Doing business in Turkey

Turkey (Turkish: Türkiye), officially known as the Republic of Turkey (Türkiye Cumhuriyeti in Turkish), is a Eurasian country that stretches across the Anatolian peninsula in Western Asia and Thrace (Rumelia) in the Balkan region of southeastern Europe.

Turkey’s neighbour countries are Bulgaria, Greece, Georgia, Armenia, Azerbaijan (the exclave of Nakhchivan), Iran, Iraq and Syria. The Mediterranean Sea, the Aegean Sea Marmara Sea and the Black Sea are other borders of Turkey.

Separating Anatolia and Thrace are the Sea of Marmara and the Turkish Straits (the Bosphorus and the Dardanelles), which are commonly reckoned to describe the boundary between Europe and Asia. Therefore Turkey is a transcontinental country, 97 % of its territory lies in Asia and 3% of its territory lies in Europe.

Turkey’s population is 82 million in 2019. Turkey’s area is 783.562 km². Turkey is a member of NATO since 1955, OECD and G-20.

Turkey has the world’s 15th largest GDP-PPP and 17th largest nominal GDP. The country is a founding member of the OECD and the G-20 major economies. Turkey’s GDP is nearly $ 755 billion in 2019 (according to TUIK). Shares of GDP are Agriculture 6,43%; Industry 27,71% and Services 55,91%.

Turkey’s key economic sectors are tourism, banking, construction, home appliances, electronics, textiles, oil refining, petrochemical products, food, iron and steel, machine industry, automotive, shipbuilding, mining (coal, chromite, copper, boron), lumber, paper. Turkey is a candidate member of the European Union. Turkey is a member of customs union with the European Union. Turkey has taken advantage of a customs union with the European Union, signed in 1995, to increase its industrial production destined for exports, while at the same time benefiting from EU-origin foreign investment into the country.

Some key information about Turkey is below:

• Currently Foreign Exchange Rates (24.01.2012) 1 Euro= 2,36 TL (Turkish Lira); 1 USD= 1,81 TL, 1 GBP = 2,82 TL (TCMB)
• Turkey’s exports $113,98 billion, imports $185,54 billion (in 2011). (DUNYA, 25.04.2011)
• Exports – partners: Germany 9,8%, UK 6,2%, UAE 6%, Italy 5,9%, France 5%, Russia 4,9% (2008)
• Imports – partners: Russia 15,5%, Germany 9,3%, China 7,8%, US 5,9%, Italy 5,5%, France 4,5%, Iran 4,1% (2008)
• Inflation rate is under 6,4 %
• Unemployment rate is 11,887 (percent of labor force)%. (IMF)

Turkish Legal System

The Republic of Turkey is a democratic, secular and social state governed by the rule of law (Constitution Art. 2). Turkish laws are made by the Turkish Grand National Assembly. Turkey adapted many western laws such as civic code from Switzerland in 1926. Therefore, generally Turkish laws are familiar to western laws. Turkish government provides equal treatment for domestic and foreign companies. Foreign investors dispute settlement either in local courts or international arbitration bodies.

Foreign Exchange Legislation

According to legislation, foreigner can carry out commercial activities in Turkey. Different legally possible business forms under the Turkish Commercial Code are listed below.

The Legal Forms

According to legislation, foreign can make commercial activities in Turkey. Different business forms are possible to Turkish Commercial Code these are below.

1. Merchants: Single Proprietorship
2. Commercial Partnership: Joint Stock Company: The Company’s stock capital is divided into shares and the liability of the shareholders is restricted with the capital subscribed by the shareholder. At least 5 shareholders (real person or legal entity) and minimum capital of 50.000 TL is mandatory. Limited Company: Participation of minimum 2 and maximum 50 real person or legal entities. The liability of the shareholders is restricted only to the capital subscribed by the shareholder. However, limited company partners are responsible for tax debts of the company in some situations. Minimum capital of 5000 TL is mandatory. Unlike Joint stock companies no stock certificate is issued. Collective Company: This is an association which has been established with the purpose of engaging in commercial activities under a common trade name. Its most important characteristic is the unlimited liability of the partners for the debt of the association. No minimum capital is required It is mandatory that all shareholders should be real person. Commandite Company: In this form of business company, some of the partners are liable for the association’s debts in the amount of capital which they contributed, while the other partners have unlimited liability. Those partners with unlimited liability are called active partners (commandite) and those with limited liability silent partners (commanditer). Legal entities can only be commandite. No minimum capital is required
3. Co-operative Association: This is a business association established by persons who want to jointly supply various needs connected with their professions, crafts and livelihoods. Such an association is based on the principle of mutual help and surety ship. Arrangements related to co-operative associations are governed by the Co-operatives Law.
   Foreign owned Turkish companies are treated as Turkish companies.
4. Branch: Also foreigners can open a branch to make commercial activities in Turkey. No minimum capital is required for branches. Branch manager is responsible for taxation activities. Mother company is also responsible for branch activities. Branches are accepted as a part of foreign entity.
5. Liaison (representative) office: a foreigner can open a liaisons office inside Turkey. Liaison office cannot conduct commercial activities. Also they cannot be a partner of Turkish companies. Their functions are to do market research, purchasing agreements, monitoring dispatch etc. To open liaison office, permission is necessary from Undersecretariat of Treasury. Employees who work in liaisons offices have tax exemption for salaries that they get outside of Turkey (ITC article 23/14). However employers have to pay their social security taxes for employees.

Turkish taxation system is similar to EU systems. Tax Procedural Code, old Corporate Taxation Code and Individual Income Tax Code come from Germany and VAT comes from Belgium. Special Consumption Tax was also prepared according to European Union systems.

1. Income Taxes in Turkey

1.1. Turkish Income Tax Code for Individual

Turkish income taxation system consists of two main taxes which are individual income tax and corporate tax. Individuals are subject to income tax. The Income Tax Law no.193 was passed by the parliament in 1960. New income tax bill is being prepared by Turkish Tax Council, where Deger is represented by president Mr. Fatih Dural (vice president of the Council) and Mr. Ibrahim Özdemir (member of the Council). New income tax code (ITC) is expected to pass in year 2010 or 2011.

In Turkish ITC, taxation criteria are residency and nationality. According to residency criterion, an individual who has his place of residence in Turkey is liable to pay tax for his worldwide income (unlimited liability). Any persons who remain in Turkey for more than six months in a calendar year are assumed as a resident of Turkey. However, foreigners who stay in Turkey for six months or more for a specific job or business or particular purposes which are specified in the ITC are not treated as residents and therefore, unlimited tax liability does not apply to them.

In addition to residency criterion, within a limited scope, nationality criterion also applies regardless of their residency status, Turkish citizens who live abroad and work for government, a governmental institution or a company whose headquarter is in Turkey, are considered as unlimited liable taxpayers. Accordingly, they are subject to the income tax on their worldwide income. Non-residents are only liable to pay tax on their income derived from the sources in Turkey (limited liability). For tax purposes, it is especially important to determine in what circumstances income is deemed to be derived in Turkey. The provisions of Article 7 of the Income Tax Code deal with this issue.

According to Turkish ITC, income is taxed via tariffs in article 103. Year 2010 tariff is below.

Also some income is taxed by withholding taxation methods. Some withholding tax rates pursuant to article 94 of the Turkish ITC are below.

* Securities tax rates are very complex. Please contact us if you have any questions.

Turkey has signed more than 74 bilateral tax agreements. (Appendix: Bilateral agreement country list). If an applicable tax agreement requires lower tax rate or exemption for any individual, tax agreements would be applied.

For example, Germany – Turkey tax agreements require 10% tax rate for copyright payments to source country. Therefore a German resident that gets copyright payment from a turkish company faces 10% withholding tax instead of 20%.

Above tax rates are applicable for anybody inside Turkey.

Above tax rates are applicable for anybody inside Turkey.

Advance taxation is available in some type of ITC; its rate is 15%.

For more information please contact us.
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1.2. Turkish Income Tax Code for Corporations

The Turkish Corporate Tax is levied on income of corporations. The Corporate Tax Code (CTC) number of 5520 was accepted in 2006. The CTC was prepared in harmony with OECD and European Union countries’ tax system. The new CTC consists of several amended and new provisions such as:

• Transfer pricing,
• Thin capitalization,
• Controlled foreign corporations (CFC rules)
• Anti-tax haven provisions (so far the provisions are not applicable because of lack of cabinet decision)
• Cost allocation
• Participation exemption for investment in foreign subsidiaries
• Capital gains exemption for sales of participation and real estates

The rate for corporate income tax has been increased to 22% for the tax periods of 2018, 2019, and 2020; however, the Council of Ministers is authorized to reduce the 22% rate to a rate as low as 20%. Advance taxation is available in the CTC advance tax rate is 22% for corporations also. Profit distribution to individual and foreign corporate shareholders is subject to dividend withholding (income) tax. Its rate is 15%. According to Turkish tax system, maximum income tax burden is 33% of earnings from corporations.

2. Turkish VAT System

The VAT has been effective from 1985 in Turkey. Turkish VAT system is similar to EU system but it has some major differences. For example, VAT refund is exclusive for export and special exemptions and reduced tax rate sales, such as food. If a company has lots of inventories, probably it has to carry VAT burden.

The Turkish VAT system levies sales of goods, imports and services. Although VAT is a general tax, there are a lot of exemptions on Turkish VAT system. VAT system has many exemptions that some of them are below.

• Export exemption,
• Petroleum and investment made under an investment incentive certificate,
• Transit transportation,
• Diplomatic exemption,
• Social exemptions
• Other exemptions (for example gold and jewelry sales)

Turkish VAT system has three different tax rates which are;

• 18 % standard rate,
• 1 % super reduced rate for delivered and services mentioned in list of I (for example, some agricultural products such as raw cotton, hazelnut etc.)
• 8% reduced rate for deliveries and services mentioned in list of II (for example some food products, books etc.)

Super reduced rate is used for tax security and social reasons. Reduced rates are used for social reasons.

3. Other Taxes

Turkey has other several taxes which are special consumption tax, stamp tax, customs duty, inheritance and gift tax, real estate tax, motor vehicle tax.

(Citizens of Foreign Countries not Residing in Turkey and Turkish Citizens Residing Abroad)

• Guidebook 2010
• www.gib.gov.tr