Value added tax in Turkey has a standard rate of 20% with reduced rates of 10% and 1%. There is no registration threshold: anyone carrying on a taxable activity registers from the first transaction. Returns are monthly. What surprises most foreign-owned businesses is not the rate but two mechanisms — partial withholding on domestic services, and the fact that excess input tax generally carries forward rather than being refunded.
Rates
| Rate | Applies to |
|---|---|
| 20% | The standard rate, applying to everything not listed in the reduced-rate schedules, including imports |
| 10% | Items in the second schedule, including many foodstuffs, medicines and medical products, accommodation and certain health and textile supplies |
| 1% | Items in the first schedule, including basic foodstuffs, newspapers and periodicals, and certain agricultural products and deliveries |
The reduced-rate schedules are annexed to a Council of Ministers decision and are amended frequently, sometimes mid-year. Classifying a product by analogy with a similar one is a common and expensive mistake: the rate follows the item as described in the schedule, and where a product does not clearly fall within an entry, the standard rate applies.
Exports are frequently described as “zero-rated”. Turkish legislation does not work that way. Exports are exempt with the right of deduction, which is a different legal mechanism with different consequences: the transaction is outside the charge, and the input tax attributable to it is deductible and, in specified cases, refundable. Educational services and agricultural products are not zero-rated either — they are either taxed at a reduced rate or exempt without the right of deduction, which is again a different position.
The distinction matters because it determines whether input tax can be recovered. Describing an exempt supply as zero-rated leads directly to claiming a deduction that is not available.
The Two Kinds of Exemption
| Exemption with the right of deduction | Exemption without the right of deduction |
|---|---|
| Input tax is deductible and may be refundable | Input tax is not deductible and becomes a cost |
| Exports of goods | Banking and insurance transactions, taxed under a separate transaction tax |
| Export of services, where the service is rendered for a customer abroad and used abroad | Certain deliveries by public bodies and non-profit organisations for educational, cultural and health purposes |
| International transport | Certain transactions in free zones |
| Deliveries under an investment incentive certificate | Certain deliveries of immovable property and participations held for a statutory period |
| Services to vessels and aircraft at ports and airports | Certain leasing transactions outside a commercial enterprise |
Both conditions must hold for the export of services exemption: the service must be rendered for a customer abroad and used abroad. Where the benefit is enjoyed in Turkey — support for a Turkish customer base, for example — the exemption fails even though the invoice is issued to a foreign company and paid in foreign currency.
Withholding: The Mechanism That Causes Most Penalties
This is absent from most guides and is the largest single source of assessments for foreign-owned companies. In specified cases the buyer, not the seller, accounts for some or all of the tax.
Applies where the supplier has no residence, place of business, legal seat or business centre in Turkey — most importantly, services received from abroad. The Turkish recipient declares the tax on a separate return and, where it has the right of deduction, deducts the same amount. Also applies to certain lease and advertising transactions.
For listed supplies — construction work, labour supply, cleaning and maintenance, consultancy and engineering, catering, freight and others — the buyer withholds a stated fraction of the tax and pays the remainder to the supplier. It applies only where the buyer is within a designated class of purchaser.
Services from abroad not declared. A group management fee, a software licence, a consultancy invoice from the parent — each triggers the reverse charge even though no Turkish supplier is involved and no cash leaves for tax. Companies that have never filed the separate return are the most common finding in a handover review.
Partial withholding missed on purchases. The obligation sits with the buyer. Where a supplier invoices the full tax and the buyer pays it, the buyer has still failed to withhold, and the tax authority collects from the buyer.
Withholding applied where it should not be. The ratios and the classes of designated buyer are set in the general communiqué and are amended regularly. Applying last year’s ratio, or withholding as a buyer who is not within the designated class, creates a different problem: an under-payment to the supplier and a deduction the supplier cannot support.
Carried-Forward Tax and Refunds
Where input tax exceeds output tax in a period, the excess is not repaid. It carries forward and is set against output tax in later periods. For a business in an investment phase, or one whose sales are exempt with credit, the carried-forward balance can grow for years.
A refund is available only in specified cases — principally exports and other transactions exempt with the right of deduction, supplies at a reduced rate where the input tax exceeds the output tax, and withholding transactions. The procedure is documentary and slow: the claim is supported by prescribed lists, cross-checked electronically against counterparties’ declarations, and above set thresholds requires either a guarantee or a certification report from a sworn-in certified public accountant.
Two practical points follow. First, a balance that cannot be substantiated with the underlying invoices is a balance that will be disallowed, so the documentation has to survive as long as the balance does. Second, recent legislation has moved away from allowing indefinite carry-forward, so a long-standing balance should be reviewed rather than left to accumulate — the current position on time limits should be confirmed for the period concerned.
On a change of accountant or an acquisition, the carried-forward balance is one of the first items to verify. It appears on the balance sheet as a receivable and is often the largest number on it that nobody has tested.
Input Tax That Cannot Be Deducted
- Tax on expenses that are not deductible for income tax purposes
- Tax on the purchase of passenger cars, outside specified activities
- Tax on goods lost, other than in specified circumstances
- Tax not shown on a valid document, or on a document issued outside the electronic regime where that regime applies
- Tax attributable to supplies exempt without the right of deduction
- Tax on documents not recorded in the statutory books within the deduction period
Non-Resident Businesses
A foreign company with no permanent establishment in Turkey does not generally register for value added tax. Where it supplies services to a Turkish business, the Turkish recipient accounts for the tax under the reverse charge.
Electronic services supplied to individuals in Turkey who are not registered for the tax are the exception. In that case the foreign supplier registers under a special regime for electronic service providers, declares and pays the tax itself, without a Turkish establishment or representative. Digital businesses selling directly to Turkish consumers fall within this regime regardless of where they are established.
Filing and Payment
Returns are monthly and are filed, with payment due, by the 28th of the following month. Transactions subject to withholding are declared on a separate return with the same deadline. Companies with related-party transactions, exemptions or refund claims file supporting lists alongside the return, and the figures are cross-checked electronically against counterparties’ filings — which means a mismatch surfaces automatically rather than in an audit.
Frequently Asked Questions
What are the VAT rates in Turkey?
Is there a VAT registration threshold in Turkey?
Are exports zero-rated in Turkey?
Do we have to account for VAT on services bought from abroad?
What is partial VAT withholding?
Can excess input VAT be refunded in Turkey?
Does a foreign company need to register for VAT in Turkey?
When are VAT returns due in Turkey?
As the Ozbek CPA team, we handle value added tax for foreign-owned companies in Turkey — rate classification, the export of services exemption, full and partial withholding on purchases and sales, review and substantiation of carried-forward balances, refund claims including the certification report, and the electronic cross-checks that follow a filing. Contact us.
