Turkey: Corporation Tax In Turkey

Last Updated: 15 July 1997
Corporation tax is assessed on the basis of Statute 5422, first passed in 1949. As with the law governing the income tax, a vast number of amendments have been transformed the Corporation Tax Code, particularly since the 1980's. The following discussion incorporates changes up to Statute 4008.

The Corporation Tax Code applies to the profits earned by "companies with share capital" (joint-stock companies, limited companies, limited partnerships) cooperatives, state-owned companies, economic enterprises owned by associations and foundations, and mutual funds and investment trusts governed by the Capital Market Law.

Corporation tax is generally assessed on the basis of a company's reported calendar-year profits. (It is however possible to obtain permission from the ministry for a different fiscal reporting period.) Two types of corporation tax liability are defined: "full" and "limited". Those with a "full" corporation tax liability are corporate entities whose legal or business headquarters are located in Turkey. Like their income-tax counterparts, they are responsible for reporting and paying tax on all their worldwide corporate income. "Limited" taxpayers on the other hand are those who have no legal or business headquarters in Turkey. These are liable for tax only on the corporate income they secure in Turkey.

The corporate profits on which corporation tax is assessed is determined in terms of the items of deductible and non-deductible income defined for commercial earnings in the Income Tax Code. Other rules contained in the Income Tax Code concerning commercial and agricultural earnings apply as well. In addition to these deductions however, corporations are also entitled to a number of deductions that do not apply to individuals: things like the cost of organizing general meetings, the issuance of corporate securities, reserves set aside for risks (applicable to insurance companies), and balance-sheet losses from prior years.

Certain types of outlays are specifically disallowed as deductible expenses. These include:

  • Interest calculated and paid on share capital
  • Interest calculated and paid on camouflaged capital
  • Legal reserves
  • Camouflaged dividend payments
  • Taxes, penalties, fines, and interest charged on their late payment
  • Part of the financing costs of companies (not including banks and financial institutions however) that revalue their fixed assets or use the LIFO method to value their inventories. (This provision goes into effect on 1 January 1996.)
  • The running and depreciation expenses of aircraft and yachts that are not directly related to the principal scope of the company's business
  • Half the operating expenses and depreciation on company-owned automobiles (except those of companies engaged in transport-related businesses)
  • Commissions or discounts paid on securities in excess of legally-allowable limits
  • Dividend income from "Type-A" mutual funds or investment trusts. (A fund or trust qualifies as "Type-A" if 25% or more of the marketable securities in its portfolio are corporate stocks.)
  • Certain types of corporate entities are statutorily exempt from the corporation tax. In addition, certain types of corporate earnings, spelled out in article 8 of the law, are also tax-immune. Some of the most important of these that will be of interest to foreign investors in Turkey are the following:
  • Earnings secured as a result of participation in the equity of another corporate entity that has a full tax liability
  • Refunds paid by certain types of cooperatives to their members
  • 20% of the proceeds that are secured as foreign exchange by corporations holding a touristic establishment license or travel agency license and that have been converted to Turkish liras during the first ten years of operation
  • Profits secured from the portfolio-management activities of mutual funds and investment trusts; income secured from venture capital and real-estate mutual funds and investment trusts
  • Earnings secured by corporate entities through the sale of preemptive stock options or as issuance premiums

Corporations are allowed to take advantage of provisions of the Income Tax Code concerning the investment tax allowance. Portions of investment-related expenditures (the actual percentage varies according to which region of the country the investment is undertaken in) may qualify as tax-deductible outlays during the year in which they are incurred.

Corporation tax for a given year is reported by filing a declaration during the fourth month of the following calendar year. The tax is payable in three installments: the first when the declaration is submitted, the second in July, and the third in October.

The basic corporation tax rate is 25% of taxable profit on top of which there is a 10% surtax bringing the aggregate rate to 27.5%. However if the amount of tax due drops to less than 20% of what would have been paid had none of the exemptions (except for equity participation earnings) listed above been claimed, then the difference between the pre-exemption calculated 20% figure and the tax reported is paid as "minimum corporation tax".

In addition, 70% of the tax that a corporation paid during one calendar year will be paid (in equal monthly installments) over the course of the next twelve months as "advance corporation tax". This advance payment is set off against the current year's tax. Taxpayers also have the option of paying this advance tax as 25% of the profit disclosed in their quarterly financial statements. If they elect this option, the tax so calculated must be paid within twenty days of the end of the quarter.

The Income Tax Code treats the after (corporation) tax profits of corporate entities as "dividend and interest income". As such, it is subject to income tax withholding (whether it is paid as a dividend or retained in the company makes no difference). The withholding rate is 20% on top of which there is a 10% surtax bringing the aggregate rate to 22%. This tax is reported when the corporation tax return is filed and paid a month later (as a rule, by May 20th). The basis on which this withheld tax is calculated consists of gross profit less corporation tax paid less a number of deductions (equity participation earnings, investment tax allowance, income secured from Type-A mutual funds, etc). In the case of publicly-owned companies (defined, rather generously, as any company that has publicly sold 15% of its stock), the withholding rate is reduced by half (i.e. 10% and 11% respectively). Different rates of withholding may apply to mutual funds and investment trusts.

The following chart summarizes the tax impact on different types of corporate entities assuming pre-tax profits of 100.

Effective tax burden

                                        Type-A       Type-B
                 Private   Public       mutual       mutual
                 company   company      fund(etc) fund(etc)
Pre-tax profit    100.00    100.00        100.00     100.00
Corporation tax  (25.00)    (25.00)         0.00       0.00
After-tax profit  75.00      75.00        100.00     100.00
Income tax withholding(15.00)(7.50)         0.00    (10.00)
Total tax        (40.00)    (32.50)         0.00    (10.00)
10% surtax        (4.00)     (3.25)         0.00     (1.00)
Total tax burden (44.00)    (35.75)         0.00    (11.00)

Because of such considerations as minimum corporation tax and the applicability of different exemptions in withholding, the aggregate tax rate may vary considerably in the case of companies whose profits consist entirely of tax-exempt earnings. The following table summarizes the different tax-exposures of various exemptions in the case of a company that is privately-owned.

                            Type-A    Type-B
                            mutual    mutual
         Part. Invest.fund etc  fund etc      Issuance Tourism
      earnings allowance  dividends    dividends  premium allowance

Earnings 100.0  100.0   100.0      100.0   100.0  100.0
Corp. tax  0.0    0.0    0.0        25.0   0.0    0.0
Min.corp.tax 0.0 20.0   20.0        20.0  20.0    20.0
Withholding0.0    0.0    0.0        15.0  16.0    16.0
Surtax     0.0    2.0    2.0         4.0   3.6    3.6
Total tax  0.0   22.0   22.0        44.0  39.6    39.6

The portion of net profit subject to a 0% rate of withholding is calculated as follows:

     I + R
Po =------ x P
       T

where,

Po = the portion of the net profit subject to 0% withholding

I = Interest from Treasury bills and government bonds

R = Income from revenue participation certificates issued by the Public Partnership Administration.

T = Total proceeds (revenues) of the corporation

P = Net profit after corporation tax, participation exemption and investment allowance (base for withholding tax under article 94/6).

Furthermore, applicable to 1994 profits, in addition to the interest income of the marketable securities listed above, it is also possible to apply reduced withholding rates to trading profits, plus the gains derived from repo transactions, and the dividend income derived from the participation certificates and shares issued by the mutual funds and unit trusts, risk capital and real estate mutual funds and unit trusts that have at least 25% of their portfolios consisting of share certificates, commensurate with the proportion of such gains to the corporate profit (subsequent to the deduction of the discounts and exemptions (participation gains excluded)). In the event that the proportion of such gains to the corporate profit exceed 37.5% (25% in publicly-held companies) the withholding rate is reduced to 0% .

The object of this exercise is to increase the demand for government bonds and Treasury bills.

Some types of earnings secured in Turkey by non-resident corporate entities are subject to taxation by means of withholding. The Corporation Tax Code stipulates that tax must be withheld from any earnings paid to non-resident corporate entities that are in the nature of:

  • Wage/salary income
  • Independent professional service income
  • Capital gains
  • Real-estate and intellectual-property income

The principles by which such earnings are taxed in Turkey are different from those in which ordinary business and agricultural income is taxed. In order for business and agricultural income to be taxable in Turkey, two conditions must be fulfilled:

  • The recipient of the income must maintain a place of business or else a permanent representative in Turkey, and
  • He must have secured this income in such a place of business or through such a permanent representative.

The four categories of income enumerated above however are taxable in Turkey even if the recipient maintains no permanent establishment or representative in the country. Such income is taxable in Turkey if either of the following conditions is fulfilled:

  • The activity generating the income took place in Turkey, or
  • Payments for the activity were rendered in Turkey or else shown as expenditures in legal books of account maintained in Turkey.

The following are the aggregate rates of withholding (basic tax plus surtax) currently due on various types of income secured in Turkey:

Income                                                       % Tax
Wages and salaries                                            27.5
Independent professional services                             22.0
License, know-how, royalties                                  22.0
Rental income from real-estate properties                     22.0
Interest on Turkish-lira deposits                              5.5
Interest on foreign-currency deposits                         11.0
Interest on government bonds and Treasury bills                0.0
Repo income                                                    0.0
Credit and loan interest                                       0.0

Dividend income is not subject to any taxation other than income-tax withholding. The tax withheld may be regarded by the non-resident corporate entity as its final tax burden on such income. If it prefers not to, it has the option of filing a corporation tax return and being taxed on its net reported earnings.

Tax withheld is declared and paid to the tax office concerned by means of a withholding tax declaration, that must be filed by the 20th of the month subsequent to the month in which the payment subject to withholding tax was made.

Non-resident corporations are required to declare their incidental earnings and revenues to the tax office within 15 days following the completion of the transaction by which such gains and revenues were generated.

A number of special provisions applicable in cases such as liquidations, mergers, and takeovers are set forth in the Corporation Tax Code.

Sample corporation tax computations are given at the end of this booklet.

Please do not hesitate to contact us if you need any additional information regarding the matters discussed here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

For further information contact Mustafa Camlica, Tax Manager on tel: +90 212 232 1210, fax: +90 212 230 8231, or e-mail mustafa.camlica@arthurandersen.com or enter a text search 'Arthur Andersen' and 'Business Monitor'.

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