Tax System in Turkey

Turkish direct taxation system consists of two main taxes; income tax and corporate tax. An individual is subject to the income tax on his income and earnings, in contrast to a company which is subject to corporate tax on its income and earnings. The rules of taxation for individual income and earnings are provided in the Income Tax Law 1960 (ITL). Likewise, the rules concerning the taxation of corporations are contained in the Corporation Tax Law 1949 (CTL). Despite the fact that each is governed by a different legislation, many rules and provisions of the Income Tax Law also apply to corporations, especially, in terms of income elements and determination of net income.

Income Tax

Taxable Income:

The income tax is levied on the income of individuals. The term individuals mean natural persons. In the application of income tax, partnerships are not deemed to be separate entities and each partner is taxed individually on their share of profit. An individual’s income may consist of one or more income elements listed below:

– Business profits,

– Agricultural profits,

– Salaries and wages,

– Income from independent personal services

– Income from immovable property and rights (rental income)

– Income from movable property (income from capital investment)

– Other income and earnings without considering the source of income

Tax Liability

In general residency criterion is employed in determining tax liability for individuals. This criterion requires that an individual who has his place of residence in Turkey is liable to pay tax for his worldwide income (unlimited liability). Any person who remains in Turkey more than six months in a calendar year is assumed as a resident of Turkey. However, foreigners who stay in Turkey for six months or more for a specific job or business or particular purposes which are specified in the ITL are not treated as resident and therefore, unlimited tax liability does not apply to them.

In addition to residency criterion, within a limited scope, nationality criterion also applies regardless of their residency status, Turkish citizens who live abroad and work for government or a governmental institution or a company whose headquarter is in Turkey, are considered as unlimited liable taxpayers. Accordingly, they are subject to the income tax on their worldwide income. Non-residents are only liable to pay tax on their income derived from the sources in Turkey (limited liability). For tax purposes, it is especially important to determine in what circumstances income is deemed to be derived in Turkey. The provisions of Article 7 of the Income Tax Law deal with this issue. In the following circumstances, the income is assumed to be derived in Turkey.

Business profit:

A person must have a permanent establishment or permanent representative in Turkey and income must result from business carried out in this permanent establishment or through such representatives.

Agricultural income: Agricultural activities generating income must take place in Turkey.

Wages and Salaries:

– Services must be rendered or accounted for in Turkey.

– Fees, allocations, dividends and the like paid to the chairmen, directors, auditors and liquidators of the establishment situated in Turkey must be accounted for in Turkey.

Income from Independent Personal Services: Independent personal services must be performed or accounted for in Turkey.

Income from Movable Capital investment:

Investment of the capital must be in Turkey.

Other Income and Earnings:

The activities or transactions generating for other income, specified in the Income Tax Act, must be performed or accounted for in Turkey.

The term accounted for used above to clarify tax liability of the non-residents means that a payment is to be made in Turkey, or if the payment is made abroad, it is to be recorded in the books in Turkey.

Determination of Net Income:

Business Profit:

Business profit is defined as profit arising from commercial or industrial activities. Although this definition is very comprehensive and includes all types of commercial and industrial activities, the ITL excludes some activities from the contents of business profits. Generally, activities performed by tradesmen and artisans who do not have permanent establishments are not assumed as commercial and industrial activities and are exempt from income tax.

Furthermore, in order to tax income resulting from commercial and industrial activities there has to be continuity in performing these activities. In other words, incidental activities in that nature are not treated as commercial or industrial activities and therefore, the Income Tax Law deals with these activities as the other income and earnings.

The ITL does not list each commercial and industrial activity and only refers to the Turkish Commercial Law for the scope of these terms. Yet several activities are listed namely for clarification in Article 37. These are as follows:

– The operation mines, stone and time quarries, extraction of sand and pebbles operations of brick and tile kilns;

– Stock brokerage;

– Operating of private schools, hospitals and similar places;

– Regular operations of sale purchase and construction of real estate;

– Purchase and sale of securities on someone’s behalf and on a continued basis;

– Fully or partly sale of land which has been obtained by purchase or barter and subdivided within five years of its date of purchase and sold during this period or in subsequent years;

-Earnings from dental prosthesis.

Corporate Tax

Taxable Income:

The corporate tax is levied on the income and earning derived by corporations and corporate bodies. The income elements by Corporate Tax Law are the same as those covered in the Income Tax Law. In other words, the Corporate Tax Law sets provisions and rules applicable to the income resulted from the activities of corporations and corporate bodies, whereas the income Tax Law deals with the income derived by individuals. Corporations and corporate bodies specified by the Law as taxpayers in respect to the corporate tax are as follows:

– Capital companies and similar foreign companies;

– Cooperatives;

– Public enterprises;

– Enterprises owned by foundations societies and associations;

– Joint ventures.

Tax Liabilities

According to the Corporate Tax Law, those legal entities covered by the law, which their legal head office situated in Turkey, or the place of effective management in Turkey are taxed on their world-wide income (unlimited liability). By specifying two criteria the law intends to prevent any problem, which may arises in determining tax liability. The term legal head office, as used in the context of the Corporate Tax Law, means the office specified in the written agreements of the mentioned entities. Therefore, it is not difficult to as certain where the legal head office of a company is located. However, the place of effective management, which is defined as the place in which the business activities are concentrated and supervised, is not easy to determine in some cases. As may be expected, the Law defines the term limited tax liability quite parallel to term unlimited tax liability, as the liability requiring to tax only the income derived in Turkey, provided that both legal head office and the place of effective management are abroad.

Determination of Net Taxable Income:

In essence, the provisions of the income Tax Law concerning the determination of business profit also applies to the procedure required in determining corporate income. Basically, net corporate income is defined as the difference between the net worth of assets owned at the beginning and at the end of the fiscal year. In addition to the expenses mentioned in article 40 of Income Tax Code allowed to be deducted from revenues, the followings may also be deducted regarding to the determination of business profit, by corporations:

– expenses related to the issuance of stocks and shares;

– initial organization and establishment expenses;

– expenses incurred for general board meeting as well as expenses made for mergers dissolutions, and liquidations;

– in case of insurance companies, technical reserves required for the insurance contracts still valid at date of inventory;

– profits shares accrued to active partners of partnerships in commendams limited by shares;

– profit shares accrued to partners by participation banks for participation accounts;

– research and development deductions calculated as %40 of new technology and know-how research expenses realized within business.

In determining net corporate income, the following deductions are not allowed:

– interests paid or accrued on the basis of equity;

– interest, exchange difference and other costs paid or accrued on the basis of disguised capital;

– disguised earning distributed by transfer pricing;

– any kind of reserves;

– the corporate tax, fines, tax penalties and late payment penalties and interest.;

– leased or registered motor vehicles’ depreciation and other expenses not related with business activities;

Corporate Tax Return:

Like income tax, the corporate tax is also assessed on the base declared through tax returns filled annually by taxpayers. Tax returns contain the results of related taxation period. In principle, every taxpayer is required to file only one single tax return, even if he has derived the income through different business places or branches and those places and branches have their own accounting and allocated capital.

The corporate tax return is filled until the 25th day evening of the fourth month of the year following the month in which the fiscal year ends and the assessed taxes are paid until the end of that month. However, if a limited liable taxpayer leaves the country for sure the corporate tax return has to be submitted to the authorized tax office in the 15 days preceding. In such case, taxes are paid in the same period of time as forth for the declaration. If the income earned by the foreign companies which are subject to the limited liability in respect to the corporate tax, consists of capital gains and non-recurring income discussed in the preceding sections (except for income earned from sale and transfer of intangible rights like license, know-how, and royalty), then the income is declared to the authorized tax offices those taxpayers (or the persons acting on behalf of them) in the fifteen days after the income has been earned. This procedure is called “special declaration”. If there is no presence in Turkey, withholding tax will generally be charged on income earned; for example income earned from sale and transfer of intangible rights like license, know-how, and royalty, income from movable and immovable property and income from independent professional services provided in Turkey. However, if there is an avoidance of double taxation treaty, reduced rates of withholding tax may apply.

Tax Rates:

Corporate income tax is applied at 20 % rate on the corporate earnings.

Taxpayers (only for income from commercial activities and agriculture in limited tax liability cases) pay provisional tax at the rate of corporate tax, these payments are deducted from revenues, the followings may also be deducted regarding to the determination of business profit, by corporations:

– expenses related to the issuance of stocks and shares;

– initial organization and establishment expenses;

– expenses incurred for general board meeting as well as expenses made for mergers dissolutions, and liquidations;

– in case of insurance companies, technical reserves required for the insurance contracts still valid at date of inventory;

– profits shares accrued to active partners of partnerships in commendams limited by shares;

– profit shares accrued to partners by participation banks for participation accounts;

– research and development deductions calculated as %40 of new technology and know-how research expenses realized within business.

In determining net corporate income, the following deductions are not allowed:

– interests paid or accrued on the basis of equity;

– interest, exchange difference and other costs paid or accrued on the basis of disguised capital;

– disguised earning distributed by transfer pricing;

– any kind of reserves;

– the corporate tax, fines, tax penalties and late payment penalties and interest.;

– leased or registered motor vehicles’ depreciation and other expenses not related with business activities;

Corporate Tax Return:

Like income tax, the corporate tax is also assessed on the base declared through tax returns filled annually by taxpayers. Tax returns contain the results of related taxation period. In principle, every taxpayer is required to file only one single tax return, even if he has derived the income through different business places or branches and those places and branches have their own accounting and allocated capital.

The corporate tax return is filled until the 25th day evening of the fourth month of the year following the month in which the fiscal year ends and the assessed taxes are paid until the end of that month. However, if a limited liable taxpayer leaves the country for sure the corporate tax return has to be submitted to the authorized tax office in the 15 days preceding. In such case, taxes are paid in the same period of time as forth for the declaration. If the income earned by the foreign companies which are subject to the limited liability in respect to the corporate tax, consists of capital gains and non-recurring income discussed in the preceding sections (except for income earned from sale and transfer of intangible rights like license, know-how, and royalty), then the income is declared to the authorized tax offices those taxpayers (or the persons acting on behalf of them) in the fifteen days after the income has been earned. This procedure is called “special declaration”. If there is no presence in Turkey, withholding tax will generally be charged on income earned; for example income earned from sale and transfer of intangible rights like license, know-how, and royalty, income from movable and immovable property and income from independent professional services provided in Turkey. However, if there is an avoidance of double taxation treaty, reduced rates of withholding tax may apply.

Tax Rates:

Corporate income tax is applied at 20 % rate on the corporate earnings.

Taxpayers (only for income from commercial activities and agriculture in limited tax liability cases) pay provisional tax at the rate of corporate tax, these payments are deducted from corporate tax of current period.

Expenses to be deducted:

In order to determine net amount of business profits on the actual basis, the following expenses may be deducted from revenues:

– general expenses made for earning and maintaining business profit;

– food and boarding expenses provided for employees at the place of business or in its annexes;

– expenses for medical treatment and medicine;

– insurance and pension premiums;

– clothing expenses paid for employees;

– losses, damages, and indemnities paid based upon written agreements, juridical decrees, or by order of law;

– expenses for travel and lodging relevant to the business;

– expenses for vehicles which are part of the enterprise and used in the business;

– taxes in kind such as building, and consumption, stamp and municipal taxes and fees and charges, related to the business;

– depreciations set aside according to the provisions of the Tax Procedure Law;

– payments to the unions;

Payments, which are not accepted as expenses:

Those payments listed below are not considered as deductible expenses;

– funds withdrawn from the enterprise by the owner or by his spouse or children, or other assets in kind taken by them;

– monthly salaries, wages, bonuses, commissions and compensation paid to the owner of the enterprise, to his spouse, or his minor children;

– interest on the capital invested by the owner of the enterprise;

– interest based on the current account of the owner of the enterprise, his spouse, his minor children including interests on all form of receivables;

– all fines and tax penalties as well as indemnities arising from unlawful actions. Indemnities incurred as penalty clauses of contracts shall not be considered indemnities of a punitive nature;

– % 0 per cent of the advertising expenses for all kind of alcohol and alcoholic beverages, tobacco and tobacco products (current rate has been reduced to 0 percent by a Governmental Decree).