Turkish Taxation System

Taxes in Turkey: A Guide to Corporate, Income, VAT, and More

Turkey’s tax system includes a variety of taxes that businesses and individuals must navigate. From corporate tax rates to VAT regulations and wealth taxes, understanding Turkey’s taxation framework is essential for both local and foreign investors. This comprehensive guide provides an in-depth look at the key tax categories, including Corporate Tax, Value Added Tax (VAT), Income Tax, Special Consumption Tax (SCT), and more.

Corporate Tax in Turkey

Corporate tax in Turkey is imposed on the profits of companies operating in the country. For non-financial companies, the corporate tax rate is set at 25%, while the financial sector is taxed at a higher rate of 30%. Companies that go public by offering at least 20% of their shares on the Istanbul Stock Exchange are eligible for a reduced tax rate of 23% for five years following their IPO. This reduction aims to stimulate the capital markets and promote public offerings.

Corporate tax calculations start with accounting profits, adjusted for various deductions, including tax-exempt incomes and expenses. Past losses can be carried forward to offset taxable income in subsequent years. It’s important to note that tax regulations may differ from accounting standards, with specific adjustments needed for depreciation and other expenses.

Value Added Tax (VAT) in Turkey

VAT is an indirect tax levied on goods and services consumed in Turkey, collected by businesses that are VAT registered. The general VAT rate in Turkey is 20%, with reduced rates of 10%8%, and 1% for certain goods and services such as basic consumer goodseducational and healthcare servicesagricultural products, and cultural activities.

VAT Offsetting and Refunds
Businesses can offset VAT paid on purchases (input VAT) against VAT collected from sales (output VAT). If input VAT exceeds output VAT, the difference can be carried forward to future periods or refunded. Companies involved in export activities or those benefiting from investment incentives may qualify for VAT refunds.

Offsetting VAT Against Tax and Social Security Debts
In addition to VAT refunds, businesses can use excess input VAT to offset other liabilities, such as taxes or Social Security premiums. This helps businesses manage cash flow and reduce their tax burden.

Special Consumption Tax (SCT) in Turkey

The Special Consumption Tax (SCT) is a crucial component of Turkey’s tax system, specifically targeting the consumption of certain goods and services. It plays a significant role in generating revenue, shaping consumer behavior, and addressing environmental concerns. Governed by Law No. 4760, the SCT outlines the tax’s scope, rates, exemptions, and the applicable taxation methods.

SCT Application and Scope

The SCT is imposed during the production or importation of specified goods and services. Typically, the producer or importer pays the tax, but the consumer ultimately bears the cost. The tax rates are tiered based on product categories, with different rates applied according to Harmonized System (HS) codes.

High SCT Rates for Harmful Products

Products with negative effects on public health and the environment are subject to higher SCT rates. These products include:

  • Tobacco Products
  • Alcoholic Beverages
  • Petroleum Products
  • Automobiles

These goods are heavily taxed to encourage healthier consumption patterns and reduce harmful environmental impacts.

Tax Collection and Enforcement

The SCT operates within the framework of Turkish law, and the tax authority is responsible for overseeing tax collection and compliance. Tax audits and penalties are enforced to ensure that companies and individuals meet their SCT obligations. Correct calculation and timely payment of the tax are essential for businesses to remain compliant.

Importance of the SCT for Businesses and Consumers

The Special Consumption Tax is a key policy tool in Turkey’s taxation system, impacting both business financial conditions and consumer behavior. Adhering to SCT regulations is essential for the sustainability and operational efficiency of businesses in Turkey.

Income Tax (Withholding) in Turkey: 

In Turkey, individuals are subject to income tax on their earnings, which is calculated based on their net income from various sources during a calendar year. The types of taxable income include:

  1. Commercial profits
  2. Agricultural profits
  3. Salaries
  4. Professional earnings
  5. Income from real estate capital
  6. Income from movable capital
  7. Other gains and revenues

Unless specified otherwise by law, these income sources are assessed based on their actual and net amounts when determining taxable income.

Taxpayer Categories: Full vs. Limited Taxpayers

Turkey’s income tax system distinguishes between full taxpayers and limited taxpayers, which is crucial for both individuals and institutions, especially for those with international operations:

  • Full Taxpayer: An individual or institution is considered a full taxpayer if they are residents in Turkey. Residency is determined by having a primary residence or the center of life in Turkey. Full taxpayers are taxed on their global income within Turkey.

  • Limited Taxpayer: Non-residents of Turkey who earn income from Turkish sources are classified as limited taxpayers. These individuals or entities are taxed only on income earned within Turkey.

This distinction plays a significant role in tax liability and tax planning for international businesses and individuals.

Progressive Income Tax Rates in Turkey for 2024

Turkey follows a progressive income tax system, meaning that as income increases, the tax rate also rises. For 2024, the income tax brackets and corresponding rates are as follows:

  • Up to 110,000 TL: 15%
  • Exceeding 110,000 TL up to 230,000 TL: 16,500 TL plus 20% of the excess over 110,000 TL
  • Exceeding 230,000 TL up to 580,000 TL: 40,500 TL plus 27% of the excess over 230,000 TL
  • Exceeding 580,000 TL up to 3,000,000 TL: 135,000 TL plus 35% of the excess over 580,000 TL
  • Exceeding 3,000,000 TL: 982,000 TL plus 40% of the excess over 3,000,000 TL

These tax rates are applied during the annual income tax return filing process. The tax calculation begins with gross income, from which necessary deductions (e.g., insurance premiums and donations) are subtracted to calculate net income. The net income is then taxed according to the relevant tax bracket.

Withholding Tax on Salaries

For salaried employees, income tax is withheld at the source by employers during salary payments. The withheld tax is directly paid to the Turkish tax office. At the end of the year, employees file an annual income tax return to report their income and compare it with the tax that has already been withheld.

  • If the amount withheld exceeds the actual tax liability, employees can claim a refund.
  • If the amount withheld is insufficient, the individual must pay the remaining balance.

Aiming for a Fair Tax System

The progressive nature of Turkey’s income tax system ensures that higher income levels are taxed at higher rates, promoting fairness. This structure aims to create an equitable system that adjusts tax burdens according to an individual’s or institution’s financial capacity.

Stamp Tax in Turkey

Stamp Tax in Turkey is a tax levied on documents rather than transactions. It applies to documents that are legally valid, enforceable, and signed (or bear an electronic signature in place of a traditional one). These documents are created to establish or prove a legal matter. The scope of Stamp Tax encompasses a wide range of documents, including:

  • Contracts
  • Letters of credit
  • Guarantee letters
  • Payroll slips

In addition, any modifications or amendments to documents—such as changes, renewals, transfers, or alterations—also trigger Stamp Tax obligations.

Calculation and Rates of Stamp Tax

Stamp tax is calculated based on a percentage rate applied to the taxable base of the document. The tax rates vary depending on the type of document. The standard rate for taxable contracts is 0.948%, with an exception for lease agreements, which are taxed at a lower rate of 0.189%.

Each year, the Turkish tax authority publishes the maximum amount of Stamp Tax that can be levied for specific transactions. This ensures clarity and sets a limit on how much tax can be owed.

Triggering Events for Stamp Tax

The signing of a document is the event that triggers the Stamp Tax liability. For documents created outside Turkey, Stamp Tax is applicable in the following situations:

  1. Presentation to Turkish Authorities: When the document is submitted to official state institutionsprovincial administrationsmunicipalities, or courts in Turkey.
  2. Transfer or Endorsement in Turkey: If the document is transferred or endorsed within Turkish borders.
  3. Benefit Derived Within Turkey: If the terms of the document result in any benefit being realized in Turkey.

Liability for Stamp Tax

Both parties signing the document are jointly and severally liable for paying the Stamp Tax. However, it is possible to include a provision in the contract to designate who is responsible for the tax payment. While all parties will remain jointly liable to the tax office, they may reimburse each other based on the terms of the agreement. This ensures that tax payments are handled fairly among the signatories.

Digital Services Tax (DST) in Turkey

The Digital Services Tax (DST) was introduced in Turkey on March 1, 2020 to target revenues generated from services provided through digital platforms. This tax applies to various digital services, including:

  • Advertising services
  • Sales of digital content such as software, apps, music, videos, and games
  • Access and downloads of digital content
  • Intermediary services for the buying and selling of goods among users

The DST is collected by digital service providers operating in Turkey, regardless of whether the provider is an individual or a corporate entity.

Exemption from DST

Certain digital service providers may be exempt from DST if they meet specific conditions. The key exemption criteria are:

  1. Revenue threshold: Providers with revenues in Turkish Lira or global revenues not exceeding 750 million Euros are exempt from DST. This exemption applies only if the quarterly cumulative revenue does not exceed the threshold.

  2. Tax liability onset: If the relevant revenue threshold is exceeded, DST liability begins from the fourth month after the tax period in which the threshold was surpassed.

It is crucial for service providers to regularly monitor and track their revenue figures on a quarterly basis to determine if they qualify for the exemption.

Compliance and Obligations

Digital service providers must ensure they are in compliance with DST regulations by:

  • Monitoring their revenues and tax liabilities.
  • Filing declarations and making timely payments as required by the tax authority.
  • Regular review of tax obligations to avoid any penalties or non-compliance issues.
 

Resource Utilization Support Fund (RUSF) in Turkey

The Resource Utilization Support Fund (RUSF), also known as KKDF in Turkish, is a mechanism introduced by the Turkish government to control external borrowing and limit the use of foreign currency loans. It aims to manage the country’s external debt and stabilize the foreign exchange market by imposing specific deductions on foreign currency loans. The fund’s application varies depending on the loan’s duration and currency type.

RUSF Deduction Rates for Foreign Currency Loans

  1. Loans with an average maturity of up to 1 year: A 3% deduction is applied to the principal amount.
  2. Loans with an average maturity between 1 and 2 years: A 1% deduction is applied to the principal amount.
  3. Loans with an average maturity between 2 and 3 years: A 0.5% deduction is applied to the principal amount.
  4. Loans with an average maturity of 3 years or more: No deduction (0%) is applied.

RUSF Deduction Rates for Domestic Currency (TL) Loans from Foreign Sources

  1. Loans with an average maturity of less than 1 year: A 1% deduction is applied to interest payments.
  2. Loans with an average maturity of 1 year or longer: No deduction (0%) is applied.

Purpose and Implementation of RUSF

The Resource Utilization Support Fund (RUSF) is designed to:

  • Manage Turkey’s external debt: By controlling the use of foreign currency loans, the government aims to limit reliance on foreign debt and mitigate external borrowing risks.
  • Stabilize foreign exchange markets: By imposing deductions on foreign currency loans, the government seeks to balance the economy and protect against foreign exchange fluctuations.

The implementation and management of RUSF is overseen by the Ministry of Treasury and Finance, which uses the funds raised for external debt payments or to cover other financial obligations.

Implications for Borrowers and Financial Institutions

For companies and financial institutions in Turkey, understanding and complying with RUSF regulations is crucial for effective financial planning and debt management. The deductions can result in additional costs for borrowers, especially those seeking foreign currency loans or short-term borrowings.

Taxes on Wealth in Turkey

In Turkey, taxes on wealth are applied to various forms of assets, including property, vehicles, and inheritances. These taxes are structured to generate revenue while also influencing ownership and transfers of wealth. Below is an outline of the key wealth-related taxes in Turkey:

1. Property Tax

Property tax in Turkey is applied to buildings, apartments, and land. The tax rate can vary, ranging from 0.1% to 0.6% of the property’s value, depending on factors like location and type of property. Additionally, 10% of the property tax collected is allocated specifically for the Conservation of Immovable Cultural Assets, ensuring the protection and preservation of culturally significant sites.

2. Motor Vehicle Tax

Motor vehicle tax in Turkey is an annual tax that is levied based on the age and engine capacity of the vehicle. The rates are fixed and vary depending on these two primary factors, meaning newer vehicles or those with larger engine capacities incur higher taxes. The tax system is designed to account for both environmental considerations and the value of the vehicle.

3. Inheritance and Gift Tax

Inheritance and gift taxes are imposed on the transfer of assets due to inheritance or gifting. The rates for this tax range from 1% to 30%, depending on the value of the estate being inherited or gifted. The rates are progressive, meaning that higher-valued estates are taxed at higher rates. This tax affects both individual estates passed on after death and gifts given during a person’s lifetime.

4. Deed Fee

When immovable property (such as land or buildings) is transferred, a deed fee is applied. The fee amounts to 2% of the sale price and is typically split equally between the buyer and seller. This fee is paid at the time of the transfer and ensures the legal documentation of the transaction.

What is Withholding?

Withholding is an essential tax mechanism in Turkey, where a third party, rather than the taxpayer, is responsible for remitting part or all of a tax payment to the government. This method ensures efficient tax collection and compliance across various tax types, such as VATincome tax, and corporate tax. Here’s a detailed overview of how withholding applies in different taxes in Turkey:

VAT Withholding

VAT withholding occurs in transactions involving specific goods and services, particularly in sectors in Turkey prone to tax evasion or those considered risky. In this process, the buyer, instead of the seller, is responsible for paying the VAT due directly to the state. There are full withholding scenarios (10/10), where the buyer pays the entire VAT amount, and partial withholding scenarios (e.g., 2/10, 5/10), where only a portion of the VAT is paid by the buyer.

Income Tax Withholding

Income tax withholding in Turkey is applied directly at the source of income, such as salariesprofessional feesrental income, and investment earnings. In this system, the payer (e.g., employer or entity) is responsible for deducting the tax from the income before transferring it to the Turkish tax authorities. This ensures timely tax payment and simplifies the year-end tax return process, where pre-paid taxes are adjusted against the actual tax liability.

Corporate Tax Withholding

Under the Corporate Tax Law (Law No. 5520) in Turkey, withholding applies to certain payments made to both full and limited taxpayers. It ensures taxes due on various corporate transactions are collected upfront, helping manage tax liabilities for companies.

Inheritance and Gift Tax Withholding

Withholding also applies to the transfer of assets through inheritance or gifts in Turkey. If beneficiaries fail to submit the required documentation to the authorities, withholding can be applied as a proactive measure to collect taxes on these transactions.

Entities Required to Implement Withholding

Certain entities in Turkey are legally required to implement withholding, including:

  • Government departments and affiliated administrations
  • Revolving fund organizations
  • Banks
  • Professional organizations with public institution status
  • Retirement and aid funds established by law or with legal personality
  • Public economic enterprises
  • Organized industrial zones and exchanges, including securities and futures exchanges
  • Entities under the scope of privatization
  • Enterprises owned by administrations, institutions, and establishments holding more than 50% of their shares
  • Companies listed on the Istanbul Stock Exchange

This wide range of entities ensures that withholding is effectively enforced across various sectors and transactions in Turkey.

Who Pays the Withheld VAT in Withholding Invoices?

In cases of full withholding (10/10 ratio), if the service provider is VAT-registered and the recipient is not, the real VAT payer (the service provider) who is not registered under the normal VAT regime will pay. In partial withholding scenarios, the VAT burden is shared between the buyer and seller according to the specified ratio (e.g., 2/10, 5/10).

Entities Authorized to Withhold Income Tax

Entities that can perform income tax withholding include:

  • Public administrations and institutions
  • Other organizationscommercial companies
  • Public economic institutions
  • Business partnerships
  • Foundations
  • Associations
  • Cooperatives
  • Economic enterprises of associations and foundations
  • Investment fund managers
  • Traders and professionals obligated to declare actual income
  • Farmers recording their agricultural earnings according to agricultural enterprise accounts or balance sheet principles.

 

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