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Doing Business in Turkey

October 2015 Contents

1. Turkish market overview

1.1. Turkey’s key attra path for growth 1.3. Turning challenges into opportunities

2. Legal environment: specificities

2.1. Introduction 2.2. Main characteristics of JSC, LLC, Branch and Liaison

3. Employment

3.1. Introduction 3.2. Foreign employees in Turkey

4. environment: specificities

4.1. High level introduction of Turkish taxation 4.2. 4.3. Major transaction 4.4. Related party transactions 4.5. Participation exemption regime in Turkey 4.6. Other tax - related issues

5. Incentives

5.1. Investment incentives 5.2. Incentives support for R&D activities

6. Electronic transformation

6.1. E-invoicing 6.2. E-archive 6.3. E-bookkeeping

2 3 1. Turkish market overview

The Turkish economy, the 17th largest economy in the world (in PPP terms), grew at a rapid rate, except during the local 2001 crisis and the 2008 and 2009 global crises. The realized CAGR (Compound Average Growth Rate) was 4.2% over that of the last decade.

This can be interpreted as the reward for the solid macro policies that have been pursued since 2001. The size of the Turkish economy (GDP) as of the 2014 year-end was 799 billion USD and the per capita GDP was 10,390USD. The general consensus indicates that Turkey’s projected economic growth rate is around 4.5-5.5% per annum, in the medium term.

Due to its strong fundamentals, demographic structure, and great potential, inflows of Foreign Direct Investment (FDI) to Turkey continue. In addition, Turkey attracted an average of 12 billion USD in real-estate investments each year between 2009 and 2014.

For more than 5 years Turkey has met two of the Maastricht Criterion, namely public debt/GDP and budget balance/GDP, whereas even Eurozone members could not achieve such success. Its two weakest points are inflation and current account deficit; however, officials have been taking measures to cope with this.

For instance, the inflation targeting regime, which has been implemented explicitly since 2006, resulted in a drop in inflation rates, which were around 68.5% in 2001, to single digit levels. Balance of payments figures are expected to decline with incentives and policies aimed at raising savings within the country. Turkey has the opportunity to Based on the investment grade Turkey attained from capitalise on a growing, skilled two of three rating agencies (Moody’s, and Fitch), labour force to sustain long-term the country is projected to become the interest of an increased foreign investor base. Also, comparably economic growth. The range of higher capital inflow potential with longer maturity options that are open to Turkey and lower costs will help the country’s macro dynamics improve more. should allow it to catch up to

According to PwC’s estimates, Turkey’s total GDP is its European peers by 2050, forecasted to move up to the 14th rank in the global cementing itself in the 14th league rankings for 2030, and is expected to maintain that rank until 2050. position as early as 2030.

4 1.1. Turkey’s key attractions

• Turkey is close to Europe (just a two to three hour flight to major European destinations), the Middle East, and the Caucasus. As a bridge between Europe and Asia, Turkey benefits from its location. It also acts as an energy corridor, connecting these two continents. • Turkey entered a union with the EU in 1996 and has been an EU accession candidate since 2005. This resulted in the expansion of relations with Europe, which now account for around 40% of Turkey’s trade. • Turkey offers an accessible, skilled, and cost-effective workforce, providing the fourth largest labour force amongst EU members and accession countries. It boasts a large population of over 74 million people, 47% of which are younger than 30 years old. • In recent years, Turkish banks • The Turkish government took on an increasingly larger role provides various tax and in financing project deals, which non-tax incentives to foreign benefit from increasingly liquid investors, in line with those balance sheets in many cases. provided to domestic companies. • The Turkish legal framework These include customs and offers a level playing field to VAT exemptions on various domestic companies. Foreign imported or locally delivered ownership is unrestricted, with no goods, including machinery pre-entry screening requirements. and equipment, as well as priority regions which offer • New Commercial Code No. incentives such as free land and 6102 came into effect as of July energy support. Investors can 2012. It aims to integrate local also benefit from R&D support applications with EU law, improve with the aim of encouraging transparency, protect minority and increasing the rights, and strengthen corporate competitiveness of firms in governance principles. international markets. • The Turkish government also introduced flexible exchange rate policies and liberal import regulations in order to promote and sustain foreign investment.

5 1.2. The future path for growth 1.3. Turning challenges into Young and educated labour market opportunities

Turkey’s demographics have the potential to support Risks to overcome a solid economic growth path. By 2050, Turkey’s If Turkey is to reach its full potential, as highlighted population is expected to grow by around 26%, to in the projections presented above, then there are approximately 94 million. Turkey’s population will major economic challenges to be overcome. For also be relatively young and well-educated. In 2050, example, the current structure of the economy 57% of Turkey’s population is expected to be of remains susceptible to potential bouts of inflation, working age (15-59). with required monetary tightening often hurting Adding more value exports most. The economy would benefit from a greater focus on exports and on raising savings to Positive developments in the labour market could reduce the persistent current account deficit. support a gradual move towards higher value- added industries, potentially allowing a number of The huge current account deficit (CAD) in centres of excellence to take shape in Turkey. The Turkey has been driven by rapidly rising private government can play an important role in supporting consumption and declining savings. Turkish these developments. A number of government authorities implemented measures such as reforms already aim to facilitate the transition with incentives for savings and consumption curving an R&D incentive programme offering generous tax measures so as to reduce external vulnerabilities. breaks, loans, and grants to support firms competing These latest policy measures are intended to higher up the value chain. The privatisation of increase the structurally low savings rate and are energy, utility, and infrastructure sectors would expected to have a positive effect on the CAD. encourage efficiency and increase productivity. With the latest local and global developments, the CAD to GDP ratio dropped from the 2011 rate of 9.7% of GDP to 5.7% of GDP in 2014. Structural reforms key

As Turkey moves towards higher value industries, structural reforms are expected to become increasingly important in order to improve competitiveness vis-a-vis other economies. Improving the transport infrastructure, the legal framework, and tax collection efficiency could be some of the items with higher priority on the government’s agenda in order to foster sustainable growth over the longer term.

6 2. Legal environment: specificities

According to Foreign Direct Investment Law No. 4875, foreign investors are entitled to establish joint stock companies, limited liability companies, and branches in Turkey, in line with Turkish Commercial Code No. 6102. Foreign investors are also allowed to incorporate liaison offices, which are preferred as another vehicle to enter the Turkish market, as per the provisions of the law. 2.1. Introduction The principals for encouraging foreign direct investment in Turkey are mainly regulated under Foreign Direct Investment Law No. 4875 (“Law No. 4875”), which defines the foreign investor as a company/legal entity registered outside of Turkey, a non-Turkish national, or a Turkish national residing abroad who is entitled to form a commercial company in Turkey.

Within the scope of Law No. 4875, foreign investors are entitled to establish any kind of legal entities, which are stipulated under Turkish commercial legislation. The main legislation regulating Turkey-based legal entities, and the corporate law principles in that respect, is Turkish Commercial Code No. 6102 (“TCC”,) which entered into force on 1 July 2012. The TCC will also be applicable to those foreign capitalized companies who seek to establish themselves in Turkey.

In line with the foregoing, there are several types of entities that can be set up under Turkish legislation. As per the provisions of the TCC, companies can either be set up in the form of a joint stock company (“JSC”) or a limited liability company (“LLC”), as well as in the form of a branch office (“Branch”). Furthermore, foreign investors can also incorporate a liaison office (“Liaison Office”) in Turkey so as to enter into the Turkish market as per the provisions of Law No. 4875 and Regulation on the Implementation of Foreign Direct Investment Law.

7 2.2. Main characteristics of Another main difference between a JSC and a LLC concerns their fields of activity. Based on this, a JSC, LLC, Branch, and Liaison JSC may be incorporated for all kinds of economic Office purposes and scopes that are not prohibited by law. A LLC may be incorporated for all kinds of economic The main characteristics of a JSC, an LLC, and a purposes and scopes that are not prohibited by law; Branch, and brief information on liaison offices, however, prohibited from operating in banking, are briefly set out below: insurance, and other specific sectors. Such specific sectors require companies to be established as joint JSC and LLC stock companies in order to grant specific licenses or commence their activities. The most common company types under the TCC are JSC and LLC, which are subject to Despite their differences, it must be highlighted that the same establishment procedures in Turkey both a JSC and a LLC can be incorporated with a before the relevant authorities. However, these minimum of one shareholder, who can be either an companies slightly differ in terms of their main individual or a legal entity. Additionally, according characteristics. to the TCC, the ultimate decision-making organ of both a JSC and a LLC is the general assembly. To begin with, the TCC foresees different minimum capital requirements and a Branch minimum nominal value of shares for JSC and LLC. Accordingly, the minimum capital Foreign investors are also entitled to establish a requirement for JSC is 50,000TRY, while a LLC Branch in Turkey in order to engage in activities can be established with a minimum capital of within Turkey, as per the TCC and the Trade 10,000TRY. Furthermore, the capital of JSC has Registry Regulation. Different than a JSC and a to be divided into shares, each with a minimum LLC, Branches may be incorporated only for the nominal value of 0.01TRY. The capital of a same purposes as the parent company. In this LLC has to be divided into shares, each with a respect, branches shall not have separate Articles of minimum nominal value of 25TRY, or multiples Association and consequently shall merely act within of this amount. Additionally, a JSC is allowed the fields of activity of their parent company. to issue debentures and offer its shares to the It should be highlighted that there is no minimum public whereas a LLC is prohibited from issuing capital requirement for branches. That being said, debentures and cannot offer its shares to the branches may have separate capital which may public. be allocated by the parent company. In practice, it Another main distinction between a JSC is generally preferred by the parent companies to and a LLC is related to the liabilities of the allocate capital to their branches. shareholders of the referred companies. As per Furthermore, branches are managed by the parent the relevant legislation, shareholders of a JSC company and represented by the branch manager(s) are not personally liable for the debts of the before third parties who is/are appointed by the company. However, shareholders of a LLC are parent company. Turkish citizens and foreigners can liable for the public debts of their company in be appointed as branch managers; however, it is case such public debts are not covered by the required that they reside in Turkey. company itself.

Moreover, a JSC and a LLC have different management and representation organs. Within this framework, while a JSC is managed and represented by a board of directors, which may be composed of at least of one member, a LLC is managed and represented by a manager or board of managers.

8 Liaison office In case the field of activity of the parent company is related to specific legislative sectors such as There also exists a Liaison Office structure in Turkey, insurance, banking, and capital markets, the which is considered neither a capital company nor a application on the establishment of a liaison office branch, but which is preferred by foreign investors as is also considered by the relevant governmental a practical way to enter the Turkish market. Basically, authority. foreign capitalized entities may likely prefer to be established as a Liaison Office in Turkey so as to Liaison offices in Turkey are represented by a liaison represent parent companies’ business activities and office representative who will be empowered by the to gather necessary information on the related sector parent company through a power of attorney. The and the country on behalf of the parent company. representative may either be a Turkish citizen or a foreigner. The terms and conditions of establishing a Liaison Offices in Turkey are regulated under Law No. The establishment permit can be granted by the 4875 and the Regulation on the Implementation Ministry of Economy for up to a period of 3 years of Foreign Direct Investment Law. As per such and can be extended after expiration. However, legislation, establishment of a Liaison Office is the activity period of the Liaison Offices, which subject to the permission of the Ministry of Economy. are established to engage in activities on market Furthermore, Liaison Offices are prohibited from research and promotion of parent company products engaging in commercial activities and conducting or services, cannot be extended and the Ministry of any income-generating activity in Turkey. Due to Economy has the right to terminate the establishment this, all payments that result from the daily activities permit of a liaison office whenever any kind of breach of Liaison Offices are to be covered by their parent of legislation is ascertained. companies. It is also of importance to state that there exists no foreign capital requirement in establishing a Furthermore, Liaison Offices are required to submit liaison office. an annual report to the Ministry regarding their previous years’ activities until the end of May of each As mentioned, a Liaison Office is a business type relevant year, at the latest. which is not allowed to conduct “commercial activities” but is allowed to carry out the Foreign investors are also authorized to establish a activities indicated under the Regulation on the regional management center in the form of a liaison Implementation of Foreign Direct Investment Law. office, thus gaining certain advantages. Those types These activities are as follows: of regional management centers are preferred for the purpose of organizing management and coordination • Market research on following exemplified activities of the parent • Promotion of the goods and services of the parent company’s various units in different countries within company the determined region: forming investment and • Representation and hosting management strategies, planning, promotion, sales & post-sales services, brand management, technical • Control of the suppliers in Turkey in terms of support, research and development, external supply, quality and standard, their supervision, and testing the newly developed products, laboratory supplier procurement services, research analysis, training and education of • Technical support employees. • Communication and information transfer • Regional management center • Other

9 3. Employment

3.1. Introduction The principal law governing the employer- employee relationship in Turkey for individual parties is Turkish Labour Law No. 4857. The Turkish Labour Law is applicable to all workplaces, other than those specified in the mentioned law, to their employers and employers’ representatives, and to the employees of the said workplaces, regardless of their activities.

The main institution involved with employment issues is the Ministry of Employment and Social Security Affairs. Labour disputes are handled by specialized courts called Labour Courts. The Turkish Labour Law sets forth provisions both for individual and collective employment and indicates key factors of employment, such as:

Individual employment regulations • Employment contract • Working time • Salary • Holidays • Military service • Maternity leave and other leave provisions • Equality • Termination of employment

Collective employment regulations • Trade unions • Collective bargaining agreements • Collective dismissals

10 3.2. Foreign employees Response to work permit 3. Social security tax applications is received within one in Turkey month, once the documents are A foreign national who is submitted to the Ministry of Labor. covered under the compulsory An efficient structure for talent The overall process, including social security system of his/ mobility is a key element of completion of the application her home country (which has a sustainable growth and success for documents and the work visa social security agreement in force any multinational company. application, may take up to 2-3 with Turkey, or is a party to the European Convention on Social Turkey hosts a large number of months. Security) is not required to pay expatriates who bring a wide range Professional services such as Turkish social security premiums, of expertise to different industries. engineering, city planning, and provided a certificate of coverage is Linked with the continuous need architecture are carefully regulated, filed with the local social security to move select individuals from therefore work permit applications office. If the individual is assigned their talent pool swiftly across for foreign nationals holding one of to Turkey from a country which borders is the essential need for these degrees differ from regular does not have a social security companies to stay compliant with work permit applications, and may agreement with Turkey, there local rules and continue to update take up to a year. may still be a 3-month exemption, their understanding of heightened if certain documentation scrutiny from immigration, tax, and In case of such applications, requirements are satisfied. If the social security authorities. individuals may be granted pre- employee is not subject to foreign approval to work for one year, Key considerations social security, full contributions provided that they do not perform are generally imposed. any technical duties within that one 1. Immigration requirements year period. Foreign national individuals to be 2. employed in Turkey need a work visa and a work permit in order to be If the employee’s salary is either eligible to work and reside in Turkey. directly or indirectly paid by the local employer, income tax is The first step to obtain authorization withheld every month from salary to work in Turkey is applying for paid through Turkish payroll a work visa through the Turkish under the pay-as-you-earn (PAYE) representative (consulate/embassy) system. The employer’s withholding in the individual’s country of obligations, the filing time of the residence or citizenship. Within monthly withholding tax returns, 10 days following the work and payment of taxes are no visa application, a work permit different than for regular Turkish application must be filed with the employees. Ministry of Labor by the Turkish employer (or the sponsoring entity). Depending on the foreign employee’s After the work permit is issued, the residency status in Turkey, any employee should visit the Turkish employment income that is taxable Representative, with whom the work in Turkey and is not captured permit application was filed, and on the individual’s local payroll obtain the work visa. Authorities would, in principle, trigger an must be informed of the individual’s individual income tax return filing Turkish residence address within 20 requirement. days of entrance into Turkey. Split pay arrangements should be Foreign nationals holding valid further analyzed based on this Turkish residence permits (a understanding. minimum validity of 6 months is required) do not need a work visa prior to applying for a work permit.

11 4. Tax environment: specificities

4.1. High level Withholding tax: permanent representatives/agents) the WHT will only be applicable introduction, to Under the Turkish tax system, on the portion of the profit that is Turkish taxation certain taxes are collected through transferred to the headquarters/ withholding, for example in the principal, in other words repatriated The primary tax considerations that hands of the service recipient tax- from Turkey. The rate of the WHT arise in Turkey include corporate registered entities making the is 15% but can be reduced by a tax income tax, withholding tax (on the payments in Turkey in order to treaty. repatriation of profits), and indirect secure the collection of taxes. These taxes, including customs duties (on include income tax on the salaries : import). of employees, lease payments to individual landlords, independent Goods imported by the newly There are also significant transfer professional service fee payments incorporated company with a pricing risks associated with related to resident individuals, royalty, certificate of origin from the EU will party transactions and it will be license, and service fee payments to not attract a customs . If the necessary to ensure that related nonresidents. Companies in Turkey payment related to the import is not party transactions, i.e. sales charges, are responsible for withholding such made before the actual importation, are undertaken on an arm’s length taxes on their payments and declaring then it is subject to a RUSF of 6%. basis. them through their withholding tax A VAT of 18% will be levied on returns. However, please note that In Turkey, there is no single imports and domestic sales. In local withholding tax rates may be registration, i.e. for VAT (Value addition, services received from reduced or the Turkish taxation may Added Tax) or other taxes purposes. non¬resident companies will be even be eliminated based on the Once a company registers for tax subjected to reverse charge VAT at a provisions stipulated in more than purposes, it will be liable for all rate of 18%. 80 effective bilateral tax treaties to Turkish taxes, i.e. CIT(Corporate which Turkey is a party. Income Tax), VAT, withholding tax, Payroll taxes: stamp tax, etc. Dividend distributions to individual Payroll payments (salary payments and non-resident corporate to employees) necessitate income : shareholders are subject to the tax, social security premiums, and withholding tax (WHT) at a rate of stamp tax on gross payments to Corporate income, as adjusted 15%. This rate may be reduced for for exemptions and deductions, employees. Income tax brackets are foreign shareholders if a announced at the beginning of each including prior year losses (tax is present. Please note that dividend losses may be carried forward year by the Ministry of Finance. The distributions to resident entities and income tax withheld at the source is for five years but losses may not branches of non-resident entities are be carried back), is subject to to be declared with the withholding not subject to the dividend WHT. For tax return filed by the company for corporate income tax at a rate of non-resident entities operating in 20%, irrespective of the legal form that related period. Please find the Turkey (i.e. branches, other types of brackets announced for 2015 below: (i.e. JSC, LLC). Likewise, branch permanent establishments such as profits are subjected to the Turkish CIT at a rate of 20% since branches are taxed solely on the income Not over Tax on lower Percentage on derived from activities in Turkey, over amount excess because they are regarded as non- resident entities from Turkish tax 0 12.000 0 15% perspective. 12.000 29.000 1,800 20% 29.000 66.000 5,200 27% 106.000 And above 25,990 35%

12 • 1% on the principal if the average maturity period of the foreign currency denominated loan is between 1 and 2 years (including 1 year)

• 0.5% on the principal if the average maturity period of the foreign currency denominated loan is between 2 and 3 years (including 2 years)

• 0% on the principal if the average maturity period of the foreign currency denominated loan is longer than 3 years (including 3 years) Please also note that any foreign sourced TRY denominated loans would attract a RUSF over interest payments at 3%, regardless of maturity.

Property taxes: Stamp tax is levied on gross • In order to benefit from the wages at a fixed rate of 0.759% treasury support, the company Property taxes should not apply for 2015. Social security should have no debt to the Social unless real property in Turkey premiums and unemployment Security Institution. is purchased. Please refer to the premiums should be declared by related section for further details employers on a monthly basis. Stamp taxes: regarding property taxes. Employee contributions are Stamp tax applies to a wide range deductible when determining Taxes on incorporation: taxable income. Employees pay of documents, including, but not 14% and employers pay 20.5% limited to, agreements, financial There is a competition fund payable per month for earnings up to statements, and payrolls. Stamp over capital contributions at 0.04%. 7,809.90TRY, between 1 January tax is levied as a percentage of the No other direct or indirect taxes 2015 and 30 June 2015 and up value stated on the agreements at applicable to capital are incurred on to 8,277.90TRY between 1 July rates varying between 0.189% and a yearly basis. 2015 and 31December 2015. 0.948% for 2015. The maximum payable stamp tax amount is 1,702 As regulated in Article 24 of Law million TRY over each original copy. 4.2. Corporate tax No. 5763, the Treasury will be Corporations are required to pay financing 5% of the companies’ Resource Utilization Support advance corporate income tax based social security employer costs, Fund (RUSF) on foreign on their quarterly profits at a rate which means that the total social sourced loans: of 20%. Advance corporate income security contribution will be taxes paid during the tax year are 32.5% instead of 37.5%, and the Foreign sourced loans obtained offset against the ultimate corporate employer’s share will decrease by Turkish resident individuals or income tax liability of the company, from 22.5% to 17.5%. In order legal entities (except for banks or which is determined in the related to benefit from 5% treasury financial institutions) are subject to year’s corporate income tax return. support, the following conditions RUSF at a rate of: The balance of advance tax can be should be met: refunded or used to offset other tax • 3% on the principal if the liabilities. • Retired employees cannot average maturity period of the benefit from the provisions of foreign currency denominated this new regulation. loan does not exceed 1 year

13 Typical calculation of All cultural and artistic donations loans which are regarded as thin corporate income tax is as made to governmental institutions capital; or to associations and foundations follows: • Fines and penalties and other that are granted indemnities arising from the by the Council of Ministers (such The corporate income tax base wrongdoing of the taxpayer; is calculated by adjusting the donations are cited in detail in the commercial profit with deductions legislation). • Donations to foundations (that and non-deductible expenses. are granted a tax exemption All sponsorship payments for by the Council of Ministers), amateur sport activities and 50% Typical deductible expenses or to government institutions of the sponsorship payments for exceeding 5% of corporate profit; are as follows: professional sport activities. • Expenses recorded through Expenses incurred for the issuance Depreciation of fixed assets severance pay provisions of share certificates or corporate (severance pay shall be accepted bonds. Meals provided on the company’s as tax deductible only when premises to employees, without any actual payments are made to Start-up costs (these costs are limitations. However, there is an employees); and, either to be expensed or capitalised updated limit each year. at the discretion of the tax payer). • The portion of expenses incurred Social security contributions that is considered in violation of Previous years’ tax losses provided regulations. that they have not been carried Compensation paid or losses forward for more than five years incurred in line with contracts or Tax returns (on the condition that the tax court rulings, provided that they Resident and non-resident entities loss corresponding to each year are related to the business. that have a is specified in the corporate in Turkey are obliged to file annual income tax return. Please note Travel and accommodation corporate income tax and quarterly that “deductible loss” is the “tax expenses related to operations advance corporate income tax loss” for the previous five periods and proportional to the volume of returns (on a calendar year basis shown on the corporate tax return, business. unless permission to the contrary not the “accounting loss” shown Real estate, stamp, and is specifically obtained from the on the income statement or the municipality taxes and duties Ministry of Finance). balance sheet of a company). It is and fees that are relevant to the also worth mentioning that loss corporation. The last date of submission of the carryback is not allowed. corporate income tax return is the 25th of the fourth month, following Donations made to governmental Fees paid by the employer to the end of the fiscal year end. institutions or to associations and labour unions The advance tax return should be foundations which are granted Contributions paid by the employer submitted at the latest by the 14th tax exemption by the Council of to the private pension system of the second month, following the Ministers, and which do not exceed (subject to a ceiling). quarter period. 5% of the current year’s profit. All donations made for the Typical disallowable Bookkeeping in Turkey construction of dormitories, expenses are as follows: Article 182 of the Tax Procedures Law nursery schools, rest homes, and • Interest, foreign exchange itemises the legal books that should rehabilitation centres, subject to losses, and other financial be maintained by companies that certain conditions. expenses on capital and on

14 keep their records per the balance- Payment of tax The VAT rates sheet method. These are: Corporate income tax must be paid The Turkish VAT system employs • Journal ledger by 30 April of the year of filing; multiple rates and the Council of • General ledger taxable income is declared on a Ministers is authorized to change the • Inventory ledger quarterly basis as advance tax on VAT rates within certain limits. the 14th of the second month, In addition to the above ledgers, the following each quarter, and is The standard rate of the VAT on Turkish Commercial Code requires payable on the 17th of the same taxable transactions is set at 10% the maintenance of the following period. Paid advance corporate tax in the VAT Law, but this rate was books: is offset against the final corporate increased to 18% on 15 May 2001. • Resolution book (Joint Stock tax calculated in the annual tax For the deliveries and services Companies) return. mentioned in List No. 1, e.g., agricultural products such as raw • Managers resolution book Legal reserves (Limited Liability Companies) cotton, dried hazelnuts, etc., the rate is 1%. For the deliveries and Under the Turkish Commercial • Share ledger services mentioned in List No. 2, e.g., Code, Turkish companies are basic food stuffs, books, and similar • General assembly and required to set aside first and publications, the rate is 8%. negotiation book second level legal reserves from their profits. Please note that These legal books should be Please note that there are two basic branches are not subject to the legal certified by a public notary before forms of exemption under the Turkish reserve requirements. the commencement of the new VAT law: accounting year. In general counting 4.3. Major transaction 1- Exemption without year is deemed as a calendar credit for previously paid year but a different fiscal year taxes VAT is acceptable if approved by the Ministry of Finance. Value Added Tax (VAT) In this case, input VAT cannot be deducted or reclaimed but can only The company’s accounting can Any person or entity engaged in be recorded as a cost or an expense. be performed by a shared service an activity within the scope of the Transactions subject to “exemption center located abroad and the VAT law must notify the local tax without credit for previously paid electronic server can also be located office where his place of business is VAT” include the supply of goods and outside Turkey, bearing in mind that located. Please note that there is no services for cultural, educational, all original documents and records single “VAT registration” approach recreational, scientific, social, and should be made available in case of in Turkey because it is not possible military purposes and certain other an inspection or upon any statutory to register only for VAT purposes in categories. request. Turkey. In order to register for VAT purposes, a foreign company must 2- Exemption with credit It is mandatory that the legal books have a permanent establishment for previously paid VAT be kept in the local language, in (PE) in Turkey and is obliged terms of the Turkish Lira, and in line In this case, transactions are exempt to register for all tax purposes with the Turkish Uniform Chart of from VAT but the taxpayer has the (i.e. VAT, corporate income tax, Account; however, dual language right to offset or request a refund withholding tax, , etc.) records are allowed. Legal books of previously incurred VAT. This with a tax office in Turkey. should be printed as hardcopies if mechanism is principally concerned the company is not registered with with operations. e-invoicing and/or e-bookkeeping systems.

15 Special is levied on the 4.4. Related party (SCT) owner of real estate at 0.2% on buildings. If the buildings are transactions The special consumption tax is used for residential purposes it Transfer pricing provisions set forth a tax applied to manufacturing, is reduced to 0.1%. For newly in Article 13 of Corporate importation and first acquisition of constructed buildings, however, No. 5520, and effective as of 01 a range of goods. SCT is applied one this tax cannot be lower than the January 2007, were prepared taking time only, unlike VAT. Four main property tax of the land on which into consideration the OECD Transfer product lists fall within the scope of it is built. In a few cases, i.e retired Pricing Guidelines and international SCT. They are: citizens’ domiciles, the developments. is 0%. Also, the property tax rate • petroleum products, natural gas, for land is 0.1%, whereas the rate lubricating oil, etc. – List 1 for arable is 0.3%. The rates are Arm’s length principle applied twice for property located • automobiles, motorcycles, planes, Under the arm’s length principle, in metropolitan municipality areas. other vehicles, etc. – List 2 with the new legislation, related Property tax is payable annually, parties must set the transfer prices in two installments, in May and • tobacco and tobacco products, for the purchase and sale of goods November. alcoholic beverages, etc. - List 3 and services as they would have been agreed upon between unrelated • luxury products such as Furthermore, a supplementary parties. diamonds, cellular phones,etc. - surcharge for the protection of cultural assets is levied at an List 4 The term “related party” is defined amount of 10% over the accrued in a very broad manner in the property tax amount of the real Banking and Insurance legislation and covers any group estate. The surcharge is payable at company with direct or indirect Transactions Tax (BITT) the same time as the property tax. shareholding, without any limitation, The transactions of licensed banks and also with direct or indirect and insurance companies are Stamp Tax control. The term “related party” also generally exempt from the VAT, covers those with whom the company Documents within the scope of but are subjected to the Banking has continuous economic relations, the stamp tax are papers which and Insurance Transactions Tax which directly or indirectly affect the are legally valid and exercisable, (BITT) at a rate of 5%, which is due economic and commercial decisions bearing a signature (or a sign on the gains of such corporations’ of that company. transactions. replacing signature, or electronic signature), and which are prepared The purchase of goods and services for the purpose of proving any Documentation requirements legal subject. In this sense, the by banks and insurance companies Taxpayers should submit the form stamp tax applies to a wide range are subjected to the VAT, but this “Transfer Pricing, Controlled of documents including written is considered an expense or cost Foreign Corporations, and Thin agreements. item. Therefore it is not recoverable Capitalization” as an attachment to (i.e., for VAT purposes, by offsetting the annual corporate tax return. against the output VAT) in the hands The stamp tax rate on the taxable papers is 0.948%, with an of these corporations. Taxpayers are obliged to prepare an exception for lease agreements annual TP report, the scope of which which are taxed at 0.189%. The changes according to the following Property Taxes stamp tax is calculated on the criteria: Buildings and land owned in Turkey highest value stated or calculable are subject to real estate tax at from the taxable paper, or on i. Corporate taxpayers registered varying rates. the maximum amount stated with the Large Taxpayers Tax on the paper. There is a cap of Office should prepare a report for 1,702,138.00TRY, per agreement, both cross-border and domestic for 2015. related party transactions. They should also include the transactions with their related parties operating in Turkish zones.

16 ii. Other corporate taxpayers The interest paid or accrued, and Moreover, as of today, the Turkish should prepare a report only for similar payments on thin capital, Council of Ministers has not yet their cross-border related party are reclassified at the end of the determined which of the countries transactions. They should also relevant fiscal year as dividend receiving payments shall be include the transactions with distributed from the perspective considered as “tax havens”. their related parties operating of the borrower and as dividend in Turkish free trade zones. received from the perspective of Treatment of group entities the lender, and as repatriated profit iii. Corporate taxpayers operating for non-resident taxpayers. Consolidation of the accounts of in Turkish free trade zones group companies’ entities for tax should prepare a report for the 4.5. Participation purposes is not allowed in Turkey, transactions with their Turkish since each company entity is resident related parties. exemption regime in regarded as a separate taxpayer unit for tax purposes. Annual transfer pricing reports Turkey should be prepared by the There is an unconditional corporate deadline for filing the annual Controlled Foreign tax and dividend withholding tax corporate tax return. However the Corporation rules (CFC) exemption for dividend income reports shall be presented when between Turkish companies. If a Corporations established abroad and requested by the Turkish Revenue Turkish company owns shares of controlled directly or indirectly, 50% Administration or by those a foreign company, this dividend or more, by tax-resident companies persons authorised to carry out income is exempt from corporate and real persons by means of tax inspections. When an annual tax under certain conditions. separate or joint participation in the transfer pricing report is requested, capital or dividends or voting rights the report should be presented For capital gains generated from are considered CFCs, provided that within 15 days, as per the general share sales in a Turkish company some conditions are fulfilled, i.e. provisions of the Tax Procedural by another Turkish company, 25% or more of the gross revenue Law. 75% corporate tax exemption of the foreign subsidiary must be is applicable under certain composed of passive income and Thin capitalization conditions. In the event that a the CFC must be subjected to an foreign subsidiary is sold by a effective income tax rate lower than According to the thin capitalization Turkish company, under certain regulation, if the ratio of the 10% for its commercial profit in its conditions 100% corporate tax home country etc. borrowings from shareholders exemption is applicable. or from persons related to the The CFC’s prorated profit would be shareholders exceeds three 4.6. Other tax-related included in the corporate income times the shareholders’ equity tax base of the controlling resident of the borrower company at any issues corporation at the rate of the shares time within the relevant year, controlled, irrespective of whether All sorts of payments made to the exceeding portion of the it is distributed or not, in the fiscal corporations (including branches borrowing will be considered thin period covering the month of of resident corporations) that capital. Excluding loans received closing of the according CFC. The are established or operational in from credit institutions which CFC’s profit which has already been countries which are regarded by provide loans only to their related taxed in Turkey as per this article the Turkish Council of Ministers as companies, the loans received will not be subject to additional tax undermining fair , from related banks and similar in Turkey in the event of dividend due to tax and other practices, may institutions alone will not be distribution; whereas the portion of be subject to taxation in Turkey considered as thin capital until the the profit distributed that had not at a rate of 30%, irrespective amount of the borrowing exceeds 6 been previously taxed in Turkey will of whether the payments in times the shareholders’ equity. be subject to taxation. question are subject to tax, or the In addition to the interest paid corporation receiving the payment or accrued, foreign exchange is a taxpayer. However, there are losses and other similar expenses certain exemptions. calculated over the loans that are considered as thin capital are treated as non-deductible for corporate income tax purposes.

17 5. Incentives

5.1. Investment 5.2. Incentives and Social security premium support (50%) incentives support for R&D Half of the employer’s portion The Turkish government provides activities of social security premiums for investment incentives - so-called R&D and support personnel state aid - in order to eliminate Current incentives (a maximum of 10% of the inter-regional economic imbalances, number of full time R&D facilitate a larger capital Tax incentives and support personnel) will be funded by contribution to the country’s capital mechanisms that are provided to the Ministry of Finance. build-up by public and foreign companies carrying out R&D and investors, and support activities innovation activities in Turkey are Stamp tax exemption as follows: that have a positive effect on Documents prepared for employment. 1. Law No. 5520 on corporate R&D activities, including the Under the Investment Incentive income tax payrolls of R&D and support personnel, are exempt from the System, investments have been R&D deduction (100%) divided into five main categories: stamp tax. All eligible innovation and R&D • General investments expenditures made for R&D and • Regional investments innovation projects which have • Preferential investments been approved by the Ministry of • Large Scale investments Finance can be deducted from the corporate income tax base as an • Strategic investments. R&D deduction of 100%.

In the scope of the Investment 2. Law No. 5746 on support of Incentive Certificate (IIC), R&D activities companies can benefit from the following ten components: R&D deduction (100%)

State aid elements for All eligible innovation and investments R&D expenditures made for technology centres, R&D • VAT exemption centres (which must employ • customs duty exemption at least 30 full-time equivalent R&D personnel), R&D and • RUSF exemption innovation projects supported • corporate tax support by governmental institutions, • support for employer portions foundations established by law, of social security premiums or international funds can be deducted from the corporate • land allocation income tax base at a rate of • interest support 100%.

• VAT refund Income tax exemption (80-90%) • support for salary income 80% of the salary of eligible taxes (only for investments R&D and support personnel (a realised in region 6) maximum of 10% of the number • support for employee of full time R&D personnel) portions of salary social is exempt from income tax. security premiums(only for This rate increases to 90% for investments realised in region 6) personnel with PhD degrees.

18 3. Law No. 4691 on technology Institutions providing cash 4. Law No. 6518 on support of development zones support on project basis patent rights and utility models Corporate income tax exemption • Scientific and Technological Revenue derived from the rental Research Council of Turkey of inventions arising as a result of The profits derived from software (TÜBİTAK ) research; development, innovation, activities or products developed as a and software activities carried result of research and development • Turkish Technology Development out in Turkey; its transfer, sale, activities in technoparks are exempt Foundation (TTGV) or marketing as a result of mass from corporate income tax. • Ministry of Science, Industry production; and part of the revenue and Technology Income tax exemption (100%) that’s only attributed to the • Small and Medium Industry patented or utility model certified The salaries of R&D and support Development Organization (by the Turkish Patent Institution) personnel carrying out R&D and (KOSGEB) invention, derived from the sale software development activities • Development agencies of the products manufactured as a in technoparks are exempt from result of the use of the invention in income tax until 31 December • European Commission the production process in Turkey, 2023. Salaries for activities other is exempt from corporate tax than software development and Investment support by 50%, in accordance with the R&D activities cannot benefit from programme for technological conditions stated in legislation. income tax exemption. products Moreover, the leasing, transfer or Social security premium support sale of the intellectual property (50%) The Ministry of Science, Industry, rights regarding patented or utility and Technology provides funding model certified inventions arising Half of the employer portion of support to companies operating in as a result of R&D, innovation, and social security premiums for R&D Turkey for: software activities carried out in and support personnel (a maximum • Investments for the production Turkey are also exempt from the of 10% of the number of full time of technological products which Value Added Tax. R&D personnel) will be funded by are successfully completed as a the Ministry of Finance. result of R&D and innovation Stamp tax exemption (only on projects (projects supported payrolls) by governmental institutions, foundations established under The payrolls prepared for R&D law or international funds, activities are exempt from the stamp projects successfully started duty. and completed in Technology VAT exemption Development Zones) • Investments for the production of Delivery of software and services technological products developed (system management, data as a result of R&D activities management, business applications, carried out in Turkey and abroad internet, mobile and sector with their own resources and with applications, military command obtained patent rights for the control applications) arising from product software development activities by companies operating in technoparks The support includes machinery are exempt from the VAT until 31 and equipment support, loan December 2023. interest support, and operation cost support for companies based on their scale.

19 6. Electronic transformation

6.1. E-invoicing • taxpayers already registered for According to General Communiqué the e-invoicing application when No. 433 (updated in the meantime E-invoicing application rules delivering goods or rendering with Communiqué No. 443), only establish that the Revenue services to other taxpayers that companies registered with the Administration is the mandatory benefit from the application e-invoicing application will be hub for the exchange of invoices in able to apply and register for the Taxpayers in the above scope were electronic format. This means that e-archive application. However, supposed to have completed their the secure circulation of e-invoices companies that conduct sales implementation by 31 December between registered parties must be of goods and services through 2013. Taxpayers who did not fall conducted through the Revenue the internet and which show a under the above scope may apply Administration. Users who benefit minimum gross sales revenue to use this application voluntarily. from the e-invoicing application of 5,000,000TRY on their 2014 As of January 2015, there were can: income statements will be obliged approximately 20,000 companies to register for the e-archive • send e-invoices to other registered in the e-invoicing application by completing all registered users system. It is expected that the necessary application and • receive e-invoices from other scope of the obligation will be implementation requirements by 1 registered users updated and broadened in the January 2016. • download e-invoices, store them future, and that the number of electronically, and present them companies registered in the system E-archive invoices will be to the authorities when required will increase to approximately reported to the Turkish Revenue 40,000 in 2016 and 80,000 in Administration on a monthly basis. In accordance with General 2018. It is expected that the scope of Communiqué No. 421, the obligation will be updated and following groups of taxpayers are 6.2. E-archive broadened in the future. obliged by the Ministry of Finance to send invoices electronically: Despite its unfortunate name, the e-archive application is similar to • taxpayers that hold mineral the e-invoicing application, except oil licenses within the scope of for the fact that the Revenue the Petroleum Market Law and Administration does not act as a taxpayers that purchase goods mandatory hub. This application from the same (and have a was designed to allow companies minimum gross sales revenue to issue invoices in electronic form of 25,000,000TRY for the 2011 to taxpayers who are not registered calendar year) in the e-invoicing system and to • taxpayers who produce or end consumers. import the goods stated in List No. III, attached to the Special Consumption Tax Law, and taxpayers who purchase goods from the same (and have a minimum gross sales revenue of 10,000,000TRY for the 2011 calendar year)

20 6.3. E-bookkeeping The core purpose of this Additionally, there are other communiqué is to allow the applications, such as the e-ticket The e-bookkeeping application will Revenue Administration to acquire application, and obligations, become a substitute for companies standardized data from the such as the new generation cash whose current obligation is aforementioned groups of taxpayers register devices, that also impact keeping their journals and general and to conduct a comparative companies conducting business ledgers as hardcopies. Accordingly, analysis of the data in order to activities in Turkey, especially in taxpayers will be expected to keep increase the efficiency of their tax the retail sector. In addition, it is their ledgers in electronic format audits. expected that new applications, in accordance with the formats such as e-waybill and e-payment, Taxpayers conducting operations and standards established by the will be implemented by the Revenue under the scope of List I of the authorities in Communiqué Nos.1 Administration in the near future. and 2 on e-bookkeeping. Special Consumption Tax Law, as well as taxpayers in the tobacco Taxpayers shall use a solution products market who are affected by approved by the tax authorities to this regulation should keep specific create their electronic ledgers in information for the following accordance with the established records in electronic format: standards. Each month, ledgers • sales records shall be electronically stamped and the respective summary • purchase records approval file must be uploaded • inventory records related period to the Revenue Administration’s beginning and period end stock e-bookkeeping portal by the end of the third following month. • import records • export records According to aforementioned Communiqué No. 421, taxpayers • production records who fall within the scope of • other records e-invoicing are also obliged to start using the e-bookkeeping application In the scope of the electronic record by 1 January 2015. Taxpayers who keeping requirements regulation, are not within this scope may apply companies were expected to start to use this application voluntarily. keeping the above mentioned It is expected that the scope of the information in electronic format obligation will be updated and starting from 1 January 2015. It broadened in the future, increasing is expected that the scope of the the number of companies registered obligation will be updated and in the system to approximately broadened in the future, with 40,000 in 2016 and 80,000 in 2018. authorities planning to make it mandatory in other sectors. Electronic record keeping requirements The Revenue Administration introduced these requirements via General Communiqué No. 431 with the aim of standardization, and in cases of need, the ability to access certain data that taxpayers in the petroleum products market and the tobacco products market keep in their accounting and/or ERP systems.

21 22 23 PwC Turkey

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© 2015 PwC Turkey. All rights reserved. In this document, “PwC” refers to PwC Turkey, which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity. “PwC Turkey” refers to Başaran Nas Bağımsız Denetim ve Serbest Muhasebeci Mali Müşavirlik A.Ş., Başaran Nas Yeminli Mali Müşavirlik A.Ş. and PricewaterhouseCoopers Danışmanlık Hizmetleri Ltd Şti. which are separate legal entities incorporated in Turkey within the PwC Turkey organisation.

2015-ArşivNo-0112