In review: direct taxation of businesses in Turkey

All questions

Direct taxation of businesses

The tax regime applied to businesses is corporate tax. The subject of corporate tax is corporate income. Corporate income consists of business profits, agricultural earnings, self-employment earnings, real estate capital gains, capital gains, and other earnings and revenues. The event that constitutes the tax is the acquisition of corporate income.

Capital companies, cooperatives, public economic institutions, economic enterprises belonging to associations and foundations, business partnerships, funds subject to the regulation and supervision of the Capital Markets Board (including foreign funds) are capital companies in terms of corporate tax application and are subject to corporate tax. As of the 2021 taxation period, the tax rate is 25 per cent.

Tax on profits Determination of taxable profit

Corporate income in corporate tax consists of taxable income elements. Elements of income are business profits, agricultural earnings, self-employment earnings, real estate capital gains, capital gains, and other earnings and revenues. Wages are excluded from the determination of corporate income.

There are differences between limited taxpayers and full taxpayers in terms of the determination and taxation of corporate income. Fully responsible taxpayers are corporates where their legal or business centres are both in Turkey, and they are taxed on all income derived in and out of Turkey. Resident taxpayers are corporates whose headquarters are not in Turkey, and they are taxed only for the income derived in Turkey. The legal headquarters of a company is the place indicated in the established laws, statutes, main statuses, or contracts of taxable corporates. The business headquarters is the place where transactions are collected and managed.

Full taxpayers are subject to a declaration basis. These corporates determine their earnings according to the principles in the Turkish Corporate Tax Law (TCTL) and declare the earnings in an annual return. Corporate tax is calculated over the net corporate income earned by taxpayers within an accounting period. In the determination of the net corporate income, regardless of the income elements included in the income, the provisions of the TITL on commercial income are applied to all. The earnings of all standard taxpayers should be determined based on the balance sheet. If non-resident taxpayers earn income from earnings and revenues other than commercial and agricultural earnings, the name of the income will be corporate income, and the determination of the net amounts related to them will be made by the provisions of the TITL.

The TCTL and TITL provide guidance on deductible expenses. In determining net corporate income, firstly, the expenses included in the TITL will be subject to deduction, then the expenses included in the TCTL will be deducted from the revenue.

Accordingly, the expenses to be deducted in accordance with TITL are:

  1. general expenses for obtaining and maintaining commercial income;
  2. maintenance and accommodation expenses;
  3. treatment and medicine expenses;
  4. insurance premiums and retirement dues of servants and workers in the workplace or in the premises of the workplace;
  5. loss, damage and compensation paid pursuant to contract or court order or legal order;
  6. provided that they are business related, travel and residence expenses related to the work and according to the magnitude and extent of the work performed;
  7. the expenses of vehicles acquired through rental or included in the business and used in the business;
  8. in-kind taxes, duties and charges, such as building, land, expense, consumption, stamp and municipal taxes, and fees and registrations, provided that they are related to the business;
  9. depreciations allocated according to the provisions of the Turkish Tax Procedure Law (TTPL);
  10. dues paid by employers to trade unions;
  11. contributions paid by employers to the private pension system on behalf of wage earners;
  12. cost of food, cleaning, clothing and fuel donated to associations and foundations; and
  13. the amounts actually paid to those who benefit from on-the-job training programmes by the employers running the programme.

Expenses to be deducted under the TCTL are:

  1. securities issuance expenses;
  2. establishment and organisation expenses;
  3. expenses incurred for general assembly meetings, and expenses for merger, transfer, division, termination and liquidation of the dividend of the active partner in limited partnerships whose capital is divided into shares;
  4. dividends paid by participation banks against participation accounts; and
  5. technical provisions about insurance contracts whose provision continues on the balance sheet date in insurance and reinsurance companies and specified in the law.

Non-deductible expenses are as follows:

  1. interest paid or calculated on equity;
  2. interest, exchange differences and similar expenses paid or calculated on disguised capital;
  3. disguised earnings distributed through transfer pricing;
  4. reserves allocated in whatever form and under whatever name;
  5. corporate tax and all kinds of fines, tax penalties, delay increases and interests;
  6. controlled foreign institution earnings;
  7. losses arising from the issuance of securities below their nominal value and commissions paid for these securities and all kinds of similar expenses;
  8. expenses and depreciations of motor vessels such as yachts, cottages, boats, speedboats and aircraft such as aircraft, helicopters that are not related to the main field of activity of the business;
  9. pecuniary and non-pecuniary damages;
  10. compensation expenses arising from the crimes of the corporation itself, its partners, managers and employees, excluding the compensations imposed as penal clause in the contracts;
  11. compensation expenses because of pecuniary and non-pecuniary damages arising from acts committed through the media or radio and television broadcasts; and
  12. maximum 10 per cent of the total expense and cost elements incurred under the names of interest, commission, maturity difference, profit share, exchange difference and similar foreign resources used in the enterprise, excluding those added to the cost of the investment, excluding those added to the amount of the investment, excluding those added to the investment the part decided by the Presidential Decree.

The amortisation application is essential because it is a cost factor and a significant expense method in determining the taxable profits of businesses. Amortisation is a cost factor rather than a fund accumulation function. Amortisation is an accounting process that shows the loss of value of economic assets and aims to restore this. Amortisation is subject to certain conditions for businesses according to the TTPL. The provisions are the economic asset should be used in the enterprise for more than one year, the fixed asset must be subject to wear, tear or depreciation for other reasons, the fixed asset must be included in the company’s assets and its value must exceed 1,500 Turkish lira (for 2021). Taxpayers will redeem their economic assets subject to depreciation according to the amortisation rates determined and announced by the Ministry of Treasury and Finance. The tax depreciation methods are specified as normal amortisation, amortisation through decreasing balances, amortisation in mines and extraordinary amortisation. Amortisation has a decreasing effect on the tax base, and the differentiation in amortisation methods also can be used as a tax planning tool. Businesses should choose the right way to implement amortisation management that will provide a tax advantage for their short or medium-term planning. Because amortisation is an expense account, it must be transferred to the profit or loss account and closed at the end of the year.

Capital and income

According to our legislation, half of the dividends obtained from full taxpayer institutions are exempted from income tax and all of the tax withholding made by the company over the total dividend, including the exempted amount, is deducted from the tax calculated on the declared income of 50 per cent. In accordance with new regulations, an additional advantage is provided for the portion that is covered by cash brought from abroad, in the interest reduction in cash capital increase. The reduction rate will be applied as 75 per cent instead of 50 per cent for the portion of the capital increase covered by cash brought from abroad. This provision will begin to apply the declarations to be submitted as of 2022.

Losses

According to the TCTL, the losses in the declarations of previous years can be offset from the corporate income, provided that the amounts for each year are shown separately in the corporate tax return and are not transferred for more than five years. The corporate tax base is reached by adding add-back expenses to business profit and deducting discounts and exceptions. The corporate tax base is also qualified as ‘financial profit’. Financial loss is calculated with the same formula as financial profit. A joint-stock company with business profit may have a financial loss because of its activities exempt from corporate tax. The previous year’s loss that must be deducted in the corporate tax return is financial loss, not a commercial loss. Previous year losses should also be shown in the current year declaration of the loss. In the case of current year earnings, previous year losses can also be deducted in the temporary tax return. In case more than one period results in a loss, offsetting must be made starting from the loss of the oldest year. Elimination of previous year losses using capital decrease does not eliminate the possibility of loss offset. It is not possible to deduct the losses of corporations arising from their activities of exemption from corporate tax from the corporate income excluding exception. For example, income arising from manufacturing activities in the free zone are exempt from corporate income tax. Because of this, it is not possible for a taxpayer operating in these regions within the scope of the exception to deduct his or her loss related to this activity from income arising from his or her business outside the free zone.

Rates

The income tax rates for 2021 to be applied are as follows:

  1. up to 24,000 Turkish lira, 15 per cent;
  2. 3,600 Turkish lira for 24,000 Turkish lira of 53,000 Turkish lira, 20 per cent for excess;
  3. 9,400 Turkish lira for 53,000 Turkish lira of 130,000 Turkish lira, 27 per cent for excess;
  4. 30,190 Turkish lira for 130,000 Turkish lira of 650,000 Turkish lira, 35 per cent for excess; and
  5. 212,190 Turkish lira for 650,000 Turkish lira of more than 650,000 Turkish lira, 40 per cent for excess.

In addition, the income tax rates for 2021 for wage earners are as follows:

  1. up to 24,000 Turkish lira, 15 per cent;
  2. 3,600 Turkish lira for 24,000 Turkish lira of 53,000 Turkish lira, 20 per cent for excess;
  3. 9,400 Turkish lira for 53,000 Turkish lira of 190,000 Turkish lira, 27 per cent for excess;
  4. 46,390 Turkish lira for 190,000 Turkish lira of 650,000 Turkish lira, 35 per cent for excess; and
  5. 207,390 Turkish lira for 650,000 Turkish lira of more than 650,000 Turkish lira, 40 per cent for excess.

The corporate tax rate to be applied for 2021 is 25 per cent.

VAT

According to the Value Added Tax Law, the rate is 10 per cent. The President of Turkey is authorised to reduce this rate up to 1 per cent and increase it up to 40 per cent. The authority to make amendments was exercised, and the basis VAT rate was determined as 18 per cent. Apart from this rate, some goods and service groups are subject to 1 per cent or 8 per cent.

Administration

Corporate tax is levied on the declaration of the taxpayer or tax responsible. The return includes the results of the relevant accounting period. The annual corporate tax return is submitted to the tax office to which the taxpayer is affiliated from the first day of the fourth month following the end of the accounting period until the evening of the 25th day. Corporate tax is paid by the end of the month in which the declaration is submitted. The annual income tax return is submitted from the beginning of March to the evening of the last day of the following year. The first instalment of the annual income tax is paid by the end of March, and the second instalment by the end of July. The VAT return is submitted and paid until the evening of the 26th day of every month.

In Turkey, there is a multi-tax system, and there is more than one tax collected from more than one source. Taxes on income are income tax and corporate tax. Taxes on expenditures are very diverse. The most well known are VAT, special consumption tax, stamp tax, games of chance tax, banking and insurance transactions tax, special communication tax, entertainment tax, environmental cleaning tax, customs taxes, fees, etc. Along with globalisation in Turkey, during the 1980s, import tax was reduced gradually, income and corporate tax rates were reduced gradually, and various tax incentives were introduced, especially for corporations.

The tax offices in Turkey are the basic administrative units in terms of providing services to taxpayers. The tax office in which the taxpayers will receive services is normally determined through their residence and workplace addresses. However, the Ministry of Treasury and Finance is authorised to determine the tax office to which taxpayers will be affiliated in terms of jurisdiction of tax offices, tax types, professions and business groups. Toward the technological developments, the Ministry of Treasury and Finance is also authorised to establish a tax office in the electronic environment. Administratively, the tax offices are subordinated to the tax office presidencies, which are the provincial organisations of the Revenue Administration.

Tax audit is the whole process of determining whether the financial administration itself and the taxpayers comply with the tax legislation, correcting the errors, if any, and deterring tax evasion by applying the prescribed penalties in case of tax loss. The function of tax auditing is mainly to investigate the accuracy of the taxes to be paid, to determine the situations, and to eliminate any inaccuracies and deficiencies. In this process, tax amounts will be investigated through tax audits, negativities will be prevented and corrected. Types of tax audit can be divided into four groups: tax inspection, poll, search and information gathering. The majority of these audits are done on notice or suspicion. However, sometimes tax authorities need to check whether the legal books, records and statements of the taxpayer are recorded as required by the legislation. In these cases, the authorities request the necessary documents from the taxpayer or make an on-site inspection when necessary.

Turkey has established the Turkey Financial Reporting Standards (TFRS) community to be equivalent to the International Financial Reporting Standards in the process of harmonisation with the European Union. Accordingly, if there is an uncertainty in income tax transactions, how to measure deferred and current tax assets and liabilities is regulated in TFRS. It is unclear whether the tax office will accept these transactions in uncertain tax transactions. International Financial Reporting Interpretations Committee 23 is applicable on income tax accounting in transactions with uncertainty and applies to matters such as the taxation of assets and liabilities, taxation of profit or loss, and tax losses or receivables and tax rates. Businesses can recognise and measure current or deferred tax assets or liabilities, based on taxable profit, tax base, unused tax losses, unused tax benefits and tax rates, by applying the requirements of the Turkish Accounting Standards 12.

Tax grouping

The consolidation of tax bases is a method that enables group companies to consolidate their tax base and pay taxes on a single tax base. In practice, many countries allow the consolidation of corporate tax bases. Some countries also allow VAT consolidation. Unfortunately, this is not possible pursuant to our legislation.

Other relevant taxes

VAT is the tax paid by the deliverer of goods and services to the delivery of goods and services. Both sole proprietorships and other companies have to submit VAT returns every month.

Stamp tax is collected on the papers specified in the Stamp Tax Law. If the business has rented a workplace, a lease is signed, and if it will work with a financial adviser, a service contract is signed with it. These two contracts are subject to stamp tax and the stamp tax liability of a newly established business begins with the signing of these two contracts.

Special Consumption Tax (SCT) is an expenditure tax charged on certain goods or products on a fixed or proportional basis. Businesses that trade transactions subject to excise tax must declare the SCT on a monthly basis.

The document that shows the payment made by the employer for the work done to the employee together with all taxes and deductions and which is prepared systematically and periodically during the employee’s work is called the payroll. The documents that must take place in payroll according to the TTPL are:

  1. the name and surname of the service person;
  2. a signature or stamp indicating that the fee has been received;
  3. the date and number of the tax card, if available;
  4. the unit fee (monthly, weekly, daily, hourly or piece rate);
  5. working time or period to which the wage belongs; and
  6. amount of taxes calculated on wage.

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