The foreign subsidiary dividend exemption under Turkish corporate tax law allows Turkish resident corporations to exclude from taxation the profit distributions (dividends) they receive from their foreign subsidiaries, provided certain conditions are met.
The objective of this exemption is to prevent the double taxation of profits earned abroad—first in the country where the subsidiary operates and again in Turkey when those profits are distributed to the parent company.
Conditions for the Foreign Subsidiary Dividend Exemption in Turkey
According to Article 5/1-b of the Turkish Corporate Tax Law, the following five conditions must be satisfied simultaneously for the exemption to apply:
- Nature of the Foreign Subsidiary:
The subsidiary must be a joint-stock (A.Ş.) or limited liability (Ltd. Şti.) company established abroad. Both its legal and business headquarters must be located outside Turkey. - Ownership Threshold:
The Turkish parent company must hold at least 10% of the paid-in capital of the foreign subsidiary. - Holding Period:
The shares of the foreign subsidiary must have been continuously owned for at least one year before the dividend distribution. - Minimum Tax Burden Abroad:
The income of the foreign subsidiary must have been subject to an effective corporate income tax rate of at least 15% in its country of residence.
However, if the subsidiary operates in finance, insurance, or securities investment, the effective tax burden must be equal to or higher than Turkey’s corporate tax rate applicable in that period. - Transfer of Income to Turkey:
The dividend income must be transferred to Turkey before the corporate tax return filing deadline for the relevant fiscal year.
Failure to satisfy any of the above requirements—such as insufficient foreign tax burden or failure to remit the dividend to Turkey in time—disqualifies the income from the exemption.
Application and Practical Considerations
This exemption is a key element of Turkey’s international tax framework, ensuring that Turkish multinationals are not disadvantaged when investing abroad.
It balances two policy goals: avoiding double taxation and preventing profit shifting to low-tax jurisdictions.
When calculating the foreign tax burden, all corporate or similar income taxes paid on the subsidiary’s profits are taken into account.
If the dividend is brought to Turkey after the corporate tax return filing deadline, the amount remitted later cannot benefit from the exemption.
A special rule applies to certain construction, installation, repair, or technical service projects abroad.
If local legislation in the host country requires the establishment of a separate company to perform such activities, the profits distributed from these entities are automatically exempt from corporate tax in Turkey without the need to meet the other conditions.
Additionally, when a Turkish company owns at least 50% of the paid-in capital of a foreign subsidiary, 50% of the dividend received from that subsidiary is exempt from corporate tax in Turkey, regardless of whether the other requirements are fulfilled.
Example
A Turkish joint-stock company owns 20% of a limited liability company established in Germany.
The German company has been subject to a 25% corporate tax rate, and the Turkish parent has held the shares for more than one year.
During the fiscal year, the Turkish company receives EUR 500,000 in dividends and transfers this amount to Turkey before filing its tax return.
Since all legal requirements are met, the entire EUR 500,000 is exempt from corporate tax in Turkey.
If the same dividend were received from a company located in a jurisdiction with an effective tax rate below 15%, the exemption would not apply.
Legal Basis
The foreign subsidiary dividend exemption is regulated under Article 5/1-b of the Turkish Corporate Tax Law (Law No. 5520).
Later amendments introduced a complementary rule whereby, if a Turkish company owns at least 50% of a foreign subsidiary, half of the dividend income received becomes exempt—regardless of the other conditions.
This mechanism aligns Turkey’s tax system with OECD principles on international double taxation and supports the country’s objective of encouraging the repatriation of foreign profits to Turkey.
