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Taxation
Accounting and auditing
Employment Regulations
Establishing a Company
A new law has been enacted that redesigns company registration process which diminishes the prior 19 required steps to 3 steps and reducing turnaround from two and a half months to one day. The company registration procedures which previously were taking almost two and a half months and requiring excessive documentation and approvals from several authorities have been simplified and streamlined. Now the registration can be done in a day. All that is required is to fill out a standard form at one point without applying to several different authorities for necessary approvals ;
The company establishment applications should be filed to Ministry of Trade and Industry or provincial trade offices which are scattered all over the Turkey and existing in every city. Investors should follow the above mentioned steps:
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Submitting the notarized the articles of association
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Depositing 0.1% of the capital at Central Bank account
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Filling the Company Establishment Form and Register with Trade
The Turkish Commercial Code recognises two distinct types of business enterprise:
- Partnerships
- Corporations
The legal differences between the two concern the allocation of liability and the legal identity of the entity. Corporations established by foreign joint venture partners with or without a Turkish partner are treated as Turkish corporations and are entitled to all rights available to Turkish companies under the Turkish commercial code. The most common type of business entities in Turkey are the joint stock company and the limited liability company.
- Limited Company (Limited Sirket - Ltd. Sti.)
- Joint Stock Company (Anonim Sirket - A.S.)
These business types exist as separate legal entities and offer their shareholders limited liability.
Joint Stock Company
A joint stock company is defined as a corporation having its own trade name and a predetermined amount of capital divided by shares. The liability of shareholders is limited to their capital.
The structure and organisation of joint stock companies are subject to regulation by the Turkish Commercial Code. However, the founders of joint stock companies are afforded significant flexibility in drafting the articles of association, thereby serving the needs of the specific venture. Capital Market Board regulations also apply to joint stock companies whose shareholders number at least 250, or who have issued bonds or whose shares are quoted on the Istanbul Stock Exchange.
A minimum of five shareholders, who may be either real persons or legal entities, are required for the formation of a joint stock company. The overall share capital must be a minimum of 50 billion TL .
The capital of a joint stock company is divided into shares of equal value which are treated as negotiable commercial paper. The shares may be issued in either registered or bearer form. Registered shares are freely transferable subject to approval by the board of the company, unless prohibited by the company's articles of association. Bearer shares are freely transferable under the Code of Obligations, unless otherwise agreed by the parties.
Decision making in a joint stock company is by majority vote; but the Turkish Commercial Code includes certain provisions to protect minority interests. Minority shareholders may also request the appointment of a special auditor on their behalf.
Limited Company
Limited companies may be composed of real persons or legal entities and must consist of at least 2 and no more than 50 partners. The overall share capital must be a minimum of 5 Billion TL All partners are personally liable for the debts of the company up to a maximum of their contribution. However, partners are not held liable for the unpaid portions of others' contributions. They are also more directly exposed to the tax liabilities of the company, limited however to their own shares.
Shares held in a limited company are non-negotiable and may be transferred only with the approval of the other partners. Transfers must be approved by at least a 75% majority vote, with at least 75% of the total capital represented. Limited companies are also prohibited from engaging in banking or insurance business. A limited company differs from the joint stock company in that its capital is not divided into shares of stock nor represented by share certificates. There is no board of directors for a limited company. Instead, the appointed manager has authority to run the company.
Branches and Liaison Offices
Foreign companies may also operate through liaison offices or branches provided that they are established in accordance with the relevant legislation. The income of a branch is taxed in the same way as resident corporations.
Liaison offices may be used to establish a presence in Turkey, but cannot be involved in any commercial activity and must be funded by the parent company abroad.
Investment Incentives
The general incentive regime is applied varying to the location, scale and subject of investments. In terms of application of general incentives, Turkey is divided into three types of regions:
- Developed Regions : The city boundaries of Istanbul and Kocaeli; and the municipality boundaries of Ankara, Izmir, Bursa, Adana and Antalya)
- First priority regions : 50 cities determined by the Council of Ministers
- Normal Regions : The remaining cities
To be eligible for these incentive measures, the minimum amount of fixed investment must be 200 billion TL for the first priority regions and 400 billion TL for the developed and the normal regions
The main incentive tools granted to investors by the current legislation are;
- Exemption from customs duties and fund levies
- Investment allowance
- VAT (Value Added Tax) exemption for imported and locally purchased machinery and equipment
- Exemption from taxes, duties and fees
Exemption from customs duties and fund levies: This incentive measure ensures that the imported machinery and equipment for the investment can be brought to the country with the exemption of customs duties and fund levies. The machinery and equipment, which are to be imported under this measure, must be included in the import machinery and equipment list to be approved by GDFI. Within this context, raw materials and intermediate goods cannot be imported.
Investment allowance: Investment allowance is a corporate tax exemption applied to taxpayers. The expenses incurred within the scope of their investment, those relating to buildings, machinery and equipment are entitled to benefit from the investment allowance. With the latest amendment in the income tax law all the investments which amounted above 5.000.000.000- TL are entitled to benefit from the investment allowance. Investment allowance rate is fixed at 40 % for all types of investments regardless of region or value. The withholding tax which has been levied up on the taxable income before deduction of the investment allowance prior to the amendment is abolished in order to provide more effective rate of 40 % with a net value. There is no need to obtain a prior approval or permission like an investment incentive certificate for the investment to be eligible for investment allowance incentive. The corresponding percentage amount of the fixed investment cost can be deducted from the future taxable profits starting with the year the cost realized. Investment allowance amount can also be readjusted for inflation.
VAT exemption for imported and locally purchased machinery and equipment: The Value Added Tax, which is due to be paid for both the imported and locally purchased machinery and equipment, shall be exempted by this incentive measure. The imported machinery and equipment, which are included in the import machinery list approved by GDFI, can be brought to Turkey without paying Value Added Tax. The locally purchased machinery and equipment should also be included in the locally purchased machinery list to be approved by GDFI. With this approved machinery list, the investor can purchase the local machinery without paying the VAT to the seller.
Exemption from certain taxes, duties and fees: The investors who commit to realize 1.000 US Dollars of exports upon the completion of the investment are granted exemption from the taxes, duties and fees related to;
- Establishing a company
- Increasing capital within the investment period
- Receiving investment credits whose terms are at least one year
- Registration of land and properties as capital-in-kind
Taxation
The Turkish tax regime can be classified under three main headings:
Income Taxes
Corporate Income Taxes
Individual Income Taxes
Taxes on Expenditure
Value Added Tax
Banking and Insurance Transaction Taxes
Stamp Duty
Taxes on Wealth
Inheritance and Gift Taxes
Property Tax
Income Taxes
Income taxes in Turkey are levied upon the income, both domestic and foreign, of individuals and corporations resident in Turkey. Non-residents earning income in Turkey through employment, ownership of property, carrying on a business or from other activities giving rise to income are also subject to tax, but only on their Turkish derived income.
Corporate Income Tax :
For tax purposes, companies are grouped as limited liability companies (corporations and limited companies) and personal companies (limited and ordinary partnerships). Corporate tax applies to limited liability companies. State economic enterprises and business entities owned by societies, foundations and local authorities are also subject to corporation tax.
Whether a company is subject to full or limited tax liability depends on its status of residence. A company, whose statutory domicile or place of management are established in Turkey (resident company), will have full tax liability; in this case, worldwide income is taxable. If a non-resident company conducts business through a branch or a joint venture, it will have limited tax liability; ie. fully subject to corporate tax on profits earned in Turkey on an annual basis. If there is no presence in Turkey, withholding tax will generally be charged on income earned; for example, for services provided in Turkey. However, if there is an avoidance of double taxation treaty, reduced rates of withholding may apply.
The basic corporate tax rate is 30%; with additional levies amounting to 10% of the tax, the total tax rate becomes 33%. For resident corporations, tax is levied on worldwide income, but credit is given for foreign tax payable in respect of income from foreign sources (up to the amount of Turkish corporate income tax, ie. 30%)
Corporate entities having their statutory domicile and place of management outside Turkey, but established in Turkey in the form of a branch are subject to tax on an annual return based on income received from the permanent establishment in Turkey.
From the non-resident's point of view, many payments abroad including those for professional services and technical assistance, royalties and rentals are subject to withholding tax at rates varying between 10% and 25%. In this regard, countries having avoidance of double taxation treaties with Turkey have considerable advantages. Turkey has signed such treaties with 46 countries and the investors of these countries can benefit from a reduction in withholding taxes.
Individual Income Tax :
The limited tax liability covers trade or business income from a permanent establishment, salaries for work done in Turkey (regardless of where paid or whether or not remitted to Turkey), rental income from real property in Turkey, Turkish derived interest, and income from the sale of patents, copyrights and similar intangible assets. The range of tax rate for individual taxes is 15-45%
Taxes on expenditure
Value Added Tax (VAT):
Deliveries of goods and services are subject to VAT at rates varying from 1% to 25%. The general rate applied is 17%. Intercompany interest charges are subject to VAT at 18%. The VAT rate on most leased assets is 1% with the exception of 25% on leased cars and 8% on other leased land transport vehicles. Lease contracts are exempt from all types of taxes, duties and stamp taxes. VAT is charged on imports at normal rates.
Banking and Insurance Transaction Tax :
Banking and Insurance company transactions remain exempt from VAT, but are subject to a Banking and Insurance transaction tax. This tax applies to income earned by the banks, for example on loan interest.
Stamp Duty :
Stamp duty applies to a wide range of documents, including contracts, agreements, notes payable, capital contributions letters of credit, letters of guarantee, financial statements and payrolls. Stamp duty is levied as a percentage of the value of the document.
Taxes on wealth
Inheritance and Gift Taxes :
Items acquired as gifts or through inheritance are subject to taxes between 1% and 30% 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 tax is payable over the period of five years and in two instalments per year.
Property Taxes :
Property taxes are paid each year on the tax values of land and buildings at rates varying from 0.3% to 0.6%. In the case of the sale of property, a 4.8% levy is paid on the sales value by both the buyer and the seller. The rate is reduced to 2.4% if the property is contributed as capital-in-kind.
Accounting and Auditing
The legislation regulating the accounting profession divides accounting professionals into three categories:
• Independent accountants (SM)
• Independent accounting and financial consultants (SMMM)
• Certified financial consultants (YMM)
Individual persons or entities acting as auditors for corporations and regulatory agencies must be licensed as independent accounting and financial consultants (SMMM) or certified financial consultants (YMM). The Ministry of Finance requires certifications, being mainly tax related, to be carried out only by certified financial consultants (YMM). The accounting records that must be kept are as follows :
• Journal
• General ledger
• Inventory ledger
These records should be kept in Turkish and in Turkish Lira and be authenticated by a public notary. Although these are the basic legal books required, others may be needed depending on the type of business. Companies may keep computerised records provided that they comply with these basic requirements.
The government requires that all corporations produce an annual report setting out the Balance Sheet and Profit and Loss Statement of the company in accordance with a standard chart of accounts, to be filed with the Trade Registry.
Companies subject to CMB regulations (banks, public companies- the companies which have more than 250 shareholders or whose shares or bonds are quoted on the stock exchange) are required to use specific formats for financial statements and comply with more detailed CMB requirements. The quoted companies should publish quarterly financial statements. Companies subject to particular regulation, specifically banks and insurance companies are required to produce and publicize quarterly and annual reports.
Audit Requirements
There is no legal requirements in Turkey for the independent audit of the statutory financial statements, although the Turkish Commercial Code requires all companies to have a "statutory auditor". However, banks, brokerage firms, public companies and those companies which issue bonds or other financial papers are subject to CMB requirements. CMB requires the financial statements of these companies to be audited by those independent firms listed by the CMB. The accounting policies and the auditing principles required under CMB regulations are similar to international standards.
Audits for entities receiving government or investment funding including state or privately owned investment development banks are usually performed in accordance with Generally Accepted Auditing Standards (GAAS). Companies operating internationally also generally request their financial statements to be audited in accordance with GAAS.
Employment Regulations
The legal working week is 45 hours in Turkey. Overtime may not exceed 3 hours a day or 90 days a year. A minimum wage is set by the government, but actual wages are higher than the minimum wage rate. Salaries are normally reviewed on a half yearly or quarterly basis. The review of wages depends on whether there is a collective bargaining agreement with a union and how long this is valid for. Fringe benefits cost employers about 30-40% of blue collar worker's gross wages and 25-30% of white collar salaries. The most common fringe benefits are meals, transportation, and yearly bonuses of two or four month's salaries.
Labor Law requires that all employees should be covered by the social security system and pay social security contributions. The system includes benefits for industrial accidents and sickness, health insurance, maternity, disability, old age and death. It also covers almost all costs of a modest level of medical care. Contributions as a percentage of gross salary are payable by individual employees and employers. The contribution rate for the employer and employee is around 19,5-25% and 14% of the gross salary respectively. For citizens of countries with which Turkey has bilateral social security agreements, it is possible to stay within their own national social security schemes. |
