Turkish Tax System for Foreign Investors

"Doing Business in Turkey"

INFORMATION ABOUT THE TURKISH TAX SYSTEM FOR FOREIGN INVESTORS

The purpose of this article is to provide general information to foreign (Russian) investors who plan to invest in Turkey. The article focuses on issues such as Turkish Tax Legislation, company types within the framework of the Turkish Commercial Code (TTK), and Turkish Exchange Legislation.

TURKISH TAX SYSTEM

Types of taxes in the Turkish tax system are divided into three main categories: taxes on income, taxes on expenditures, and taxes on wealth.

Taxes on Income

  • Income tax
  • Corporate Income tax

Taxes on Expenditures

  • Value Added Tax (VAT)
  • Special Consumption Tax (SCT)
  • Customs Duty
  • Banking and Insurance Transactions Tax
  • Securities Law
  • Fees

Taxes on Wealth

  • Motor Vehicles Tax
  • Property tax
  • Inheritance and Transfer Tax

Among these taxes, the following information can be given briefly about the three types of taxes (Income Tax, Corporate Tax and Value Added Tax) that are particularly important for an investor:

INCOME TAX

It is a kind of tax levied on the income of a real person.

The income mentioned in this tax type includes the revenues (Commercial Income, Agricultural Income, Wages, Self-Employed Earnings, Real Estate Capital Earnings, Securities Capital Earnings, Other Earnings and Revenues) earned by a real person in a financial year. (01.01.202..-31.12.202..)

The tax has progressive rate according to the amount of income, and the top rate is currently 40%, starting from the lowest 15% tax bracket.

CORPORATE INCOME TAX

It is a tax that capital companies are responsible taxpayers. Joint stock companies and limited liability companies established according to the preference of the investor (detailed information will be given in the following sections of our article about these companies) are within the scope of this tax.

The income taxed in here is the taxable income of a capital company in one year (taxation period), and it is filed and declared till the last day of 4th month of the following year and paid at the same time.

However, it should be noted here that there is an issue regarding the declaration period; In accordance with the relevant law, companies are obliged to submit a Provisional CIT (in other words, advance tax) declaration to be deducted from the annual corporate tax in quarterly periods of the year they earn income and pay the final tax to the tax office within the 17. days of second month following the declaration period. (It will be filed and submitted 3 times as of 2022, the last declaration will not be submitted to tax office anymore).

Currently, the corporate tax rate in Turkey is 20%. To be implemented as 23% in 2022.

-The corporate tax rate deduction %1 will be applied with on the profits of the exporting entities exclusively has taxable profit result from exports. The corporate tax rate deduction will be applied with a %1 point on the profits obtained exclusively from the production activities of the institutions that have the industrial registration certificate and are engaged in production activities.

- For companies with at least 20% of shares in a new public offering, %2 point CIT deduction is applied for 5 accounting periods after the first public offering.

In the corporate tax law, taxpayer status seperated two parts as Fully Taxpayer and Limited Taxpayer, and those companies whose legal and business centers are not located in Turkey (limited taxpayers), are only subject to CIT on their earnings in Turkey (Source Principle).

Double Tax Treaties are signed between countries to prevent double taxation in taxation of limited taxpayers. The Double Tax Treaty signed between the Government of the Republic of Turkey and the Governments of the Russian Federation on year 1999 is an example of this situation. Currently, there are Double Tax Treaties between Turkey and more than 80 countries.

VALUE-ADDED TAX

Value Added Tax, is the tax levied on the delivery of all kinds of goods and services (except for the exemptions written in the law, this detail will not be mentioned in our article).

The general rate of Value Added Tax in Turkey is %1, %8 and 18%. Some goods and services have been completely exempted from this tax.

Exemptions have also been applied in many activities, provided that the stipulated conditions are met, such as the export exemption, the transport exemption, the diplomatic exemption and the import exemption.

There are legal regulations regarding the refund of VAT arising from purchases, which cannot be used by deduction from Calculated VAT, and which creates a cost due to Deferred VAT on the taxpayer.

In today's practice, generally the VAT taxation period is monthly, and the VAT calculated for the relevant month is declared and paid in the next month.

There is also reverse charge mechanism in terms of VAT. ( full withholding VAT and partial withholding VAT)

COMPANY TYPES AND COMPARISONS WITH GENERAL ASPECTS

As we mentioned in the previous parts of our article, companies in Turkey are generally divided into two, Joint Stock Companies and Limited Liability Companies.

The specific regulations of the information we provide according to the relevant law are also valid for foreign capital companies, and there is no special regulation in this regard. There is no difference between foreign owned entity and domestic owned entity.

There are also ordinary partnership types that is not in a corporate structure, such as an ordinary company. But such companies are very rare and are the type we would not recommend. Therefore, detailed information about this type of company will not be explained.

Issues such as the establishments, bodies of joint stock and limited companies, and the responsibilities of their partners against taxes are regulated in the Turkish Commercial Code.

According to the relevant law:

  • Both company types can be established with a single person.
  • While the minimum capital requirement is 10.000 TL in Limited Companies, this minimum amount is 50.000 TL in Joint Stock Companies.
  • There are similar regulations in both types of companies in matters such as capital exchange, dividend distribution, issuance of share certificates, privileged shares, and general assemblies. We’re going to summarize the advantages, disadvantages and responsibilities that reflect significant differences in these two types of companies below.

SHARE TRANSFER

Share transfer transactions in limited companies are subject to many procedures such as share transfer agreement, notary approval, approval of the transfer by the general assembly, registration of the transfer in the Turkish Trade Registry. In joint stock companies, this process is much simpler and if there is no contrary provision in the Company's Articles of Association, the transfer process can be completed with a simple transfer agreement. And if there are printed stocks, the transfer process can be concluded by endorsing them.

RESPONSIBILITY FOR PUBLIC DEBTS

In limited companies, the partner has responsibility for public debts. The partner is responsible with all his assets for the part of the company's taxes and premium debts to be paid to the Social Security Institution that cannot be collected from the company. Company partners are at risk of being held liable in proportion to their capital shares for public debts that cannot be collected from a limited liability company.

In joint stock companies, the partner is not responsible for public debts. In joint stock companies, the partner has no responsibility for taxes, SSI (SGK) and other debts of the company. The partner who pays the amount of capital he has committed to put into the company is not responsible for any other debt.

TAXATION ON SHARE TRANSFER

This is one of the most important differences between the two types of companies in terms of partners.

In limited companies, the partner is obliged to pay income tax in accordance with the relevant article of the Income Tax Law, on all the earnings between the registered value of the share and the sales price, no matter how many years later he sells the company shares in his possession.

However, in joint stock companies, if the partner of the company sells his shares after holding it for at least two years, the gain from this sale is exempt from tax and will not be liable to pay any tax.

Considering the regulations under these three headings that we have mentioned, we recommend that investors who will establish a new company prefer the Joint Stock Company type.

COMPANY ESTABLISHMENT PROCEDURES

Company establishment procedures in Turkey can be carried out in as far as 10 days after the completion of the following procedures, which must be done before the establishment (this period will be much shorter with the new regulations that will come into force soon), and foreign investors are not required to obtain preliminary permission from any authority before these procedures, unlike full taxpayers.

  • After the founding partners have determined the company's title, headquarters, capital and shares, the notarized articles of association must be recorded in the central registry system and applied to the relevant Trade Registry Office.
  • For documents issued outside of Turkey, the apostille annotation must be obtained and approved by the consulate or a notary office.
  • For company partners who are not Turkish citizens, a tax number called Potential Tax Number is required.
  • Company partners do not have to reside in Turkey (not mandatory).
  • Foreign companies may employ foreign personnel in the companies, branches, or liaison offices they established in Turkey, if they obtain a work permit.
  • Foreign companies can also operate by establishing branches or liaison offices in Turkey.
  • Liaison offices to be established to conduct market and feasibility research in Turkey are not allowed to engage in commercial activities. The establishment of such offices requires permission from the Ministry of Economy.

INCENTIVES

There are many incentive arrangements in Turkish tax legislation with basic economic and social motives such as increasing investments, developing technology, increasing competition in international markets, increasing employment.

In terms of incentives, the geography of Turkey is divided into 6 regions according to their level of development, and some of the incentives are applied to investments in the determined regions.

In summary;

Investment location allocation - Investment location can be allocated within the framework of the procedures and principles determined by the Ministry of Finance for large-scale investments, strategic investments and investments that will benefit from regional supports for which Investment Incentive Certificate has been issued.

Interest support- is a financial support provided for loans with a maturity of at least one year used within the scope of the Investment Incentive Certificate, and is an incentive provided for strategic investments, R&D and environmental investments and certain regions.

Interest support is applied to loans with a maturity of at least one year.

In investments that will benefit from regional supports, the loan amount that will be the basis for the application of interest support cannot exceed 70% of the fixed investment.

The amount of interest support is the rate of interest or dividend payable for each amortization plan;III. For investments to be made in the region, 3 points for Turkish Lira loans, 1 point for foreign currency or foreign currency indexed loans, IV. It has been determined as 5 points for Turkish Lira loans for investments to be made in the region, 2 points for foreign currency or foreign currency indexed loans, 5 points for Turkish Lira loans in research and development investments, regardless of region, and 2 points for foreign currency or foreign currency indexed loans.

Maximum interest support amount to be applied on the basis of incentive certificate; III and IV. 500.000 Turkish Liras for investments to be made in the region, 300.000 Turkish Liras for research and development and environmental investments.

The interest support is applied for a maximum of 5 years from the date of first loan usage within the determined scope.

In order to benefit from interest support, the loan must be used from institutions that have signed a protocol with the Undersecretariat of Treasury.

Social Security Insurance Employer Premium Support-Investment Incentive Certificate is that the portion of the employer's share of the insurance premium, which must be paid for additional employment provided by investment, corresponding to the minimum wage, is covered by the Ministry for a period to be determined by the Ministry.

It is applied for incentive certificates issued within the scope of large-scale investments, strategic investments and regional incentive applications.

Tax deduction - it is the application of income and corporate tax at a discount until the investment contribution amount foreseen for the investment is reached.

Earnings from investments that have been granted an incentive certificate by the Ministry of Economy are subject to reduced corporate tax rates, starting from the accounting period in which the investment is partially or fully operational, until the investment contribution amount is reached.

As a deduction from the investment contribution amount to be calculated, starting from the date they actually started their investments within the scope of the regulated investment incentive certificates;

- Not to exceed the ratio of the total investment contribution amount determined by the Council of Ministers Decision to which the incentive certificate refers, and

- Not to exceed the amount of investment expenditure incurred,

In the investment period, the amount of contribution to the investment that can be benefited by applying reduced corporate tax to the income of taxpayers from other activities can be up to the portion of the total investment contribution amount that corresponds to the rate determined by the Council of Ministers Decision.

In regional incentives, the investment contribution rate starts from 15% in the 1st region and reaches 50% in the 6th Region, and the Tax Discount Rate starts from 50% in the 1st Region and reaches up to 90% for the investments to be made in the 6th Region. These rates are respectively 25%-60% and 50-90% in Large Scale investments.

Large-Scale Investments is an Incentive System that provides Turkey with a competitive advantage in the international arena and has great economic returns for Turkey. 12 investment subjects are supported within the scope of Large-Scale Investments.

Number

Subject of Investment

Minimum Fixed Investment Amounts (Million TL)

1

Refined Petroleum Products Manufacturing

1000

2

Manufacturing of Chemicals and Products

200

3

Port and Port Services Investments

200

4

Investments in the Manufacturing of Motor Vehicles:

  
 

a) Motor Land Vehicles Main Industry Investments

200
 

b) Motor Land Vehicles Sub-Industry Investments

50

5

Railway and Tram Locomotives and/or Wagon Manufacturing Investments

50

6

Transportation Services Investments with Transit Pipeline

7

Electronic Industry Investments

8

Medical Instruments, Precision and Optical Instruments Manufacturing Investments

9

Pharmaceutical Production Investments

10

Air and Space Vehicles and/or Parts Manufacturing Investments

11

Machinery (Including Electrical Machinery and Devices) Manufacturing Investments

12

Investments in Metal Production:

[Investments in final metal production from ore and/or concentrate of IV/c group metallic minerals specified in the Mining Law (including mining investments integrated into these facilities)]

 

This support is provided within the scope of incentive certificates issued within the framework of strategic investments, large-scale investments and regional incentive practices.

Customs Duty Exemption - It is applied in the form of non-payment of customs duty for investment goods machinery and equipment to be procured from abroad within the scope of Investment Incentive Certificate.

VAT exemption is applied in the form of non-payment of value added tax for investment goods, machinery and equipment to be procured from within the scope of Investment Incentive Certificate, and software and intangible rights sales and leases within the scope of the document.

Insurance Premium support- It is the ministry for a period of time, determined by the ministry, of the insurance premium to be paid by the employer (investor) provided for large-scale investments, strategic investments and investments that will benefit from regional supports.

Income Tax Withholding Support - It is the cancellation of the income tax withholding corresponding to the minimum wage for 10 years, which must be paid for additional employment provided by investment within the scope of the Investment Incentive Certificate, which is foreseen only for investments made in a region.

VAT refund - It is the return of VAT incurred for building-construction expenditures realized within the scope of strategic investments with a fixed investment amount of more than 500 million Turkish liras.

In addition, very detailed incentive elements related to R&D investments have been arranged.

CORPORATE TAX DEDUCTION ARISING FROM CAPITAL INCREASE IN CASH

Capital companies can benefit from the corporate tax deduction arising from capital increase in cash.

The amount of capital increase in cash that may be subject to deduction is defined as “cash capital increases in the amounts of paid or issued capital registered in the trade registry during the relevant accounting period or the portion of the capital paid in newly established capital companies as covered in cash. It can be benefited both in the establishment of the company and in the of cash capital increase.  The discount rate for the cash-covered portion of the cash increase from foreign sources is 75% (normally 50%).

Capital companies will be able to benefit from the tax deduction for each accounting period starting from the accounting period in which the capital increase in cash was made. On the other hand, in the event of capital reduction in the following periods, the amount of reduced capital amount will not be considered when calculating the tax deduction amount.

If tax deduction amount calculated by the capital companies regarding the increase in cash capital cannot be deducted in the determination of the Corporate Tax base for the accounting period due to financial losses, these interest amounts can be carried forward and deducted in determining the tax base for the following accounting periods without any tax indexation.

TECHNOPARK EXEMPTIONS  

In accordance with the Technology Development Zones Law no. 4691 and the Regulation on Implementation, the following exemptions and deductions are applied to entrepreneurs/companies engaged in research and development, software, and design development activities in Technopark.

a. Income and Corporate Tax Exemption for Companies and Entrepreneurs

The earnings of the executive companies within the scope of this law and the gains of the income and corporate taxpayers operating in the region exclusively from software and R&D activities in this region are exempted from income and corporate tax until 31/12/2028.

b. Income Tax Exemption for R&D Personnel

R&D employee working in the technopark; these employee wages related with to these duties will be exempted from income tax and until 31/12/2028.

c. VAT Exemption

The delivery of products which has produced exclusively by the entrepreneurs operating in the Technopark, are exempt from value added tax during the period which earnings from this area are exempted from tax (until 31/12/2028). These products are and in the form of system management, data management, business applications, sectoral, internet, mobile and military command, and control application software.

d. Social Security Premium Support

Working personnel in companies operating in Technology Development Zones whose wages are exempt from income tax; half of the employer's share of the Social Security insurance premium calculated on the wages they earn in return for these works is covered by the allowance to be placed in the budget of the T.C. Ministry of Treasury and Finance for 5 (five) years for each employee.

e. Custom Duty Tax Exemption

Goods imported for use in research related to software, R&D, innovation, and design projects carried out within the scope of the Law in the Regions, customs duties and all kinds of funds, papers and transactions issued within this scope are exempt from stamp duty and fees.

f. Ease of Employing Foreign Personnel

Foreign managers, skilled R&D personnel can be employed in the regions within the framework of the Law No. 4875, the Law no. 27/2/2003 and the Law on The Work Permits of Foreigners No. 4817 and the provisions of the relevant legislation.

EMPLOYMENT INCENTIVES

Some important social security premium incentives that can be used in the current situation are as follows.

.         5510 - 5% Treasury Support ( Employer SSP Support)

Private sector employers who employ workers with a service contract, under certain conditions, %5 percent of employer’s social security premium liability will be reimbursed by the national treasury. This support will be applicable till there is no undue liability regarding SSP.

·       6111 -  Incentive for Additional Employment,

The amount of social security premiums calculated on the income of the employee dependent on SSP is covered by the Unemployment Insurance Fund from the date of employment, provided that the conditions determined by the private sector employers, which apply to each insured personnel.

·         6486 - Incentive for Priority Provinces in Development,

In order for employers to benefit from the incentive to reduce social security premiums by an extra six points, the entity must be operating in the provinces and districts under the incentive set by the President, in addition to the requirements for the five-point premium reduction incentive.

·         5746 – Research and Development Incentive

R&D and support personnel working in R&D and innovation projects, enterprises that benefit from technology capital supports and pre-competitive cooperation projects; income tax calculated after applying the minimum subsistence deduction on the wages they earn in return for their work-  

-            90% for those with PhDs,

-            80% for others

In addition, half of the employer's share of the social security premium calculated on their fees, which are exempt from income tax, is covered by the allowance to be put in the budget of the Ministry of Finance, not exceeding five years.

ASSURANCE OF FOREIGN INVESTORS

The investor who will invest in Turkey is defined and secured by the "Foreign Direct Investments Law" numbered 4875.

In the 3rd article of the relevant law,

Under the heading of freedom of investment and national treatment, unless otherwise provided by the provisions of international agreements and special laws;

Foreign direct investment in Turkey by foreign investors is free.

Foreign investors are treated equally with domestic investors.

Foreign direct investments cannot be expropriated or nationalized unless required by the public interest and paid for in accordance with the current legislation (this is the same for national investors).

Net profit, dividends, sales, liquidation and compensation amounts arising from the activities and businesses of foreign investors in Turkey, amounts to be paid in return for licensing, management and similar agreements, foreign loan principal and interest payments can be freely transferred abroad through banks or private financial institutions.

The resolution of disputes is also regulated by this law.

For the settlement of disputes arising from investment contracts subject to private law and investment disputes arising from public service concession agreements and contracts made by foreign investors with the administration, in addition to the competent and authorized courts, provided that the conditions in the relevant legislation are met and the parties agree, national or international arbitration or arbitration other dispute resolution methods may also be used.

Again, in case this foreign investor puts in non-cash capital, the value of the capital will be determined in accordance with the provisions of the Turkish Commercial Code, and in case the securities of companies established in foreign countries are used as an investment instrument, the authorities authorized to appraise according to the legislation of the country of origin or the experts to be determined by the courts of the country of origin or the international It is stipulated that the evaluations of the evaluation institutions will be taken as the basis.

Foreign national personnel to be employed in companies, branches and organizations established within the scope of this law are granted a work permit by the Ministry of Labor and Social Security.

CONCLUSION

As can be understood from this article, which we prepared for the purpose of informing the foreign investors who will invest in Turkey before the investment, Turkey does not approach foreign investors planning to invest in its country with a different legal regulation than its own national investor,and provides all kinds of convenience with legal assurance in this regard.