Corporate Tax, VAT & Withholding in Turkey

1. Introduction

Thanks to its strategic location bridging European, Asian, and Middle Eastern markets, Turkey remains a significant trade and production hub for foreign investors. However, one of the most critical issues for foreign businesses entering the Turkish market is compliance with the frequently changing and technically detailed Turkish tax legislation.

With the enforcement of inflation accounting practices effective as of 2024 and continuing in subsequent years, alongside mechanisms for corporate tax deductions and regulations regarding the minimum corporate tax, foreign companies are required to plan their financial structures in Turkey with increased diligence.

As Turkish Trade Lawyers (TTL), in this guide, we address the Corporate Tax, Value Added Tax (VAT), and Withholding Tax systems from the perspective of Turkish tax law for foreign businesses operating or planning to operate in Turkey.

2. Corporate Income Tax in Turkey

In Turkey, corporate tax is regulated under the Corporate Tax Law No. 5520. For foreign companies, the fundamental distinction is made based on the type of tax liability.

Full Liability and Limited Liability

• Full Tax Liability (Tam Mükellefiyet):
  Entities with their legal seat or place of business located in Turkey are taxed in Turkey on their entire global income.
• Limited Tax Liability (Dar Mükellefiyet):
  Entities with both their legal seat and place of business located outside of Turkey are subject to corporate tax in Turkey only on their income derived from Turkey. These earnings are generally obtained through a workplace, branch, or permanent representative in Turkey.

Corporate Tax Rates (Current Framework)

Within the scope of the current legislation:

• General Corporate Tax Rate: 25%
• Banks, Financial Institutions, and Certain Financial Companies: 30%

In addition to this, certain deduction mechanisms are foreseen provided that specific conditions are met:

• Export Income Deduction:
  A 5-point reduction may be applied to the corporate tax rate for earnings derived exclusively from exports, provided that relevant conditions are met and the earnings can be segregated in accounting records.
• Manufacturing Activity Deduction:
  Limited rate reductions may be applicable to earnings derived from production activities by manufacturers holding an Industrial Registry Certificate.

Domestic Minimum Corporate Tax

With recent regulations, a "Domestic Minimum Corporate Tax" application has been introduced for taxpayers whose corporate tax burden falls below a certain level due to tax exemptions and deductions.

Under this system, excluding certain exceptions, the tax calculated on corporate earnings before deductions and exemptions are applied is restricted from falling below a specific base amount. The scope of the application and the technical calculation method should be evaluated in accordance with the relevant secondary legislation and implementation guides.

3. Value Added Tax (VAT) in Turkey

The Turkish VAT system is regulated under the Value Added Tax Law No. 3065 and generally possesses a structure similar to the European Union VAT system.

VAT Rates

Pursuant to current Presidential Decrees:

• Standard VAT Rate: 20%
• Reduced VAT Rate: 10% (for certain groups of goods and services)
• Super Reduced VAT Rate: 1% (for certain basic consumer goods)

The applicable rate is determined based on the nature of the goods delivered or services provided.

Reverse Charge VAT (VAT Withholding)

If foreign companies with no workplace or permanent representative in Turkey provide services to a VAT taxpayer in Turkey, the Reverse Charge VAT mechanism applies.

In this scenario:

1. VAT is calculated on the service fee.
2. However, the VAT is not declared by the foreign service provider, but is declared and paid by the Turkish company receiving the service under the title of the "responsible party" (via VAT Return No. 2).
3. The foreign company issues the invoice exclusive of VAT (net).

This mechanism may eliminate the requirement for the foreign company to establish a separate VAT liability in Turkey.

VAT Refunds

Export deliveries are exempt from VAT. Exporters may receive a refund (in cash or via offset) for the VAT they have incurred but could not deduct.

Depending on the refund amount and the method selected, the refund process may be conducted through different procedures such as:

• Sworn-in Certified Public Accountant (YMM) Report
• Guarantee/Collateral
• Tax Audit

4. Withholding Tax in Turkey

Dividend Withholding Tax

In the event that a company in Turkey distributes dividends to its partner abroad, the general withholding tax rate is 10%. This rate is determined by the relevant Presidential Decrees.

Service Fees and Royalties

For payments made to limited liability entities regarding services performed or benefited from in Turkey, the withholding tax rates are generally as follows:

• Professional Services (consultancy, engineering, legal, etc.): 20%
• Royalties (intellectual property): 20%
• Rental Payments: 20%

These rates may be reduced to lower rates under Double Taxation Avoidance Agreements (DTA) to which Turkey is a party.

5. Double Taxation Treaties

Turkey has signed Double Taxation Avoidance Agreements with more than 85 countries. If the provisions of an agreement are more advantageous than domestic legislation, the agreement provisions take precedence.

To benefit from DTA advantages, the following are generally required:

• A Certificate of Residence obtained from the relevant country.
• Fulfillment of conditions regarding the Beneficial Owner of the income.

It is required that documents are duly certified (apostilled/legalized) by the competent authorities.

6. Conclusion

While the corporate tax and VAT system in Turkey offers significant opportunities, it possesses a technical and detailed structure. Specifically, applications such as the domestic minimum corporate tax, reverse charge VAT, and withholding tax require professional planning for foreign investors.

Turkish Trade Lawyers provides legally compliant and secure solutions for foreign investors in all processes, from company incorporation to tax structuring, profit repatriation, and international tax treaties.