For the most part, the Turkish Labor Law governs legal aspects of the employer-employee relationship in Turkey. This code defines employers as real persons, legal entities, or institutions or establishments with no legal personality which employ people. In other words, the Labor Law focuses on the employment relationship rather than legal capacities. It does not define the parties eligible to enter this relationship, nor does it offer any clarification as to whether the employer must be legally established in Turkey. So how can a foreign company with no legal presence in Turkey employ a Turkish national in Turkey?
Under Turkish law, forming an employer-employee relationship results in joining the social security system. Once the employee is registered with the system, the employer is obliged to pay into the Social Security Institution ("SSK"), and the employee thus becomes a part of the system. Pursuant to the Social Security Law, an employer is obliged to pay its employee's social security premiums, calculated over the employee's total monthly income and paid in accordance with the relevant provisions of the Social Security Law.
In fact, there is no provision in the law prohibiting foreign companies from employing people in Turkey while having no actual presence in Turkey. However, under the Social Security Law, because the social security due from the employment relationship begins on the first date of employment, it is practically impossible for an employer to avoid becoming part of the social security system. Under normal conditions, an employer has to inform the SSK of the employment relationship, and also the SSK registration number of the workplace. If there is no such number – i.e., no legal presence in Turkey – it may not be possible for the employee to enroll in the social security system.
Furthermore, if the employer does not pay the premiums within the periods required by the Social Security Law, the SSK may collect such payments in line with the Law on the Collection of Public Receivables. When we examine these provisions on the SSK's collection of premiums owed, we can see that the mechanism the legislature has formed is based on a scenario where the employer is a real person, company, institution or other establishment with a physical presence in Turkey. Otherwise, collecting premiums in case of non-payment would be impossible within Turkish jurisdiction. As for companies, such physical existence should take the form of either a corporate establishment, as described in the Turkish Commercial Code, or an ordinary partnership relationship as provided in the Code of Obligations.
The Income Tax Law also sets forth requirements for employers, defining "employer" broadly as either a real person or a legal entity. Similar to the Labor Law and the Social Security Law, the Income Tax Law makes no mention of an employer's physical existence in Turkey. At the same time, the Income Tax Law subjects employees' income arising from employment agreements to income tax, obligating the employer to pay it through withholding from the employee's monthly income, and declare it to the relevant tax office.
In case of employment by a foreign company – whether or not it has a physical presence in Turkey – an employee's income arising from activities in Turkey would be subject to income tax, but there are exemptions. If a foreign-based employer-taxpayer pays the salary of the employee from earnings generated outside Turkey, such wage payments would be exempted from income tax. However, proving the source of such earnings is relatively difficult, meaning that the relevant employee may not benefit from this Income Tax Law exemption, and may still need to declare his income to the relevant tax office in Turkey.
If we evaluate the provisions of the Social Security Law and Income Tax Law together with the practice of the SSK, a foreign company with no physical existence in Turkey may not employ a Turkish individual within the meaning of the employment relationship provided under the Labor Law, Social Security Law and Income Tax Law. Nevertheless, there may be exceptions if the employee in Turkey applies for voluntary social insurance, which is available under certain circumstances. If the employee is a foreigner, these circumstances change depending on the home country, and fulfillment of the requirements under the social security legislation. However, foreign-based companies may send their employees (who are registered with social security in their home country) to Turkey for certain assignments, and depending on the period of their presence in Turkey and their activity, income tax may be payable in Turkey.
According to legal circumstances and established practice, there may be alternative solutions, for example, entering into a consultancy relationship instead of an employment relationship. If a foreign company with no physical existence in Turkey wishes to charge an individual with a specific task or assignment, it may enter into a consultancy contract with that individual – who would thereby be a self-employed person. By such mechanism, the payments of the foreign-based company are made to the self-employed in return for a self-employed receipt, and consequently the self-employed individual would be liable for the income tax arising from his earnings. By applying this alternative, the foreign company would avoid or minimize risks arising from the employment relationship, as well as any obligations towards the tax authorities.
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.