The Turkish direct taxation system consists of income tax and corporate income tax, which are enacted in the Income Tax Law number 193 and the Corporate Income Tax Law number 5520.

Turkish residents are subject to income tax on their worldwide income.  An individual whose domicile is in Turkiye or any person who remains in Turkiye for more than six months in one calendar year is deemed to be a resident of Turkiye.

Companies whose legal or business headquarters are located in Turkiye are subject to corporate tax on their worldwide income; described as full liability taxpayers in the legislation.  Limited liability taxpayers whose legal and business headquarters are not located in Turkiye are only taxed on their income derived in Turkiye.  The general corporate tax rate was increased to 25% in Turkiye, as per the Law No.7456, published on July 15, 2023.

Before December 22, 2021, the withholding tax rate on dividends was 15%.  Due to the Presidential Decision No. 4936, Turkiye reduced the withholding tax rate on dividends to 10% as of December 22, 2021.  The withholding tax rate on professional services and royalty payments made to non-residents is 20%.  Turkiye has an extensive double taxation treaty (DTT) network that will reduce the local withholding tax rate on such types of income.

Turkiye is a signatory to the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI) and has agreed to adopt the minimum standards as well as certain optional provisions.  The ratification process has not yet been completed.

In addition to direct taxes, the Turkish taxation system includes indirect taxes such as value added tax, special consumption tax, banking and insurance transactions tax, special communication tax, stamp tax, customs tariff and fees.

In this chapter

• Legal system
• Taxation authorities
• Business vehicles
• Financing a corporate subsidiary
• Corporate income tax
• Cross border payments
• Payroll taxes
• Indirect taxes

Legal system

Turkiye operates under a civil law system, which is largely based on continental European models. Turkiye’s legal framework is based on the separation of public and private law. The sole authority to enact laws belongs to the Grand National Assembly of Turkiye. Turkiye has a three-tier judicial system that includes First Instance Courts, Regional Courts of Appeal and the Supreme Court.

Taxation authorities

In Turkiye, taxation authorities are separated into two main heads: Revenue Administration and Tax Inspection Board. These two authorities are placed under the Turkish Republic Ministry of Treasury and Finance in the organizational chart of Turkiye’s administrative system. The Tax Inspection Board has the responsibility of carrying out inspections by its tax inspectors of the taxpayers, whereas the Revenue Administration is responsible for levying and collecting taxes through tax offices.

Business vehicles

According to Foreign Direct Investment Law No. 4875 and in line with the Turkish Commercial Code No. 6102, foreign investors are entitled to establish joint stock companies, limited liability companies as well as branches and liaison offices in Turkiye.

Joint stock companies & limited liability companies

A minimum of one (1) shareholder and Turkish lira (TL) 250,000 of capital is required to establish a joint stock company.  Limited liability companies shall also have a minimum of one (1) shareholder but can be established with a minimum capital of TL 50,000.

Both entities are corporate taxpayers in Turkiye.

Due to the favorable position concerning the liabilities borne by shareholders, joint stock companies and limited liability companies are the business vehicles in Turkiye most commonly chosen by foreign investors, along with the other business setup forms of branch offices and liaison offices.  These two types of companies, joint stock companies and limited liability companies, are the ones for which the shareholders are not held liable for the debts of the company in terms of their personal assets.

For limited liability companies, if the tax receivables cannot be wholly or partially collected from the company itself, or it is apparent that the public receivables will not be collected from company, the liability of the shareholders and/or legal representative arises.

Branch

Foreign investors are also entitled to establish a branch in Turkiye in order to engage in activities within Turkiye, as per the Turkish Commercial Code and the Trade Registry Regulation.  Unlike joint stock companies and limited liability companies, branches may be incorporated only for the same purposes as the parent company; therefore branches shall not have separate Articles of Association.  There is no minimum capital requirement for branches but branches may have separate capital, which may be allocated by the parent company.  Turkish citizens and foreigners can be appointed as branch managers; however, they must reside in Turkiye.

Branches are liable for all taxes such as corporate income tax, value added tax, withholding tax and stamp duty once they are registered for tax purposes in Turkiye.  Branches are treated as non-resident limited liability companies for tax purposes and only profits generated in Turkiye are subject to corporate tax at a rate of 25% for 2024.  The branch profits transferred to headquarters are subject to dividend withholding tax at a rate of 10%, which might be reduced if there is an available DTT between Turkiye and the country of which the principal is a resident for income tax purposes.

Liaison office

A foreign entity may prefer to establish a liaison office in Turkiye to represent its parent company’s business activities and to gather necessary information on the related sector and the country on behalf of the parent company. This is a practical way to enter the Turkish market. The Ministry of Trade is authorized to permit foreign companies established under the laws of foreign countries to establish liaison offices to carry out the activities indicated under the Regulation of the Implementation of Foreign Direct Investment Law, provided that they do not engage in commercial activities in Turkiye. The Ministry must be convinced with supporting documents that the operations of the prospective liaison office fall within the accepted categories. These activities are as follows: market research, promotion of the goods and services of the parent company, representation and hosting, control of the suppliers in Turkiye, technical support, communication and information transfer and regional management center etc. There is no foreign capital requirement in establishing a liaison office.

Even if the Law and Communiqué prohibit liaison offices from engaging in any profit or expense-generating activities, tax liability of the liaison office will arise in the event that the liaison office performs commercial activities contrary to the permission. In the case of engaging in commercial activities, the liaison office will be taxed in accordance with legislation on the limited liability taxpayer.

Financing a corporate subsidiary

Equity financing

Capital increase

The share capital of joint stock companies/limited companies may be increased either by issuing new shares or by increasing the value of each share.

“Notional interest deduction” has been in effect for cash capital increases since July 1, 2015. Turkish capital corporations (except for those that operate in finance, banking and insurance sectors) will be able to deduct from their taxable income 50% of the interest (the annual weighted average interest rate last announced for the year benefitted from the deduction by the Central Bank of Turkiye for TL denominated commercial loans) calculated on cash capital increase amounts which are registered in the Turkish Trade Registry or the interest calculated on cash capital contributions. This deduction may be benefitted from for a maximum of five years and the deduction rate will be 75% instead of 50% for the capital increased where the cash brought from abroad.

Debt financing

Thin capitalization and transfer pricing

If the ratio of borrowings from shareholders or from persons related to the shareholders exceeds three times the shareholders’ equity in the borrower company at any time within the relevant year, the excess portion of the borrowing will be considered disguised capital. For borrowings from related parties that are banks or financial institutions, half of the borrowings are taken into consideration in the calculation of disguised capital.

Interest paid or accounted for and foreign-exchange differences related to disguised capital are regarded as non-deductible expenses in determining the corporate tax base. Interest related to disguised capital is treated as a dividend distribution and is subject to dividend withholding tax.

For borrowings obtained from related parties, the interest rate should be determined in line with the arms’ length principle. In the case of non-compliance with the arms’ length principle, the excessive portion would be considered as a disguised profit distribution through transfer pricing and would be deemed to be a non-deductible expense for corporate tax purposes. Also, the deemed profit distribution would be subject to a 10% dividend withholding tax, as per local tax law. However, the rate might be reduced per the applicable DTT.

Financing expense limitation

As per the Presidential Decision dated February 4, 2021, 10% of the financing expenses will be considered non-deductible for companies (other than the financial institutions) whose liabilities exceed their equity.

In other words, for the companies whose liabilities exceed their equity, as per the balance sheet at the end of the relevant fiscal period, 10% of the financing expenses corresponding to the excessive portion will not be deemed deductible for the determination of the corporate tax base, as of the 2021 fiscal period.

Withholding tax implications

Interest payments made to non-resident entities are subject to withholding tax at rates ranging from 0%-10%. The withholding tax rates might be reduced under an applicable DTT.

Resource utilization support fund (RUSF)

Foreign exchange and gold borrowings provided to Turkish residents (banks and financing institutions are exempt) from abroad are subject to RUSF depending on the maturity.

RUSF rates on foreign currency denominated loans are as follows:

RUSF rates on TL denominated loans are as follows:

Value-added tax (VAT) for financing services

Financing services provided by a shareholder or a group company (as an intercompany loan) in Turkiye would be subject to 20% VAT in Turkiye. If the financing would be met through a third party loan to be provided by a resident and/or non-resident financial institution/bank, no VAT applies on the interest payments.

Banking and Insurance Transaction Tax (BITT)

If the loan is granted by a bank resident in Turkiye, the interest payments will be subject to BITT at 5%.

Stamp tax

Documents in relation to loans extended by banks, foreign credit institutions and international institutions, their securities, repayments, transfers and the assignment of receivables that stem from the loan and the annotations established on these documents (excluding the use of the loans) are exempt from stamp tax.

Corporate income tax

Income tax rate

Companies whose legal or business headquarters are located in Turkiye or whose operations are centered and managed in Turkiye are subject to corporate tax on their worldwide income.

The general corporate income tax rate is 25% for 2024.  However, there are certain deviations from the general corporate tax rate, for certain taxpayer groups, as follows:

1. For banks, electronic payment and money institutions, companies within the scope of the Law No. 6361 on Financial Leasing, Factoring, Financing Companies, authorized foreign exchange institutions, asset management companies, capital market institutions, insurance and reinsurance companies and pension companies, the corporate tax rate is 30%
2. The corporate tax rate will be reduced by 1% (to 24% for 2024) for the profits of manufacturers that are derived exclusively from manufacturing activities; and the corporate tax rate will be reduced by 5% (to 20% for 2024) for the profits of exporters that are derived exclusively from export operations, under certain conditions
3. For institutions (except banks, leasing companies, factoring companies, financing companies, payment and electronic money institutions, authorized foreign exchange institutions, asset management companies, capital market institutions, insurance and reinsurance companies and pension companies) at least 20% of whose shares are offered to the public to be traded on the Borsa Istanbul Equity Market for the first time, as of November 17, 2020, the corporate tax rate shall be applied at a 2 point discounted rate (23% for 2024) for five accounting periods starting from the fiscal period in which their shares are offered to the public for the first time.

Capital gains

Capital gains derived by all companies are included in ordinary income and subject to corporate tax.

75% of capital gains derived by corporate taxpayers from the sale of shares¹ owned by them for at least two years are exempt from corporate tax provided that the gains from the sale are kept in a special account until the end of the fifth year following the year of sale.

Capital gains derived from the sale of foreign participations that have been held for at least two years by a holding company resident in Turkiye are exempt from corporate tax subject to certain conditions.

Branch tax

Branches are taxed solely on income derived from activities in Turkiye since they are regarded as non-resident entities for Turkish purposes.  Branch profits are subject to Turkish corporate income tax at the rate of 25% for 2024.

The branch profit transferred to headquarters is subject to dividend withholding tax at a rate of 10%, which might be reduced under an applicable DTT.

Computation of taxable income

Taxable base

The corporate tax base is determined by deducting expenses from the revenue of a company.

Deductions

All business related expenses are deductible.  Some of the exceptions listed in the legislation are:

1. Interest on shareholders’ equity or on advances from shareholders
2. Interest, foreign-exchange differences or similar expenses calculated or paid on disguised capital
3. Disguised profit distribution through transfer pricing
4. Reserves set aside from profits
5. Corporate tax, all fines, tax loss penalties and interest imposed on such tax
6. Discounts or other losses arising from selling the company’s own securities for less than par value.

Income tax reporting

Resident and non-resident entities having a permanent establishment in Turkiye are obliged to file an annual corporate income tax return and quarterly advance corporate income tax returns (on a calendar year basis unless permission to the contrary is specifically obtained from the Ministry of Treasury and Finance). The last date of submission of the corporate income tax return is the 25th of the fourth month following the fiscal year end. The last advance tax return should be submitted at the latest by the 14th of the second month following the quarter period; a total of three advanced tax returns will be submitted quarterly for the first nine months of the year. Advance corporate tax is offset against the final corporate tax calculated in the annual tax return.

Turkiye does not allow for tax consolidation; each company in a group must file its own corporate tax return.

Cross border payments

Transfer pricing

The transfer pricing regulations in Turkiye that include the arm’s length principle and the requirement for documentation of related party transactions are set out in the Corporate Tax Law in parallel with the Organisation for Economic Cooperation and Development (OECD) guidelines. Three-tier transfer pricing documentation including master file, local file and country-by-country reporting was adopted on February 25, 2020.

The main methods that can be used by taxpayer in the determination of arm’s length prices are (i) the comparable uncontrolled method, (ii) the cost plus method, (iii) the resale price method, (iv) the profit split method and (v) the transactional net margin method.

It is possible to enter into advance pricing agreements with the tax authorities.

Withholding tax on payments made to non-residents

Resident companies in Turkiye are obliged to apply withholding tax upon certain types of payments made to non-residents.

These rates might be reduced under an applicable DTT.

Withholding tax at 15% on online advertising services provided by non-residents has been effective since January 2019.

Multilateral Instrument (MLI) 

Turkiye signed the MLI on June 7, 2017 and has agreed to adopt the minimum standards as well as certain optional provisions.  However, the ratification process has not yet been completed.

The renewed Draft Law on ratification of the MLI was submitted to the Grand National Assembly of Turkiye on October 3, 2023.  Currently, the report of the Committee has been expected and the ratification process has not yet been completed.

As per the draft law, Turkiye has listed 94 treaties to be covered by MLI.  However, the total number of treaties covered is still expected to change in the legislative process.  Also, Turkiye has adopted the minimum provisions of the MLI but reserved the right not to apply Article 4 (dual resident entities), Article 8 (dividend transfer transactions), Article 10 (anti-abuse rule for permanent establishments situated in third jurisdictions), Article 11 (application of tax agreements to restrict a party’s right to tax its own residents), Article 14 (splitting-up of contracts), and Articles 18-26 (arbitration).

On the other hand, Turkiye has changed its first declaration and reservation status regarding Article 5 (application of methods for elimination of double taxation) and has selected to apply Option C, where the provisions on the “exemption method” are replaced with the “credit method”.  Twenty-two covered tax agreements including the Netherlands, Belgium and Sweden, are listed to be impacted through this election.  In addition, regarding Article 13 (artificial avoidance of PE status through the specific activity exemptions), Turkiye chose to apply Option A.

International Tax Reform

On October 8, 2021, Turkiye, along with 135 other countries, committed to a two-pillar plan for international corporate tax reform that supports the OECD Inclusive Framework’s “Tax Challenges Arising from Digitalisation of the Economy” project.

DST has been applicable in Turkiye, since March 1, 2020.  In November 2021, Turkiye and the US agreed on a joint statement setting forth a temporary “political compromise” on the application of DST.  As per the joint statement, Turkiye will grant tax credits to companies with DST liabilities to be used against future tax liabilities arising under Pillar One.  The credits can be obtained regardless of whether the levy imposed by the DST has actually been paid, and they can be carried forward to future tax years until fully utilized.

The agreement runs until the earlier of (a) the date on which the Pillar One multilateral convention comes into force or (b) December 31, 2023.  In light of the continuing multilateral negotiations at the G20/OECD Inclusive Framework, Türkiye and the US agreed on an extension regarding this joint statement, until June 30, 2024. The crediting mechanism, however, only takes into account DST amounts that have been accrued on or after January 1, 2022.

Payroll taxes

Income tax

The employer must withhold income tax on salaries at progressive income tax rates ranging from 15% to 40%.

Social security contributions

Social security premiums, which are calculated on salary limits of a minimum of TL 20,002.50 (between January 1, 2024 and December 31, 2024) and an upper limit of TL 150,018.90 monthly (between January 1, 2024 and December 31, 2024), are paid monthly by the employer and the employee at rates defined according to labor categories.  Premiums are calculated as a percentage of gross salary based on a range and for Turkish nationals, the general rates are 20.5% for the employer and 14% for the employee.

Unemployment insurance

The employer is required to deduct unemployment premiums and declare these along with social security premium contributions on a monthly basis. The rates are 2% for the employer and 1% for the employee.

Indirect taxes

Digital services tax (DST)

The digital services tax became effective as of March 1, 2020. Revenues generated from digital services provided in Turkiye including any and all kinds of advertising services provided through digital media, sale of audio, visual or digital content through digital media and services provided through digital media, services of the provision and operation of digital media enabling users to interact with each other and intermediation services provided by digital service providers through digital media, are subject to DST.

The rate of this tax is 7.5% on the revenue generated from services falling within the scope of the DST in the relevant taxation period. The president of Turkiye is authorized to reduce the rate to 1% separately, for each service type or collectively, or to increase the rate up to 15%. The relevant taxpayers are the digital service providers. The tax residency status of the digital service providers (i.e., whether they are considered full taxpayers or non-residents performing activities in Turkiye through a permanent establishment or permanent representative) has no impact on the tax liability.

Value-added tax (VAT)

The deliveries and services performed in Turkiye within the scope of commercial, industrial, agricultural and self-employment activities and importation of goods and services to Turkiye are subject to VAT.  The general VAT rate was increased to 20% in Turkiye, as of July 10, 2023, whereas the reduced rate range from 1% (e.g., newspapers and magazines (except online sales), staple food) to 10% (e.g., plastic and plastic made products, books (except e-books), cotton, fibers, leather and processed goods, houses with a net area of up to 150m2) depends on the delivery of certain types of goods and services.

Taxpayers offset input VAT paid for purchases against the output VAT collected through sales. If input VAT exceeds the output VAT, the balance is not refunded (unless there is a special delivery which enables a VAT refund, such as an export exemption) but carried forward to the following months to be offset against future output VAT. There is no time limitation for such VAT carry forwards.

Non-resident electronic service suppliers are liable for Turkish VAT on their supplies to consumers who are not VAT taxpayers in Turkiye. These suppliers must register for, collect and remit VAT to the Turkish tax authority, as of January 1, 2018.

Special consumption tax (SCT)

SCT is an expenditure tax levied on certain goods and services.  SCT is applied as either an exact value or a certain ratio and charged only once, at the stage of manufacture, import or at first acquisition.

Four main products lists that fall within the scope of SCT are:

1. List I: Petroleum products, aviation gasoline, unleaded gasoline, diesel oil, jet fuel, distillate marine fuels, hydraulic oil, etc.
2. List II: Automobiles, motorcycles, tow trucks for semi-trailers, bus, minibus, special purpose motor vehicle, excursion ship, cruise ship, etc.
3. List III: Tobacco products, cigarettes, cigars and alcohol products, cola drink, soft drinks, soda water, fizzy drinks, sparkling wines, alcohol-free beers, etc.
4. List IV: Other consumption goods (caviar, furs, cosmetic products, glassware, small home appliances, microphones, speakers, guns, armaments, domestic appliances and other electrical household machines etc.).

Stamp tax

Stamp tax is applied to a wide range of documents, including but not limited to, agreements, deeds of assignment, deeds of undertaking, and payrolls.  There are two types of stamp tax: proportional stamp tax and fixed stamp tax.  The proportional stamp tax rates vary between 0.189% and 0.948% depending on the type of the document with an overall cap of TL 17,006,516.30 (for 2024).

Real estate tax

Buildings and land owned in Turkiye are subject to real estate tax on the tax value of the property at varying rates between 0.1% and 0.6% depending on the classification of the property. The property tax is payable annually, in two installments in March to May and November.

Valuable house tax (VHT)

Owners, usufruct right holders, or those making dispositions of residential immovable property in the absence of an owner or a usufruct right holder of residential immovable properties located within the borders of Turkiye and with a building tax value exceeding TL 12,880,000 (for 2024) will be VHT taxpayers regardless of their status as a real person or a legal person.  Progressive VHT rates range from 0.3% to 1% depending on the building tax value of the property.

If the owner of the immovable property with a building tax value exceeding TL 12,880,000, has only one immovable property, then, that immovable property will be exempt from VHT.  Also, if a person has more than one residential immovable property within the scope of VHT, the property which has the lowest value will also be considered within the scope of the exemption.

VHT will be accrued annually and taxpayers should declare tax for each of the subsequent years.  VHT should be paid by two installments by the end of February and August of the relevant year.

Title deed

The title deed fee is payable on the transfer of immovable property and equally paid by the buyer and the seller as 2% of the sale price.

Accommodation Tax

The subject of the accommodation tax, which came into effect as of January 1, 2023, is the overnight services provided in accommodation facilities such as hotels, motels, holiday villages, pensions, apart-hotels, guesthouses, camping, chalet, highland houses and all other services offered within the accommodation facility (such as eating, drinking, activity, entertainment services and the use of pool, sports, thermal and similar areas).

Taxpayers of the accommodation tax are those who provide the above-mentioned services. The taxation period is the one-month period of the calendar year in which the activity is carried out.

The rate of the accommodation tax is 2%.

1. Before July 15, 2023, there was a partial (50%) corporate tax exemption granted also for the capital gains obtained through the transfer of immovable property, but this regulation has been abolished as of July 15, 2023. However, for the immovable properties, that have already been acquired and recorded under the assets, before July 15, 2023, the provisional article would apply; and 25% of the capital gains obtained via the sale of such immovable property held for more than two years, might be exempt from corporate tax, under certain conditions.↩