Business in Turkey

10.1. Individuals/income tax

Income earned by individuals in Turkey is subject to income tax. Regulating laws are Income Tax and Tax Procedures Law. Turkish resident individuals are taxed on their worldwide income. The definition of Turkish residents or assumed residents has been laid in the Income Tax Law.

According to this definition; either having the residence in Turkey or, staying in Turkey more than six months in a calendar year (in 1/1.-31/12. period) is sufficient to be regarded as Turkish resident. Other individuals and so-called non-resident individuals will be subject to income tax only on earnings, income and gains earned or received in Turkey.

10.1.1. Business profits

1.1. Conditions for taxation

Business profits can only be earned by a non-resident individual through either a Permanent Establishment (i.e. place of management, a branch, an office, a factory, a workshop, a mine, an oil or gas well), or by a Permanent Representative in Turkey.

Profits earned through a permanent establishment and by a permanent representative are regarded as Business Profits (Attribution Principle). Without those conditions any earnings or income can only be regarded as a different type of income and will subject to different taxation procedures.

1.2. Method of taxation

Business profits should be maintained in official records and books to be kept in accordance with Turkish Tax Procedures Law.

VAT and Withholding Tax Returns must be filed every month. Every three-months, net profit should be calculated, declared and advance (provisional) tax must be paid within 45 days after the period. The rate of this advance tax payment is 20%. The payment is deducted from the final – annual income tax.

Following the end of each calendar year an annual tax return is filed within 3 months. The calculated tax (at rates of 20-40%) is paid in two equal installments in March and July.

In calculating the taxable income (net profit):

- Direct related expenses incurred in Turkey or outside;

- Head office expenses share of Turkish branch;

- Traveling expenses from and to Turkey of head office personnel, and

- Salary charges allocate to Turkish trading business.

Should be allocated accordingly. Interest and commissions charged from head office, any share of losses of the head office, or of other branches of the owner, are disallowed.

1.3. Tax treaties

In general, Article 7 of the tax treaties concluded by Turkey deals with the taxation of business income.

10.1.2. Agricultural profits

2.1. Conditions for taxation

Incomes earned through agricultural activities are called Agricultural Profits.

A non-resident individual can earn this type of income only by means of a representative staying and working in Turkey.

2.2. Method of taxation

In line with the taxation of business profits, the net agricultural profit is calculated by means of proper books, records and accounts, and declared annually. Agricultural income is not subject to quarterly advance payment tax. All other information given above for business profits is the same for agricultural income of non-resident individuals.

10.1.3. Wages and salaries (dependent personal services)

3.1. Conditions for taxation

Wages and salaries are defined in the income tax law as payments made to individuals who work for an employer, within his premises, and as per his instructions.

All kinds of payments for such dependent activities are included in the total wages or salaries, no matter what they are called or named.

3.2. Method of taxation

All kinds of income earned in Turkey by non-resident individuals are subject to withholding tax, at the same rates applicable to Turkish residents (from 15% to 35%).

3.3. Tax treaties

Most tax treaties concluded by Turkey allocate the right to tax employment income to Turkey if,

- the recipient is present in Turkey for a period or periods exceeding in the aggregate 183 days in any twelve month period commencing or ending in the fiscal year concerned, and

- the remuneration is paid by an employer resident of Turkey, and

- the remuneration is borne by a permanent establishment resident in Turkey or a Turkish company.

10.1.4. Independent personal services (professional income)

4.1. Conditions for taxation

Income earned by a person in respect of professional services or other activities of an independent character is called professional income.

When such services are performed in Turkey, or paid and recorded as cost in books and accounts as deductible expense, the earnings of non-resident individuals are taxable in Turkey according to Turkish income tax regulations.

4.2. Method of taxation

Most commonly such earnings are subject to tax at a rate of 22%.  When a taxpayer is making the payment it withholds the tax at the time of payment (at source). (If the owner of the work is not a taxpayer). If the services are performed for a Turkish resident, not subject to Turkish taxes, then no withholding tax can be levied at source and in these cases the recipient non-resident professional will file a special tax return and declare these earnings within 15 days. Tax will be calculated at the same rates as Turkish residents (from 20% to 40%).

As an alternative, the non-resident professional individual can keep books and proper accounting according to Turkish regulations and at the end of the work can file a tax return and calculate his taxable income, subsequently he can deduct withholding tax he has already paid (deducted from the payments to him) from the final calculated tax amount.

Proper books and documents should be kept in order to demonstrate proper calculation and allocation of related direct expenses. A relevant feature of this alternative is the ability of the tax office to audit all the books and accounts. Only after such an audit has taken place and approval has been obtained from the Turkish tax authorities, any excess tax will be refunded.

4.3. Tax treaties

Most tax treaties concluded by Turkey allocate the right to tax professional earnings to Turkey if,

- the recipient is present in Turkey for a period or periods exceeding in the aggregate 183 days in any twelve month period commencing or ending in the fiscal year concerned, or

- the recipient has a fixed base in Turkey for the purpose of performing his services or activities.

In most of such agreements, independent services include independent scientific, literary, artistic, educational or teaching activities, independent activities of physicians, lawyers, engineers, architects, dentists, and accountants and other independent activities requiring specific professional skill.

10.1.5. Income from immovable property (rent)

5.1. Conditions for taxation

Earnings received by letting land, properties, buildings, fixed assets, equipment, motor vehicles and royalty, know-how, patent, trade marks are called income from immovable property and are subject to income tax if received by an individual.

When received by a non-resident individual, if:

- The property or the fixed asset is in Turkey or,

- The above mentioned intangibles are utilized in Turkey, and

- The rent payment is recorded into the books and accounts of a resident individual or company as deductible expense, and then the income is taxable in Turkey.

5.2. Method of taxation

Rent payments made by taxpayers in Turkey are subject to withholding tax at the rate of 22%. For residents the withholding tax is creditable against the final income tax liability.

For non-resident the withholding tax is a final tax, possibly subject to reduced rates under tax treaties.

Returns should be submitted before the end of March of the following calendar year. Rental income will be taxed at the same rates as for residents (from 20% to 40%). The tax is paid in two installments; in March and July.

5.3. Tax treaties

According to agreements signed by Turkey, rental income can be taxed in Turkey only if the land or property is situated in Turkey.

Royalties received for intangibles can only be taxed if the intangibles are utilized in Turkey. Aircraft, ships and boats are not regarded as immovable property.

10.1.6.  Capital gains/investment income

6.1. Conditions for taxation

The following gains derived from capital investments are considered to be capital gains

Withholding Tax

- Dividends   10 %

- Bank deposit interests   7 % - 18%

(Change as for duration and type of the deposit)

- Interest on government papers   0%

- Investment Bonds (A)   0%

- Investment Bonds (B)  10%

- Overnights  22%

- Investment on Receivables  10%

QUESTION:

What is meant by “Overnights”? One day (or One night) demand deposit

For capital invested and used in Turkey, gains derived from such investment is taxable income for non-resident individuals.

6.2.  Method of taxation

Capital gains are subject to a fund withholding tax. The rates in force in 2005 are set out above. If there was no withholding tax, these gains should be declared within 15 days in a special return and taxed with normal rates applicable to Turkish residents. Gains to be declared are subject to a reduction to eliminate the effect of the inflation. The net balance after such reduction will be taxed.

6.3. Tax treaties

Agreements make a differentiation between interest and dividends.

According to the tax treaties concluded by Turkey, Turkey has a limited right to tax capital invested in Turkey. The maximum rates vary between 12-35%. When a participation in a Turkish company is more than a certain percentage (usually 25%) maximum tax rates of withholding tax on dividends are reduced to generally 15%. But anyhow, as explained the rate of withholding tax for dividends is 10%. As for interest, the maximum rates of withholding tax are between 10-15%.

10.1.7. Other gains and earnings (other income)

7.1. Conditions for taxation

Other taxable gains and earnings are defined as follows:

Sales gains:

- Gains derived from sale of real estate within 4 years of acquisition;

- Gains derived from sale of shares trading at the stock Exchange within 3    months of acquisition for non-quoted companies within one year of acquisition;

- Gains derived from sale of stocks, partnership rights and similar participation privileges.

Gains resulting from transport activities:

- For a non-resident individual, gains resulting from transport activities between Turkey and his country are subject to tax.

7.2. Method of taxation

The net gains, regarding the sale of real estate, bonds or stocks are calculated by taking into account the monthly price increases (adding them to the cost of the real estate or papers).

Further, foreign exchange losses are deductible and only a net gain needs to be declared and taxed.

The rates are the same annual rates as for Turkish residents, ranging from 20% to 40%.

Special tax returns need to be filed for these gains within 15 days after receipt. As an exception, gains derived from the sale of patent and copyrights are subject to withholding tax of 25%.

7.3. Double taxation agreements

Based on the tax treaties concluded by Turkey’s taxation of gains derived from the sale of real estate is allocated to Turkey.

As to gains from sale of stocks and participation rights, Turkey’s right to taxation depends on the following conditions:

- Sale should be made to a Turkish resident and,

QUESTION:

“to” or “by” a Turkish resident?   To a Turkish resident

- Sale should also be made within a certain time limit depending on the applicable tax treaty.

10.2. Entities/corporation tax

Non-resident companies are those companies that have their statutory seat outside Turkey and/or have an effective place of management outside Turkey. So-called non-resident entities are those companies, which have their headquarters neither legally, nor business wise in Turkey.

The non-resident entities are subject to Turkish corporation tax only on the part of their income earned in Turkey, while others – Turkish Companies – are being taxed on income earned in and outside of Turkey, i.e. their worldwide income.

Based on the Turkish Corporation Tax Law (K.V.K.) there are seven kinds of income for non-resident entities. These types of income are explained below, and maximum burdens of taxation as set forth in Turkish law and tax treaties, as applicable.

10.2.1. Business profits

1.1. Taxability conditions

When a foreign company has a permanent establishment in Turkey or has a representative the profits are generated through and by a permanent establishment or representative is regarded as business profit of the foreign entity and subject to Turkish tax. We refer to paragraph “I.1.1. (Individuals) Business Profits”.

1.2. Method of taxation

As explained in the first section in paragraph “I.1.2.”, annual income and expenses will be recorded and books need to be kept, according to Turkish Procedure Law and at the end of the accounting year an annual tax return needs to be submitted. Tax is levied on net profit attributable to the place or activities where it was generated.

Taxable profit comprises the taxable entity’s gains from all sources, derived by any means and in any form. Exemptions are provided to encourage investments and stock exchange operations. These exemptions 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 business so requires or the parent company has a different accounting year.

Normally all expenses related to the business are deductible.

The corporation tax rate amounts to 30%. When profits are distributed or transferred to abroad (Head Office) then 10% withholding tax is applicable on the dividend.

QUESTION:

Is the 10% rate still applicable? Yes

An advance tax payment is made quarterly at the rate of 30 % on the period’s net profit. These payments are deducted from the annual corporation tax to be paid.

To encourage investments, a certain percentage of the costs of the investment may be deducted from the taxable income. The extra deduction amounts to 40% and may increase to 100% (in some cases the percentages are 40% and 200% respectively) depending on the region and the sector in which the investment is made. (see also 6.1.)

Losses can be carried forward for five years to be off set against future profits.

Specific provisions for bad and doubtful receivables are deductible.

For inflation purposes, please see the inflation adjustment regulations mentioned earlier in paragraph 6/1.

Depreciation and accumulated depreciation are calculated on the increased amounts according to inflation rate.

Tax returns should be filed within four months of the year-end closing. A tax assessment is then made and calculated tax, after the deduction of prepaid corporation tax payment made, is payable in April.

1.3. Tax treaties

The conditions, principles and determinations set forth in double taxation agreements as to kinds of income of foreign entities have been explained in the first section, paragraph 10.1 - 1.1.3.

10.2.2. Agricultural profits

2.1. Conditions for taxation

The types of agricultural activities and the conditions that should be met have been explained in paragraph 10/1. These conditions are also applicable to agricultural income of entities.

2.2. Method of taxation

Agricultural profits are followed, recorded and declared annually, like individuals’ income and the same as business profits as explained above.

10.2.3. Wages and salaries

3.1. Conditions for taxation

Under Turkish tax law an entity can earn wages, through its employees. The wages paid to an employee of a non-resident company are then considered as earned by the company.

3.2. Method of taxation

Wages and salaries are taxed according the withholding tax method. When the income of a non-resident company consists of wages or salaries, the withholding tax amounts 25% and it is withheld by the payer at source.

3.3. Tax treaties

When a double taxation agreement exists the following conditions need to be met:

- The employees of the foreign company should be present in Turkey at least 183 days;

- The income must be paid in Turkey;

- The payment should be borne by the payer, by entering the payment into the records as a deductible expense.

10.2.4. Independent services

4.1. Conditions for taxation

The conditions under which gains for independent services are taxable are similar to the conditions as explained in 10.1 - 4.1. for the individual independent earnings. According to these terms and conditions such payments or earnings of a non-resident entity are regarded as Independent Services Income earned in Turkey and taxation is levied accordingly.

4.2. Method of taxation

Independent services earnings are subject to withholding tax at the rate of 22% when they are not included within the business or agricultural income and thus are not be subject to an annual declaration. The withholding tax withheld will be the final taxation. When these earnings are included, the tax withheld will be deducted from the gross tax amount to be paid.

However, the non-resident recipient company may opt to be taxed as a business company at the annual corporation tax rate by keeping proper books and filing an annual return at the end of the accounting year.

This option may be advantageous if the deductible expenses incurred produce a tax saving.

4.3. Tax treaties

For the terms and conditions and the applicable maximum rates and other necessary information we refer to the first section (10.1) at paragraph 4.3.

10.2.5. Income from immovable property

5.1. Conditions for taxation

Income from immovable property received by non-resident companies is taxed in the same manner for non-resident individuals.

5.2. Method of taxation

Income from immovable property is subject to withholding tax at the rate of 22%. A resident payer makes deductions at source and this taxation in most cases is final (when they are not to be included into business or agricultural profits to be declared at the end of the year).

5.3 Double taxation agreements

We refer to paragraph 10.1.5.3.

10.2.6. Capital gains

6.1. Conditions for taxation

Types of capital gains and the conditions for their taxation in Turkey are given in 10/I.6.1. and is similarly applicable to non-resident entities.

6.2. Method of taxation

Most capital gains are subject to withholding tax. The rates in force as in 2005 are:

- Dividends 10%

- Bank deposit interests 7% - 18%

(Changes as for duration and type of the deposit)

- Interest on government papers  0%

- Investment Bonds (A)  0%

- Investment Bonds (B) 10%

- Overnight 22%

- Investment on Receivables 10%

QUESTION:

What is meant by “Overnights”? One day (or One night) demand deposit

Procedures and conditions for gains, which are not subject to any withholding tax, such as government papers, have been explained in section I, paragraph 6.2.

6.3. Tax treaties

Taxable capital gains received by non-resident companies and the maximum rates set forth in the double taxation agreements are the same as given in 10/I.6.3, for individual recipients.

10.2.7. Other gains and earnings

7.1. Conditions for taxation

As per the existing regulations, taxable other gains and earnings are as follows:

Sales gains

- Gains derived from sale of real estate (if sold within 4 years),

- Gains derived from sale of shares (stocks) (if sold within 3- 12 months),

- Gains derived from sale of other rights,

- Gains derived from sale of partnership rights and similar participation privileges.

Casual gains

For a non-resident entity, casual gains could only be earned by doing transportation business between Turkey and its country of residence.

7.2. Method of taxation

Royalties, sums derived from the sale or transfer of copyrights, patents and trademarks are subject to withholding tax of 25%.

The other casual gains, net gains form the sale of shares and properties must be separately declared by special returns within 15 days of the date of receipt of the earnings or gains. The calculation of the net gain will be made as explained earlier in  10.1.7.2.