The participation income exemption is one of the most fundamental regulations introduced in Turkey’s corporate tax system to prevent double taxation.
This exemption ensures that a corporation’s share of profits earned as a partner in another corporation is not subject to corporate tax a second time, as the income has already been taxed at the initial stage.
In other words, the profit share earned by a fully taxable corporation in Turkey through its participation in the capital of another fully taxable Turkish corporation is deductible from corporate income and exempt from tax in accordance with Article 5/1-a of the Corporate Tax Law.
This regulation is a tax advantage frequently used in group companies and affiliated partnership structures in Turkey.
Conditions for the Exemption of Participation Gains in Turkey
For participation gains to be considered exempt, certain basic conditions must be met according to Turkish legislation:
- Source of Income:
- The income must have been earned through participation in the capital of a fully taxable entity in Turkey.
- Types of Participation:
- Income arising from participation in the capital of fully taxable entities in Turkey, dividends from founder’s certificates and income certificates, and income from venture capital investment funds or partnership shares fall within the scope of this exemption.
- Participating Institution:
- The participating institution must be a fully taxable institution in Turkey. Dividends arising from participation in institutions whose legal or business center is located outside Turkey (partially taxable) are not covered by the exemption.
- Ratio or Duration Requirement:
- There are no restrictions in Turkey regarding the participation ratio or holding period. The institution can benefit from the exemption regardless of the share ratio and the duration of share ownership.
Application and Interpretation in Turkey
The main purpose of this exemption is to prevent double taxation of the same income in Turkey.Since a company’s profits are already subject to corporate tax within its own structure, they are not taxed again when transferred to other affiliates.The affiliate income exemption applies only to dividends received by fully taxable entities through participation in capital.
Profit shares distributed by limited tax liability entities (e.g., companies headquartered in Germany or the United Arab Emirates) are not considered under this exemption in Turkey.Profit shares obtained from founder or beneficiary certificates are also considered exempt in Turkey because the income has already been taxed at the corporate level in the first instance. In addition, dividends paid to board members may also be considered as participation income in certain circumstances. Whether the distributing entity has earned exempt income or is subject to a low tax rate does not affect the exemption; the key factor is that the income must first be subject to tax in Turkey.
Application
A joint-stock company operating in Turkey owns shares in another company that is fully taxable in Turkey and has earned 2,000,000 TL in dividends from its stake in that company.
Since this income has already been subject to corporate tax by the distributing entity, the shareholder company includes this amount in its own corporate income but exempts it from corporate tax.
Conversely, dividends received from a foreign-based (limited taxpayer) entity are not covered by the participation income exemption in Turkey and are taxed according to general principles.
Legal Basis
The participation income exemption is regulated under Article 5, Paragraph 1(a) of the Corporate Tax Law No. 5520.
With subsequent amendments, income earned from venture capital investment funds and venture capital investment partnerships in Turkey has also been included in this exemption.
This regulation is an important tax advantage that protects the participation income of institutions operating in Turkey from a tax perspective, strengthens capital markets, and supports the creation of internal resources for group companies.
For professional advice on corporate tax exemptions and tax incentives in Turkey, contact the expert team at ÖzbekCPA.
