporate tax if they meet the conditions.

ii Reorganisation

Mergers made under the following conditions are tax free: (1) outcome of the merger, the defunct entity, and merged entity have headquarters and business centres in Turkey, and (2) the transfer of the balance sheet values on the date of acquisition of the closed acquisition as a whole and transferring it to its balance sheet exactly by the merged entity.

In mergers made under these conditions, only the earnings of the entity closed with the following conditions will be taxed until the date of acquisition, and the profits arising from the merger will not be taxed.

The jointly signed corporate tax declaration regarding the acquisition must be submitted to the tax office of the defunct entity within 30 days from the date the merger is announced in the Trade Registry Gazette.

The merged entity will undertake that it will pay the taxes of the defunct entity, fulfilling its other duties with a letter of undertaking attached to the corporate tax declaration for the merger.

In addition, SMEs merging on the condition that they are manufacturers, 75 per cent of their earnings after the merger are exempt from corporate tax for three years.

iii Exit

The relocation of a business varies according to the status of the liability of the business. The institutions that are fully responsible in Turkey can be relocated by transferring the shares of the institution to third parties or by liquidation if the institution is subject to liquidation provisions. If a business operating as a branch in Turkey has the status of a limited taxpayer, the business can relocate by the closure of the branch. Even if a business is disconnected from Turkey, considering the period of limitation, retroactive responsibilities of this business continue in terms of the transactions made in Turkey. For public receivables, considering the period of limitation, the business may receive tax penalties limited to the periods of activity or legal representation, delay increase or interest in terms of debts not paid on maturity.

Anti-avoidance and other relevant legislation

i General anti-avoidance

In general, taxpayers can avoid tax by applying for tax benefits. In this way, taxpayers who would like to keep their tax burden low and increase their capital accumulation can avoid heavy taxation through legal means.

ii Controlled foreign corporations

Controlled foreign companies refers to the foreign organisations that are controlled by full taxpayer real persons and institutions directly or indirectly, either separately or together, by owning at least 50 per cent of their capital, dividends or voting rights.

In order for foreign institutions and organisations to be accepted as controlled foreign companies, the following conditions must be fulfilled together: (1) 25 per cent or more of the total gross revenue of the foreign organisation in the relevant year must consist of passive income; (2) the foreign organisation must bear less than a 10 per cent tax burden; and (3) the foreign organisation must have a minimum gross revenue amount (more than 100,000 Turkish lira or equivalent in foreign currency).

In case of profit on the balance sheet of that CFC because of the sale of shares, even if this profit is not distributed, ‘dividend income’ is deemed to have been obtained and income tax is borne by the real person in Turkey controlling that company.

iii Transfer pricing

In the event that the institutions purchase and sell goods or services at a price determined against the arm’s-length principle with related parties, the earnings are deemed to have been distributed completely or partially through transfer pricing implicitly.

Camouflaged earnings distributed through transfer pricing cannot be subject to discounts in the determination of corporate earnings.

The income distributed in a camouflaged manner through transfer pricing in whole or in part will be deemed to be the distributed profit share as of the last day of the relevant accounting period or the amount transferred to the head office for non-resident taxpayers and previous taxation transactions will be corrected accordingly by the party taxpayers.

iv Tax clearances and rulings

Taxpayers and tax officials may request a written explanation from the authorities regarding the issues that are not clear and may hesitate in terms of their tax status and tax application. In such a case, the taxpayer will need to act in line with the opinion of the tax administration. However, if the tax administration changes this opinion later on, the taxpayer will not pay tax penalty and default interest.

In addition to this, The Turkish Revenue Administration may issue opinions on the issues that are unclear to provide guidance and clarify practice for all taxpayers.

Year in review

Because of the covid-19 pandemic, taxpayers have seriously struggled to pay their taxes and therefore the government introduced various tax reliefs in a number of ways and forms that include deductions, time extensions and even tax amnesties.

Outlook and conclusions

Turkey has a modern tax regime. Its SMEs are evolving from individual settings to more complex and corporate structures across the country. Turkey’s tax regime reflects this shift and complexity. More and more foreign investment is made into Turkey in various forms and investments of Turkish companies abroad have massively increased too. Turkey’s tax structures and treaties to which Turkey is party provide a tax-friendly environment for both inbound and outbound investors. In the same vein, this year there have been discussions around reducing the corporate tax ratio to 15 per cent, which would motivate local and foreign investors. The covid-19 pandemic has hit the Turkish economy hard, but the government has taken measures to protect business by introducing a wide range of tax reliefs in many forms