The previous Corporate Income Tax Law (Law No. 5422) was replaced by a new Law (Law No. 5520) (published in the Official Gazette on 21 June 2006) including a number of significant changes and introducing new concepts with the intention to bring Turkey more in line with the international applications and to fully address international tax issues of multinational companies as well as issues relevant to Turkish companies with extensive trade and manufacturing operations in foreign countries. Some of the rules of the New Turkish Corporate Income Tax Law apply retroactively from 1 January 2006.
In Turkey, income and earnings of corporations, limited liability companies, Turkish branch offices of foreign firms, joint ventures, cooperatives and public enterprises are subject to corporate income tax. State Economic Enterprises and trading bodies of foundations and associations are also regarded as corporate income taxpayers and subject to corporate income tax.
Residence is of considerable importance for corporate income taxation. Residents are fully liable under the Turkish tax system (that is, they pay taxes based on their worldwide income). Nonresidents have limited liability and are subject to tax on only their business earnings derived in Turkey.
Corporations have full liability to Turkish taxation if their legal headquarters (as indicated in the taxpayer's Articles of Incorporation) or their business centers are in Turkey. Business center means the place where business transactions are actually concentrated or carried out. All companies established with foreign capital under the Commercial Code of Turkey have full liability.
Foreign companies investing in Turkey usually have corporate status abroad and their legal and business headquarters are outside of Turkey. For this reason, foreign companies or foreign members of joint venture companies are usually regarded as having limited liability under the Corporate Income Tax Law and are subject to tax only on their business income and earnings derived in Turkey.
Under Turkish Tax Legislation, for the income of a non- resident company to be taxable, the company must have a place of business or a permanent representative in Turkey and the earnings must have been realized either at this place of business or through this representative. Even if these conditions are fulfilled, if a company’s business headquarters are not in Turkey and it sells in other countries—but not in Turkey—the goods purchased in Turkey for export purposes, the company will not be taxed on the earnings derived from this business. On the other hand, all the commercial earnings derived in Turkey (in a place of business or through permanent representatives) by foreign legal entities having a place of business or branch offices or permanent representatives in Turkey shall be taxable.
Taxable corporate income is determined by taking into consideration all business-related expenses, income, tax losses and deductions in accordance with the provisions of Articles 8, 9, 10 and 11 of the new Corporate Income Tax Law.
Effective from 1 January 2006, the Turkish corporate income tax rate is reduced from 30% to 20%. Please refer to Table 8.05 for a computation of the tax burden of a resident corporate income taxpayer assuming that profit is distributed.
With effect from 23 July 2006, the dividend withholding tax rate is increased from 10% to 15% on distributions of profit to non-resident shareholders and amounts repatriated by a branch to its head office. Dividends distributed by a resident Turkish entity to another resident Turkish entity continue to be exempt from dividend withholding tax.
| TL | |
| Corporate Income | 100 |
| Corporate Income Tax (20%) | -20 |
| Net Income After Corporate Income Tax | 80 |
| Dividend Withholding Tax (15%) | -12 |
| Total Tax Burden | 32 |
| Net Profit After Taxes | 68 |
Tax losses may be carried forward for five years provided that the losses for each year are shown separately in the corporate income tax returns. Tax losses may not be carried back. If a company incurs losses as a result of which share capital is impaired or the company becomes insolvent (“technical bankruptcy”), shareholders are to take the necessary actions to repair the equity in accordance with Article 324 of the Turkish Commercial Code.
a) Exemption of Participation Gains Derived from Turkish (Resident) Participations Dividends received by a resident corporate income taxpayer or a Turkish branch of a foreign entity from a Turkish (resident) company are exempt from Turkish corporate income tax.
b) Exemption of Participation Gains Derived from Foreign (Non-Resident) Participations Dividends received from foreign participations will be exempt from corporate income tax in Turkey provided that all of the following conditions are satisfied:
Under new rules, with effect from 1 January 2006, capital gains derived from the sale of foreign participations that have been held for at least two years (730 days) by an international holding company (in the form of a corporation) resident in Turkey are exempt from corporate income tax. To qualify as an international holding company, the following requirements must be met:
Based on the relevant rules of the new Corporate Income Tax Law effective from 21 June 2006, a corporate income tax exemption is granted for 75% of the capital gains derived from the sale of participation shares and immovable property that have been held for at least two years provided that the gains from such transactions are kept in a special reserve account under “Shareholders’ Equity” for five years and that the sales proceeds are collected by the end of the second calendar year following the year of sale. Liquidation of the company or distribution of the reserves within five years is a violation to apply the exemption. Those corporate income taxpayers that are commercially engaged in continuous trading of participation shares and immovable property cannot benefit from this capital gain exemption.
The CFC rules, which apply from 1 January 2006, will be triggered where a Turkish resident company controls, directly or indirectly, at least 50% of the share capital, dividends or voting power of a foreign entity and the following conditions are satisfied;
If the above requirements are met, the profits of the CFC will be included in the profits of the Turkish company in proportion to the Turkish company’s share in the capital of the CFC, regardless of whether such profits are distributed, and will be taxed currently at the Turkish corporate income tax rate of 20%.
The new Corporate Income Tax Law has introduced transfer pricing rules that are in the line with the OECD Transfer Pricing Guidelines. The transfer pricing rules have been effective from 1 January 2007.
According to the transfer pricing rules, transactions (i.e. the sale or purchase of goods and services) between related parties (both resident and non-resident) must be in line with the arm’s length principle. Otherwise, the related profits will be treated as having been wholly or partially distributed in a disguised way via transfer pricing and subject to both corporate income tax and dividend withholding tax depending on the tax status of the recipient of the disguised profit. The rules provide for three traditional transfer pricing methods listed in the OECD Transfer Pricing Guidelines:
1) the Comparable Uncontrolled Price (CUP) method,
2) the Cost-plus Method and
3) the Resale Price Method. When these are not appropriate, taxpayers may use other methods as necessary.
Other acceptable methods include profit-based methods in the OECD Transfer Pricing Guidelines (e.g., the profit-split method and the transactional net margin method) as well as unspecified methods which prove to be the best method based on the particular circumstances of the taxpayer.
Taxpayers also have the option of concluding an advance pricing agreement (APA) with the Turkish Ministry of Finance to determine the transfer pricing method. The selected method would apply for a maximum period of three years, provided that the conditions effective at the time the APA is agreed remain unchanged. APAs may be unilateral, bilateral or multilateral.
Taxpayers are required to prepare/maintain documentation to support transfer prices determined and used.
Declaration of Related Party Transactions: All corporate income taxpayers are required to complete a “Form Relating to Transfer Pricing, Controlled Foreign Companies and Thin Capitalization” and submit it to their tax office together with their corporate income tax returns.
Annual Documentation Report Requirement: Corporate income taxpayers registered with the Large Taxpayers Tax Office (LTTO) must prepare annual transfer pricing documentation report regarding their both cross-border and domestic related party transactions. Those corporate income taxpayers not registered with LTTO must also prepare annual documentation report regarding only their cross-border related party transactions. All documentation must be prepared by the time corporate income tax returns are filed. Taxpayers must retain the documentation reports and submit it to the Tax Authorities upon any official request.
As long as a domestic related party transaction between two Turkish corporate entities does not cause a loss of revenue to the Turkish Treasury, it will be deemed to be at arm’s length for tax purposes.
Costs incurred by headquarters located abroad may be allocated to Turkish branches and deducted through distribution keys to be determined in accordance with the arm’s length principle, provided that the costs incurred abroad are directly related to the commercial activities of the Turkish branch.
In order to ensure tax deductibility, the following conditions must be satisfied:
- Benefit Test: The services underlying cost contribution arrangements or cost sharing agreements must be performed in reality. The payment must be related to the services which contribute to generation and securing of revenues in Turkey.
- The group company in Turkey receiving the service must really need the service concerned.
- The portion of the cost to be allocated with respect to the services provided for the benefit of the Turkish recipient must be in compliance with the arm’s length principle. The allocation/distribution key of the costs shared must be at arm’s length.
- The relevant supporting documentation must be maintained.
Any cash/accrued payments to parties including the business offices of Turkish Resident Companies located in those jurisdictions engaged in “harmful tax competition” (usually tax haven countries), to be specified by the Council of Ministers, will be subject to a 30% withholding tax regardless of the type of income derived by the party resident in a country engaged in harmful tax competition.
The Council of Ministers is expected to announce these tax heaven countries by taking into consideration the taxation system of the country where the earnings are derived as well as the capacity to exchange information. The Council of Ministers has the authority to reduce the WHT rate to 0% for particularly specified transactions which are in line with the arms-length principle. If the transactions involve the import of a commodity, acquisition of participation shares or dividend payments, the withholding tax will not be imposed provided that the pricing is considered to be at arm’s length.
Under the new rules, that portion of the loans granted by shareholders or related parties which exceeds three times the equity at any time within an accounting period is deemed to be thin capital. In case the loan is obtained from a related bank or a related financial institution, then half of such loans will be taken into consideration in determination of thin capital amount. Accordingly, loans from related party banks or financial institutions will not trigger the rules unless the amount of the borrowing exceeds six times the equity.
For thin capitalization purposes,” related parties”are defined as shareholders and persons related to shareholders that own, directly or indirectly 10% or more of the shares, the voting rights or the right to receive dividends of the company. The equity amount to be determined in accordance with the Tax Procedures Code at the beginning of the accounting period shall be the equity to be considered in determination of thin capitalization.
Interest, foreign exchange losses and any similar expenses incurred on the exceeding portion of the related party loan are considered as nondeductible for corporate income tax purposes and thus subject to corporate income tax. In addition, the interest and any relevant expenses corresponding to that portion of the loan exceeding three times the equity will be deemed as “hidden profit distribution” or a “remittance of profits” (in the case of non-residents operating in Turkey through a permanent establishment) as of the last day of the accounting period in which the conditions for application of thin capitalization rules are satisfied. Such hidden profit distributions will be made subject to dividend withholding tax at 15%, depending on the taxation status of the recipient of the hidden profit. Double Tax Treaties may reduce the rate of dividend withholding tax down to 10% or even 5% depending on the country of residence of the recipient of the dividends.
The following loans are not within the scope of Turkish thin capitalization rules:
- Loans from third parties under a non-cash guarantee provided by shareholders or related parties,
- Loans extended to shareholders or related parties under the same conditions as they are obtained from third-party banks, financial institutions or capital market institutions (i.e. “pass through loans”)
- Loans received by financial leasing and factoring companies.
Comparison of the provisions of thin capitalization under the new rules and the previous regime is provided below:
| Explanation |
Previous Thin Capitalization Rules (Abolished) | New Thin Capitalization Rules (in effect) |
| Relevant Legislation |
Article 16 of the Abolished CT Law (Law No. 5422) |
Article 12 of New CT Law (Law No. 5520) |
| Definition of “Related Party” | Not clear, no objective criteria: “related either directly or indirectly” |
At least 10% of shares or voting power must be held either directly or indirectly. |
| Definition of Equity for the purpose of determination of debt /equity ratio |
No definition | Defined as: Equity amount to be determined in accordance with the Tax Procedures Code at the beginning of accounting period |
| Debt / Equity Ratio | No specific ratio indicated. | There is a subjective description: “significantly higher as compared to those of similar companies” 3:1 (the portion exceeding three times the equity) |
| Period of using related
party loan |
No objective definition:
“continuous use” (9 months/1 year deemed to be continuous based on Court Case decisions – subjective) |
No specific period is
indicated. That part of the
related party loan
exceeding 3 times the equity at any time within an accounting period is deemed as thin capital. |
| Differentiation as to the status of the Lender (independent bank, related bank, nonfinancial entity) | No clear differentiation
exists in the abolished CT Law |
There are explanations in this respect in the New CT Law. If the lender is a related bank, debt/equity ratio to be applied is 6:1 |
Branches of foreign companies are considered to have limited tax liability based on the income derived in Turkey. Business income derived by a Turkish branch of a foreign entity is subject to corporate income tax at 20% effective from 1 January 2006 based on the new Corporate Income Tax Law.
Additionally, branch profits after deduction of 20% corporate income tax will be subject to 15% withholding tax in case profit is transferred. See Table 8.14 for a sample computation of tax burden on a branch.
Income items other than business income derived by non–resident corporate entities are subject to withholding tax at the following rates:
| TL | |
| Branch Profits Before Tax | 100.00 |
| Corporate Income Tax (20%) | 20.00 |
| Profit after Corporate Income Tax (Withholding Tax Base) | 80.00 |
| Withholding Tax (15% * 80) | 12.00 |
| Total Tax Burden | 32.00 |
Liquidation involves the conversion of assets into cash, settlement of liabilities and distribution of the surplus to the shareholders in proportion to their equity. Capital gains (asset realization value less book value) are subject to corporate income tax. Net liquidation proceeds (after tax) can be repatriated.
Liquidation is started by a court decision at the company's request or at the request of creditors and a fairly lengthy process lasting eighteen to twenty-four months.
The accounting period for tax purposes (tax year) is normally the calendar year. However, companies may have tax years other than the calendar year, appropriate to their business and subject to the prior approval of the Ministry of Finance.
Returns, Assessments and Payments
Corporate income tax return is due to be filed by the 25th day of the fourth month after the end of the accounting year (i.e. in case of the calendar year, the return is due by April 25th of the following year). The corporate income tax is payable by the end of the month in which tax return is due to be filed (i.e. by the end of April for the companies using calendar year as fiscal year). The balance sheet and income statement for the relevant period must also be filed together with the corporate income tax return.
Delays in the payment of taxes are made subject to a monthly delay charge at the rate of 2.5% (effective from 21 April 2006). The Council of Ministers is authorized to amend the delay charge rate, at any time.
If a taxpayer fails to file a return, the tax authorities may do ex-officio assessment. In case of fraudulent transactions (specified in Article 359 of Turkish Tax Procedures Code) there may be imprisonment penalties charged from one year to three or five years in addition to the monetary tax penalties.
Advance corporate income tax payments must be made based on 20% of quarterly profits, as shown in the corporate income taxpayer’s quarterly income statement.
The advance corporate income tax must be declared until the 14th of the second month following the quarterly period (i.e. within 44 days) and paid until the 17th day of the second month following the quarterly period. If the advance corporate income tax payments made during a year exceed the actual corporate income tax amount calculated on the annual corporate income tax return, the excess may be credited or paid back to corporate income taxpayer upon written application to tax office.
Role of Accounting Professionals and Tax Auditors
Until June 1989, there were no regulations in Turkey related to the accounting profession. The Law of Certified Public Accountancy And Sworn Certified Financial Consultancy (Law No. 3568) basically defines the profession and indicates the rights and responsibilities of accountants and tax auditors. Certain transactions and documentation require certification by sworn financial consultants (similar to certified public accountants in the US practice).
Inspections for tax purposes are carried out by government tax inspectors under the supervision of the Ministry of Finance and the district tax offices (the latter deal with the auditing of small companies). Controls are strict and tax inspectors from the Ministry of Finance make spot checks of tax returns. Nowadays, tax inspections are mainly focused on related party transactions and transfer pricing applications as a result of the introduction of transfer pricing rules with effect from 1 January 2007.
The period of statute of limitations for tax inspections is five years.