BEGINNER’s GUIDE FOR FOREIGN INVESTORS
Turkey has a complex tax system implemented with numerous separate laws, regulations, communiques and subsequent amendments. Accordingly, the main legal texts regulating the Turkish Tax System are the Tax Procedure Law No. 213 dated January 4, 1961 (Tax Procedure Law), Corporate Tax Law No. 5520 dated June 13, 2006 (Corporate Tax Law), Value Added Tax Law No. 3065 and dated October 25 1984 (Value Added Tax Law), Stamp Tax Law No. 488 and dated July 1, 1964 (Stamp Tax Law) and the Income Tax Law No. 193 dated December 31, 1960 (Income Tax Law/ITL).
B. Corporate Tax & Other Taxes Applicable to Businesses in Turkey
i. Income Tax
In this respect the Income Tax Law No. 193 (ITL), Article 2 sets forth that commercial earnings, income from agriculture, wages, self-employment earnings, income from immovable property and movable capitals, other incomes and revenues are determining factors for the taxation regime in Turkey.
It should further be noted that for individuals, residence and ownership of property and citizenship in Turkey are determining factors for the applicable taxes in Turkey. The liability for taxation of an individual in Turkey mostly depends on their income as an employee or as a professional worker. Residency is the main qualification required to determine tax liability for individuals. According to the ITL, individuals having their permanent residence in Turkey, or who stay in Turkey continuously for more than six months in one calendar year, are designated as fully liable or resident taxpayers.
The income tax calculations for 2022 are as follows:
|Income Amount||Tax Rate|
|Up to 32.000 TL||%15|
|Above 32.000 TL and up to 70.000 TL||%20 (4.800 TL tax for the initial 32.000 TL)|
|Above 70.000 TL and up to 170.000 TL||%27 (12.400 TL tax for the initial 70.000 TL)|
|Above 170.000 TL and up to 880.000 TL||%35 (39.400 TL tax for the initial 170.000 TL)|
|Above 880.000 TL||%40 (287.900 TL tax for the initial 880.000 TL)|
ii. Corporate Tax
It should also be noted that Income Tax applies both to individuals such as employees, and corporations separately and the tax rate varies for each taxpayer depending on their nature and the aggregated income. Accordingly, the Corporate Tax is charged on corporate income generated by commercial entities. This is the most significant and characteristic tax that is applicable to corporate transactions, since this Corporate Tax is only levied from corporations and not from real persons. Turkish corporate tax rate is 23% for 2022, although it is expected to be lowered to 20% in 2023. Corporations in Turkey may be grouped as either resident or non-resident taxpayers.
If both the legal and the business headquarters of a company are located outside Turkey, the company will be regarded as a non-resident entity. If either of them is located within Turkey, the company is regarded as a resident entity. Resident entities are subject to tax on their worldwide income, whereas non-resident entities are taxed solely on the income derived from activities in Turkey.
|Example 1 – Corporate Tax Your company (Company A) issues invoices for a total of 1.000.000 TL net (after tax) within the year 2022, and receives invoices totaling to 500.000 TL for purchased products and services. Let’s also assume that Company A had further organizational expenses within the same year totaling to 100.000 TL. This means that the total expenses made by Company A will total to 600.000 TL, and Company A’s profit will be 400.000 TL for 2022. This means that the 400.000 TL profit will be subjected to 23% CIT (92.000 TL), which will be paid by March 2023.|
|Example 2 – Quarterly CIT (Temporary Tax) Company A issues invoices for a total of 1.000.000 TL net (after tax) for the first quarter of 2022 (January, February and March). Company A’s organizational expenses for the same period is 100.000 TL. Scenario 1: Company A does not purchase any products/services, so has not received any invoices from third parties during the first quarter. This means Company A’s quarterly profit is 900.000 TL (1.000.000 – 100.000), This quarterly profit will be subject to 23% quarterly CIT, so a total of 207.000TL will need to be paid as temporary tax by May 2022. Scenario 2: Company A does not issue any invoices for the 1st quarter of 2022, but makes expenses totaling to 500.000 TL. For the 2nd quarter of 2022, Company A makes no expenses but issues invoices totaling to 600.000 TL. Since Company A had no income during the 1st quarter, it is not possible to deduct the 500.000 TL expenses made in the same period, so those expenses will transfer over to the 2nd quarter. In the 2nd quarter, although Company A did not make any expenses and received a profit of 600.000 TL, since there is a transferred expense of 500.000 TL from the previous quarter, that transferred expense will be deducted and only 100.000 TL will be subject to 23% quarterly CIT at the 2nd quarter. .|
iii. Value Added Tax
VAT is the main tax applicable to almost all transactions, including any invoice your company will issue for services. There are different tiers of VAT applicable depending on the nature of the products and services. However, the main VAT rate is 18%. There are also rates of 8% and 1% that may be applicable depending on the nature of the transaction. VAT declarations are made at the end of every month, through the issued and received invoices, and VAT corresponding to each month needs to be paid by the end of the following month.
|Example 3 – VAT Company A wants to issue an invoice of net 10.000 TL fee with 18% VAT. In this case, the VAT will be 1.800 TL whereas the actual invoice will need to be issued for a total of 11.800 TL. This 11.800 TL will be collected from the customer in full, and the VAT amount will be declared to the tax office at the end of the month. Since Company A already collected the VAT amount, Company A will be required to pay this VAT to the tax office before the end of the following month.|
|Example 4 – Deducting VAT Taking the above example as our baseline, assume Company A issues a total invoice of 11.800 TL with 1.800 TL noted as VAT. In this case, Company A will be required to pay 1.800 TL to the tax office. However, this VAT can be deducted if Company A also receives invoices from third parties for any service or product purchased. Scenario 1: Company A issues 11.800 TL invoice to Company X in May, and purchase a product worth 5.000 TL + VAT again in May (the VAT will be 900) with invoice from Company Y. Since both the issued and the received invoices are within the same month, the 900 TL VAT paid by Company A to Company Y will be deducted from the 1.800 TL VAT charged by Company A from Company X, making the total VAT payable by Company A 900 TL. Scenario 2: Company A does not issue any invoices in May, but purchases a product worth 5.000 TL + VAT in May (the VAT will be 900) with invoice from Company Y. Since there are no invoices issued by Company A in May, there is no declared VAT, and although Company A received an invoice with 900 TL VAT, there is no declared VAT to deduct this 900 TL from. Since excess VATs cannot be claimed from tax offices in cash, this excess VAT will transfer to the following month (or until Company A issues an invoice). Now let’s assume Company A issues an invoice of 5.000 TL +VAT in June to Company Z in June, for 11.800 TL (1.800 TL VAT included). Under normal circumstances, Company A is required to pay a total of 1.800 TL as VAT for June due this invoice. However, since there is an excess VAT of 900 TL transferred from May, this 900 TL will be deducted and Company A will only be required to pay the remaining 900 TL of VAT|
iv. Withholding Tax
Withholding tax is a special type of tax, which is unlike the others mentioned in this brief. It is not applicable to all transactions, so it is an exceptional tax. It is basically a pre-paid income tax or corporate income tax, which is generally noted directly at the issue invoices (for example, invoices issued by lawyers). The rate is 20%.
The legal framework concerning tax (and especially corporate tax) in Turkey is highly complex. There are multiple legislations covering different taxes that are applicable, as well as hundreds of secondary regulations (regulations, communiques, internal tax memos, etc.) that govern the rules and procedures applicable to tax deductions, declarations and penalties. In this respect, it is important to note that this article is not meant to be a complete guide to all matters relating to the tax in Turkey, but is rather intended to be a brief introduction to corporate tax for foreigners looking into investing in Turkey.