This country-specific Q&A provides an overview to tax laws and regulations that may occur in Turkey.
It will cover witholding tax, transfer pricing, the OECD model, GAAR, tax disputes and an overview of the jurisdictional regulatory authorities.
This Q&A is part of the global guide to Tax. For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/index.php/practice-areas/tax-3rd-edition/
How often is tax law amended and what are the processes for such amendments?
Tax law is quite frequently amended in Turkey. All basic tax laws have been amended several times throughout the years.
Turkish constitution requires that all taxes should be imposed, abolished or altered by parliamentary acts. Law making process is defined separately in the Constitution and Parliament’s Rules of Procedure. Briefly, a bill proposed either by the government or MPs is discussed first in the relevant commissions of the Parliament and then in the general assembly. Final bills passed by the Parliament are approved by the President, who has a very limited veto power, and published in the Official Gazette to become law.
What are the principal procedural obligations of a taxpayer, that is, the maintenance of records over what period and how regularly must it file a return or accounts?
Main rights and duties of the taxpayers are defined under Articles 153-257 of Tax Procedure Law. Basically most taxpayers have to;
- Notify the tax authority of certain activities or change of status, e.g. starting a business,
- Keep records of their transactions in designated legal books according to Turkish accounting principles and issue certain documents, e.g. invoice, after certain transactions.
- Preserve the legal books and documents for 5 years (10 years for non-tax purposes as per commercial law) and make them available whenever requested.
Furthermore, taxpayers have to file several tax returns throughout the year depending on the tax type and taxpayer’s status. Submission requirements of each type of tax are specified in their separate laws. Most returns are filed periodically (monthly, trimonthly or annually) but some of them are submitted within a certain time as from the taxable event.
Submission deadlines for major tax types are as follows:
- Corporate tax → by April 25 of the following year
- Advance corporate tax → by 14th of May, August, November and February
- Income tax withholding → by 23rd of the following month
- VAT → by 24th of each month
- Stamp tax → by 23rd of the following month
- Banking and insurance tax → by 15th of following month
Who are the key regulatory authorities? How easy is it to deal with them and how long does it take to resolve standard issues?
The top authority regarding tax matters is the Revenue Administration, which is responsible for the collection of tax and enforcement of tax law. The time it takes to reach a solution depends on the complexity of the tax matter. Standard issues can be resolved in a couple months with a non-compulsory administrative solution rather than with a lawsuit. More complex issues may take years to resolve.
Are tax disputes capable of adjudication by a court, tribunal or body independent of the tax authority, and how long should a taxpayer expect such proceedings to take?
The taxpayers have the right to file a lawsuit against the tax assessments and penalties or other actionable administrative acts of the tax authority within 30 days as from the notification date. According to case law, taxpayers can also pay a tax under protest and file a lawsuit for the refund within the same time.
Waiting periods vary according to the caseload of the tax courts but whole litigation process can usually take up to 4 years (1 year before tax court and further 3 years at the appeal stage) as from filing of the lawsuit.
There are independent tax courts for tax disputes resolutions, the tax courts are independent from Ministry of Finance and other related tax execution authorities.
On the other hand, some alternative dispute resolution methods are also available to taxpayers. Reconciliation ‘after assessment’ is the most significant one. Taxpayers may apply for reconciliation prior to filing a lawsuit within the same time. It is hard to estimate a waiting time as the workload of reconciliation commissions vary, however, 3 months to 1 year should be expected. Applying for reconciliation prevents the deadline for filing the lawsuit being expired, which means if the reconciliation meeting ends without settlement, taxpayer can still file a lawsuit within the remaining days which cannot be shorter than 15 days.
There are other administrative mechanisms called correction request, complaint and reconciliation ‘before assessment’. In addition, all double taxation treaties that Turkey has signed have a mutual agreement procedure clause.
Are there set dates for payment of tax, provisionally or in arrears, and what happens with amounts of tax in dispute with the regulatory authority?
Self-assessed taxes are paid within certain times specified in the legislation of each tax type. Payment deadlines for major tax types are as follows:
- Corporate tax → by end of April
- Advance corporate tax → by 17th of May, August, November and February
- Income tax withholding → by 26th of the following month
- VAT → by 26th of each month
- Stamp tax → by 26rd of the following month
- Banking and insurance tax → by 15th of following month (same with the declaration date)
Taxes assessed by the tax authority are paid within a month. However, filing a lawsuit against the assessment automatically ceases the collection of taxes. If the tax court does not cancel the assessment, taxes become collectible, yet higher court may grant a stay of execution decision upon the request of the taxpayer which will cease the collection of taxes again until the final judgment.
Is taxpayer data recognised as highly confidential and adequately safeguarded against disclosure to third parties, including other parts of the Government?
Is it a signatory (or does it propose to become a signatory) to the Common Reporting Standard? And/or does it maintain (or intend to maintain) a public Register of beneficial ownership?
According to Article 5 of Tax Procedure Law, tax officers, court staff, members of the commissions formed under tax laws and expert witnesses cannot disclose taxpayers’ information to third parties. This restriction remains even after they leave their posts.
Article 362 of the same law makes it a criminal offense to violate this provision and requires incarceration of the offender from 1 year to 3 years with an additional fine at the amount of 5.000 days according to day-fine system.
There are some exceptions. For instance, taxpayers’ data may be shared with other public authorities if their own legislation gives them the power to request this data directly from the taxpayer and the data is relevant and necessary to perform the public service. Furthermore, taxpayers’ data may be shared with officials conducting a judicial or administrative investigation. Persons who have obtained taxpayers’ data through this exceptions become liable to protect it in the same way with the persons enumerated in Article 5.
Turkey, as a member of the G20 and the OECD, has officially stated that it will comply with the OECD’s Common Reporting Standards (CRS). In addition, the tax authorities shared with Turkish banks a draft version of the CRS Secondary Legislation, which was published and became effective on 30 June 2017, to request their comments. Accordingly, the first reporting will be made by 30 September 2018.
Decree of the Council of Ministers No: 2018/11790, regarding the entry into force of the Mutual Administrative Aid Convention, was published in Official Gazette No: 30460 dated 26 June 2018 and became effective 1 July 2018.
The agreement was published in the Official Gazette and entered into force on 20 May 2017.
What are the tests for residence of the main business structures (including transparent entities)?
A statutory domicile or place of management of a company (such as a capital company, cooperative, public economic enterprise, commercial enterprise, etc.) which is established in Turkey is considered to be resident in Turkey. Therefore, a registered head office which is established according to law is important for determining residency in Turkey.
Non-resident companies are subject to limited tax liability and are only liable to pay tax on their income derived in Turkey.
In Turkey, joint ventures, unlimited companies and ordinary limited partnerships are not considered to be taxable units under the Income Tax Law. Shares that shareholders of an unlimited company and unlimited partners in a limited partnership receive from the partnership are characterized as commercial earnings under Article 37 of the Income Tax Law. In the case of ordinary limited partnerships, the shares that limited partners receive from the partnership are earnings on movable assets. As per the contracts that we are party to, if these partnerships are subject to tax in the same manner as in other contracting states the profits derived by these partnerships fall within the scope of Double Taxation Treaty if these partnerships are residents of a contracting state.
Have you found the policing of cross border transactions within an international group to be a target of the tax authorities’ attention and in what ways?
In Turkey, tax authorities tend to audit the activities of international group companies in Turkey. Most of the audits focus on intra-group payments.
On the other hand, PE audits started to take a brand new dimension in Turkey and many of worldwide companies are one by one taken under tax audits based on permanent establishment claims in line with a new approach of tax authority.
Is there a CFC or Thin Cap regime? Is there a transfer pricing regime and is it possible to obtain an advance pricing agreement?
CFCs are covered in Article 7 of Corporate Income Tax Law No. 5520 (the CITL), and according to this law if the foreign company is controlled directly or indirectly by a Turkish resident company which has at least 50% the share capital, dividends or voting power, the foreign company is defined to be a CFC provided that the below conditions are fulfilled:
- 25% or more of the gross income of the foreign company is composed of passive income,
- the foreign company is subject to an effective income tax rate lower than 10% for its commercial profit in its home country, and
- the annual total gross revenue of the foreign company in the related period in foreign currency exceeds the equivalent of TRY 100,000.
If these conditions are fulfilled, the profits of the CFC will be included in the corporate tax base of the controlling resident company, and it will be subject to taxation in Turkey without consideration of whether or not the profits are distributed.
The thin capitalization issue is covered in Article 12 of the CITL. According to this article, if the borrowings from shareholders or from persons related to shareholders exceeds three times the shareholders equity of the borrower company at any time within the relevant year, the excess portion of the borrowing will be considered to be thin capital. “Related parties” is defined as shareholders and persons who are related to the shareholders that own 10% or more of the shares, voting rights or rights to receive dividends of the company. The shareholders equity of the borrower company is defined as the total amount of the shareholders equity of the corporation at the beginning of the fiscal year, or the difference between the assets and liabilities of the company. If the company has negative shareholders equity at the beginning of the year, then any borrowings from related parties will be considered to be thin capital. If thin capitalization exists, the interest paid or accrued, foreign exchange losses and other similar expenses calculated for the loans that are considered to be thin capital are treated as non-deductible for CIT purposes. Moreover, the interest paid or accrued and similar payments on thin capital will be treated at the end of the relevant fiscal year as dividends and will be subject to withholding tax.
Specific transfer pricing rules are valid in Turkey as of 1 January 2007 under Article 13 of the CITL, entitled “Disguised Profit Distribution through Transfer Pricing”.
The regulations in Article 13 follow the arm’s-length principle established by the Organisation for Economic Co-operation and Development Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD Guidelines), and are applicable to all financial, economic and commercial transactions and employment relations between related parties. Details on the application of Article 13 are provided in a communiqué regarding disguised profit distribution through transfer pricing.
Turkish transfer pricing (TP) legislation is part of the CITL. The arm’s-length principle, which is defined in line with OECD Guidelines and Article 9 of the OECD Model Tax Convention, is described in Article 13 of the CITL, along with a detailed definition of related parties and the introduction of methods to be applied to determine arm’s-length prices. According to the CITL, related parties must set transfer prices for the purchase and sale of goods and services equal to those they would have agreed to had they been unrelated parties. A comprehensive definition of what constitutes a related party is found in Article 13 of the CITL. The definition of related party in Turkish transfer pricing regulations is very broad, and it includes direct and indirect involvement in management or control, in addition to the existence of a shareholder/ownership relationship. In addition to transactions with foreign group companies, the scope of the law also includes transactions with entities that are based in tax havens or jurisdictions those are considered harmful tax regimes by the Turkish government.
Principles of transfer pricing documentation are covered in a TP communiqué. The communiqué introduced two different types of documentation liability for taxpayers. Accordingly, taxpayers need to fill out the form in the appendix of the corporate income tax return with information on the goods and services purchased and sales transactions they perform with their related parties in each accounting period. Furthermore, taxpayers registered with the Directorate of Major Taxpayers Tax Office are obliged to prepare an annual transfer pricing report including the information and documents stipulated by the communiqué and in the format defined in the same communiqué. These reports are completed to reflect the domestic and overseas transactions carried out with related parties in each accounting period and overseas transactions carried out in a given accounting period with other corporate income tax payers and their related parties. They need to be completed by the submission date of the corporate income tax return and to be submitted upon demand to the authority or officials authorized to carry out tax inspections after the end of these given periods.
The legislation requires documentation as part of the transfer pricing rules describing how Turkish taxpayers should keep documented evidence within the company in case of a request from the tax authorities. The documentation must show how the arm’s length price was determined and the methodology selected and applied using any fiscal records, calculations and charts available to the taxpayer.
An advance pricing agreement is a method used to determine the prices for purchases or sales of goods or services between related parties, and may be agreed upon with the Ministry of Finance upon a taxpayer request. This approved method will be fixed for a maximum period of three years within the terms and conditions of the agreement. If the administration finds the agreement interests more than one country, and if there are already APAs with another/other country/countries, the administration may consider a bilateral or multilateral agreement. In practice, the APA process changes according to the complexity and type (unilateral, bilateral or multilateral) of agreement, and the process cannot be completed in fewer than 18 to 24 months, on average.
Is there a general anti-avoidance rule (GAAR) and, if so, in your experience, how would you describe its application by the tax authority? Eg is the enforcement of the GAAR commonly litigated, is it raised by tax authorities in negotiations only etc?
In Turkey, the substance over form principle, as described in Article 3/B of Tax Procedure Law, serves as a GAAR. According to this principle, taxation should rely on “true nature” of taxable events. This principle allows the tax authority to characterize the transactions differently than the parties and to assess taxes independent of legal form and denomination of transactions. On the other hand, this rule is also used by taxpayers where additional taxes are assessed by the tax authority with a strict literal interpretation of laws or documents but economic substance of the transaction requires to pay less tax. In any case, the principle is often referred in Council of State precedent.
Have any of the OECD BEPs recommendations been implemented or are any planned to be implemented and if so, which ones?
Turkey is mainly concerned with the adoption of a digital economy, base erosion through the use of interest deductions, treaty shopping and transfer pricing. However, to date, Turkey has taken very limited action on the implementation of BEPS actions. In 2016 the Turkish parliament empowered the Council of Ministers to adopt the country-by-country reporting procedures only for transfer pricing. The Council of Ministers prepared a draft communiqué, but the draft communiqué has not entered into force and studies on it continue. The draft communiqué is related to the BEPS action plans on transfer pricing. Draft Transfer Pricing Communiqué Serial No. 3 states that new additions must be applied to the comparability section of the effective transfer pricing communiqué. The purpose is to take into account local market qualities, the experienced work force, and group synergies in the benchmark analysis. This article aims to bring transfer pricing documentation in Turkey into conformity with the 13th BEPS action plan, and foresees reporting in three phases.
In your view, how has BEPS impacted on the government’s tax policies?
In parallel with international development, important issues such as CFC and TP are described in detail in a new corporate tax law. As a long-time member of the OECD, Turkey exhibits a positive attitude toward adopting the policy and comments of the OECD voluntarily. Therefore, we predict that BEPS certainly will affect the policies of the country. The government in Turkey intends to make new arrangements for tax incentives in order to make Turkey more attractive to foreign investors. However, the accumulation of international tax knowledge has progressed very slowly in Turkey, since it is a quite new topic of discussion. We believe the Turkish government will make more actions and speed up the process in order to overcome economic problems.
Does the tax system broadly follow the recognised OECD Model?
Does it have taxation of; a) business profits, b) employment income and pensions, c) VAT (or other indirect tax), d) savings income and royalties, e) income from land, f) capital gains, g) stamp and/or capital duties.
If so, what are the current rates and are they flat or graduated?
Turkey has long committed to complying with OECD principles, hence double taxation regulations in particular are mostly in line with the OECD model.
While it has not been officially ratified yet, Turkey also declared in June 2017 that it will implement the provisions of the OECD’s Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting.
a) Business profits:
Corporate profits are subject to a 20% corporate tax. However, a provisional clause increased the rate to 22% for FYs 18, 19 and 20.
b) Employment income and pensions:
Salaries are subject to progressive income tax at rates of from 15% to 35%.
c) VAT (and other indirect taxes):
The general VAT rate is currently 18%, while reduced rates of 1% and 8% apply to some goods and services.
The importation and domestic production of certain goods are also subject to special consumption tax (SCT) at various rates based on a tariff which is charged at a single stage. There are other customs taxes and levies under various names collected for imports. VAT is charged on top of SCT and other indirect taxes.
d) Savings income, royalties and capital gains:
As a rule, all types of dividends, savings account interest, capital gains and other types of income generated from securities are subject to income tax, but they are taxed in different ways and sometimes the applicable rate is set to zero. For instance, while domestic savings account interest is taxed only by withholding and is not declared individually, dividends in excess of TRY 34k shall be separately declared by fully registered taxpayers. Withholding rates for interest earnings on domestic savings accounts vary between 10% and 18%, and the rate for dividends is 15%. Capital gains on different types of securities are subject to withholding tax of between 0% and 15%.
Royalties are also subject to income tax but are treated as a different segment of income similar to income from immovable property. The applicable withholding rate is 20%.
e) Income from land:
Gains from letting property is subject to income tax. It is either declared by the landlord and taxed at progressive rates of between 15% and 35%, or is withheld by the tenant at the rate of 20%, depending on the nature of the tenancy.
f) Stamp and capital duties:
Certain types of transactions are subject to stamp tax. The most common rate is 0.948% of the value stated on the document.
Is the charge to business tax levied on, broadly, the revenue profits of a business as computed according to the principles of commercial accountancy?
As a rule, yes. Taxpayers must record all their taxable earnings and transactions in legal books according to certain accounting standards. Corporate tax is collected upon the filing of the tax return by the taxpayer himself. However, adjustments that may lead to additional taxation may be made by the tax authority during a tax audit.
Are different vehicles for carrying on business, such as companies, partnerships, trusts, etc, recognised as taxable entities? What entities are transparent for tax purposes and why are they used?
Income tax is charged on certain types of income whether the taxpayer is a natural person or an entity. Corporate tax is charged on the same items of income but only for certain types of entities, some of which are not considered legal persons under civil law: i) corporations, ii) cooperatives, iii) state-owned enterprises, iv) enterprises owned by associations or foundations, v) business partnerships. However, some unincorporated partnerships, e.g. attorney partnerships, are transparent for tax purposes, which means partners, are taxed individually as if they are ordinary partnerships, collective and ordinary limited partnerships.
Is liability to business taxation based upon a concepts of fiscal residence or registration? Is so what are the tests?
“Fully-liable taxpayers” resident in Turkey are obliged to pay taxes on income generated either in Turkey or abroad. “Limited-liability taxpayers” are obliged to pay taxes on income generated in Turkey. There are different tests to decide whether the taxpayer is resident in Turkey or whether the income is generated in Turkey. As for corporations, if the legal or actual headquarters of a company is in Turkey, then it is resident in Turkey. In addition, when a foreign nonregistered company generates income through a permanent establishment or agent in Turkey, this is taxable under income tax law. The terms of double taxation treaties are applied together with domestic law when deciding what constitutes a permanent establishment.
Are there any special taxation regimes, such as enterprise zones or favourable tax regimes for financial services or co-ordination centres, etc?
There are 18 free trade zones in Turkey where goods may be stored, manufactured, and re-exported under specific customs regulations and where the goods are not subject to customs taxes. Furthermore, as the free trade zones are considered to be outside of Turkey, earnings and many transactions are exempt from income tax and VAT.
There are also organized industrial zones and technology development zones, or “technoparks”, where enterprises are not fully exempt but enjoy certain incentives.
Are there any particular tax regimes applicable to intellectual property, such as patent box?
There is no patent box but there are many incentives for R&D activities spanning corporate tax, income tax, customs tax, stamp tax and VAT.
Is fiscal consolidation employed or a recognition of groups of corporates for tax purposes and are there any jurisdictional limitations on what can constitute a group for tax purposes? Is a group contribution system employed or how can losses be relieved across group companies otherwise?
Turkey does not allow fiscal consolidation of company groups. Each company within a corporate group must file tax returns and pay taxes individually.
Are there any withholding taxes?
Withholding is a well-established method of taxation in Turkey as it is easier for the tax authority to collect taxes by this method. In particular, income tax on wages, dividends and royalties paid to non-resident companies, as well as many other types of payments, is subject to withholding.
Are there any recognised environmental taxes payable by businesses?
Municipal administrations collect a tax called “environment and cleaning tax” from the occupants of buildings for the use of water. Some other taxes, particularly special consumption tax and motor vehicles tax, are indirectly used as a means to discourage the use of products that have more of an effect on pollution.
Is dividend income received from resident and/or non-resident companies exempt from tax? If not how is it taxed?
All dividends received from a resident subsidiary are exempt from corporate tax in order to prevent double taxation. However, dividends received from non-resident subsidiaries are exempt only under certain conditions: the subsidiary should be either a joint stock or a limited liability company, the parent company should hold at least 10% of the shares of the subsidiary for at least one year, the income in question should have been taxed in the foreign country at a rate of at least 15% (20% for finance and insurance companies) and the dividend should have been transferred to Turkey before filing the corporate tax return.
If you were advising an international group seeking to re-locate activities from the UK in anticipation of Brexit, what are the advantages and disadvantages offered?
There is an investment incentive system in Turkey which allows companies to benefit from various incentive elements. To benefit from this system, companies need to obtain Investment Incentive Certificate (IIC).
Investments are supported through 6 different incentive schemes and different incentive elements designed within the scope of the Investment Incentive System. Contributions provided to investors through incentive elements depend on the characteristics of the investment and applicable schemes.
These elements are mentioned below:
- VAT Exemption
- Customs Duty Exemption +RUSF
- Municipal Revenue Support
- Stamp Tax Support
- Real Estate Tax Support
- Tax Deduction ( There are duration limitations and the rates differs depend on the scheme and type of investment for this support)
- Investment Land Allocation
- SSI Employer Share ( There are duration limitations and the rates differs depend on the scheme and type of investment for this support)
- Interest Support
- Insurance Premium Support
- Revenue Tax Witholding Support
- VAT Refund