Double Taxation Treaties in Turkey
Double Taxation Treaties in TurkeyUpdated on Friday 09th August 2019
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Turkish companies owned by foreigners interested in avoiding the double taxation of profits may use the provisions of the treaties signed between Turkey and their home countries. Turkey has a vast network of treaties on the avoidance of double taxation of foreign companies operating on the Turkish territory; investors interested in receiving more information on the main tax exemptions to which they are entitled to can request for assistance from our team of attorneys in Turkey.
We invite you to read below about the double tax treaties signed by Turkey. Our lawyers can also help you set up a business in Turkey.
Tax legislation in Turkey
Turkey has one of the most advantageous tax systems in Europe and its tax legislation covers three large categories of taxes: the income taxes, the expenditure taxes and the wealth taxes.
The income taxes are further divided into the personal income and the corporate taxes. The most important expenditure tax imposed in Turkey is the value added tax, however, there are also other levies, such as the special consumption tax, the bank and insurance transaction levies and the stamp duty. In the category of wealth taxes, we can mention the property, the motor vehicle and the inheritance taxes.
All these taxes are covered by Turkey’s double taxation agreements. Apart from these, any similar taxes imposed in Turkey and the signatory state of such a convention.
Other important aspects which need to be considered with respect to taxation in Turkey is that a foreign citizen or company must have a tax residence here which implies living, respectively operating in Turkey for more than 6 months in a calendar year. In the case of double taxation treaties of Turkey, the minimum period is determined in the country with each country entering the agreement.
If you need information on the taxes to be paid in Turkey as a local or foreign citizen or investor, our lawyers are at your disposal with detailed information.
How do Turkish double tax treaties work?
Individuals and companies with activities in one or both the signatory countries are covered by the double tax treaties signed by Turkey. The following aspects are covered by the Turkish double taxation agreements:
- - the individuals or companies must be tax residents in at least one of the countries entering the treaty;
- - the avoidance of double taxation will occur by exemption, deduction or tax credit;
- - most of the agreements cover activities of international transport by sea or air;
- - most of the treaties follow the OECD’s standard model which also covers the exchange of tax information.
Our lawyers in Turkey can offer more information on the taxation of foreign companies here.
The main taxes covered by Turkey’s double tax agreements
The main reason for which countries, including Turkey, sign double taxation agreements is because these documents usually regulate the ways in which the taxes imposed in two countries will be imposed to individuals and companies doing business in the states signing the convention. The provisions of Turkey’s double tax treaties are drafted in accordance with the other countries’ national tax laws, which is why each tax treaty covers a different set of taxes.
Most Turkey’s double taxation treaties cover the following taxes when it comes to Turkish taxation system:
- the income tax which is imposed on individuals residing in Turkey and foreign citizens with activities in Turkey;
- the corporate tax which is levied on companies with seats in Turkey, but also foreign companies with activities here;
- the levy imposed for the support of the defense industry which is imposed in Turkey only;
- the levy imposed for support of businesses apprentices and the improvement of training of personnel;
- the income tax, the corporate tax and other similar taxes imposed in the countries signing the double tax treaties with Turkey.
It is important to note that all Turkish double tax conventions provide for the articles referring to similar taxes which fall under the scope of the agreements.
Treaties on the avoidance of double taxation signed by Turkey
Foreign businessmen who want to open a company in Turkey can benefit of various tax deductions if their company is a tax resident of one of the following states: Albania, Algeria, Australia, Azerbaijan, Austria, Bahrain, Bangladesh, Belarus, Belgium, Bosnia and Herzegovina, Bulgaria, Canada, China, Croatia, Cyprus, Czech Republic, Denmark, Egypt, Estonia, Ethiopia, Finland, France, Georgia, Germany, Greece, Hungary, India, Indonesia, Iran, Israel, Italy, Japan, Jordan, Kazakhstan, Korea, Kuwait, Kyrgyzstan, Latvia, Lebanon, Lithuania, Luxembourg, Macedonia, Malaysia, Moldova, Mongolia, Montenegro, Morocco, New Zealand, Norway, Oman, the Netherlands, Norway, Pakistan, Poland, Portugal, Qatar, Romania, Russia, Saudi Arabia, Serbia and Montenegro, South Africa, South Korea, Singapore, Slovakia, Slovenia, Spain, Sudan, Syria, Sweden, Tajikistan, Thailand, Tunisia, Turkmenistan, Ukraine, United Arab Emirates, United Kingdom, Yemen, United States of America and Uzbekistan.
Other drafts of the double tax treaties with Turkey are waiting to be ratified; our Turkish lawyers can inform you on the agreements which will be signed in a near future by local authorities.
Definitions under Turkish double tax treaties
One of the most comprehensive articles of Turkey’s double tax agreements refers to the general definitions which provide for individuals, companies, the contracting state and the territories of Turkey where the agreements apply.
According to these definitions, individuals with a Turkish nationality and those of a contracting state have the right to complete various activities, including of employment and benefit from taxation in accordance with the double tax treaty between Turkey and another country.
Companies must have a registered address in Turkey, no matter if they are tax residents of Turkey or not in order to benefit from the double taxation agreements signed. In the case of foreign companies, the permanent establishment status applies, case in which various tax advantages can be obtained.
With respect to the territories in which Turkey’s double taxation agreements apply it is important to note that the Turkish territory is made of the land and water territories, as well as, special economic zones in which preferential taxes apply. This is why all double tax treaties are negotiated in respect to these special economic areas.
With respect to the authorities in charge with the acknowledgement of Turkey’s double tax treaties, the main authority is the Ministry of Finance and Customs.
Each tax agreement is negotiated individually, and amendments are brought to such treaties every time the legislation in a country changes. This is why if you need updated information on a specific agreement, you can ask our Turkish lawyers for complete and up to date information.
Provisions of the double tax treaties in Turkey
The treaties signed for the avoidance of double taxation aim to regulate the income incurred by a company registered in a contracting state which has business operations in Turkey. As a general rule, all agreements signed on this basis refer to the taxation of income, where income can be represented by various types of income taxes applicable to corporations in accordance with the local legislation. It is important to know that the contracting states will try to apply the taxation on income to similar taxes available in both countries.
According to these treaties, the business profits of a company are exempt from taxation in Turkey, as they will be taxed in the country of residency. The regulation is no longer available if the company is operating in Turkey through a permanent establishment, which refers to a fixed place of business in which the company is carrying out its activities.
In order to beneficiate from these provisions, the applicant must prove that the taxes are paid in the country of origin.
The withholding taxes for dividends, interests, and royalties paid to non-residents are established at 15%, 10% (or a maximum of 15%) and 10% in Turkey.
Many of the treaties that were signed with Turkey have included provisions related to the avoidance of tax frauds. For instance, the OECD model after which many of the treaties are elaborated is stating that every signatory member may request a list of the taxpayers that perform commercial activities in Turkey or in the foreign country.
The treaties on the avoidance of double taxation are signed in order to promote foreign investments in the Turkish market, by providing a competitive and attractive business environment to international companies.
Permanent establishments in Turkey
Foreign companies can operate through branches and subsidiaries in Turkey which, in accordance with the double taxation agreements, can be considered permanent establishments. All Turkish double taxation conventions provide for permanent establishments which must operate for a certain period of time (in most cases not less than 6 months).
The following places of business can be considered permanent establishments:
- - foreign companies’ office spaces which have registered addresses in Turkish cities;
- - places of management and factories of foreign companies operating in Turkey;
- - factories, industrial places and workshops established by foreign companies and investors;
- - any type of place established for the extraction of natural resources.
If you have any questions related to Turkey’s double taxation treaties, our lawyers can answer them.
The avoidance of double taxation in Turkey
There are two main ways in which Turkey provides for the avoidance of double taxation. The first one refers to a deduction offered to a Turkish national or company in case a similar tax was paid in the other contract country of the agreement. The deduction will be granted for an equal amount of money paid in the other country.
The other way of avoiding double taxation in Turkey is by granting a tax exemption on the tax paid in other contracting state.
When it comes to the avoidance of double taxation in contracting states, these will choose the solution based on their tax and accounting regulations.
Taxation of income from real estate under Turkey’s double tax treaties
Considering foreign investors can obtain the right to purchase real estate property in Turkey, most double taxation conventions provide for the taxation of such property under articles referring to the taxation of immovable property.
Under most Turkish double tax treaties, the incomes derived from owning real estate in one of the signatory countries of such agreement will be taxed in the country in which the property is located. In Turkey, incomes derived from forestry or other agricultural activities are taxed here.
Taxation of business profits under Turkish double tax agreements
The incomes derived from business profits of Turkish and foreign companies in an overseas country, respectively in Turkey will be taxed in the home country of the company in question, unless the business completes its activity through a permanent establishment.
In order to separate the profits earned by a company through a permanent establishment, each country in the treaty will attribute the profits to the permanent establishment through its tax authority. Based on the attribution of these profits, the parent company will report both in its home country and the other state the income generated through the permanent establishment.
If you have any questions related to creation of a permanent establishment, our lawyers in Turkey can answer them. Moreover, we can help you set up a permanent establishment under the form of a branch office in Turkey.
Taxation of services according to Turkish double tax conventions
The services provided by a Turkish company in a foreign country or those offered by a foreign company in Turkey can be included in a double taxation agreement which provides for two types of such services:
- - independent personal services;
- - dependent personal services.
In the case of individuals completing independent activities which result in an income earned in the contracting state of a double taxation treaty, the person will be taxed in the contracting state. However, a person can also be taxed in Turkey even if he or she is a resident of a contracting state if the person resides here for more than 183 days in a calendar year.
In the case of dependent personal services, which usually cover individuals hired by foreign companies, the income derived from employment, the income will be taxed in the country where the activity is completed. In the case of Turkey, a foreign employee can be taxed if he or she resides here for the same period of more than 183 days in a calendar year.
Another type of income which will be taxed in the country where an individual resides is the director’s fee. This fee applies to company directors or persons acting as members in the board of directors in a company. With respect to artists and sportsmen, these will be taxed in the countries in which they perform. Income derived from pensions will be taxed in the country of residence of the individual.
If you have questions about the provisions of a specific double tax treaty, our Turkish lawyers can assist you.
Tax conventions as tax minimization tools in Turkey
Turkey’s double tax treaties represent the most effective tax minimization solution for foreign companies and individuals with activities here. Under these agreements, both individuals and companies can benefit from tax deductions and exemptions from the income, dividend, interest and capital gains taxes.
If you are interested in starting a business in Turkey, you should know that after a contraction of the economy in the past few years, Turkey has a good future ahead:
- - the country’s Gross Domestic Product is expected to reach 4.8% increase in 2019;
- - exports are expected to increase from 8.1% in 2018 to 9.9% in 2019;
- - the import of goods and services are expected to go down from 5.7% in 2018 to 5% in 2019;
- - 2020 is also expected to bring an increase of 2.5% to the Turkish economy, slightly higher than in 2019.
If you need further information on the double taxation treaties signed by Turkey, please contact our team of Turkish lawyers for assistance.