Tax Guide for Foreign Investors in Turkey

Tax System in Turkey for Foreign Investors: A Comprehensive Guide

Turkey continues to be an attractive investment destination for international investors thanks to its strategic location, young and dynamic population and growing economy. However, a thorough understanding of the Turkish tax system is essential for building a successful investment strategy. This guide provides a comprehensive overview of tax obligations, exemptions and incentives for foreign investors who are planning or already have investments in Turkey.

Corporate Income Tax

Companies operating in Turkey are subject to corporate income tax on their earnings.

Tax Rate

The corporate income tax rate is currently 25%. This rate applies to all commercial income (both domestic and foreign-sourced) earned by the company. However, reduced rates may be available for certain sectors and regions.

Full Tax Liability vs. Limited Tax Liability

• Full tax liability (resident): Companies with their legal headquarters or place of effective management in Turkey are subject to full tax liability and pay tax on their worldwide income in Turkey.
• Limited tax liability (non-resident): Foreign companies without a legal headquarters or place of effective management in Turkey but earning income from Turkish sources are taxed only on their Turkey-sourced income.

Permanent Establishment

One of the most critical concepts determining whether a foreign company will be subject to tax in Turkey is the "permanent establishment" concept. If a company has a fixed place of business, branch, office or factory in Turkey, this may trigger tax liability. Our investment advisory services include detailed assessments of this matter.

Value Added Tax (VAT)

Supplies of goods and services in Turkey are subject to Value Added Tax (VAT). VAT rates are applied across three categories:

• Standard rate: 20% - Applied to most goods and services
• Reduced rate: 10% - Applied to basic food items, accommodation services and certain other goods and services
• Low rate: 1% - Applied to certain basic agricultural products, newspapers and magazines

VAT Exemptions and Immunities

Key VAT exemptions that are particularly relevant for foreign investors include:

• Export exemption: Exports from Turkey are exempt from VAT.
• Investment incentive certificate imports: VAT exemption may be granted on machinery and equipment imports for holders of incentive certificates.
• Free zone activities: Manufacturing and service activities conducted in free zones may benefit from certain VAT advantages.
• Diplomatic exemption: VAT exemption applies to foreign diplomatic missions and international organizations.

Withholding Tax

An important tax component for foreign investors, withholding tax is applied on certain payments made from Turkey to abroad:

• Dividend distributions: A 10% withholding rate applies. This rate can be reduced through double taxation treaties.
• Interest payments: A 10% withholding rate applies. May vary under applicable treaties.
• Royalty and license payments: A 20% withholding rate applies.
• Service fees: Withholding may apply to services performed in or benefiting from Turkey.

Double Taxation Treaties

Turkey has signed double taxation avoidance agreements with more than 80 countries. These treaties offer significant advantages aimed at preventing investors from being taxed on the same income in both Turkey and their home country.

Advantages Provided by Treaties

• Reduced withholding rates: Withholding rates on dividends, interest and royalty payments can be reduced through treaty provisions.
• Tax credit: Taxes paid in Turkey can be credited against the investor's tax liability in their home country.
• Permanent establishment definition: Treaties clearly define the permanent establishment concept, eliminating ambiguities.

Key Treaty Partners

Turkey's major double taxation treaty partners include Germany, the United Kingdom, France, the United States, Russia, China, the United Arab Emirates, Saudi Arabia, Qatar and Japan. Since each treaty contains different rates and conditions, a detailed review of the relevant agreement is essential before making investment decisions.

Investment Incentives

Turkey offers various incentive mechanisms to all investors, including foreign investors. The incentive system varies based on the investment's size, sector and region.

General Incentive Schemes

• VAT exemption
• Customs duty exemption
• Social security premium support for employer contributions (in certain regions)

Regional Incentive Schemes

Turkey is divided into 6 regions, with different incentive rates applied based on the level of economic development:

• Tax reduction: Corporate tax reductions based on investment amount
• Social security premium support: Employer contribution support for 2-12 years
• Interest support: Interest rate subsidies on loans utilized
• Land allocation: Allocation of Treasury-owned land
• Income tax withholding support: Additional advantage for Region 6 investments

Strategic Investment Incentives

Additional advantages are provided under the strategic investment incentive certificate for the production of goods with high import dependency. Benefits include up to 50% tax reduction, VAT refunds and customs duty exemptions.

Transfer Pricing

Foreign investors must comply with transfer pricing rules governing transactions between their Turkish companies and related companies abroad.

• Transactions between related parties must be conducted in accordance with the arm's length principle.
• Annual transfer pricing reports must be prepared.
• Country-by-country reporting obligations apply for related-party transactions above certain thresholds.
• Advance pricing agreements can be concluded to obtain prior approval from the tax administration.

Tax Residency Rules

For individuals, tax residency in Turkey arises in the following circumstances:

• Residing in Turkey for more than 6 months in a calendar year
• Having a domicile in Turkey
• Having one's center of business or vital interests in Turkey

Tax residents are subject to taxation on their worldwide income in Turkey. Tie-breaker rules in double taxation treaties are used to resolve cases of dual residency.

Free Trade Zones

Free trade zones operating in Turkey offer particularly attractive tax advantages for foreign investors:

• Income from manufacturing activities is exempt from corporate income tax.
• Employee wages are exempt from income tax (for manufacturing activities).
• Goods and services are exempt from VAT.
• Profit transfers can be made freely without restriction.

Technology Development Zones (Technoparks)

Technology development zones provide significant tax advantages for software and R&D activities:

• Income from R&D and software activities conducted in these zones is exempt from corporate income tax.
• R&D personnel salaries are exempt from income tax.
• Delivery of software produced in these zones is exempt from VAT.

Tax Dispute Resolution

The Turkish tax system provides several mechanisms for resolving tax disputes:

1. Reconciliation: Administrative reconciliation between the tax authority and the taxpayer
2. Litigation: Right to file lawsuits in tax courts
3. Mutual agreement procedure: Resolution between competent authorities under double taxation treaties

Conclusion and Recommendations

Turkey's tax system contains both opportunities and obligations that require careful attention from foreign investors. A properly structured investment can maximize the benefits available through tax incentives and exemptions.

At Emir Law & Consulting, we offer comprehensive advisory services to foreign investors on tax planning, corporate structuring and accessing investment incentives. We recommend contacting our expert team before finalizing your investment decisions.