Withholding Tax In Turkey

Withholding Tax in Turkey: A Complete Guide for Businesses and Investors

Withholding tax in Turkey is a crucial component of the country's taxation system, impacting businesses, investors, and foreign entities operating within its borders. Understanding the rates, applicability, and compliance requirements can help businesses optimize their tax liabilities while ensuring compliance with Turkish tax laws. In this guide, we will explore everything you need to know about withholding tax in Turkey, including applicable rates, exemptions, and filing procedures.

What is The Withholding Tax

Withholding tax is a form of income tax deducted at the source by the payer (withholding agent) before the payment is made to the recipient. In Turkey, withholding tax applies to various types of income, including wages, professional services, dividends, interest, royalties, and rental income. The deducted tax is then remitted to the Turkish Revenue Administration (TRA) on behalf of the taxpayer.

This system ensures efficient tax collection and reduces the risk of tax evasion. Both residents and non-residents earning income in Turkey may be subject to withholding tax, depending on the nature of the income and the recipient's tax status.

Types of Income Subject to Withholding Tax in Turkey

In Turkey, certain types of income are subject to withholding tax (stopaj vergisi), which is deducted at the source by the payer before the payment is made to the recipient. Below are the main types of income subject to withholding tax in Turkey:

1. Employment Income

• Salaries and wages paid to employees (subject to income tax withholding)
• Payments to foreign employees working in Turkey

2. Professional Service Fees

• Payments made to self-employed professionals (Chartered Accountants, Lawyers, Translators, Cnsultants, Engineers, etc.)
• Fees for independent professional services

3. Rental Income

• Rent payments for business premises (offices, warehouses, etc.)
• Rental income earned by individuals leasing properties

4. Dividends

• Profit distributions made by Turkish resident companies to shareholders
• Withholding tax applies to both resident and non-resident shareholders

5. Interest Income

• Interest on bank deposits
• Interest on bonds and treasury bills
• Interest from loans provided by foreign entities

6. Royalties & Licensing Fees

• Payments made for intellectual property rights (trademarks, patents, copyrights, etc.)
• Franchise and licensing fees paid to foreign companies

7. Payments to Non-Residents

• Professional service fees paid to foreign individuals or entities
• Royalties and license fees paid to foreign companies
• Technical service fees for consulting, engineering, or project management
• Interest and dividend payments to foreign investors

8. Construction and Repair Work

• Payments made for construction, maintenance, and repair services provided by subcontractors

9. Other Income Types

• Advertising payments (subject to special withholding rates)
• Commission payments made to agents or brokers
• Payments to freelancers and digital service providers

The applicable withholding tax rates vary depending on the type of income and whether the recipient is a resident or non-resident.

Withholding Tax Rates in Turkey

Withholding tax (Stopaj Vergisi) applies to various types of income in Turkey. The rates differ depending on the income type and whether the recipient is a resident or non-resident. Below is an overview of common withholding tax rates:

1. Employment Income

• Salaries & Wages → Progressive income tax rates (15% – 40%)

2. Professional & Service Fees

• Payments to self-employed professionals (e.g., Chartered Accountants, CPAs, Consultants, Engineers, Lawyers) → 20%
• Independent professional services provided by non-residents → 20%

3. Rental Income (Real Estate Leases)

• Office, workplace, or commercial property rentals → 20%
• Residential property rentals (not subject to withholding tax)

4. Dividends

• Dividend payments to residents → 15%
• Dividend payments to non-residents → 15%

5. Interest Income

• Bank deposit interest
  
  • Turkish Lira deposits → 7,5%-10% (depending on maturity period)
  • Foreign currency deposits → 25%
• Bond and treasury bill interest → 5% – 10%
• Interest on loans paid to foreign entities → 10%

6. Royalties & Licensing Fees

• Royalty payments to residents → 20%
• Royalty payments to non-residents → 20%

7. Payments to Non-Residents

• Professional service fees → 20%
• Technical service fees → 20%
• Management fees → 20%
• Software & IT service fees → 20%

8. Construction & Repair Work

• Payments to subcontractors (for construction, maintenance, and repair services) → 5%

9. Advertising & Commission Payments

• Advertising services (TV, radio, newspapers, digital ads, etc.) → 20%
• Commission payments to agents & brokers → 20%

10. Capital Gains & Other Income

• Capital gains from securities → 0%
• Income from copyrights, patents, and trademarks → 0%

Important Notes

• Tax rates may be lower or exempted if Turkey has a Double Taxation Agreement (DTA) with the recipient's country.
• VAT (Value Added Tax) applies separately to most taxable transactions.
• Certain incentives may apply to businesses operating in Technoparks, Free Zones, or with R&D investments.

Compliance Requirements for Withholding Tax in Turkey

1. Registration: Companies and individuals making payments subject to withholding tax must register with the Turkish Revenue Administration.
2. Deduction and Remittance: The withholding agent must deduct the applicable tax from the payment and remit it to the TRA by the 26th of the following month.
3. Filing Returns: Withholding agents are required to file monthly withholding tax returns, declaring the amounts deducted and remitted.
4. Record-Keeping: Proper documentation of all transactions subject to withholding tax must be maintained for at least five years.
5. Double Taxation Treaties: If a reduced rate or exemption applies under a DTT, the withholding agent must obtain the necessary documentation (e.g., a tax residency certificate) from the recipient.

Exemptions and Reduced Rates

Certain payments may be exempt from withholding tax or subject to reduced rates under specific conditions. For example:

• Payments to government entities or charitable organizations may be exempt.
• Reduced rates may apply under double taxation treaties.
• Certain types of interest income (e.g., government bonds) may be exempt or subject to lower rates.

Penalties for Non-Compliance

Failure to comply with withholding tax (Stopaj Vergisi) obligations in Turkey can result in significant financial penalties, interest charges, and even legal consequences. Below are the main penalties imposed for non-compliance:

1. Late Payment Penalty & Interest

• If withholding tax is not paid on time, the taxpayer is subject to a late payment interest (Gecikme Faizi).
• The monthly interest rate is determined by the Turkish Tax Authority and is applied on a daily basis until the tax is fully paid.
• As of recent updates, the late payment interest rate is around 3%-4% per month.

2. Late or Non-Filing of Tax Returns

• Failure to submit a withholding tax return (Muhtasar Beyanname) on time results in an administrative fine.
• The fine depends on the taxpayer's size and the delay period:
  • Small-scale businesses → Starting from 2,500 TL per return
  • Medium and large businesses → Can go up to 5,000 TL – 25,000 TL per return

3. Underreporting or Incorrect Tax Declarations

• If a company declares incorrect amounts or underreports tax, penalties are applied based on the undisclosed tax amount:
  • Tax Loss Penalty (Vergi Ziyaı Cezası) → 50% – 100% of the unpaid tax
  • If fraud is detected, the penalty can go up to three times the unpaid tax.

4. Failure to Withhold and Remit Tax

• If a company fails to deduct and remit withholding tax, the Turkish Tax Authority may impose:
  • Full repayment of the unpaid tax
  • A tax loss penalty of 100%
  • Late payment interest from the due date until full payment

5. Fraud & Intentional Tax Evasion

• Engaging in fraudulent activities (e.g., fake invoices, concealing income) results in severe penalties, including:
  • Three times the unpaid tax amount
  • Legal prosecution, including imprisonment (if fraud is proven)
  • Business activity suspension in extreme cases

6. Recurring Non-Compliance

• If a company continuously fails to file returns or pay withholding tax, the tax authorities may:
  • Conduct an in-depth tax audit
  • Increase penalties and apply additional fines
  • Restrict company operations or bank transactions

How to Avoid Withholding Tax Penalties in Turkey

• Understand Your Withholding Tax Obligations
  • Identify the types of payments subject to withholding tax (e.g., salaries, dividends, interest, royalties, rental income, professional services).
  • Determine the applicable withholding tax rates based on the type of income and the recipient's residency status.
  • Review double taxation treaties (DTTs) to see if reduced rates or exemptions apply.
• Register with the Turkish Revenue Administration (TRA)
  • Ensure your business is registered with the TRA and has a valid tax identification number.
  • If you're a foreign entity operating in Turkey, confirm your tax registration and compliance status.
• Accurately Calculate and Deduct Withholding Tax
  • Use the correct withholding tax rates for each type of payment.
  • Ensure accurate calculations to avoid under- or over-deducting tax.
  • For cross-border payments, verify the recipient's tax residency and apply DTT provisions if applicable.
• Timely Remittance of Withholding Tax
  • Withholding tax must be remitted to the TRA by the 26th of the following month.
  • Late payments result in penalties and interest charges, so ensure timely remittance.
• File Withholding Tax Returns on Time
  • Submit monthly withholding tax declarations (Form MUHTASAR) by the 26th of the following month.
  • Ensure all required information is accurately reported, including the amounts deducted and remitted.
• Maintain Proper Documentation
  • Keep detailed records of all transactions subject to withholding tax, including invoices, contracts, and payment receipts.
  • Retain documents for at least 5 years, as the TRA may request them during audits.
• Apply Double Taxation Treaty Benefits Correctly
  • If a reduced rate or exemption applies under a DTT, obtain a valid tax residency certificate from the recipient.
  • Submit the certificate to the TRA to claim the treaty benefits.
• Stay Updated on Tax Law Changes
  • Turkish tax laws and rates may change, so regularly review updates from the TRA or consult a tax advisor.
  • Subscribe to official tax bulletins or newsletters to stay informed.
• Conduct Internal Audits and Reviews
  • Periodically review your withholding tax processes to identify and correct errors.
  • Use accounting software or tools to automate calculations and reduce manual errors.
• Seek Professional Assistance
  • Work with a qualified tax advisor or accountant to ensure compliance with withholding tax regulations.
  • Professional guidance is especially important for complex transactions or cross-border payments.
• Common Mistakes to Avoid
  • Incorrect Tax Rates: Applying the wrong withholding tax rate can lead to underpayment and penalties.
  • Missed Deadlines: Late remittance or filing of withholding tax returns results in penalties.
  • Incomplete Documentation: Failing to maintain proper records can complicate audits and lead to fines.
  • Ignoring DTT Provisions: Not applying reduced rates or exemptions under DTTs can result in overpayment or non-compliance.

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.