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Income Tax in Turkey

Income Tax in Turkey

Updated on Wednesday 23rd September 2020

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Turkey is an attractive destination for foreign investors who are interested in opening companies in countries with low corporate taxes. These taxes in Turkey are regulated by Corporate Tax Law No. 5520 since 2006. The rates from present days are among the most competitive in the region of OECD (Organization for Economic Cooperation and Development). The mission of this organization is to promote policies for economic and social well-being for people, as it states in its statute. Our lawyers in Turkey can offer more information on the tax legislation in this country.
 

How are taxes applied in Turkey?

 
The Turkish taxation system is based on residency. The same principle applies to natural persons and companies. While natural persons must live in Turkey to be considered tax residents, companies must have their seats registered in a Turkish city. Tax residents will be levied the income tax on their worldwide income in Turkey. Non-residents will be taxed by the local authorities only on the income made in Turkey. Considering there is the possibility of non-residents being subject to double taxation once in Turkey and secondly in their home countries, Turkey has signed agreements in order to prevent double taxation.
 
Our law firm in Turkey can offer information on the double taxation treaties signed by the central authorities. You can also explore the following infographic:
 
 
The main taxes paid by companies in Turkey (1).png


Direct and indirect taxes
 

Turkey has a direct and an indirect tax system and both of them are alike to other European taxation systems, but in contrast to other countries from Europe, Turkey has very competitive taxes. Foreign entrepreneurs should know the rates of taxes that could bring them a lot of business opportunities, if they choose Turkey to invest in.

The direct taxation system in Turkey includes income and corporate tax. A natural person must pay the income tax for his/her income and other earnings in Turkey and the corporate tax is owed by legal persons.  

The value of the income tax is calculated according to the income of natural persons that can consist in:
 
  1.  profits from different businesses, including agriculture,
  2.  wages,
  3.  services offered to other persons,
  4.  rent of properties,
  5.  capital investments etc.
     

The income tax in Turkey

 
The income tax is the most important levy applied in Turkey. The income tax is applied progressively based on the total earnings of an individual and ranges between 15% and 35%. The following tax rates are levied on employment income in Turkey:
 
  • 15% on an income of  TRY 18,000;
  • 20% on an income ranging between TRY 18,001 and 40,000;
  • 27% on an income ranging between TRY 40,001 and 148,000;
  • 35% for an income above TRY 148,000.
 

The corporate tax in Turkey

 
The corporate tax legislation from Turkey is harmonized with the international standards, which is very important for foreign entrepreneurs who want to invest in this country.  The development of industry and services in recent years attracted many foreign investors, so as the authorities who offered important incentives for doing business in Turkey.  The tax regime is a very important issue for foreign entrepreneurs. One of the most important taxes for businessmen is corporate income tax which is 22% calculated on the business profit. Other types of taxes for entrepreneurs are 15% on dividends and 0% interest for treasury-bill, treasury bonds and other types of bonds and bills.
 

The VAT in Turkey

 
The value added tax is the most important indirect tax in Turkey. Its rates vary between 1% and 18%, the latter being the standard rate. The Turkish tax system also provides for tax deductions and exemptions. The transactions made by banks and insurance companies are exempt from the VAT. In these cases, it is mandatory to pay a banking and insurance transaction tax calculated on the income. The rate is 5% generally, but for foreign exchange transactions there are no taxes.
 
Other exemptions from VAT are available for certain transaction and activities, such as: exports, petroleum exploration, international transportation, research and development allowances etc.
 

What is the capital gains tax in Turkey?

 
The capital gains of a company in Turkey are levied as any kind of income, meaning that the corporate tax of 22% rate is applicable. There is also an exemption of 75% of the capital gains derived from the sale of the shares in a subsidiary in Turkey. An exemption from tax up to 50% is applicable to the sales of immovable properties in Turkey if held for at least two years. There is no corporate income tax for the capital gains derived from the sale of foreign participations held by foreign companies in Turkey for at least two years. For more details about the capital gains tax, you can get in touch with one of our Turkish lawyers
 

Are there any allowable deductions and tax credits applied in Turkey?

 
Yes, the real estate property tax related to business operations, expenses connected to business and expenditures for research and development projects in Turkey can be deducted. It is important to know that the contribution for employees hired in the R&D field is 50% covered by the Ministry of Finance in Turkey. The donations made for charity organizations that are involved in projects related to hospitals, schools or for associations in the scientific research field are 5% deductible. 
 

Double tax treaties signed by Turkey

 
The tax regime in Turkey is quite appealing for various entrepreneurs looking for establishing a business in this country, and the double taxation treaties signed to avoid the payment of taxes twice provide even more confidence among investors. Turkey signed double tax treaties with countries like Slovenia, Cyprus, Japan, Estonia, Belgium, Latvia, Oman, South Africa, Pakistan, Yemen, Indonesia, Italy, Greece, Bosnia and Herzegovina, the UAE, Sudan, India, Australia, Croatia, France, Finland, Ethiopia, the UK, Korea, Germany, Bulgaria, Romania, Saudi Arabia, Kazakhstan, Lebanon, Luxembourg, Moldova, the Czech Republic, Bahrain, Egypt, Austria, Albania, Montenegro, Spain, Morocco, Macedonia, Thailand, Turkmenistan, China, Canada, Belarus, Hungary, Qatar, Portugal, South Korea, Ukraine, Denmark, New Zealand, Tunisia and many more. The double taxation agreements signed by Turkey cover the corporate tax for companies with establishments in Turkey, the income tax of companies and foreigners generating incomes in Turkey. Complete information about the provisions of the double taxation treaties signed by Turkey with countries worldwide can be provided by our Turkish lawyers.
 

The dividend tax in Turkey

 
The withholding tax is applicable to dividend payments in Turkey at a rate of 15%, but lower rates can apply in particular situations. Such a tax is applicable to residents and non-residents in Turkey, mentioning that specific provisions of double tax treaties apply. In the case of companies from Bahrain, Austria, and Belgium the dividend payments might be subject to partial exemptions or set at a 10% rate like in the case of Yemen, Croatia, and Estonia. It is good to know that the dividend tax is normally paid before the profits are repatriated.
 

Other taxes in Turkey

 
The special consumption tax is to be paid for different types of goods and services, such as: petroleum, gas, automobiles and other vehicles, tobacco, alcohol and luxury products. The investors have to pay also the stamp duty for some of the documents they need for their companies, such as: contracts, letters of credit, payrolls etc. The rate for stamp duty is between 0.189% and 0.948% and is calculated related to the value of the acts (in certain situations) and as a fix amount (for others).
 

Tax minimization methods in Turkey

 
Tax minimization methods can be used by investors interested in reducing the number of taxes a company needs to pay in Turkey. For instance, tax deductions are applicable to cash or assets donations. Also, if the company credit rates are paid in advance, the taxes can be reduced. It is important and also recommended to have the support of a financial advisor or an accountant who can take care of all the financial aspects of the firm. There are numerous foreign companies that choose to externalize the accounting services and benefit from complete support in matters of taxation and also for choosing the ideal tax minimization tools. Let out team of advisors tell you more in this matter and give detailed information about the taxation structure in Turkey. Below you can find information about the investments, economy and business direction in Turkey:
 
  • Qatar will be one of the main investors in Turkey that guarantees investments of approximately USD 15 billion in the years to come;
  • according to “Doing Business Report 2019”, Turkey ranks 43rd out of 190 economies in the world;
  • USD 12,944 million is the FDI inward flow registered in 2018 in Turkey;
  • 44,8% of the foreign investments in Turkey were directed in the real estate sector, as registered for January-October 2018;
  • there are more than 18,000 companies registered in Turkey, where at least 10% of the capital is held by foreign companies.

 

Taxation of Foreign Companies in Turkey

 
The main tax a foreign company has to pay for its activities in Turkey is the corporate tax that is calculated on the income obtained in this country, according to the Corporate Tax Law. The foreign companies that have their headquarter in Turkey or that are managed from Turkey are required to pay the corporate tax on their total income obtained all over the world, at the rate decided by the Turkish authorities – 20%. For companies that have the headquarters abroad and that are managed also from abroad, the corporate tax is owed only for the income obtained in Turkey.

When a foreign company wants to calculate its net taxable income, it is important to know there are some deductions from the gross income, such as expenses related to different activities (issuing shares and stocks, mergers, liquidations, meetings of the general board etc.) etc.
 
If the foreign company has research and development activities, it can benefit from a 40% deduction applied on the expenses with these activities.
 
Another benefit is the corporate tax return and the application for it must be filed until April 25th or on the same day of the fourth month after the end of the fiscal year.
 

A more attractive tax rate for foreign investors

 
The rate of the corporate tax decreased in the last years from 30% to 20% and this made Turkey an attractive destination for foreign investors. The foreign citizens from certain countries, with which Turkey has signed double tax treaties, have other important advantages because they benefit from the double tax avoidance.
 
Support for overseas entrepreneurs in terms of investments can be solicited from our Turkish attorneys who can also provide business management strategies on request.
 
For more details about the income tax you have to pay, if you obtain any income in Turkey, you may ask our lawyers in Turkey. Our law firm in Turkey will keep you updated with the latest changes of the Turkish legislation related to taxation.