Any company, either incorporated or has its legal or business headquarters in Turkey, resident in Turkey has full tax liability. The company is liable to corporate income tax on all its profits, wherever arising, and upon its net realized capital gains. The legal headquarters is shown in the Articles of Association of the company. All foreign companies established under the Turkish Commercial Code have full tax liability. Corporations who have no legal or business headquarters in Turkey or foreign members of joint ventures have limited tax liability. They are liable to corporate income tax on their all profits derived in Turkey only.

Taxation period in Turkey is a calendar year. In case of reasonable and acceptable reasons, the corporation tax payer may be subject to special accounting period other than one calendar year. The foreign investor may apply to the Ministry of Finance for the harmonization of taxation period with the mother company. Taxable income of an entity is the difference between the net worth at the end of the accounting year and the net worth at the end of the preceding year with certain adjustments, mainly to eliminate movements of capital items and to recognize special statutory allowances and disallowances.

During the current taxation period, tax payers file a temporary income tax returns (provisional corporate income tax return) quarterly and remit the amount of temporary income due in the following month after. Final tax returns are filed in April after the year-end; and calculated final corporate tax is paid in the same time. When the temporary tax payment, during the year exceed the taxpayer’s annual tax liability, the excess is credited against the advance payments due in the succeeding year.
Private agreements pertaining to tax liability or tax responsibility shall not be binding upon tax offices.

The emoluments of employees of non-resident companies are exempt from income tax, if only the employer is a non-resident, and the emoluments are paid in foreign exchange, and the emoluments are paid from gains of employer outside Turkey and not deducted from the tax base in Turkey as a wage expense.

The corporate tax withholding includes only some specific profits and earnings of the corporations, such as sales proceeds of copyrights, patents, royalties, concessions, trade-name, and other intangible assets, professional fees (excluding professional fees for petroleum extraction activities) and rentals. Such transactions are subject to corporate tax withholding at the rate of 20%. Taxes collected through withholding are declared by a special return filed on the 20th of the following month, and paid to the tax office until the 26th of the month in which the return is given.

Tax losses may be carried forward limited to five years and set off against all income derived in later years. Advance tax payments such as taxes paid in foreign countries on the basis of income, withheld taxes, provisional tax, tax receivables are set off against corporate income tax calculated on the return.

The partners of a joint venture have an option for being a corporate income taxpayer together for the revenue of the joint venture where the members of the consortium must be a separate taxpayer for their own revenues derived from the joint project.
Profits of non-resident companies which have an establishment or a permanent representative in Turkey, which forwards goods purchased or manufactured in Turkey for the purpose of export, without selling such items in Turkey are excluded from corporate income tax.

The corporate income tax rate is 20 percent of taxable profit.

The profit after corporate income tax, paid as dividends to the shareholders is subject to 15% withholding income tax. However, withholding income tax on the dividends is tax burden of corporate, but it can be deductable from individual income tax calculations of the shareholder. Half of the dividends received by the shareholders are exempted from personal income tax where remaining half is taxable personal income for the shareholders. Whether the stockholder is full tax payer or limited tax payer (foreigner) is irrelevant.

The shareholders who received and declared dividends/capital gains are eligible to deduct withheld income tax amount from the amount of personal income tax computed.
he following table summarizes the effective tax burden on income of corporations and the stockholders assuming pre-tax profits of 100 and no capital reserve:

Before-tax Profit 100
Corporation Income Tax (20)
After Corporate Tax Profit 80

The profit after corporate income tax added to capital is not subject to withholding tax or income tax.

(In case of after tax profit is paid as dividends)
Income Tax Withholding (15%) (12)
Total Tax Burden on Corporate 32

The effective tax burden on natural person shareholders resident in Turkey
Dividends Received 68
Personal Income Tax Base (50%) 34
Personal Income Tax (Max.: 35%) (11.9)
Withheld Income Tax Deduction 12
Personal Income Tax to be Paid 0

As summary:
Pre-tax profit 100

Total Corporate Tax Burden 32

Total Income Tax Burden
on the Shareholders Received Dividends 0

That example is also true for natural person shareholders not resident in Turkey, and any foreign company participated in the Turkish subsidiary.

Note: Legal reserves up to 5% of the capital, in accordance with the Turkish Commercial Code, are neglected in the calculations of the tax burden.

For a non-resident shareholder with limited tax liability, the dividends after corporate income tax and legal reserves are subject to withholding income tax at the rate of 15%. That is the final taxation on the dividend earnings of the foreign natural person or foreign investor who is not resident in Turkey.

The withholding tax rate on the distribution of profit may vary in accordance with the Prevention of Double Taxation Agreements.

Repatriation of profit is free via banking system if only tax liabilities are fulfilled.

Please ask for details to Granit.

All deliveries made and services rendered in Turkey are subject to VAT. Also, importation of goods into Turkey is subject to VAT.

Regular rate of VAT is 18%, where VAT base is the value of the transactions.

VAT payers are allowed to deduct the VAT paid for deliveries and services from the VAT collected or calculated for deliveries and services.

In case, the amount of VAT to be deducted is larger than the VAT calculated on the taxpayers’ activities in a taxation period (a month), the difference is not returned but carried over to subsequent taxation period (month).

The exportation of goods and services are exempted from VAT, and the offsetting mechanism does not work well for exporters. Therefore, the exporters are allowed to claim VAT back from the tax office. Alternatively, exporters do not pay the VAT to producers for merchandise delivered with the precondition to export. In that case, the tax office suspends (for the period of three months) the uncollected tax subsequent to the declaration of the fact by the producer in the tax statement submitted for relevant period.

In other words; exporters have two options to reduce their VAT burden:
1) to claim VAT back within a few months OR
2) to commit export, and not to pay VAT to the producers/manufacturers only.

Deliveries of goods and services are subject to VAT at rates varying from 1% (agricultural commodities, newspapers etc) to 18%. The general rate applied is 18%. VAT payable on local purchases and on imports is regarded as “input VAT” and VAT calculated and collected on sales is considered as “output VAT”. Input VAT is offset against output VAT on the VAT return filed to the related tax office by the 20th of the following month. If output VAT is in excess of input VAT, the excess amount is paid to the related tax office. On the contrary, if input VAT exceeds the output VAT, the balance is carried forward to the following months to be offset against future output VAT. With the exception of a few situations such as exportation and sales to an investment incentive holder there is no cash refund to recover excess input VAT. There is also a so-called “reverse charge VAT mechanism or VAT Withholding”, which requires the calculation of VAT by resident companies on some payments to abroad. Under this mechanism, VAT is calculated and paid to the related tax office by the Turkish company. The local company treats this VAT as input VAT and offsets it in the same month. This VAT does not create a tax burden for the Turkish and the non-resident company, but cash flow distortion for the Turkish company, if there is no sufficient output VAT to offset from.

There are mainly 4 different product groups that are subject to special consumption tax at different tax 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

Unlike VAT, which is applied on each delivery, special consumption tax is charged only once.

Under the Turkish tax system, certain taxes are collected through withholding by the payers in order to secure the collection of taxes. These include income tax on salaries of employees, lease payments to individual landlords, independent professional service fee payments to resident individuals; and royalty, license and service fee payments to non-residents. Companies in Turkey are responsible to withhold such income taxes on their payments and declare them through their withholding tax returns However, please note that local withholding income tax rates may be reduced based on the available bilateral tax treaty provisions. Withholding VAT may be applied for some cases as well.

Banks and insurance companies are exempt from VAT but are subject to BITT at a rate of 5%, which is due on the gains of such companies from their transactions. The purchase of goods and services by banks and insurance companies are subject to VAT but is considered as an expense or cost for recovery purposes. Although the general rate of BITT is 5%, there are different rates to be applied to some specific transactions. For instance; BITT rate, for foreign exchange transactions is 0,1% where inter-bank deposits and credits 1%.

Buildings and lands owned in Turkey are subject to real estate tax at the following rates:

• Residences 0.1%

• Other buildings 0.2%

• Vacant land* 0.3%

• Land 0.1%

• Allocated for construction purposes

The rates are doubled for the properties located in the metropolitan municipality areas.

Stamp tax applies to a wide range of documents, including but not limited to agreements, financial statements, letters of guarantee and payrolls. Stamp tax is levied as a percentage of the monetary value stated on the agreements at rates ranging from 0.15% to 0.75%. Please note that salary payments are subject to stamp duty at the rate of 0.6% over the gross amounts paid, whereas a lump sum stamp tax is calculated for financial statements.

According to the stamp duty regulations, for the agreements signed in Turkey, taxable event occurs when the documents are signed. Stamp tax is payable by the parties who sign a document. Parties to a taxable document are jointly responsible for the payment of stamp tax. Note that each and every signed copy of the agreement is separately subject to stamp tax.

RUSF is applied on importation on credit basis and loans obtained locally or from abroad (except for foreign loans with an average maturity of more than one year). The rate of RUSF changes between 0-15%. This fund is not applicable where there is an incentive certificate or in the case of re-export credits.

Municipalities are authorised to collect an environmental tax as a contribution oriented to finance certain services, such as garbage collection. This tax is levied at scheduled fixed amounts that vary according to the location of the office for which the environmental services are being provided. For houses the environmental tax is levied according to the water consumption of the domiciles. The taxpayer is considered to be the occupant of the premises, whether as owner or tenant.

The Turkish Requirements

According to the Turkish Tax Procedural Law, Article 171; the purpose of book-keeping is to follow, audit and to inspect the status of tax-payers for operations, capital, transactions, gains and tax levies. According to the Turkish Commercial Code, the legal books provide evidence in favor of the party who has maintained the books properly.

According to the Turkish Tax Procedural Law, Article 175; Ministry of Finance has the authority to introduce required rules and standards related with computerized book-keeping and accounting software.

The legal books and books of accounts along with statutory financial statements must be maintained in accordance with accounting principals of the Turkish Commercial Code and tax legislation/the Turkish Tax Procedural Law (collectively “Turkish Practices”).

Statutory books and books of account required to maintain are journal, general ledger, inventory and the minute books.
The legal books must be kept in Turkish and in terms of Turkish Lira (TL) based on the Turkish Uniform Chart of Accounts, which requires use of accounting codes assigned for each account.

Computerized or dual language records are allowed provided that the requirements of the Turkish Uniform Chart of Accounts and the Turkish Tax Procedural Law are complied with. However, those additional records are not allowed make any change on the tax base.

Accrual basis accounting is applicable for corporate income tax purposes.

All foreign currency transactions are translated into the Turkish Lira, and are accounted for at the prevailing foreign exchange rate on the transaction date, i.e. invoice date.

The statutory records of the company have to be based on the exchange rates announced by the Central Bank of Turkey and/or the Ministry of Finance (mostly the same rates). The exchange rates announced by the private banks which have realized foreign currency transfers, would also be used, (but not practicable).

Gains and losses resulting from the settlement of such transactions and from the translation/re-valuation of monetary assets and liabilities denominated in foreign currencies are posted to the related accounts and recognized in the financial statements (P&L and BS). Therefore, foreign exchange gains and losses are taken into account in determination of tax base. In addition to this, gains from the revaluations of foreign currency transactions are subject to VAT.

In summary, revaluation is required for all foreign currency transactions, i.e. invoices, trade receivables and payables with in terms of foreign currency. However, revaluation is not necessary for TL transactions since all the Turkish Lira transactions are recorded and considered with their nominal values.

Prepayments

Prepayments in terms of Euro are translated and recorded as TL value at the date of the payment has been made. Those are also subject to re-valuation i.e. at the date of invoicing or at the year end (or at the end of each quarter for temporary corporate income tax purposes)

Invoicing

The invoice can be issued prior to deliver goods, at the time of delivery or within seven days just after delivery. A regular invoice is issued in Turkish and in TL terms. However, dual language and dual currency invoices are acceptable based on sales conditions and/or statistical reasons. In case the invoice is issued in terms of foreign currency for only the statistical reason, it should be clearly indicated on the invoice. Sales/invoices in terms of foreign currency are subject to re-valuations, but not the sales/invoices in terms of TL.

Receivables/Payables

When the invoice is issued, trade receivables or payables in terms of foreign currency are translated and recorded as TL value on accrual basis. The balance of trade receivables/payables in terms of foreign exchange are also subject to re-valuation i.e. at the year end (or at the end of each quarter for temporary corporate income tax purposes)

Payments/Collections

Payment/collection in terms of foreign currency is also translated and recorded as TL value on the date of the payment/collection has been made.

The Monetary Assets

The monetary assets such as cash and banks in terms of foreign currency, are also subject to re-valuation i.e. at the year end (or at the end of each quarter for temporary corporate income tax purposes)

The new legislation sets a specific debt/equity ratio as 3/1 for consideration of thin capital.

In cases where direct or indirect loans are obtained from related parties or shareholders who holds at least 10% of the company shares, and the borrowing amount exceeding three times of the shareholders equity of the borrower company, the exceeding portion of the borrowing will be considered as thin capitalization case.

The outcome of a loan being deemed as thin capital is that interest expenses paid or accrued, foreign exchange losses and other similar expenses calculated on the loan will be treated as non-deductible expenses for corporate income tax purposes. Interest payments over thin capital will be treated as dividend distributions by the tax authority.

Borrowings not considered within the scope of thin capital case are:

• Loans received from third parties based on non-cash guarantees provided by shareholders or related parties,

• Loans obtained by related parties from banks and other finance institutions so that wholly or partially transferred with the same terms and conditions,