Corporate Taxation in Turkey

Corporate taxation in Turkey is imposed at a rate of 20% on both resident and non-resident companies. Corporations in Turkey are classified as either limited taxpayers or unlimited taxpayers based on their tax liability.

Resident vs. Non-Resident Taxpayers

• Unlimited taxpayers: Companies with their statutory head office or actual business center in Turkey are subject to tax on their worldwide income.
• Limited taxpayers: Companies that are not headquartered in Turkey but earn income within Turkey are taxed only on their Turkey-sourced income.
• Foreign-owned subsidiaries in Turkey are regarded as unlimited taxpayers, whereas foreign branches are treated as limited taxpayers.

Tax Year and Filing

• The standard tax year follows the calendar year.
• Companies can apply to the Ministry of Finance for a special fiscal period.
• Corporate tax returns must be filed by April 25 of the following year, with taxes due in April.
• Advance tax payments are made quarterly and offset against the final tax liability.

Taxable Income

• All profits derived from business activities are included in taxable income.
• Dividends from qualifying participations may be exempt under the participation exemption.
• Expenses incurred for business operations are generally deductible.

Capital Gains Tax

• Capital gains are taxed as ordinary income.
• A 75% exemption applies to capital gains from the sale of domestic participations if:
  1. The asset has been held for at least two years.
  2. The gain is recorded in a special reserve account for five years.
  3. The gain is not transferred to another account (except capital injection).
  4. Payment for the sale is received by the end of the second year following the sale.
• If a company is liquidated within five years of a tax-exempt capital gain, the exemption is revoked, and taxes plus penalties and interest must be paid.

Tax Losses

• Losses can be carried forward for five years but cannot be carried back, except in case of liquidation.

Foreign Tax Credit

• Foreign taxes paid may be credited against Turkish corporate tax, up to the Turkish tax liability.
• Unused foreign tax credits can be carried forward for three years.
• Foreign tax payments must be supported by receipts approved by the Turkish consulate in the country of taxation.

Participation Exemption

• Dividends received by resident companies from other Turkish companies are exempt from corporate tax.
• Dividends from non-resident companies are exempt if:
  1. The foreign payer is a corporation or limited liability company.
  2. The Turkish company owns at least 10% of the foreign entity for at least one year.
  3. The foreign company’s corporate tax rate is at least 15% (or 20% for financial companies).
  4. The dividends are remitted to Turkey before the tax return deadline.

Holding Company Regime

A Turkish company qualifies as an international holding company if:

1. It is an Anonim Şirket (A.Ş.).
2. At least 75% of its assets (excluding cash) are foreign participations held for at least one year.
3. It owns at least 10% of each foreign participation.
4. The foreign participations are corporations or limited liability companies.

Capital gains from the sale of foreign participations held for at least two years are exempt from corporate tax.

Tax Incentives

• R&D Tax Allowance: Companies performing qualifying R&D activities can deduct 100% of R&D expenses.
• Free Trade Zones (FTZs): Manufacturing companies with licenses obtained before February 6, 2004, benefit from tax exemptions.
• Investment Incentives: Corporate tax reductions up to 90% apply to specific regions and sectors.

Withholding Tax Rates

• Dividends paid to non-residents: 15%
• Interest on loans: 0% for banks and financial entities, 10% for others
• Royalties and professional fees: 20%
• Branch remittance tax: 15% on profits remitted to the head office

Other Corporate Taxes

• Payroll tax: Withheld at source on salaries (progressive 15%–35% rates).
• Real property tax: 0.1%–0.3%, doubled in larger cities.
• Social security contributions: Employer: 19.5%–25%, Employee: 14%.
• Stamp duty: 0.75%–0.6%, depending on the document.
• Banking and insurance transaction tax: 5%.

Anti-Avoidance Rules

• Transfer Pricing: Transactions between related parties must follow OECD guidelines.
• Thin Capitalization: Loans from related parties exceeding a 3:1 debt-to-equity ratio trigger reclassification as hidden profit distribution, subject to 15% withholding tax.
• Controlled Foreign Company (CFC) Rules: Foreign company profits are taxable in Turkey if:
  • The Turkish company owns at least 50% of the foreign entity.
  • At least 25% of income is passive (dividends, interest, etc.).
  • The foreign tax rate is below 10%.
  • Annual revenue exceeds TRY 100,000.

Tax Compliance and Penalties

• Corporate tax returns: Due April 25 (for calendar year taxpayers).
• Quarterly advance tax: Due the 17th of the second month after the quarter.
• Late payments: 1.95% monthly interest.
• Non-compliance penalties: For failure to file returns, maintain accounts, or issue invoices correctly.

Advance Rulings

• Taxpayers may request advance rulings on tax matters.
• Advance pricing agreements (APAs) are possible, but bilateral/multilateral procedures remain unclear.

Final Thoughts

Turkey offers a competitive corporate tax regime, including participation exemptions, R&D incentives, and free trade zone benefits. However, companies must carefully navigate transfer pricing, thin capitalization, and CFC regulations to maintain compliance. Proper tax planning and expert guidance can help businesses optimize tax liabilities while remaining compliant with Turkish tax laws.

Conclusion

Corporate tax in Turkey presents both opportunities and complexities for local and foreign businesses. With a competitive 20% tax rate, various exemptions, and investment incentives, Turkey remains an attractive jurisdiction for corporate activities. However, navigating the detailed rules on participation exemptions, capital gains, anti-avoidance measures, and international taxation requires careful planning. Engaging with experienced tax advisors can help companies ensure compliance, optimize their tax positions, and fully benefit from Turkey’s corporate tax regime.To discuss your company’s specific needs and navigate Turkey’s corporate tax system with confidence, contact us.