Taxation and International Cooperation in Turkey

Under Article 73 of the Turkish Constitution, everyone in Turkey is under the obligation to pay taxes according to his or her financial resources in order to provide for the public expenditure. The term “everyone” has wide scope and includes legal persons, individuals, citizens, residents and non-residents for tax purposes. Turkish Income Tax Act and Corporation Tax Act prescribes detailed rules defining the scope of the levy of taxes. Taxation principles are laid out in the Tax Procedure Law No. 213, the provisions of which mostly concern central concepts such as procedural rules, taxpayers, tax assessments, tax audits, payments, accounting, fines and criminal tax matters.

The Turkish tax regime can be classified under three main headings: (i) Taxes on income (Income Tax, Corporate Tax); (ii) Taxes on expenditure (Value Added Tax, Special Consumption Tax, Banking and Insurance Transaction Taxes, Stamp Duty, Special Communication Tax, Tax on Customs); and (iii) Taxes on wealth (Inheritance and Gift Taxes, Property Tax, Motor Vehicle Tax).

The Turkish direct taxation system consists of two main taxes; income tax and corporation tax. An individual is subject to income tax on his income and earnings, in contrast to a company which is subject to corporation tax on its income and earnings. The rules of taxation for individual income and earnings are provided in the Income Tax Law 193 (ITL). Likewise, the rules concerning the taxation of corporations are contained in the Corporation Tax Law 5520 (CTL). Despite the fact that each is governed by different legislation, may rules and provisions of the Income Tax Law also apply to corporations, especially in terms of income elements and determination of net income. Taxpayers having a corporation and income tax liability may also have other tax liabilities such as VAT and withholding tax liability.

Turkish residents are liable to income tax on their worlwide income and gains. Companies are considered resident if their legal head office is situated in Turkey or the place of management is in Turkey. A non-resident company that carries on business in Turkey through a permanent establishment in Turke is liable to pay tax on the profits earned in Turkey. The standard tax rate for both resident and non-resident companies is 20%. The taxpayers of the corporation income tax are: capital stock companies, public economic enterprises, economic enterprises of foundation and associations and joint venture.

The tax rate for individuals (both residents and non-residents) is progressive, ranging from 15% to 35%. Partnerships are not regarded as separate taxable entities and are considered fiscally transparent. Consequently, partners are taxed individually on their share of the partnership’s profit. The tax year ends on 31 December.

Withholding taxes apply in respect of payments to residents of wages, professional services income, payment for construction on works extended to years and rent payment. Payments made to non-residents on account of dividends, interest and royalties are also subject to withholding tax. The withholding agents are obliged to file a Withholding Tax return detailing the information on payments, payees and amount of tax withheld.

All legal entities, unincorporated entities and individuals must obtain a Turkish tax identification number (TIN) in order to undertake professional or business activities in Turkey. The tax identification number of legal persons denotes back office information on the type of legal entity, type of liability, starting date of business activity, relevant tax office, type of business activity and its address. As of 1 July 2006, the Turkish Identification Number is used as the unique tax identification number for nationals of Turkey. Number is used as the unique tax identification number was initiated in 1995. Foreigners staying in Turkey more than six months are also required to obtain a TIN. Information on identification and address is associated with TIN of each of the partners needs to be submitted. Pursuant to General Communique No. 247 and 262 of the TPL and Communique No.2 on TINs, a TIN is also required to undertake certain transactions like banking and financial service transactions, loan transactions, purchase and sale of immovable property and motor vehicles and various other financial transactions.

Turkey has several Free Zones. Free Zones are special sites within Turkey but deemed to be outside of the customs territory. Turkish Free Zones are tax free zones. Income generated through activities in the Free Zones is exempt from some kind of taxes including income, corporate and value-added tax. There is no limitation on the proportion of foreign capital participation in investment within Free Zones Legislative provisions pertaining to customs and foreign exchange obligations are not applicable in free zones. All kinds of activities can be performed in Turkish Free Zones such as manufacturing, storing, packing, general trading, banking and insurance. Every local or foreign real or legal entity must obtain a licence to operate in Turkish free Zones from the Under Secretary of Foreign Trade.