Business in Turkey

6.1. Corporation tax

All legal entities incorporated in Turkey are subject to both corporation tax and various withholding taxes. In principle, a branch of a foreign company is taxed in the same way as a company. Tax is levied on profit attributable to a branch.

Corporation tax is assessed on taxable profit, which is determined in accordance with the tax legislation, which consists of Corporation Tax Law, Income Tax Law and Tax Procedures Law. Taxable profits comprise all the taxable entity’s gains, from all sources, derived by any means and in any form. Within this profit, capital gains are subject to lower taxation through a cost escalation mechanism to reduce partly the effect of inflation. Exemptions are provided to encourage investments and stock exchange operations and do not usually extinguish the tax but help to reduce the applicable rate.

Profit and loss is calculated on an annual basis. In principle, the taxation year is the calendar year. Exceptions can be granted where the nature of the business so requires or if the parent company has a different accounting year. Expenses related to the business are normally deductible. Accrued provisions, except for some specific cases, are not deductible for taxation purposes.

An advance provisional corporation tax payment is made on a quarterly basis, at the rate of 30% on net profit. These payments are deducted from the annual corporation tax.

The rate of corporation tax is reduced to 30 % from 01.01.2005 on.

The distribution of profit to foreign individuals and foreign entities and to local shareholders is subject to 10% withholding tax. There is no dividend withholding tax on dividend distributions to resident corporate shareholders or permanent establishments or representatives of non-resident companies.

Dividends paid to local companies are exempt from further taxation. Dividends received by individuals must be declared for income tax purposes.

To encourage investment, a certain percentage of the cost of investments may be deducted from the taxable income. The investment allowance rate is 40% (as of 24 April 2003). Based on transitional provision companies with an investment document received before 24 April 2003 can still apply the old regime. Based on this regime the investment allowance rate varied from 40% to 200% depending on the region or the subject of the investment.

Losses incurred in routine business transactions can be carried forward for five years and offset against future profits. Capital losses are not deductible for individuals.

For inflation purposes; at the beginning of 2004 Article 5024 has been enacted by the Parliament, which made amendments to the Tax Procedural Law, Income Tax Law and Corporation Tax Law, as Inflation Adjustment and Re-evaluation.

Inflation Accounting is to recalculate the financial amounts of the non-monetary assets and liabilities – shareholders’ equities – by multiplying them with the calculated adjustment rate in order to show their real values at the time when their financial tables are structured.

The positive and negative differences will be recorded as profit or loss. At the first application of this inflation adjustment mechanism (as of 31^st December 2003) such differences will not be considered as taxable or tax deductible. Afterwards they will be taken into account as tax deductible or taxable amounts.

According to this regulation, if the cumulative inflation exceeds 100% in the last three annual tax periods and if the inflation exceeds 10% in the current tax period, the inflation adjustment will be made.

The inflation adjustment will terminate if both of these conditions are not realized simultaneously.

For almost all fixed assets, depreciation may be charged against profits over five years. The rates are determined by the government according to the economic lives of the relevant fixed asset.

If the declining-balance method is chosen, the annual depreciation rate is double.

Tax returns should be filed by the 15thday of the fourth month of the following book year (if book year is calender year by15th April). An assessment is then made on the profit declared. There is no final assessment system, which would be based on an official control.

The tax thus calculated after the deduction of prepaid provisional corporation tax is payable in April.

6.2. Withholding taxes

Income taxes on salaries are withheld on a progressive basis. Payments for professional fees and rents paid to individuals by legal entities are subject to 22% withholding tax.

For the construction and contracting business the withholding tax is 5% on the gross payments to them.

All the taxes thus paid are taken into consideration when the final tax is declared and calculated.

6.3. Stamp duty

Stamp duty applies to most business documents. The general rate is 0.75% of the proceeds (0,15% of rental contracts) and applies to all business agreements except labor agreements. The rate on the payment of salaries is 0.6%.

QUESTION:

Is the rate of 0,6% still applicable? Yes

6.4. Other taxes

- Motor Vehicle Annual Tax; (Depending on the ages and capacity of the engines and weight of the vehicles.)

- Land and Building Purchase Tax……..1,5%

- Land and Building Annual Tax………..0,1-0,6%

- OTV (Special Consumption Tax). (Mainly on car purchases, petroleum and some luxurious goods)…..27-50%

6.5. Bookkeeping regulations

All companies must have an accounting system within the generally accepted accounting standards and in accordance with “Standard Turkish Accounting Program”.

Minimum books should be kept and approved by the Notary are as follows:

- Journal

- Ledger

- Inventories and Balance Sheet Book

QUESTION:

Is the notary obligatory? Yes

They must be kept 5 years for tax and 10 years for Commercial Code purposes.

Bigger companies’ having assets or sales exceeding certain limits are subject to CPA audit and approvals.

6.6. Working in a high inflation environment

There were numerous measurements and adjustments within Turkish tax and commercial regulations with respect to the high inflation environment and they were abolished when the inflation Adjustment regulation has been adopted as mentioned above.

6.7. Working on foreign currency base

All books and accounts must be kept in Turkish and New Turkish Lira, according to the relevant laws. Recent change has made the original language and currency records possible as long as the Turkish translation and equivalents are expressed along with.

The accounts – and figures – can always and any time be converted into any foreign currency.