Turkish Tax System: How It Works

Turkish Tax System

Venturing into the bustling economic landscape of Turkey? Understanding the Turkish Tax System is a pivotal piece of the puzzle for businesses and individuals alike. Worry not! We’ve got you covered for this!

From the vibrant markets of Istanbul to the sunny shores of Antalya, this guide demystifies the complexities of Turkish taxes, providing clarity on everything from income tax to corporate responsibilities. Let’s dive into the nuances of navigating Turkey’s tax waters.

Let’s dive in!

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How Are Taxes Applied In Turkey?

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The Turkish taxation system is based on residency. The same principle applies to natural persons and companies. 

While natural persons must live in Turkey to be considered tax residents, companies must register their seats in a Turkish city. 

Tax residents will be levied the income tax on their worldwide income in Turkey. 

Nonresidents will be taxed by the local authorities only on the income made in Turkey. 

Considering the possibility of nonresidents being subject to double taxation once in Turkey. Secondly, Turkey has signed agreements to prevent double taxation in their home countries.

What Is The Turkish Direct Taxation System?

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The Turkish direct taxation system consists of two central taxes: income tax and corporate tax. 

An individual is subject to the personal income tax on his income and earnings, unlike a company, which is subject to corporate tax on its income and earnings. 

The Personal Income Tax Law 1960 (PIT Law) provides the rules of taxation for individual income and earnings. 

Likewise, the corporate taxation rules are contained in the Corporate Income Tax Law 1949 (CIT Law). 

Even though different legislation governs each, many rules and provisions of the Personal Income Tax Law are also being applied to corporations, mainly in terms of income elements and determination of net income.

What Are Income Taxes In Turkey?

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Income taxes in Turkey are levied upon the domestic and foreign income of individuals and corporations resident in Turkey.

Nonresidents earning income in Turkey through employment, ownership of property, carrying on a business, or other activities providing an income are also subject to taxation, but only on their income derived in Turkey.

Individual Income Tax

The limited tax liability covers trade or business income from permanent establishment salaries for work done in Turkey (regardless of where paid or whether or not remitted to Turkey).

Rental income from real property in Turkey, Turkish-derived interest, and income from the sale of patents, copyrights, and similar intangible assets. 

The personal income tax rate varies from 15% to 40%.

Corporate Income Tax

For tax purposes, companies are grouped as limited liability companies (corporations and limited companies) and personal companies (limited and ordinary partnerships). Corporate tax applies to limited liability companies. 

State economic enterprises and business entities owned by societies, foundations, and local authorities are also subject to corporation tax.

Whether a company is subject to total or limited tax liability depends on its residence status. 

A company whose statutory domicile or place of management is established in Turkey (resident company) will have the entire tax liability; in this case, worldwide income is taxable.

Suppose a nonresident company conducts business through a branch or a joint venture. In that case, it will have a limited tax liability, i.e., entirely subject to corporate tax on profits earned in Turkey annually. 

If there is no presence in Turkey, withholding tax will generally be charged on income earned, such as services provided in Turkey. 

However, if a double taxation treaty is avoided, reduced withholding tax rates may apply.

The introductory corporate income tax rate levied on business profits is 30% in Turkey, but for 2006, it’s planned to take it down to 20%. 

Dividend withholding tax is also applied if profit is distributed to shareholders. 

For resident corporations, tax is levied on worldwide income. Still, credit is given for foreign tax payable with income from foreign sources (up to the Turkish corporate income tax amount, i.e., 30%).

Corporations are required to pay Advance Corporate Income Tax based on their quarterly profits at the rate of 30%. 

Advance Corporate Income Taxes paid during the tax year are offset against the company’s ultimate Corporate Income Tax liability, which is determined in the related year’s Corporate Income Tax return.

Corporate entities having their statutory domicile and place of management outside Turkey but established in Turkey as a branch are subject to tax on an annual return.

This is based on income received from the permanent establishment in Turkey.

From the non-resident’s point of view, many payments abroad, including those for professional services and technical assistance, royalties, and rentals, are subject to withholding tax at rates varying between 10% and 25%.

In this regard, countries that avoid double taxation treaties with Turkey have considerable advantages. 

Turkey has signed such treaties with 60 countries, and the investors of these countries can benefit from a reduction in withholding taxes.

Countries with which Turkey has bilateral tax treaty agreements that came into force as of April 2005 are as follows:

  • Albania, Algeria, Austria, Azerbaijan,
  • Belarus, Bangladesh, Belgium, Bulgaria, 
  • Czech Republic, Croatia, China, Denmark, 
  • Egypt, Estonia, 
  • Finland, France, 
  • Germany, Greece, 
  • Hungary, 
  • India, Indonesia, Israel, Italy, 
  • Japan, Jordan, 
  • Kazakhstan, Kyrgyzstan, Kuwait, 
  • Latvia, Lithuania, Luxemburg, 
  • Macedonia, Malaysia, Moldova, Mongolia, 
  • Netherlands, Norway, 
  • Pakistan, Poland, 
  • Romania, Russia, 
  • Saudi Arabia (but only air transportation activities), Singapore, Slovakia, Slovenia, South Korea, Spain, Sudan, Sweden, Syria, 
  • Turkish Republic of Northern Cyprus, Tajikistan, Thailand, Tunisia, Turkmenistan, 
  • Ukraine, United Arab Emirates, UK, USA, Uzbekistan.

What Is The Taxation System Of Foreign Companies In Turkey?

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According to the Corporate Tax Law, the central tax a foreign company has to pay for its activities in Turkey is the corporate tax calculated on the income obtained in this country. 

Foreign companies that have their headquarters in Turkey or are managed from Turkey must pay the corporate tax on their total income obtained worldwide, at the rate decided by the Turkish authorities – 20%. 

For companies that have headquarters abroad and are managed also from abroad, the corporate tax is owed only for the income obtained in Turkey.

When a foreign company wants to calculate its net taxable income, it is essential to know there are some deductions from the gross income.

There are expenses related to different activities (issuing shares and stocks, mergers, liquidations, general board meetings, etc.).

If the foreign company has research and development activities, it can benefit from a 40% deduction applied to the expenses of these activities.

Another benefit is that the corporate tax return and its application must be filed by April 25th or the same day of the fourth month after the end of the fiscal year.

What Are The Taxes On Expenditure?

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Value Added Tax (VAT)

The VAT (KDV in Turkish) rates vary between 1% and 18%, but it’s generally applied as 18%. 

VAT payable on local purchases and imports is regarded as “input VAT,” and VAT calculated and collected on sales is considered “output VAT”. 

Input VAT is offset against output VAT in the VAT return filed at the related tax office by the 20th of the following month. 

If output VAT is more than 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. 

There is no cash refund to recover excess input VAT, except for exportation.

There is also a reverse charge VAT mechanism, which requires the calculation of VAT by resident companies on payments sent abroad. 

Under this mechanism, the Turkish company calculates and pays VAT to the related tax office on behalf of the foreign company. 

The local company treats this VAT as input and offsets it in the same month. This VAT does not create a tax burden for the Turkish and nonresident companies, except for its cash flow effect.

Special Consumption Tax

Special Consumption Tax (ÖTV in Turkish) was implemented in August 2002 by abolishing 16 different indirect taxes and funds to make the direct taxation system in line with the European Union directives. 

Unlike VAT applied on each delivery, ÖTV is charged only once. 

There are mainly 4 different product groups that are subject to ÖTV 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

Banking And Insurance Transaction Tax

Banking and Insurance company transactions remain exempt from VAT. Still, they are subject to a Banking and Insurance Transaction Tax of 5%, due on the gains by the banks for their loan interest or transactions, for example. 

Purchasing goods and services by banks and insurance companies is subject to VAT but is considered an expense or cost for recovery purposes.

Stamp Tax

Stamp duty applies to a wide range of documents, including contracts, agreements, notes payable, capital contributions, letters of credit, letters of guarantee, financial statements, and payrolls. 

Stamp duty is levied as a percentage of the value of the document at rates ranging from 0.15% to 0.75%. 

In the event of the absence of a monetary value on the agreement, Stamp Tax would be calculated on a lump sum basis and paid in New Liras. 

Stamp Tax is payable by the parties who sign a document. Every signed copy of the agreement is separately subject to Stamp Tax.

What Are The Taxes On Wealth?

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Property Tax

Property taxes are paid each year on the tax values of land and buildings at rates varying from 0.1% to 0.6%. 

In the case of the sale of property, a 1.5% levy is paid on the sale value by both the buyer and the seller. 

The rate is also applied as 1.5% if the property is contributed as capital-in-kind. The rates are applied twice for properties located in the Metropolitan Municipality areas.

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

  • Residences 0.1%
  • Other buildings 0.2%
  • Land 0.1%
  • Vacant land (but allocated for construction purposes) 0.3%
  • Farming lands 0%

Inheritance And Gift Tax

Items acquired as gifts or through inheritance are subject to taxes between 1% and 30% of the appraised value. 

Tax paid in a foreign country on inherited property is deducted from the taxable value of the asset. Inheritance tax is payable over three years and in two installments per year.

Withholding Tax

Under the Turkish tax system, certain taxes are collected through withholding by the payers 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 nonresident nonresidents. 

Companies in Turkey are responsible for withholding such taxes on their payments and declaring them through their withholding tax returns.

Environmental Tax

Municipalities are authorized to collect an Environmental Tax as a contribution towards the financing of certain services such as garbage collection. 

This tax is levied at scheduled fixed amounts that vary according to the location of the house or office. 

This tax is paid through the property’s water bill by the person who lives or occupies that house or office.

What Are Tax Minimization Methods In Turkey?

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Tax minimization methods can be used by investors interested in reducing the taxes a company must pay in Turkey. 

For instance, tax deductions apply to cash or asset donations. Also, the taxes can be reduced if the company credit rates are paid in advance. 

It is essential and also recommended to have the support of a financial advisor or an accountant who can take care of all the financial aspects of the firm. 

Numerous foreign companies choose to externalize their accounting services, benefit from complete support in taxation, and choose the ideal tax minimization tools. 

Below, you can find information about the investments, economy, and business direction in Turkey:

  • Qatar will be one of the leading investors in Turkey that guarantees investments of approximately USD 15 billion in the years to come;
  • according to “Doing Business Report 2019”, Turkey ranks 43rd out of 190 economies in the world;
  • USD 12,944 million is the FDI inward flow registered in 2018 in Turkey;
  • 44,8% of the foreign investments in Turkey were directed in the real estate sector, as registered for January-October 2018;
  • More than 18,000 companies are registered in Turkey, where foreign companies hold at least 10% of the capital.

Conclusion

As we wrap up our comprehensive overview of the Turkish Tax System, it’s clear that a thorough understanding is key to fiscal success in this dynamic country.

Whether you’re an entrepreneur, an expat, or a local business, mastering these tax principles ensures you contribute to and benefit from Turkey’s growing economy with confidence and compliance.

Turkish Taxology!

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