Corporate Tax Regulation 101 – Newbie’s Information For International Traders – Withholding Tax

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A. Overview

Turkey has a complex tax system implemented with numerous
separate laws, regulations, communiques and subsequent amendments.
Accordingly, the main legal texts regulating the Turkish Tax System
are the Tax Procedure Law No. 213 dated January 4, 1961 (Tax
Procedure Law), Corporate
Tax Law No. 5520 dated June 13, 2006 (Corporate
Tax Law), Value Added Tax Law No. 3065 and dated October 25
1984 (Value
Added Tax Law), Stamp
Tax Law No. 488 and dated July 1, 1964 (Stamp Tax Law) and the
Income
Tax Law No. 193 dated December 31, 1960 (Income Tax
Law/ITL).

B.Corporate Tax & Other Taxes Applicable to Businesses in
Turkey

i.Income Tax

In this respect the Income Tax Law No. 193 (ITL), Article 2 sets
forth that commercial earnings, income from agriculture, wages,
self-employment earnings, income from immovable property and
movable capitals, other incomes and revenues are determining
factors for the taxation regime in Turkey.

It should further be noted that for individuals, residence and
ownership of property and citizenship in Turkey are determining
factors for the applicable taxes in Turkey. The liability for
taxation of an individual in Turkey mostly depends on their income
as an employee or as a professional worker. Residency is the main
qualification required to determine tax liability for individuals.
According to the ITL, individuals having their permanent residence
in Turkey, or who stay in Turkey continuously for more than six
months in one calendar year, are designated as fully liable or
resident taxpayers.

The income tax calculations for 2022 are as follows:

Income Amount Tax Rate
Up to 32.000 TL %15
Above 32.000 TL and up to 70.000 TL %20 (4.800 TL tax for the initial 32.000 TL)
Above 70.000 TL and up to 170.000 TL %27 (12.400 TL tax for the initial 70.000 TL)
Above 170.000 TL and up to 880.000 TL %35 (39.400 TL tax for the initial 170.000 TL)
Above 880.000 TL %40 (287.900 TL tax for the initial 880.000 TL)

ii. Corporate Tax

It should also be noted that Income Tax applies both to
individuals such as employees, and corporations separately and the
tax rate varies for each taxpayer depending on their nature and the
aggregated income. Accordingly, the Corporate Tax is charged on
corporate income generated by commercial entities. This is the most
significant and characteristic tax that is applicable to corporate
transactions, since this Corporate Tax is only levied from
corporations and not from real persons. Turkish corporate
tax rate is 23% for 2022
, although it is expected to be
lowered to 20% in 2023. Corporations in Turkey may be grouped as
either resident or non-resident taxpayers.

If both the legal and the business headquarters of a company are
located outside Turkey, the company will be regarded as a
non-resident entity. If either of them is located within Turkey,
the company is regarded as a resident entity. Resident entities are
subject to tax on their worldwide income, whereas non-resident
entities are taxed solely on the income derived from activities in
Turkey.

Example 1 – Corporate Tax Your company
(Company A) issues invoices for a total of 1.000.000 TL net (after
tax) within the year 2022, and receives invoices totaling to
500.000 TL for purchased products and services. Let’s also
assume that Company A had further organizational expenses within
the same year totaling to 100.000 TL. This means that the total
expenses made by Company A will total to 600.000 TL, and Company
A’s profit will be 400.000 TL for 2022. This means that the
400.000 TL profit will be subjected to 23% CIT (92.000 TL), which
will be paid by March 2023.
Example 2 – Quarterly CIT (Temporary Tax)
Company A issues invoices for a total of 1.000.000 TL net (after
tax) for the first quarter of 2022 (January, February and March).
Company A’s organizational expenses for the same period is
100.000 TL. Scenario 1: Company A does not purchase any
products/services, so has not received any invoices from third
parties during the first quarter. This means Company A’s
quarterly profit is 900.000 TL (1.000.000 – 100.000), This
quarterly profit will be subject to 23% quarterly CIT, so a total
of 207.000TL will need to be paid as temporary tax by May 2022.
Scenario 2: Company A does not issue any invoices for the
1st quarter of 2022, but makes expenses totaling to
500.000 TL. For the 2nd quarter of 2022, Company A makes
no expenses but issues invoices totaling to 600.000 TL. Since
Company A had no income during the 1st quarter, it is
not possible to deduct the 500.000 TL expenses made in the same
period, so those expenses will transfer over to the 2nd
quarter. In the 2nd quarter, although Company A did not
make any expenses and received a profit of 600.000 TL, since there
is a transferred expense of 500.000 TL from the previous quarter,
that transferred expense will be deducted and only 100.000 TL will
be subject to 23% quarterly CIT at the 2nd quarter.
.

iii. Value Added Tax

VAT is the main tax applicable to almost all transactions,
including any invoice your company will issue for services. There
are different tiers of VAT applicable depending on the nature of
the products and services. However, the main VAT rate is 18%. There
are also rates of 8% and 1% that may be applicable depending on the
nature of the transaction. VAT declarations are made at the end of
every month, through the issued and received invoices, and VAT
corresponding to each month needs to be paid by the end of the
following month.

Example 3 – VAT Company A wants to issue an
invoice of net 10.000 TL fee with 18% VAT. In this case, the VAT
will be 1.800 TL whereas the actual invoice will need to be issued
for a total of 11.800 TL. This 11.800 TL will be collected from the
customer in full, and the VAT amount will be declared to the tax
office at the end of the month. Since Company A already collected
the VAT amount, Company A will be required to pay this VAT to the
tax office before the end of the following month.
Example 4 – Deducting VAT Taking the above
example as our baseline, assume Company A issues a total invoice of
11.800 TL with 1.800 TL noted as VAT. In this case, Company A will
be required to pay 1.800 TL to the tax office. However, this VAT
can be deducted if Company A also receives invoices from third
parties for any service or product purchased. Scenario 1: Company A
issues 11.800 TL invoice to Company X in May, and purchase a
product worth 5.000 TL + VAT again in May (the VAT will be 900)
with invoice from Company Y. Since both the issued and the received
invoices are within the same month, the 900 TL VAT paid by Company
A to Company Y will be deducted from the 1.800 TL VAT charged by
Company A from Company X, making the total VAT payable by Company A
900 TL. Scenario 2: Company A does not issue any invoices in
May, but purchases a product worth 5.000 TL + VAT
in May (the VAT will be 900) with invoice from
Company Y. Since there are no invoices issued by Company A in
May, there is no declared VAT, and although
Company A received an invoice with 900 TL VAT, there is no declared
VAT to deduct this 900 TL from. Since excess VATs cannot be claimed
from tax offices in cash, this excess VAT will transfer to the
following month (or until Company A issues an invoice). Now
let’s assume Company A issues an invoice of 5.000 TL +VAT in
June to Company Z in June, for 11.800 TL (1.800 TL
VAT included). Under normal circumstances, Company A is required to
pay a total of 1.800 TL as VAT for June due this invoice. However,
since there is an excess VAT of 900 TL transferred from May, this
900 TL will be deducted and Company A will only be required to pay
the remaining 900 TL of VAT

iv. Withholding Tax

Withholding tax is a special type of tax, which is unlike the
others mentioned in this brief. It is not applicable to all
transactions, so it is an exceptional tax. It is basically a
pre-paid income tax or corporate income tax, which is generally
noted directly at the issue invoices (for example, invoices issued
by lawyers). The rate is 20%.

C.Final Remarks

The legal framework concerning tax (and especially corporate
tax) in Turkey is highly complex. There are multiple legislations
covering different taxes that are applicable, as well as hundreds
of secondary regulations (regulations, communiques, internal tax
memos, etc.) that govern the rules and procedures applicable to tax
deductions, declarations and penalties. In this respect, it is
important to note that this article is not meant to be a complete
guide to all matters relating to the tax in Turkey, but is rather
intended to be a brief introduction to corporate tax for foreigners
looking into investing in Turkey.

Continue Reading With CORPORATE TAX LAW 102
Tax ID, Cycles, Submission of Declarations & Invoicing
in Turkey

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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