September 17: A decision of the tax court of Turkey concludes
that entities operating in free trade zones are not required to
calculate value added tax (VAT) using a reverse-charge basis with
respect to services provided by resident and non-resident companies
to an entity operating in the free trade zone.
An unresolved issue between Turkey's tax authority and
taxpayers concerns the status of entities operating in free trade
zones and whether services received (both from resident and
non-resident companies) are subject to VAT.
Under Turkey's VAT law, services performed (or the benefits
of which are provided) in Turkey are subject to VAT.
The position of Turkey's tax authority has been that free
trade zones are within the political boundaries of Turkey
geographically and, as such, services received by entities in free
trade zones, either from resident or non-resident companies, are
subject to VAT because the services are deemed to be used / to
provide a benefit in Turkey.
There are exceptions—one is related to services that are
actually performed within free trade zones (i.e., maintenance works
performed within free trade zones); another exception relates to
contract manufacturing services performed by a resident company in
Turkey for its customer in a free trade zone—that are
regarded as being exempt from VAT.
Other than these two exceptions, all other services received by
entities in free trade zones are subject to VAT.
When it comes to the services received from non-resident
companies, entities in free trade zones calculate the amount of VAT
on a reverse-charge basis for these charges. In these instances,
entities in free trade zones are to declare and remit the amount of
VAT via the VAT-II tax return (actual cash out) whereas the
incurred VAT will not be regarded as deductible VAT.
Because the entities are not considered to be VAT taxpayers, the
incurred VAT will be regarded as a cost item that decreases the
efficiency of entities operating in free trade zones.
Recent tax court and Supreme Court decisions conclude
that—even though free trade zones are within the political
boundaries of Turkey geographically, but taking into consideration
that they have been formed with the aim of increasing exportation
and are outside the customs area—free trade zones must be
accepted as being outside of Turkey "economically."
Accordingly, services received by entities in free trade zones from
resident or non-resident suppliers are not subject to VAT.
Even though there is no change in VAT law regarding this issue,
entities operating in free trade zones (especially entities that
calculated VAT on the reverse-charge basis over the charges
received from the non-resident companies) may declare and file
their VAT-II returns using a "reservation
clause"—i.e., when the entity declares its intention
that although a VAT declaration is made, it will initiate a refund
Taking into consideration the outcome of the recent court
decisions, tax professionals in Turkey express an opinion that
following the route of a legal action might be preferable for
entities operating in free trade zones because the conclusion of
the legal holding in the entity's favor could create a saving
both from "cash" and "cost" perspective.
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.
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