Taxation & Investment in Turkey
Nexia International Tax Conference
Istanbul 1– June 02, 2011
The information included herein is not intended or written to
be used, and it cannot be used by any taxpayer.
The information included herein is of a general nature and
should not be relied on as tax advice. Consultation with a
tax advisor in respect of specific transactions should be
undertaken.
Outline
• Main Taxes
– Income Taxes
– Taxes on Transactions of G&S
– Other Taxes
• Inbound Investment to Turkey
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Liability to Tax
Financing & Thin Capitalization
Transfer Pricing
CFS Exemption
Payments to the Non Residents
• Main Incentives
• New Trade Law
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MainTaxes
• Income Tax
– Corporate Income Tax
– Personal Income Tax
• Tax on transfer of G&S
– VAT
– Real Estate Transfer Tax
– Special Consumption Tax (petrolium products, motor vehicles,
tobacco products, luxery goods)
– Special Communication Tax
– Inheritance and Gift Tax
• Other Taxes
– Bank and Insurance Transactions Tax
– Stamp Duty
– Property Tax
– Motor Vehicle Tax
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Corporate Income Tax – Taxable Entity
• Unlimited Taxpayer Status → Taxed on WWI
– Resident Entities
• JSC – LLC – other corporations and legal entities
• Foreign Subsidiaries (with legal base in Turkey)
– Non-Resident Entities
• Main Business Center is in Turkey
– Same rules apply both domestic and foreign Unlimited Taxpayers
• Limited Taxpayer Status → Taxed on income and gain derived in
Turkey
• Taxation depends on the type of the income and DTT
• Business income derived from a premises-offices or by an representative
→ The same rules apply with Unlimited Taxpayer (except WWI)
• Liaison Offices → No tax requirement, if doing no business activity
• No Consolidation
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CIT (Unlimited Taxpayer)
• Financial Year
– Calendar year, or
– Other 12 months period (upon taxpayers request and
approval of Tax Administiration)
• Returns & Payment
– Quarterly Advance CIT Return (second month)
– CIT Return (4th month)
(*) Apply to Limited Taxpayers with business or agricultural activities
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CIT Base: Adjusted corporate income
• Business Income Adjusted for Tax Purposes;
• Deductables
– Dividend income from unlimited taxpayers to unlimited taxpayer
– Dividend income and capital gain from CFS
– Income from sale of real property and subscription stocks, held more
than 2 years (75%)
– Unrealized gains from financial assets
– Incentives and other deductions
– Losses carried forward 5 year – No loss carry back
• Undeductebles
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Unrealized losses of securities
Penalties
Personal expenses
Donations over certain limits
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PERSONAL INCOME TAX
Personal Income Tax-1
• Taxable Person - Individuals incurring taxable income
– Residents → worldwide income
– Non-residents → Income derived from Turkey
• Residence test (183 days rule)
• Be determined in line with applicable DTT
• Tax Base: Income from,
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Trade and business activities
Agriculture
Independent professional service
Immovable assets and rights
Income from capital investment (dividends, interests, etc.)
Wages and salaries
Other incomes
(*) Exemptions, deductions and personel allowances apply
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Personal Income Tax-2
• Period: Calendar year
• Returns & Payment
•
– Quarterly Advance Tax Return (income from business
activities and professional service)
– No filing requirement in certain cases (mostly WHT case,
salary only from one employer, etc.)
Tax Rates
– Progressive tax rates
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Personal Income Tax Rate
(2011)
Income (TRY)
0
9.401
23.001
53.000
- 9.400
- 23.000
- 53.000
∞
Tax Rate (%)
15
20
27
35
(*) Lower for wages
(*) If allowade not to fill tax return, lower rates or WHT apply
(Euro/TRY = 2,2)
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Provisions for Income Taxes
• Taxable income is calculated in accordance with the Turkish Accounting
Standards issued by Ministry of Finance
• Accural basis (except income from professional service and rents)
• Depreciation: Straight-line or Accelerated method. Usefull life is
anounced bu Tax Administration (from 2 to 50 years, generally 5 year)
• Inflation accounting for high inflation periods (once)
• Dividends treated as flow through entities until to individuals or
foreigners.
• Interest paid to related or unrelated parties is deductible.
– TP and Thin Capitalization rules apply
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VALUE ADDED TAX
Value Added Tax
• Credit mechanism
– Paid VAT = Collected – Input
– Refund in some cases for residual (exemption, etc.)
• Monthly VAT Return
• VAT Rates
– Generaly
18 %
– Basic foods, medicines, book, textile, meals, etc. 8 %
– Dried food, cotton, newspaper, etc.
1%
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VAT - Taxable Transactions
• G&S transactions (except personel assets)
• Import of G&S
• Main exemptions
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Export (and free zones)
Transit transportation
Temporary import of goods (transit), free-zones
Diplomatic exemption
Services of banks, insurance companies
Suplies to taxpayers with Investment Incentive Certificate
Certain suplies and services for cultural, educational, social,
miltary purposes
– Other sectoral exemption (sea, air, railway transportation,
petrolium extract, defence, precious metals and stones,
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Main Taxe Rates
• Income Tax
•
•
– Corporate Income Tax
(20%)
– Personal Income Tax
(%15 – 35%)
Tax on transfer of G&S
– VAT
(18% - 8% - 1% - exemptions)
– Real Estate Transfer Tax
(0,15% + 0,15%)
– Special Consumption Tax
(0% - 84%)
(petrolium products, motor vehicles, tobacco products, luxery goods, etc.
– Special Communication Tax
(5% - 25 %)
– Tax on Inheritance (1% - 10%) and Gift (10% - 30%)
Other Taxes
– Bank and Insurance Transactions Tax
(5%)
– Stamp Duty (from fixed amount to 0,825 %) ceiling TRY1.251.383,40
– Property Tax
(0,1% - 0,3%)
– Motor Vehicle Tax
– Etc.
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INBOUND INVESTMENT TO
TURKEY
- tax aspect -
Tax Liability
• Subsidiary
: Unlimited Taxpayer (WWI)
• Branch (main business center) : Unlimited Taxpayer (WWI)
• Branch or Representative
: Limited Taxpayer
– Not a main business center
– Taxed on income derived in Turkey
• Liaison Offices (non-trading) : No tax requirements
• Tax treaties comes first
– DTT with 74 countries
• No consolidation
• Controlled Foreign Subsidiary (CFS) rule apply
• Resident and NR Companies with permanent
establishment taxed same
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Financing & Thin Capitalization
• Tax on Borrowings
– WHT on interest paid
– Stamp tax on borrowings
• Thin Capitalization
– Disguised capital ratio: 3 to 1
– Related party: At least 10% voting or dividend right
– Transit loans (from bank to company) are not deemed as
DC
– Disallowable deductions;
 Interest, exchange rate differences, other charges
 Considered as distrubuted dividends and taxed accordingly
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Transfer Pricing
• Arm’s length rule
• Methods
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Comparative Uncontrolled Price (CUP) Method
Resale Price Method
Cost-Plus Method
Other Methods if above 3 can not be used
APA
TP Forms (for all taxpayers)
TP Report (for taxpayers have transactions with foreigners)
Detailed documentation requirements
Profit distrubuted through TP is considered as dividends and taxed
accordingly
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Controlled Foreign Subsidiary Exemption
• Dividends and capital gains (distrubuted or not) is part of the taxable
income
• Not exempt on the conditions that:
– Direct or indirect participation of at least 50% anytime in the tax
year
– At least 25% of income of the CFS results from passive activities
– At least 100.000 TRY gross income
– Taxed less than 10% in resident country
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Payments to abroad-1
• Subject to WHT (DTT is the key)
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Dividend (and branch net gain after tax)
Interest (bank loans exempt)
Royalty
Charged expenses by foreign parent
• Management and service fees paid to a foreign parent is
deductible. In some cases subject to WHT. Documentation
requirement for reasonableness.
– No differences between domesitc corporations or foreign
subsidiary-branches in terms of WHT on payments to the
foreigners or parent company
– 183 days rule apply
– Precautionary WHT on payments to tax heavens
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Payments to abroad-2
Tax Rate
15%
-
DTT
10%
10%
20%
-
WHT
20%
20%
20%
-
WHT
WHT
10%
%18
(if transaction take place in Turkey or imported to Turkey)
All payments to the entities in tax-heavens 30%
WHT
WHT
• Dividend
• Interest
• Payment for professional services
- Service is not rendered in Turkey
- Service is rendered in Turkey
- Over 183 days
- Less than 183 days
• Royalty, licence, software, etc. payment 20%
• VAT on payments
18%
•
Payment
WHT
WHT
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Overview for a Foreign Investment
• Most common case;
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– Permanent establishment → Subsidiary, Unlimited Taxpayer
Mostly: JSC or LLP
Corporate Income Tax Rate : 20%
Debt financing allowed → Thin Capitalization rule apply
Transfer Pricing apply
Interests paid to the abroad : 10 % (WHT)
Dividends paid to the abroad : 10 % (WHT)
(Example: CIT= 100*20% = 80 WHT= 80*10% = 8 TOTAL=20+8 = 28)
No tax filings by foreign parent company
No consolidation
Tax authorities will question allocations of income and deductions
with parent company
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INCENTIVES
Main Incentives-1
• Incentives for Large Scale Investments
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Corporate Income Tax
VAT exemption
Social security premium support
Custom duty exemption
Land allocation
• Incentives for investments increasing employment in
recognized undeveloped areas (4 different region)
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Tax relief
Social security premium support
Land allocation
Interest support
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Main Incentives-2
• Free-Trade Zones
• Income from production of goods are exempt from CIT
• VAT exemption
• Techno Parks
• Income derived from Techno Parks are exempt from CIT
• Software transactions are exempt from VAT
• Qualifying R&D expenditures deductible from CI
• SME Support
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New Business Law
• JSC and LLC with one shareholder (current: 5 - 2)
• One-man Board of Directors
• Electronic Shareholders and Board of Directors meetings
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•
•
and voting
Accounting in line with IFRS
Independent Audit
Effective by July 2012 (some provisions, January 2013)
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Thank You
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