Turkish direct taxation system consists of two main taxes; income tax and corporate tax. An individual is subject to the personal income tax on his income and earnings, in contrast to a company which is subject to corporate tax on its income and earnings. The rules of taxation for individual income and earnings are provided in the Personal Income Tax Law 1960 (PIT Law). Likewise, the rules concerning the taxation of corporations are contained in the Corporate Income Tax Law 1949 (CIT Law). Despite the fact that each is governed by a different legislation, many rules and provisions of the Personal Income Tax Law is also being applied to corporates, especially, in terms of income elements and determination of net income.
The personal income tax is levied on the income of individuals. The term individuals mean natural persons. In the application of income tax, partnerships are not deemed to be separate entities and each partner is taxed individually on their share of profit. An individual's income may consist of one or more income elements listed below:
In general residency criterion is being applied in determining tax liability for individuals. This criterion requires that an individual whose domicile is in Turkey is liable to pay tax for his worldwide income (unlimited liability). Any person who remains in Turkey more than six months in one calendar year is assumed as a resident of Turkey. However; foreigners who stays in Turkey for six months or more by the reason of a specific job or business or particular purposes which are specified in the PIT Law are not treated as resident and therefore, unlimited tax liability is not applicable for them.
In addition to residency criterion, within a limited scope, nationality criterion also applies regardless of their residency status, Turkish citizens who live abroad and work for government or a governmental institution or a company whose headquarter is in Turkey, are considered as unlimited liable taxpayers. Accordingly, they are subject to PIT on their worldwide income.
Non-residents are only liable to pay tax on their income derived from the incomes in Turkey (limited liability). For tax purposes, it is especially important to determine in what circumstances income is deemed to be derived in Turkey. The provisions of Article 7 of the PIT Law deal with this issue. In the following circumstances, the income is assumed to be derived in Turkey.
Business profit: A person must have a permanent establishment or permanent representative in Turkey and income must result from business carried out in this permanent establishment or through such representatives.
Agricultural income: Agricultural activities generating income must take place in Turkey.
Wages and Salaries:
Income from Independent Personal Services: Independent personal services must be performed or accounted for in Turkey.
Income from Immovable Property:
Income from Movable Capital investment: Investment of the capital must be in Turkey.
Other Income and Earnings: The activities or transactions generating for other income, specified in the Income Tax Act, must be performed or accounted for in Turkey.
The term “accounted for” used above to clarify tax liability of the non-residents means that a payment is to be made in Turkey, or if the payment is made abroad, it is to be recorded in the books in Turkey.
Business profit is defined as profit arising from commercial or industrial activities. Although this definition is very comprehensive and includes all types of commercial and industrial activities, the PIT Law excludes some activities from the contents of business profits. Generally, activities performed by tradesmen and artisans who do not have permanent establishments are not assumed as commercial and industrial activities and are exempt from income tax.
Furthermore, in order to tax income resulting from commercial and industrial activities there has to be continuity in performing these activities. In other words, incidental activities in that nature are not treated as commercial or industrial activities and therefore, the PIT Law deals with these activities as the other income and earnings.
The PIT Law does not list each commercial and industrial activity and only refers to the Turkish Commercial Law for the scope of these terms. Yet several activities are listed namely for clarification in Article 37. These are as follows:
Basically, the taxable income of a business enterprise is the difference between its net assets at the beginning and at the end of a calendar year.
Two methods are used to compute business profits: Lump-sum basis and actual basis in the former method, the PIT Law specifies estimated business profits for taxpayers who are qualified for such treatment according to the relevant provisions of the Law. The main assumption is that those taxpayers specified by the Law have difficulty to keep accounting books and to determine then income on the actual basis. Therefore, their income taxes are assessed on their estimated profits determined by the Law.
In the latter method business profits is determined on the actual basis: Taxpayers are required to keep accounting books to record their actual revenues and expenses which occur within the calendar year. In general, business related expenses paid or accrued related to business are deducted from revenues:
In order to determine net amount of business profits on the actual basis, the following expenses may be deducted from revenues:
Those payments listed below are not considered as deductible expenses;
Income derived from agricultural activities is also subject to the income tax. The term agricultural activity means any activity performed in land, sea, lakes and rivers in forms of cultivating, planting, breeding, fishing, hunting and etc. For tax purposes, persons who engaged in such activities are referred to farmers.
Agricultural earnings of farmers shall be taxed by the way of deduction over the proceeds as provided for in article 94 of this Law. Earnings of farmers exceeding the dimensions of size of exploitation specified in article 54 or the earnings of the farmers owning a reaper thresher or a motor vehicle of the same nature or more than two tractors up to the age of 10 years shall be taxed by determining their earnings according to the actual procedure (according to agricultural operations accounting or if they wish, according to the balance sheet principle). The farmers whose earnings are not taxed according to the actual procedure shall not submit tax statement for such earning. However, the income derived from operation of reaper thresher, or any sort of motor vehicle, or more than two tractors up to age of ten that belong to the farmer but not included in the records of the agricultural exploitation, shall be taxed according to provisions relating to commercial earnings. Gross revenue arising from agricultural activities consists of the following elements:
On the actual basis, the following expenses are deducted from the gross revenue to reach taxable income for the year.
a) Interest on money borrowed for and spent on the farm.
b) Taxes, charges and levies paid, provided they are concerned with the farm.
c) Travelling and residential expenses concerning the farm in proportion with the importance and volume of business (provided they are limited to the duration and necessity of the voyage
d) Rent paid for the farm
e) Other expenditures in general.
Income derived from dependent personal services is subject to the income tax. This income comprises such income from all kinds of employment in both public and private sector as salaries and wages, as well as associated supplementary income such as allowances, bonuses, anniversary gifts, gratuities, commissions, premiums, compensations and other wage and salary related remunerations including benefits in kind at market value.
In determining taxable amount of salaries and wages the following expenditures are allowed to be deducted from gross amount:
The term independent professional services means any activity performed by a person who is self-employed, and based on professional and scientific expertise rather than capital, income from such activities is subject to the income tax.
The term includes services given by such independent professionals as lawyers, accountants, doctors, consultants and engineers. Revenues received from independent professional services within a year as well as expenses paid are recorded on a simple accounting book. In general, all expenses related to independent professional services can be deducted from revenues. But, the scopes of those expenses are narrower than those specified for the commercial and business and business activities. The following expenses are allowed to be deducted from the gross revenue in reaching the profit from independent professional services:
Immovable property means real property which includes land buildings, and permanent leasehold rights. Ships, boats, aircraft and other types of transportation vehicles are also regarded as immovable property in the application of the Income Tax Law. Income from immovable property comprises:
In computing net income from immovable property, costs related to maintenance, management, renovation and running, and depreciation may be deducted from the gross income on the actual basis; it is also allowed to make a lump-sum deduction instead of actual costs, except for the income from the lease of the rights mentioned above. In such cases, lump-sum deduction is 25 per-cent of the rental income.
Income from movable property means any income such as interest, dividend, rent and the like derived from capital in cash or capital in kind. (Income from business activities, agricultural activities and independent personal services is not considered as income from movable property.)
However, such capital income is not considered as income from movable property, should they are earned (gained) through business, agricultural or independent professional activities.
Regardless of their sources, the following earnings are deemed to be income from movable property:
In determining net income from movable property, costs related to and allowed to be deducted from gross income include insurance costs, collection costs, and taxes and other levies, excluding income tax, paid for securities.
The mentioned elements are included in business profit when they are connected to the business activity of the recipient. In such case, this income is treated as business profit and become subject to the rules described earlier related to the rules described earlier related to the business profit.
Capital gains non-recurring are dealt with by the Income Tax Law under the heading "Other Income and Earnings". Capital gains specified in the ITL are as follows:
Net amount of capital gains is determined by deducting acquisition costs and the costs incurred to the alienation of the capital assets from the proceeds received in return of the alienation.
Non-recurring income comprises:
The corporate tax is levied on the income and earning derived by corporations and corporate bodies. The income elements by Corporate Tax Law are the same as those covered in the Income Tax Law. In other words, the Corporate Tax Law sets provisions and rules applicable to the income resulted from the activities of corporations and corporate bodies, whereas the income Tax Law deals with the income derived by individuals. Corporations and corporate bodies specified by the Law as taxpayers in respect to the corporate tax are as follows:
According to the Corporate Tax Law, those legal entities covered by the law, which their legal head office situated in Turkey, or the place of effective management in Turkey are taxed on their world-wide income (unlimited liability). By specifying two criteria the law intends to prevent any problem, which may arises in determining tax liability. The term legal head office, as used in the context of the Corporate Tax Law, means the office specified in the written agreements of the mentioned entities. Therefore, it is not difficult to ascertain where the legal head office of a company is located. However, the place of effective management, which is defined as the place in which the business activities are concentrated and supervised, is not easy to determine in some cases.
As may be expected, the Law defines the term limited tax liability quite parallel to term unlimited tax liability, as the liability requires taxing only the income derived in Turkey, provided that both legal head office and the place of effective management are abroad.
In essence, the provision of the PIT Law concerning the determination of business profit also applies to the procedure required in determining corporate income. Basically, net corporate income is defined as the difference between the net worth of assets owned at the beginning and at the end of the fiscal year. In addition to the expenses mentioned in article 40 of PIT Law allowed to be deducted from revenues, the followings may also be deducted regarding to the determination of business profit, by corporations:
In determining net corporate income, the following deductions are not allowed:
Like income tax, the corporate tax is also assessed on the base declared through tax returns filled annually by taxpayers. Tax returns contain the results of related taxation period. In principle, every taxpayer is required to file only one single tax return, even if he has derived the income through different business places or branches and those places and branches have their own accounting and allocated capital.
The annual tax return is applicable for the reporting of net corporate profits realized in the course of one accounting period. The corporate tax return shall be submitted to the tax office, which the taxpayer is affiliated to, starting from the first day until the evening of the 25th day of the 4th month that follows the month during, which the fiscal period closes. The corporate tax must be paid until the end of the month the tax return is submitted.
Non-resident foreign corporations use special tax return for reporting certain profits and earnings. Special tax return must be given in 15 days from the obtainment of earnings and profits. (This procedure is called "Special Tax Return".)
Those who are obliged to make tax withholding are required to file a brief tax return to tax office associated with the place of payment or accrual of the payments which they have made during the month, or the profits and revenues on which they have caused accrual to take place, as well as of the taxes which they have withheld from these, by the evening of the 23th day of the following month and they should pay by the evening of the 26th day of this month.(This procedure is called "Withholding Tax Return".).
Corporate income tax is applied at 20 % rate on the corporate earnings.
Taxpayers (only for income from commercial activities and agriculture in limited tax liability cases) pay provisional tax at the rate of corporate tax, these payments are deducted from corporate tax of current period.
In Turkey, there are several indirect taxes but most important indirect tax is V.A.T.
The beginning of the studies on Value Added Tax (VAT) in Turkey goes back to 1970. In 1974, a draft VAT law, which was the result of studies of a technical group, was prepared. The subject (VAT)was discussed by different levels of public opinion and some project games were organized to test the drafts with the volunteer enterprises. After the appreciation of the results of these discussion and games, seven law drafts were prepared between 1974-1984. The 8th draft was enacted on November 2nd , 1984 and entered into force on January 1st , 1985. By the VAT Law, eight indirect taxes on consumption were abolished.
The Turkish Tax System levies value added tax on the supply and the importation of goods and services. The Turkish name for Value Added Tax is Katma Değer Vergisi, abbreviated to KDV.
Liability for VAT arises;
(a) when a person or entity performs commercial, industrial, agricultural or independent professional activities within Turkey,
(b) when goods or services are imported into Turkey.
VAT is levied at each stage of the production and the distribution process. Although; liability for the tax levies on the person who supplies or imports goods or services, the real VAT burden is on the final consumer. This result is achieved by a tax- credit method where the computation of the VAT liability is based on the difference between the VAT liability of a person on his sales (output VAT) and the amount of VAT he has already paid on his purchases (input VAT).
The Turkish VAT system employs multiple rates and the Council of Ministers is authorized to change the VAT rates within certain limits.
VAT taxpayers are defined in the VAT Law as those engaged in taxable transactions, irrespective of their legal status or nature and their position with regard to other taxes.
The following people or entities are liable to VAT:
■ Those supplying goods and services,
■ Those importing goods or services,
■ Those required to complete customs formalities in case of transit of goods through Turkey,
■ General Directorates of Postal Services (PT and Telecom) and radio and television corporations,
■ Organizers of any kind of chance and gambling,
■ Organizers of shows, concerts and sporting events with the participation of professional artists and professional sportsmen,
■ Lessors of goods and rights stated in Article 70 of the Income Tax Law.
■ Applicants for optional tax liability
Goods and rights set out in Article 70 of the PIT Law including immovable property such as land, buildings, mines and rights which are in the nature of immovable property; and. other goods and rights such as all kinds of motor vehicles, machines and equipment, ships, literary, artistic and commercial copyrights, commercial or industrial know-how, patents, trademarks, licenses and similar intangible properties and rights.
In the event that the taxpayer is not resident or does not have a place of business in Turkey, a legal head office or place of management in Turkey, or in other cases deemed necessary, the Ministry of Finance is authorized to hold any one of the people involved in a taxable transaction responsible for the payment of tax.
According to the Turkish VAT law, there is a so-called reverse charge VAT mechanism, which requires the calculation of VAT by resident companies over payments to abroad. Under this mechanism, VAT is calculated and paid to the related tax office by the Turkish company or customers on behalf of the non-resident company (foreign company). On the other hand, the local company treats this VAT as input VAT and offsets it in the same month.
The taxable base of a transaction is generally the total value of the consideration received, not including the VAT itself. The VAT Law deals with the taxable base under four headings, namely the taxable base on deliveries and services, on importation, on international transportation, and special types of taxable base.
In case a consideration does not exist, is unknown or is in a form other than money, the taxable base is the market value. Market value is the average price payable in the market for similar goods and services and is determined with reference to the Tax Procedural Law.
The following elements are not included in the taxable base:
a) Discounts, in amounts in compliance with customary commercial practices, in transactions of delivery and service shown on invoices and similar documents,
b) The value-added tax calculated.
The standard rate of VAT on taxable transactions is set at 10% in the VAT Law, but this rate was increased to 18% as of 15 May 2001.
• For the deliveries and services mentioned in List No. I 1% (e.g. agricultural products such as raw cotton, dried hazelnuts)
• For the deliveries and services mentioned in List No. II 8% (e.g. basic food stuffs, books and similar publications)
VAT is collected at every stage of the production and distribution process from the initial sale by the producer to the final sale to the consumer. At each of these stages, the amount of tax payable is the difference between the total amount of tax charged on the invoices issued by the taxpayer and the total amount of tax charged on invoices issued to the taxpayer during the same period. Thus the VAT is initially computed by applying the appropriate rate of taxation to the taxable base for goods and services supplied by the taxpayer during a taxable period. This amount is then reduced by a credit for VAT previously paid on importation and on goods and services supplied to the taxpayer.
In the following cases, VAT may not be credited from the VAT computed on taxable transactions.
(a) VAT on purchases of cars (which should be recorded as an expense or cost) (except for businesses related with lease or operation of cars)
(b) Missing and stolen stocks,
(c) VAT on expenses accepted as non-deductible in determining income according to Income Tax Law and Corporate Tax Law,
(d) Input VAT on exempt deliveries listed in Article 17 of the VAT Law. [excluding article (17/4-s)]
Value Added Tax (input VAT) shown on invoices and similar documents related to the transactions which are exempt from the tax, such as:
■ Exportation of goods and services,
■ Exemption in vehicles, precious metals and oil prospecting activities and national security expenditure and investments made under an investment incentive certificate (IIC)
■ Transit transportation,
■ Diplomatic exemption ,
are deducted from the Value Added Tax (output VAT) to be calculated on the transactions of the taxpayer which are subject to VAT.
In the absence of transactions subject to VAT, or if the output VAT is less than the input VAT, then the input VAT which cannot be deducted is refunded to those who perform such transactions, on the basis of principles to be determined by the Ministry of Finance.
Stamp Tax applies to a wide range of documents, including but not limited to, contracts, agreements, notes payable, letters of credit and letters of guarantee, financial statements and payrolls. Stamp duty is levied according to the type of documents at different tax rates or lump-sum amount listed in Annex I of The Stamp Tax Law. The Stamp Tax Law provides that each relevant party shall be responsible for payment of the total amount of stamp tax on the agreements. Each original document is separately subject to stamp tax.
The subject of the tax is motor vehicle. Taxable event is registration of the motor vehicles in the traffic and Ministry of Transportation, Maritime Affairs and Communications.
Taxpayers are real and legal people who have motor vehicles that are registered to their own names in the traffic register and the civilian air-vehicle register maintained by the Ministry of Transportation, Maritime Affairs and Communications.
Tax is assessed and accrued annually in the beginning of January. The motor vehicle taxes are paid in two equal installments, in January and July, every year.
Motor vehicles are classified into three categories in terms of motor vehicle tax:
- List 1 : cars, motorcycles and terrain vehicle etc.
- List 2: minibuses, panel vans, motorized caravans, busses, trucks etc.
- List 3 : planes and helicopters
The amount of Motor Vehicle Tax for land transportation vehicles is determined according to their age, type, number of seats, cylinder capacity, maximum gross weight and for planes and helicopters is determined according to their maximum takeoff weight..
The subject of the tax is transactions and services performed by banks, bankers and insurance companies.
Taxpayers are banks, insurance companies and bankers.
All transactions and services performed by banks and insurance companies are subject to BITT regardless of the nature of the transaction. There will be the tax upon the money, which they collect under the name of interest, commission and expenditure because of the services they performed on behalf of them. Bankers' certain transactions and services performed and stated in Law Number 6802 are the subject of the tax. Other transactions of bankers are subject to VAT.
The transactions of banks and insurance companies are exempt from VAT, but are subject to BITT, which is due on the gains of such companies from their transactions. The purchase of goods and services by banks and insurance companies is subject to VAT but is considered as an expense or cost for recovery purposes.
The general BITT rate is 5% and some specific transactions are taxed at 1%. In addition, foreign exchange transactions are subject to 0 % BITT according to the Council of Ministers Decision since 2008.
Taxation period in BITT is each month of the calendar year. Taxpayers declare their taxable transactions up to the evening of the 15th day of the following month.
The subject of the tax is betting, lotteries and other forms of gambling. Taxpayers are composers of gambling activities and proportional taxation is applied in Gambling Tax.
Taxation period in Gambling Tax is each month of the calendar year. Taxpayers declare their taxable transactions and pay the accrued tax up to the evening of the 20th day of the following month.
Turkish citizens are subject to inheritance and gift tax on worldwide assets received. Resident foreigners are subject to inheritance and gift tax on worldwide assets received from Turkish citizens and on assets located in Turkey received from resident foreigners or nonresidents. Nonresident foreigners are subject to inheritance and gift tax on assets located in Turkey only.
Items acquired as gifts or through inheritance are subject to a progressive tax rate ranging from 10% to 30% and 1% to 10%, respectively, of the item's appraised value. Tax paid in a foreign country on inherited property is deducted from the taxable value of the asset. Inheritance and Gift Tax is payable in biannual installments over a period of 3 years.
The buildings and lands in Turkey are subject to property tax.
The tax base for the property tax is the tax value of the building/land according to Property Tax Law numbered 1319.
Property taxes are calculated annually by related municipality based on the tax values of land and buildings at rates varying from 0,1 % to 0,3 %
These rates are increased by % 100 within the frontiers of metropolitan municipality.
The taxpayer is the owner of the building/land, the owner of any usufruct over the building/land or if neither of these exist any person that uses the building/land as its owner.
Property tax liability begins following budget year in the case of acquiring property/change in situation of property or end of exemption.
It is compulsory that a property tax declaration is submitted to the related municipality where the building and land is located in the case of there is a reason for modificatıon of tax value.
Property tax is paid annually to local municipalities in two equal installments; the first is paid at any time during the period from March through May, and the second in November.
Payment can be made at banks, by cheque, online and in cash.
Telecommunication services are subject to special communication tax. This tax is not included in the VAT base. Special communication tax rates are as follows:
- on mobile electronic communication services (including the sales for pre-paid lines) %25,
- the services regarding the transmission of radio and television broadcasts on satellite platforms and cable medium 15%,
- the internet providing services by wired, wireless and mobile 5%,
- electronic communication services not listed above 15%.
The tax base for Special Communication Tax is the same as the Value Added Tax base. Tax payers will declare the communication tax on the VAT returns and pay the accrued tax by the 15th day of the following month. Special Communication Tax is not deductible for income and corporate tax purposes.
Transactions and certain documents stated in the related law are subject to Education Contribution Fee in different amounts. Education Contribution Fee is taken as a fixed levy according to the document or the transaction. Education Contribution Fee is a temporary fee applicable until 31 December 2010.
Goods imported from abroad are the subject of the tax. Taxable events are free circulation of goods, registration of customs declaration, and temporary importation in case of partial exemption.
Taxpayer is principally person who declare to the customs office.
Customs duties are assessed on written declaration by the taxpayer and paid within 10 days dating from communication.
There are different types of fees: Judgment Fees, Notary Fees, Tax Judgment Fees, Title Deed Fees, Consulate Fees, Ship and Harbor Fees, Permit of License and Certificate Fees, Traffic Fees, Passport, Visa and Ministry of Foreign Affairs Certification Fees. Mentioned fees are taken at different rates or fixed price.
Goods in the Lists attached to the Special Consumption Tax Law are the subject of the tax. For goods in the Lists, Special Consumption Tax is charged only once.
There are mainly 4 different product groups that are subject to special consumption tax at different tax amounts/rates
List I is related to petroleum products, natural gas, lubricating oil, solvents and derivatives of solvents.
List II is related to automobiles and other vehicles, motorcycles, planes, helicopters, yachts.
List III is related to tobacco and tobacco products, alcoholic beverages and cola.
List IV is related to luxury products.
The Taxpayers of the Special Consumption Tax
Taxpayers are different according to the lists. They are;
For List I; manufacturers including refineries or importers of the petroleum products,
For List II; merchants of motor vehicles, exporters for using or sellers through auction
For List III; manufacturers, exporters or sellers through auction of tobacco, alcoholic beverages and cola.
For List IV manufacturers, exporters or sellers through auction of luxury products.