Tax System in Turkey

Overview of the Tax System in Turkey

The Turkish Tax System is structured into two main categories: direct taxes and indirect taxes. The direct taxation system primarily includes Personal Income Tax (PIT) and Corporate Income Tax (CIT), while the indirect taxation system includes Value Added Tax (VAT), Special Consumption Tax (SCT), Stamp Tax, Banking and Insurance Transactions Tax (BITT), Motor Vehicle Tax, Property Tax, Customs Duty, Fees, and Gambling Tax.

Direct Taxes in Turkey

Personal Income Tax (PIT)

Taxable Income

Individuals are subject to PIT on their income, which may consist of:

• Business profits
• Agricultural profits
• Salaries and wages
• Income from independent personal services
• Income from immovable property (rental income)
• Income from movable property (capital investments)
• Other income and earnings

Tax Liability

Tax liability is based on residency status:

• Residents (domiciled in Turkey or staying more than 6 months) are subject to unlimited tax liability on their worldwide income.
• Non-residents are subject to limited tax liability on income derived only from Turkey.

Article 7 of the PIT Law outlines conditions under which income is deemed to be derived in Turkey.

Determination of Net Income

There are two methods:

• Actual basis: Requires keeping books and deducting actual business-related expenses.
• Lump-sum basis: For small taxpayers with limited accounting capacity, tax is assessed based on estimated income.

Deductible expenses include:

• General business expenses
• Employee-related costs (food, boarding, medical, insurance)
• Travel and vehicle expenses
• Certain taxes and fees
• Depreciation

Non-deductible expenses include:

• Withdrawals by the owner or family
• Salaries to owner or close family members
• Fines, penalties, interest on personal capital

Agricultural Income

Defined as income from activities like cultivation, breeding, fishing, etc., conducted on land, sea, or rivers.

Taxation method depends on the size of operations:

• Actual procedure (balance sheet or agricultural operation records) applies to larger-scale farmers.
• Withholding method applies to small-scale farmers.

Gross revenue includes:

• Sales of agricultural products
• Service revenues from equipment use
• Insurance compensations
• Asset sales (excluding immovable property)

Deductible expenses:

• Fertilizers, seeds, feed
• Labor costs and premiums
• Equipment maintenance
• Rent, taxes, travel expenses

Salaries and Wages

Income from dependent personal services includes all compensation elements such as:

• Base salary
• Bonuses
• Commissions
• Allowances
• Benefits in kind

Deductions:

• Social security premiums
• Pension and insurance payments
• Union dues

Income from Independent Personal Services

Applies to self-employed professionals (e.g., doctors, lawyers, consultants).

Deductible expenses:

• Rent, utilities, salaries
• Office-related costs
• Professional subscriptions
• Travel and depreciation

Income from Immovable Property

Includes rental income from:

• Real estate (land, buildings)
• Mining rights
• Intellectual property rights
• Aircraft, ships, vehicles

Deduction methods:

• Actual expenses (maintenance, renovation, depreciation)
• Lump-sum deduction (25% of rental income)

Income from Movable Property

Covers capital income such as:

• Dividends
• Interest
• Profit share
• Securities income

Deductible costs include taxes (excluding income tax), insurance, and collection costs.

Other Income and Earnings

Covers capital gains and non-recurring income, such as:

• Sale of securities and real estate within five years of acquisition
• Intellectual property sales
• Termination of business activities
• Leasehold transfers
• One-off business activities

Corporate Income Tax (CIT)

Taxable Entities

CIT applies to:

• Capital companies
• Cooperatives
• Public enterprises
• Foundations, societies, associations
• Joint ventures

Tax Liability

• Entities with legal head office or effective management in Turkey are subject to unlimited liability.
• Foreign entities without presence in Turkey are subject to limited liability.

Determination of Taxable Income

The CIT Law follows PIT rules, with additional deductions including:

• Stock issuance expenses
• Merger and liquidation costs
• R&D deductions
• Technical reserves (for insurers)
• Profit shares to participation accounts

Non-deductible expenses:

• Interest on equity
• Disguised capital and earnings
• Reserves
• Fines, penalties, and taxes

Filing and Payment

• Annual CIT Return: Due by April 25 following the fiscal year-end. Tax must be paid by the end of April.
• Provisional Tax: Paid quarterly, offset against annual tax.
• Withholding Tax Return: Filed monthly by the 23rd; payment due by the 26th.

Corporate Tax Rate

The standard corporate tax rate is 20%.

Indirect Taxes in Turkey

Value Added Tax (VAT / KDV)

Scope and Liability

VAT is applicable to:

• Supply and import of goods and services
• Each stage of production and distribution

Taxpayers:

• Sellers and importers
• Postal services and broadcasters
• Organizers of events
• Lessors of specified goods
• Optional taxpayers (based on Article 70 of PIT Law)

VAT Mechanism

• Output VAT (sales) minus Input VAT (purchases) = Payable VAT
• Final burden is on the consumer

Reverse Charge VAT

Applies when services are received from abroad:

• Turkish company calculates and pays VAT
• Treated as input VAT (offsettable)

VAT Withholding

Partial withholding applies to:

• Toll-manufacturing
• Ready-made textile materials
• Scrap materials

Taxable Base

Based on market value or the invoice amount excluding VAT.

Exclusions:

• Commercial discounts
• VAT amount itself

VAT Rates

• Standard rate: 18%
• Reduced rate (List I): 1%
• Reduced rate (List II): 8%

Non-Deductible VAT

• Passenger car purchases (unless related to lease operations)
• Missing/stolen inventory
• VAT on non-deductible expenses
• VAT on exempt deliveries (except Article 17/4-s)

VAT Refund

Applies to:

• Exports
• Inward processing and investment incentive activities
• Transit transport
• Diplomatic transactions

Other Indirect Taxes

Stamp Tax

Applies to documents such as:

• Contracts
• Financial statements
• Payrolls Tax is either ad valorem or lump sum.

Motor Vehicle Tax

Assessed annually on registered vehicles, based on:

• Type
• Engine capacity
• Age
• Seat count
• Weight

Paid in two installments: January and July.

Banking and Insurance Transactions Tax (BITT)

Applies to income from services of:

• Banks
• Insurance companies Rate: 5% (1% for some cases, 0% for FX transactions)

Gambling Tax

Applies to:

• Betting
• Lotteries
• Games of chance

Filed monthly, due by the 20th of the following month.

Inheritance and Gift Tax

Applies to assets received by:

• Turkish citizens (worldwide assets)
• Foreigners (only Turkish assets)

Rates:

• Gifts: 10%–30%
• Inheritance: 1%–10%

Payable over 3 years in 6 installments.

Property Tax

Applies to land and buildings:

• Rate: 0.1%–0.3%
• Doubled in metropolitan municipalities

Paid annually in two installments: March–May and November.

Special Communication Tax

Applies to telecom services:

• Mobile services: 25%
• Satellite and cable broadcasting: 15%
• Internet services: 5%
• Other electronic communication: 15%

Filed with VAT return and not deductible for PIT or CIT.

Customs Duty

Applies to imported goods:

• Assessed upon entry into free circulation
• Paid within 10 days of notification

Fees

Various administrative services are subject to fixed or proportional fees, such as:

• Court fees
• Notary fees
• Consulate and visa fees
• Title deed fees

Special Consumption Tax (SCT)

Applies once to goods in 4 categories:

1. Petroleum products
2. Vehicles
3. Tobacco and alcoholic beverages
4. Luxury goods

Taxpayers vary by list:

• Manufacturers, importers, or sellers through auction

Conclusion

The Turkish Taxation System is comprehensive and incorporates both direct and indirect taxes. It aligns with international practices while addressing the specific needs of the Turkish economy. Understanding tax liabilities, deductions, rates, and compliance procedures is essential for both individuals and companies operating in Turkey.

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