Where only market research, coordination or representation will be carried out in Turkey, a liaison office is considered; where commercial activity will be carried out but the structure is to remain directly attached to the parent company, a branch; and where an operation with separate legal personality, able to take on investors and intended for the long term is to be set up, a limited liability company. The decisive question is this: will income be earned from a customer in Turkey? If the answer is yes, a liaison office is not a suitable structure.
Which structure should be chosen in Turkey?
A foreign company entering the market in Turkey faces three options: a liaison office, a branch of the foreign company in Turkey, or a separate limited liability company. These structures differ considerably in terms of commercial activity, taxation, legal liability, banking transactions and the relationship with the parent company. The decision should not be made on formation cost alone; which contracts will be concluded in Turkey, who payment will be received from, what the employees will do and the growth plan should all be examined together.
Liaison office
Established with Ministry permission and cannot carry out commercial activity. Suitable for market research, coordination and representation. Its expenses are funded by the parent company.
Branch
Registered with the trade registry, issues invoices and earns income. It has no separate legal personality; the parent company is directly liable.
Limited liability company
A company in Turkey with separate legal personality. Investors may be taken on and shares transferred; liability is limited as a rule to the capital undertaken.
Comparison table
Liaison office, branch and limited liability company compared against the main criteria
| Criterion | Liaison office | Branch | Limited liability company |
|---|---|---|---|
| Commercial activity and invoicing | Not possible | Possible | Possible |
| Earning income in Turkey | Not possible | Possible | Possible |
| Separate legal personality | None | None | Yes |
| Method of formation | Ministry permission | Trade registry registration | Trade registry registration |
| Capital requirement | None | Allocated capital required | Statutory minimum capital required |
| Corporate tax | Generally does not arise where there is no commercial activity | On income arising in Turkey (limited tax liability) | Within the scope of full tax liability |
| Profit transfer | Not applicable | Transfer to head office | Dividend to the shareholder |
| Employing staff | Possible | Possible | Possible |
| Taking on an investor or partner | Not suitable | Not suitable | Suitable |
| Liability of the parent company | Direct | Direct | Limited as a rule to the capital undertaken |
| Long-term operation | Limited | Possible | Generally more suitable |
| Closing process | Closing the permit, tax and registrations | Registry and liquidation formalities | Liquidation process (longer) |
Liaison office
A liaison office is the structure a foreign company sets up in order to carry out representation, coordination, market research or technical support activities in Turkey without earning commercial income. Its establishment is subject to the permission of the Ministry of Industry and Technology under Foreign Direct Investment Law No. 4875; carrying out commercial activity is prohibited. It has no legal personality separate from the parent company and performs all its transactions in the name and under the responsibility of the parent company.
Advantages
- The market is tested with low operational risk
- No capital company needs to be formed
- Under certain conditions an income tax exemption on salaries may come into play
- May be used as a transitional structure before a company or a branch
Disadvantages
- Cannot sell, issue invoices or collect payments
- The field of activity is limited by the Ministry permission
- The permission is time-limited; an extension application is needed to continue
- Activity taking on a commercial character creates permit and tax exposure
Where it is planned that employees will sell, take orders, set commercial terms or collect payments from customers, a liaison office is not suitable. Likewise, where there is a plan for e-commerce, tender participation, manufacturing or opening a store, a branch or a local company must be established.
Branch
A branch is the organisation that a company established abroad registers with the trade registry in order to carry out commercial activity in Turkey, and which is directly attached to the parent company. It has no separate legal personality; on the other hand it creates a tax liability, and it may conclude contracts, issue invoices and earn income. Because the branch’s transactions are legally treated as transactions of the parent company, the parent company may be directly liable for its debts and obligations.
Advantages
- Carries out commercial activity, issues invoices and collects payments
- No separate local partner is needed
- The commercial identity and brand of the parent company are used
- Profit may be transferred to head office
Disadvantages
- The parent company is directly liable for the branch’s debts
- Management changes at the parent company require additional registry formalities
- Banks and some institutions may prefer a local company structure
- Not suitable for taking on a local investor or partner
Foreign entities whose legal and business centres are both outside Turkey are taxed on a limited liability basis on the income they earn in Turkey. Depending on the nature of the activity, a branch is also subject to VAT, the withholding and premium service return, stamp duty, advance tax, payroll and social security obligations, and electronic document and electronic ledger requirements. Profit transfer to head office and the provisions of the applicable double taxation agreement should be examined separately.
Limited liability company
A limited liability company is a capital company registered with the trade registry and having legal personality separate from its shareholders. Foreign individuals or companies may be the sole shareholder; there is no requirement for a local partner, and foreign investors benefit as a rule from the principle of equal treatment. The company may carry out commercial activity, issue invoices, employ staff and acquire assets. The entire income of limited and joint stock companies is subject to corporate tax.
Advantages
- It has legal personality separate from the parent company
- Local or foreign investors may be taken on and shares transferred
- Liability is limited as a rule to the capital undertaken
- Treated by banks and customers as a resident company in Turkey
Disadvantages
- The statutory minimum capital must be contributed
- Company organs and decision-making processes must be set up
- Transactions with related companies must be monitored for transfer pricing purposes
- The liquidation process is longer than closing a liaison office
Critical differences
Commercial activity and liability
A liaison office cannot sell or issue invoices; a branch and a limited liability company can. Neither the liaison office nor the branch is a legal personality separate from the parent company, and the parent company may be directly liable for their transactions. In a limited liability company the shareholders’ liability is limited as a rule to the capital undertaken; however, a separate assessment is needed as regards directorship, public debts and guarantees.
Money transfers and banking
The expenses of a liaison office are met with funds sent by the parent company; these amounts are not commercial income but funding of the activity, and the office should not collect payments from customers. The nature of money sent to a branch varies according to whether it is capital, a transfer of funds, a loan or a cover for expenses. Transfers to a limited liability company may be capital, a capital advance, a shareholder loan or a service fee. Transfer descriptions and accounting records should therefore be planned in advance. Banks apply a different compliance procedure for each structure; it should not be assumed that the account will be opened at the same time as the formation.
Personnel
All three structures may employ staff; what is decisive is what the staff do. Liaison office employees may carry out market research, coordination, reporting, quality control and supplier communication. Where employees are to sell, take orders or conclude contracts, the model becomes risky. For foreign employees, the work permit conditions should be examined separately for all three structures; the options may be more limited in liaison offices. Where only employment of staff is needed, the employer of record (EOR) model may also be compared.
Profit transfer and closing
A liaison office has no distributable commercial profit. Branch income may be transferred to head office once the tax obligations have been completed; the profit of a limited liability company is distributed as a dividend by decision of the general assembly, taking withholding tax and the provisions of the applicable agreement into account. On closing, completing the permit and closing the registrations is sufficient for a liaison office, whereas liquidation formalities are required for a branch and a company. How the structure will be closed should also be considered when the formation decision is taken.
Decision tree
Common wrong choices
“Let’s open a liaison office first and run sales from there”
A liaison office cannot sell. Employees taking part in commercial activity may put the structure in breach of the conditions of its permission.
“A branch is a separate company”
A branch is not a separate legal personality. The foreign parent company may be directly liable for the branch’s debts and transactions.
“If we set up a company, there will be no connection with the parent company”
The connection continues in terms of transfer pricing, intra-group services, financing, dividends and reporting.
“Staff sell and head office signs the contract”
Signing the contract abroad does not on its own remove the risk; the actual role of the staff in the sales process is assessed.
Eight questions to ask before deciding
- Will products or services be sold and invoices issued in Turkey?
- Will customer payments come into the bank account in Turkey?
- Will employees take part in sales meetings?
- Will contracts be signed in Turkey?
- Will a local partner or investor be taken on?
- Does the parent company want to be directly liable for debts in Turkey?
- Is the operation temporary or long-term?
- How is the profit planned to be transferred to the parent company?
Where the answer to most of the first four questions is “yes”, a branch or a company structure should be considered instead of a liaison office.
Frequently asked questions
Is a liaison office or a branch more suitable?
Where no commercial activity will be carried out, a liaison office is considered; where sales and invoicing will take place in Turkey, a branch. Suitability depends on the company’s actual operating model.
Can a foreign company set up a single-shareholder limited liability company in Turkey?
Yes. A foreign individual or a foreign company may be the sole shareholder of a limited liability company in Turkey. There is no requirement to have a local partner.
On what basis is a branch taxed?
Foreign entities whose legal and business centres are both outside Turkey are taxed on a limited liability basis, only on the income they earn in Turkey.
Can a liaison office submit an offer to a customer?
Contact may be made for general information or market research purposes. Finalising a price, taking an order or concluding a sales contract creates a commercial activity risk.
Can a liaison office later be converted into a limited liability company?
A liaison office does not convert directly into a limited liability company. A separate company is formed, the activities of the liaison office are terminated and the operations are transferred to the new company.
Can an investor be brought into the operation in Turkey later on?
Because a liaison office and a branch have no separate capital structure, a partner cannot be taken into these structures. Where an investor is to be taken on, a limited or joint stock company must be formed.
- Foreign Direct Investment Law No. 4875 and its Implementing Regulation
- Turkish Commercial Code No. 6102 (branch registration, limited liability company provisions)
- Corporate Tax Law No. 5520 (full and limited tax liability)
- Article 23 of the Income Tax Law and the applicable double taxation agreements
Not sure which structure suits you?
Send us the activities you are planning in Turkey, your estimated headcount and your invoicing model, and our team will prepare a road map covering the appropriate formation option, the documents required, the estimated timeline and the ongoing obligations. Contact the Ozbek CPA team.
