Introduction
Corporations and other similar commercial entities pay a corporate tax on their revenues and income. Companies doing business in Turkey have paid a flat rate of corporate tax since 2006, which is comparatively cheap when compared to the OECD average.
This essay tries to provide a basic introduction of corporate tax by focusing on a few of the most prevalent aspects that all potential investors should be aware of. Sector-specific regulations are left out on purpose.
Corporate Tax Responsibilities
Corporate tax applies to the following entities:
Joint Stock Companies (JSCs) are a type of corporation that
Limited Liability Corporations (LLCs),
Other types of companies with a share capital and foreign companies that are similar
Companies that work together,
Foreign Entities’ Branch Offices,
Public Corporations,
Foundations and associations own businesses, and
Joint Ventures are a type of business arrangement in which two or more (1)
Corporate tax does not apply to sole proprietorships or partnerships founded by real people. Profits made by such businesses are assigned to their individual partners, who are then taxed on their individual income tax bills.
Liability’s Territorial Reach
Corporate taxpayers’ taxable income and earnings are determined by the location of their principal place of business:
- Full Taxpayer Status: A corporate taxpayer qualifies as a “resident” and is subject to taxation on its worldwide revenue if its registered head office or actual business center is in Turkey. Foreign-owned subsidiaries founded in Turkey, for example, are considered full taxpayers.
- Limited Taxpayer Status: A corporate taxpayer is classified as a “non-resident” if neither the registered head office nor the actual business center is situated in Turkey. The corporate taxpayer is only liable for corporation tax on revenue produced in Turkey. A non-resident firm operating in Turkey through a branch office or a joint venture, for example, has minimal tax liability.
Taxable Earnings
Taxable income is defined as the monetary difference in the net worth of assets between two fiscal years. Companies in Turkey frequently calculate their taxable income by first applying statutory adjustments, primarily to exclude capital items, then adding non-deductible expenses to net business income and deducting tax-exempt income and losses to be carried forward.
Deductions
Net business income is calculated by subtracting operating expenses from gross revenue generated by a business. All ordinary and necessary expenses paid or spent for the development and maintenance of revenue, in general, are deductible. The following are some well-known deductible expenses:
Expenses incurred in the formation and registration of the company,
Expenses for Day-to-Day Operations (e.g. employee salaries, pensions, interest),
Expenses for travel (including meals and lodging),
Taxes on real estate, stamp duty, and local taxes
Payments for the use of intellectual property, such as patents, trademarks, copyrights, and know-how, are known as royalties.
Expenses for research and development (R & D)
Donations to government agencies, municipalities, public-interest organizations, foundations, and scientific research and development organizations (up to 5 percent of taxable income),
Expenses associated with amateur and professional sports sponsorship
Losses incurred in the previous five years, as well as
Depreciation.
In the case of foreign entities’ branch offices in Turkey, expenses incurred by head offices might be deducted from the revenue of the branch office if the expenses are directly related to the branch office’s commercial activity in Turkey.
Exemption from participation
The term “participation exemption” merely refers to the exemption of shareholders from dividend taxation. A participation exemption is justified by the desire to avoid double taxation of shareholders.
Dividends received by a firm (e.g. holding company) through its participation (e.g. subsidiaries, partly-owned enterprises, etc.) are totally exempt from corporation tax under Turkish law, as long as both entities are based in Turkey.
Dividends paid out by participations outside Turkey, on the other hand, are tax-free if the following conditions are met:
(1) As of the date of receipt of the dividend, the Turkish firm must own at least 10% of the foreign company’s paid-in capital for a continuous period of at least one year.
(2) The foreign company must be a Limited Liability Company or a Joint Stock Company.
(3) The foreign firm shall pay corporate tax at a rate of not less than 15% effective rate, and
(4) Dividends must be sent to Turkey prior to the annual business tax return deadline.
Under the preceding circumstances, dividends paid out by overseas branches of Turkey-based enterprises are likewise eligible for this exemption.
Exemption for Capital Gains
Capital gains earned by resident and non-resident businesses, including international branch offices, are normally taxed like ordinary income.
Nonetheless, if the following requirements are followed, 75 percent of capital gains resulting from the sale of domestic participation shares or real estate are excluded from corporate tax:
(1) The shares/real estate must have been in the owner’s possession for at least two years.
(2) Sales revenue must be collected until the end of the second calendar year after the sale transaction is completed.
(3) Sales proceeds must be held in a designated reserve account for a period of at least five years.
(4) Exempt revenue cannot be transferred to another account for a period of five years [unless it is moved to the capital account for capital injection purposes].
(5) The business shall not be liquidated within the first five years.
Companies whose primary business involves the trading of domestic securities or the trade of real estate, however, are not eligible for this exemption.
Dividend Withholding Tax
When firms issue dividends to shareholders, they are obligated to deduct a 15% withholding tax from the dividends. This includes dividends paid to individual shareholders as well as dividends paid to foreign corporations. Dividends paid to Turkish enterprises, on the other hand, are not subject to withholding tax because they fall within the participation exemption.
Profits from branches are subject to a withholding tax.
When profits generated by foreign corporations’ branch offices are transferred to the parent company, a withholding tax is applied. Following the deduction of corporate tax, the withholding tax is applied to the distributable (net) branch profits.
Returns on Income
The accounting year begins on January 1st and concludes on December 31st, as it does in many other jurisdictions. Annual tax returns must be filed with the appropriate tax agency by the fourth month of the accounting year’s end.
Furthermore, for actual quarterly earnings created during the accounting year, business taxpayers must file provisional tax returns, through which the corporate tax is paid in advance. The tax rate used in preliminary returns is the same as the ordinary corporation tax rate of 20%.
Quarterly payments are deducted from the total amount of tax due on the annual tax return. If the total amount of quarterly payments exceeds the annual tax, the surplus can be used to other tax liabilities or repaid within one year if there are no other tax liabilities.
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