• HOME

The subject of this study is to guide to foreign investors who are planning to invest and to do business in Turkey. It should be underlined that this study frames only the general climate of Turkish Investment atmosphere. Therefore, a foreign investor who is really thinking about investing in Turkey should take legal advice in order to consider special conditions that could change case by case. For this purpose, our firm is ready to serve foreign investors who would like to invest in Turkey. Detailed information could be extracted from this link: www.legal-finance.com

The information that stated in this study refers to the actual legal situation in Turkey up to September 2005.

New Regulations regarding Turkish Corporate Tax Law

We would like to inform you regarding new improvements related with Turkish Corporate Tax Law. Please find below all explanations:

• The Turkish Parliament is expected to approve a new Corporate Tax Code that would apply retroactivity to corporate income generated as af January 1 2006,

• As proposed, the new corporate Tax Code would reduce the corporate tax rate and capital gains taxation on shares and immovable property and change the rules governing thin capitalization, transfer pricing, the foreing tax credit and the participation exemption related to dividend income from Turkish corporate taxpayers' foreing subsidiaries and PEs. It also would be introduce controlled foreign corporation regulations, antiabuse provisions to combat transactions by persons resident in offshore jurisdictions and cost allocations for Turkish permanent establishments of foreing parent companies.

• Corporate Tax Rate: The percent corporate tax and the 30 percent quarterly advance corporate tax(known as the temporary tax) both would be reduced to 20 percent.

• Thin Capitalization: Borrowing from related parties that exceed a debt to equity ratio of 2 to 1 would be considered as disguised capital. For borrowings from related party banks and financial institutions, the debt to equity ratio would be 4 to 1. Total borrowings from all related parties would be treated collectively. The debt to equity ratio would apply to Turkish PEs of foreing parents as well as their Turkish subsidiaries.

• Transfer Pricings: The tradational transfer pricing methods mentioned in the OECD model transfer pricing guidlines would be used for commerical transactions conducted between related parties both domestic and foreign. The rules of related party transactions also would apply to commercial transactions conducted by persons resident in offshore jurisdictions. Payments made in cash or on account to nonresident real or legal persons, if considered not to be priced at arms's length would be subject to a 30 percent witholding tax. Transactions between related parties that are not executed in compliance with the approved transfer pricing method would be considered as disguised profit distrubitions and would be subject to dividend witholding tax. The article of the new corporate tax code regarding transfering pricing would be effective from July 1, 2006.

• Participation Exemptions: The conditions for the application of the participation exemption by Turkish corporate taxpayers on the dividend income they receive frim their foreign subsidiaries and PEs would be loosened as follows:
1. the minimum shareholding in the foreign participation would decrease from 25 percent to 10 percent;
2. the minimum holding period of the participation share would decrease from two years to one
3. the minimum tax burden on the foreign participation would decrease from 20 percent to 15 percent.

• Reduced Capital Gains Taxation: Under the new rules 75 percent of the capital gains derived from the disposal of participation shares and immovable property that has been held by the corporate taxpayer for at least two years would be exempted from corporate taxation. Based on the proposed corporate tax rate of 20 percent and the 75 percent corporate tax exemption on capital gains derived from the disposal of participation shares and immovable property, effective corporate tax rate oin capital gains would be 5 percent. The inclusion under the existiong regime of capital gains derived from the disposal of shareholdings would be abolished. Under the new rules those capital gains would be kept in a special reserve account for a minimum of five years with no furher obligation to add the capital gains into the company's capital.

• Foreign Tax Credit: Join stock companies that are fully liable taxpayers would have the right to a credit based on the corporate or income tax paid by foreing subsidiaries in their jurisdictions, provided that the subsidiaries distribute dividends to Turkish joint stokc companies The tax paid in foreing jurisdictions that cannot be credited against the corporate tax base in Turkey because of a lack of corporate income could be carried forward for a period of three years. The credit would be claimed on the advance corporate tax return.

• CFC Regulations: For the first time in Turkish corporate tax practice the concenpt of a controlled foreing corporation would be introduce.CFC regulations would apply to fully taxable corporate taxpayers that have a direct or indirect participation in companies that have been established abroad provided that the foreign corporation satisfies all of the following conditions:

1. 25 percent or more of the foreing company's income should be of a passive nature(portfolio investments)
2. the foreing company should be subject to corporate taxation of less than 10 percent
3. the gross revenue of the foreing company should not exceed TRY 100.000(approxiamtely US 75.000 USD)

• Antiabuse Provisions: Turkish resident taxpayers would have to appyl a 30 percent witholding tax on payment made in cahse or on account, for services, commissions, interest, royalties and so on, that relate transactions with persons resident in jurisdictions that the Council of Ministers considers to be in harmful tax competition with Turkey.

• Cost Allocation for Turkish PEs of Foreing Parents: Turkish branches of foreign companies could treat costs incurred at the headquarters, or at the level of group companies resident abroad, as deductible for corporate tax purposes, provided that the expenses inccured abroad are in direct relation to the commercial operations of the Turkish branch and the costs that have been allocated to the Turkish branch through cost allocation factors determined at the headquarters comply with the arm's length pricing principles.