TURKEY, A GENERAL TAX GUIDE FOR FOREIGN INVESTORS December 2004 1 www.vergiportali.com This guide has been produced to assist those who consider investing in Turkey. Its aim is to provide a broad outline on general taxation system in Turkey. It reflects the current tax law or practices in Turkey as of January 2005. This booklet is not intended for definitive advice, but merely as an explanatory guide. We would strongly recommend that readers seek professional advice before making any decisions. Furthermore, it should also be kept in mind that Turkish tax regulations are subject to frequent change. For further information, please contact the PricewaterhouseCoopers office in Turkey. 2 www.vergiportali.com CCoonnttteenntttss Page I INCORPORATION OF COMPANIES OR BRANCHES IN TURKEY........................................... 5 1.1 TYPE OF LEGAL ENTITY .................................................................................................................... 5 1.3 ESTABLISHMENT PROCESS ................................................................................................................ 5 1.4 COMPARISON OF THE THREE FORMS OF ENTITIES ............................................................................ 6 1.5 COST OF ESTABLISHMENT................................................................................................................. 7 II. CORPORATE TAX SYSTEM IN TURKEY........................................................................................ 7 2.1 CORPORATE INCOME TAX ................................................................................................................. 7 2.2 ADVANCE CORPORATE INCOME TAX................................................................................................ 8 2.3 LEGAL RESERVES .............................................................................................................................. 8 2.4 CALCULATION OF CORPORATE INCOME TAX BASE.......................................................................... 9 2.7 TRANSACTION TAXES...................................................................................................................... 11 2.8 PROPERTY TAXES............................................................................................................................ 12 2.9 STAMP TAX ..................................................................................................................................... 12 2.10 WITHHOLDING TAX......................................................................................................................... 13 2.13 EFFECTS OF BILATERAL TAX TREATIES.......................................................................................... 13 III. INVESTMENT INCENTIVES......................................................................................................... 15 3.1 GENERAL REQUIREMENTS............................................................................................................... 15 3.2 REGIONAL CLASSIFICATIONS .......................................................................................................... 15 3.3 MINIMUM INVESTMENT AMOUNT AND CAPITAL REQUIREMENT ................................................... 16 3.4 STATE AIDS TO BE GRANTED ......................................................................................................... 16 IV. FREE TRADE ZONES ..................................................................................................................... 18 4.1 PERSONAL AND CORPORATE INCOME TAX EXEMPTION ................................................................. 18 4.2 19 TAX, FEE AND DUTY EXEMPTION .................................................................................................................. 19 V. LICENSE, KNOW-HOW AND TECHNICAL ASSISTANCE AGREEMENTS .......................... 20 5.1 COST ALLOCATION.......................................................................................................................... 20 5.2 TAXATION OF LICENSE, KNOW-HOW, AND TECHNICAL ASSISTANCE PAYMENTS TO ABROAD ..... 20 VI. RELATED PARTY TRANSACTIONS .......................................................................................... 22 VI. RELATED PARTY TRANSACTIONS .......................................................................................... 22 6.1 THIN CAPITALISATION .................................................................................................................... 22 6.2 TRANSFER PRICING ......................................................................................................................... 22 6.3 TREATMENT OF GROUP COMPANIES ............................................................................................... 23 VII. TECHNICAL INSOLVENCY and CAPITAL ADEQUACY ...................................................... 24 7.1 TECHNICAL INSOLVENCY ................................................................................................................ 24 7.2 RESERVE FOR LOSS ......................................................................................................................... 24 7.3 CAPITAL ADEQUACY AND BORROWING LIMITS ............................................................................. 25 VIII. EXIT ROUTE - CAPITAL GAINS ................................................................................................. 26 8.1 SHARE DISPOSALS........................................................................................................................... 26 8.2 ASSET DISPOSALS (COMPANIES ONLY) ........................................................................................... 27 IX. MERGER & DEMERGER...............................................................................................................28 9.1 MERGER & TAKE-OVER.................................................................................................................. 28 9.2 DE-MERGER & SHARE SWAPS......................................................................................................... 29 X. LIQUIDATION....................................................................................................................................... 30 XI. FILING REQUIREMENTS & PAYMENT OF TAXES .............................................................. 31 11.1 TAX YEAR ....................................................................................................................................... 31 11.2 CORPORATE INCOME TAX ............................................................................................................... 31 11.3 DIVIDEND WITHHOLDING TAX ....................................................................................................... 31 11.4 VAT ................................................................................................................................................ 31 3 www.vergiportali.com 11.5 ADVANCE CORPORATE INCOME TAX.............................................................................................. 31 11.6 WITHHOLDING TAX......................................................................................................................... 31 11.7 SOCIAL SECURITY PREMIUM NOTIFICATIONS................................................................................. 32 XII. LEGAL BOOKS & GENERAL ACCOUNTING PRINCIPLES ................................................ 33 12.1 LEGAL BOOKS AND RECORDS ......................................................................................................... 33 12.2 RECOGNITION OF INCOME AND EXPENSE - ACCRUALS................................................................... 33 12.3 FOREIGN CURRENCY TRANSACTIONS ............................................................................................. 34 12.4 BAD DEBTS...................................................................................................................................... 34 12.5 BAD DEBTS WRITTEN OFF .............................................................................................................. 34 12.6 INVENTORY VALUATION ................................................................................................................. 34 12.7 INFLATION ACCOUNTING ................................................................................................................ 35 12.8 LOSS CARRYOVERS ......................................................................................................................... 35 XIII. TAXATION OF EMPLOYEES IN TURKEY ............................................................................... 36 13.1 EMPLOYMENT INCOME TAX............................................................................................................ 36 13.3 UNEMPLOYMENT FUND................................................................................................................... 36 13.4 STAMP TAX ON PAYROLL................................................................................................................ 36 XIV. EXPATRIATE TAXATION in TURKEY...................................................................................... 37 APPENDIX I ..................................................................................................................................................... 38 APPENDIX II...................................................................................................................................................