Turkey: Corporate Income Tax

Last Updated: 2 September 2015

Legal entities are subject to corporate income tax in Turkey under the Corporate Income Tax Law (the "CIT Law"). Under the CIT Law, all gains and revenues a corporation generates within one fiscal year are corporate income regardless of their source, and taxed at 20%. Unless the Ministry of Finance grants permission to determine any other 12-month period a fiscal year, the fiscal year is the calendar year by default.

Corporations pay a temporary (prepaid) tax on their taxable gains as of the third, sixth, ninth and twelfth months during the fiscal year. These prepaid taxes are deducted from the annual corporate income tax burden calculated based on the corporation's corporate income tax declaration. If the prepaid tax paid during the fiscal year is higher than this tax burden, the outstanding balance is refunded to the taxpayer. Temporary taxes accrued during the year that the taxpayer has not yet paid, cannot be deducted.

Under Article 3 of the CIT Law there are two groups of taxpayers: (i) resident (full) taxpayers and (ii) non-resident (limited) taxpayers. Corporations whose legal seat or business center is in Turkey are considered resident (full) taxpayers and are taxed on the basis of their entire income derived from their operations conducted in Turkey and/or abroad. Corporations whose legal seat or business center is not in Turkey are deemed non-resident taxpayers. Limited taxpayers must pay Turkish taxes only over the income “derived in Turkey” through a permanent establishment or a permanent representative in Turkey.

  1. Scope of "income"

Under Article 6 of the CIT Law, corporate income tax is calculated over a corporation’s net income derived during one fiscal year. The CIT Law includes all sources of corporate income, and does not distinguish between the sources.

  1. Deductible expenses

Under Turkish law, income is subject to taxation over the net amount. A company can deduct allowable expenses from its gross income to reach the net income assessed for corporate income tax.

Expenses that can be deducted from corporate income are:

  1. General expenses incurred in generating and maintenance of commercial income.
  2. Depreciation expenses.
  3. Catering and lodging expenses in the workplace or its establishments, expenses for employees' medical treatment and medicine, insurance premiums, pension contributions and clothing.
  4. Proportionate (in terms of nature and size of the business conducted) traveling and accommodation expenses related to the business.
  5. Losses, damages and indemnities paid according to an agreement, penalty or law, which arise within business operations.
  6. Expenses for leased vehicles leased or included in the assets of the enterprise and used in the business.
  7. Taxes, duties and fees in kind including consumption, stamp duty and municipality taxes, fees and registration fees, buildings, land and expenses, provided they are related to the business.
  8. Expenses related to issuing stocks and bonds.
  9. Membership fees paid to trade unions up to certain limits.
  10. Contribution shares the employers pay to individual retirement systems on their employees' behalf up to certain limits.
  11. Grants and donations to certain foundations, organizations, establishments and associations that the law sets out under certain conditions.
  12. Merger, termination and liquidation expenses.
  13. Incorporation, establishment and pre-operating expenses.
  14. R&D expenses.
  15. The corporation's losses within the last five years, if the corporation shows each year the losses separately.
  1. Non-deductible expenses

Expenses that cannot be deducted from corporate income are:

  1. Money or other assets in kind that the owner or his/her spouse and children withdraw from the corporation.
  2. Monthly salaries, wages, bonuses, commission and compensation the corporation pays to its owner and to the owner's spouse and minor children.
  3. Interest incurred on capital that the owner invested in the corporation.
  4. Interest charged by the owner of the corporation, and/or the owner's spouse and minor children, for receivables due in the current account or in other forms.
  5. If the owner of the corporation purchases/sells goods or services over the values determined contrary to the arm's length principle, the difference between the arm's length principle value and the value applied by the owner that is to the detriment of the corporation is considered withdrawn from the corporation. Manufacturing and construction, renting and leasing, borrowing and lending and transactions involving payment of wages, bonuses or similar payments are treated as purchase/sale of goods or services.
  6. Monetary and fiscal penalties and compensation for the owner's crimes.

Under Article 11 of the CIT Law:

  1. interest paid on the equity capital;
  2. interest, exchange differences and similar expenses paid or calculated over the thin capital;
  3. any kind and form of legal reserves;
  4. disguised profits a company distributes through transfer pricing; and
  5. monetary and fiscal penalties, penalties due to public debts and default interest cannot be deducted from the corporate income.
  1. Exemptions

The following incomes are exempt from corporate income tax:

  1. Dividends received from resident taxpayer corporations.
  2. Participation income generated from foreign companies, if:
    • the foreign company is a joint stock or limited liability company whose statutory seat or business center is in Turkey;
    • the company holding participation shares owns at least 10% of the paid-in capital of the foreign company;
    • the participation shares have been held for at least one year continuously following the date of acquisition of the income;
    • foreign participation income, including the tax paid on the income that is the source of the dividends distributed, carries a tax burden similar to income tax or corporate income tax at a rate of at least 15%; and
    • participation income is transferred to Turkey before the corporate income tax declaration of the fiscal year in which the participation income is obtained must be submitted.
  3. Income generated from workplaces or permanent establishments abroad, if:
    • under the laws of the country of origin this income carries a tax burden similar to income tax or corporate income tax at a rate of at least 15%, and
    • the income is transferred to Turkey before the corporate income tax declaration of the fiscal year in which the participation income is obtained must be submitted.
  4. Portfolio management gains.
  5. Gains generated from pension investment funds.
  6. Gains generated from the sale of pre-emptive rights and the surplus capital for such rights.
  7. Gains generated from construction, repair and installation works performed abroad, and gains generated from technical services performed abroad and carried over to the final accounts in Turkey.
  8. 75% of the capital gains generated from the discharge of participation certificates and immovable real property included in the corporations' assets for at least two years.
  1. Distribution of dividends

Corporate tax varies depending on whether the distribution payment is made to a resident or non-resident corporation.

Dividend income that resident corporations generate from another resident corporation is exempt from withholding tax and corporate income tax. The case is different for dividends distributed to non-resident corporations, which are subject to withholding tax at 15% — the final tax for dividend income that non-resident corporations earn.

Importantly, if the non-resident corporation is the resident of a country with which Turkey has executed a double taxation treaty, lower rates may apply.

This document is not intended to create an attorney-client relationship. You should not act or rely on any information in this document without first seeking legal advice. This material is intended for general information purposes only and does not constitute legal advice. If you have any specific questions on any legal matter, you should consult a professional legal services provider.

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