Establishing a business in Turkey
A Q&A guide to establishing a business in Turkey.
This Q&A gives an overview of the key issues in establishing a business in Turkey, including an introduction to the legal system; the available business vehicles and their applicable formalities; corporate governance structures and requirements; foreign investment incentives and restrictions; currency regulations; and tax and employment issues.
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This article is part of the global guide to establishing a business worldwide. For a full list of contents, please visit www.practicallaw.com/ebi-guide.
The Republic of Turkey has a civil law legal system. Under the Turkish Constitution, the Grand National Assembly is the supreme legislative authority and can create or abolish any law. All state power is derived from the Constitution. Sovereignty belongs to the nation without any reservation or condition and is exercised through competent organisations in compliance with the principles set out in the Constitution. The assembly is composed of 550 deputies elected from 81 provinces and 85 electoral districts. There is a possibility that the Constitution may be revised within 2017 to change the administrative system.
Under the Turkish Commercial Code No. 6102 (Commercial Code), companies are classified into two main groups:
Capital companies, including:
joint stock companies (JSCs) (anonim şirket);
limited liability companies (LLCs) (limited şirket); and
commandite partnerships with a share capital divided into shares (sermayesi paylara bölünmüş komandit ortaklık), in which the shareholders have limited liability.
Non-capital companies (in which shareholders have unlimited liability), including:
collective partnerships (kollektif ortaklık; and
commandite partnerships (komandit ortaklık).
The most common types of capital companies in Turkey are JSCs and LLCs. JSCs are better suited for large operations. The legal framework for the corporate governance of JSCs is more developed and more flexible compared to other business forms. Holding companies, telecom companies, banks, financial institutions, intermediary institutions and insurance companies must be incorporated as JSCs. Only JSCs can make a public offering.
One advantage of LLCs is that their corporate structure and documentation is well suited to reflect the parties' commercial understanding. For instance, strict share transfer restrictions, ancillary tag rights, drag-along rights, or rights of first refusal clauses, can only be included in an LLC's articles of association.
LLCs and JSCs can be established with a single shareholder. JSCs and LLCs can be incorporated with a minimum share capital of TRY50,000 and TRY10,000, respectively. For both types of entity, one-quarter of the share capital must be paid before registration, with the remainder paid within 24 months.
The liability of shareholders of both JSCs and LLCs is limited to their capital contribution (corporate veil principle). However, shareholders and managers of an LLC and members of the board of directors of a JSC can be held liable for public debts that cannot be collected from these entities.
Shareholders of personal companies (that is, collective partnerships and commandite partnerships) have unlimited liability for the company's debts and undertakings. Therefore, investors are generally reluctant to incorporate personal companies, and these are not common in Turkey.
Establishing a presence from abroad
A foreign business intending to operate in Turkey directly as a foreign investor can establish a liaison office, a branch or a Turkish subsidiary (see Question 4).
Foreign investors may prefer incorporating a joint stock company (JSC) or a limited liability company (LLC) due to the corporate veil principles. In principle, the liability of shareholders of both JSCs and LLCs is limited to their capital contribution under Turkish law. However, a few exceptions in relation to public debts or unpaid taxes can lead to the unlimited liability of directors or shareholders.
Legal representatives of both LLCs and JSCs (board members of JSCs and managers of LLCs) and shareholders of LLCs can be personally liable for the unpaid public debts (such as corporate tax, social security premiums of employees and income tax withheld from employees' salaries, taxes and fines owed to public authorities) of the company that cannot be collected from the company.
There are several differences between JSCs and LLCs in terms of share capital structure, corporate board of directors, and liability of the shareholders (see Question 2)
A business intending to operate in Turkey as a foreign investor can establish one of the following:
Liaison office. Liaison offices are prohibited from engaging in commercial activities and are only permitted to conduct market research and advertise and promote the foreign investor's business in Turkey. These offices are an extension of their foreign parent company and do not have an independent legal personality. They cannot acquire rights and incur liabilities through their own actions. Without an independent legal personality or representation power against third parties, liaison offices cannot issue invoices, make purchasing/selling agreements on behalf of the parent company, execute contracts, provide price quotations, or accept orders from customers. Liaison offices must submit an annual notification of their activities to the Ministry for Economy.
Branch office. Branches do not have a legal personality and are not fully independent from their parent company. This means that the foreign parent company remains liable for the branch's debts. A foreign investor is directly liable for all the obligations of the branch irrespective of the capital allocated to the branch itself. However, branches are independent from the parent company with regard to their external affairs, and can therefore carry out any transactions in their fields of activity. In addition, branches must maintain separate accounting records and separate management personnel from the parent company. Turkish law applies to branches in Turkey.
Turkish subsidiary. The last option is to incorporate a Turkish company. The most common forms of company are joint stock companies (JSCs) and limited liability companies (LLCs) (see Questions 2 and 3). The procedures for establishing a company with foreign capital are fundamentally the same as for local companies. Therefore, unless the new company is going to perform certain specific activities regulated by a regulatory authority (such as the Capital Markets Board and the Energy Market Regulatory Authority), no prior authorisation is necessary before incorporation. Most subsidiaries are formed as closely held companies and can be converted into listed public companies through a public offering if the need arises.
Ordinary partnerships (adi ortaklık) have no legal personality. Any partnership formed for the purpose of carrying out a specific project qualifies as an ordinary partnership, regulated under the Turkish Code of Obligations No. 6098 (Code of Obligations). Other types of companies are regulated by the Commercial Code. Turkish law does not significantly distinguish between ordinary partnerships, joint ventures, consortiums or business partnerships.
Partnerships do not offer the large scope of corporate shield provided by limited liability companies (LLCs) and joint stock companies (JSCs). The liability of partners is not limited to the subscribed share capital. However, under the Code of Obligations, ordinary partnerships are subject to relatively less complicated requirements and procedures than those applicable to companies regulated by the Commercial Code, such as JSCs and LLCs (see Question 2).
Joint ventures that are not formed as a capital company are deemed ordinary partnerships and have no legal personality. International joint ventures between a foreign company and a local company are common in Turkey. Under Turkish law, joint ventures are commonly established as a company or a partnership.
If a joint venture is set up as a company, a limited liability company (LLC) may be a more appropriate option as LLCs have certain favourable features for reflecting the parties' commercial understanding in the corporate structure and company documentation (see Question 2).
Forming a private company
The main legislation governing the incorporation and registration process of a joint stock company (JSC) or limited liability company (LLC) is the Commercial Code and any relevant secondary legislation issued in line with the Commercial Code. The application for incorporation of the company is addressed to the relevant trade registry office, depending on the province where the company is to be incorporated. Unless the new company is going to perform certain specific activities that require permission from the relevant regulators, no prior authorisation is necessary before incorporation.
For more information on the regulatory authorities see box: The regulatory authorities.
Tailor-made or shelf companies
It is not possible to use a tailor-made or shelf company in Turkey.
The incorporation procedures for a JSC and an LLC are very similar and include the:
Preparation of the company's articles of association.
Registration of the company with the relevant trade registry office.
Announcement of the company in the trade registry office.
All companies must register with the trade registry of the relevant city where the proposed company will have its headquarters, by submitting documents concerning its shareholders and board members or directors (such as share capital amount, number of board members, convention of meetings and so on) .
Providing the appropriate documentation in relation to the shareholders is easier if the incorporating shareholders are natural persons. The number of requested documents is greater for corporate shareholders since the trade registry requires submission of documents to demonstrate the following:
The necessary approvals in the applicable jurisdiction have been finalised for their participation in the entity planned to be established in Turkey.
The corporate shareholder duly exists under the applicable laws in the relevant jurisdiction.
In addition, board members must provide copies of their passports, and a signature declaration to fix the signature with which they will be bound while performing their board member duties. If any of the shareholders, board members, managers, or the authorised representatives of the company are not Turkish nationals, he or she must also obtain a potential tax number.
All the relevant information and documents must be filed in the Mersis System, an electronic system recently introduced by the Ministry of Customs and Commerce that is being used by most of the trade registry offices in Turkey, including Istanbul and Ankara. To date, most of these offices only require Mersis System registrations for the incorporation of a company and the establishment of a branch office. However, certain trade registry offices (for example, the Gebze Trade Registry and Çorlu Trade Registry) require other actions to be registered via the Mersis system, including:
The creation of a commercial enterprise pledge.
Resolutions of the shareholders' general assembly.
Resolutions of the board of directors (for example, resolutions regarding the representation of the company or the appointment of a director).
The Mersis System registration does not replace the requirement to submit all relevant documents to the relevant trade registry office. All applications will ultimately be filed in the Mersis System. The transition is currently being implemented incrementally.
After completing the Mersis System registration, the articles of association of the new company must be notarised. The notary public certifies the relevant articles of association with the registration number obtained through the Mersis System. Notarisation of the articles of association will no longer be required, if the authorised signatories sign the articles of association before the trade registry director or deputy director. Once the articles of association of the company are notarised/signed and the company has obtained a potential tax number, the company can establish a bank account, which is required for depositing one-quarter of the share capital of the company. In addition, before applying to the relevant trade registry office, 0.04% of the share capital of the JSC or LLC must be deposited with Competition Board Authority.
On completion of the above actions, an application can be submitted to the relevant trade registry office. Incorporation takes about two to five days, depending on the workload of the trade registry office. The corporate books of the new company must be prepared and notarised no later than the registration date of the company. Some annual books (for example, the company's general ledger, inventory and journal) must be kept by an accountant in order to submit relevant tax notifications. Additionally, a signature circular must be signed by the company's authorised representatives and notarised, depending on the representation structure of the new company.
The articles of association constitute the main incorporation document of a JSC or LLC. The articles set out the rules governing the company, including the appointment and removal of directors/managers and the procedures for holding board and shareholder meetings. The articles of association are publicly available and registered by the trade registry office. Strict share transfer restrictions, ancillary tag rights, drag along rights or right of first refusal clauses, can only be included in the articles of association of an LLC.
It is possible to use a separate shareholder agreement in addition to the articles of association. However, the agreement is only a contractual obligation between the parties and is not binding on third parties.
The Commercial Code requires companies to keep books and records in accordance with the Turkish Accounting Standards, which are in line with International Financial Reporting Standards (IFRS). The board of directors in joint stock companies (JSCs) and the managers in limited liability companies (LLCs) prepare and keep the financial statements and annual activity reports as per these standards and they are submitted to the shareholders for approval.
Each year, companies must submit a specific form regarding their activities and inform the relevant ministry of any changes with regard to share capital, share transfer or registered address.
The Commercial Code contains certain corporate governance requirements of transparency and accountability, regarding:
Annual reports. The board of directors (for joint stock companies (JSCs)) and board of managers (for limited liability companies (LLCs)) prepare the annual report on the company's activities for that year to ensure that complete and accurate information regarding the company's activities is provided.
Website. JSCs that are subject to an audit in line with Article 397 of the Commercial Code (determined by a Council of Ministers' decision) and publicly-held companies whose shares are exchanged on the Istanbul Stock Exchange, must establish a corporate website within three months of their registration in the relevant trade registry office. Announcements that must be made through this website include balance sheets, financial statements, the board of directors' annual report and so on. The company's website must also be available in English for foreign investors.
Turkish companies are represented and bound by their authorised representatives, who are authorised to execute contracts or deeds on behalf of the company. These representatives can also be seen in the relevant trade registry office's publicly available records. These authorised representatives and their sample signatures are provided under the signature circular of the company.
Under Article 371 (7) of the Turkish Commercial Code, which entered into force on 10 September 2014, companies must adopt resolutions on the representation of the company, which include an internal directive that imposes limitations on the authorised representatives' powers. Details of the internal directive are set out in Article 367 of the Turkish Commercial Code. Some of the trade registry offices (e.g., the Istanbul Trade Registry Office, Çorlu Trade Registry Office) have issued an instruction on their own web-site that provides more detailed information on the implementation of this recent amendment. This instruction provides that the identity of authorised individuals cannot be stated in the internal directive but in a separate resolution. A signature circular of the company can be issued after registration of the resolution in relation to the authorized representatives and also the resolution in relation to the internal directive with the relevant trade registry office.
However, signature circulars of companies that were issued without registration of an internal directive are not affected by this recent change and such signature circulars remain effective. To issue an internal directive, a company must be authorised to do so by its articles of association. If the articles of association do not include any provision in relation to issuing an internal directive, then the relevant article(s) must be amended in a way to authorise the company to issue an internal directive. A signature circular can only be issued after the registration of the authorised representatives and the resolution in relation to the internal directive (see above).
Minimum capital requirements
If the value of a joint stock company's (JSC) shares in registered form has not been paid in full, these shares can only be transferred with the approval of the company (unless the transfer is a result of an inheritance, administration of spouses' properties or execution proceeding). The JSC can only refuse such a transfer if the transferee’s solvency is suspicious and the transferee has not provided the requested collateral. In addition, subject to the reasons set out in Article 493 of the Commercial Code, it is possible to state in the articles of association of a JSC that the transfer of shares in registered form requires the approval of the company. However, the list of reasons for which a transfer can be rejected by the company is comprehensive and very restrictive. Therefore, it is almost impossible to effectively create drag-along, tag-along or right of first refusal clauses in the articles of association of a JSC.
The case is different in limited liability companies (LLCs), where approval of the general assembly is required for share transfers, unless otherwise stated in the articles of association. It is also possible to prohibit share transfers in the articles of association. Even if the articles of association of an LLC do not prohibit share transfers, a share transfer can be rejected by the general assembly if the articles of association include additional payment or supplementary obligations for partners and there is suspicion as to the transferee's solvency due to its incapacity to provide the required capital.
Shareholders and voting rights
A shareholder or a group of shareholders with at least 10% of the share capital of a privately held joint stock company (JSC) (5% for publicly-held companies) enjoys minority shareholders' rights under the Commercial Code. The threshold for the minority shareholding can be decreased by the articles of association. There are no provisions under Turkish law requiring the inclusion of these rights in bye-laws or shareholders' agreements, and failure to do so would not hinder the applicability or enforceability of these rights. The minority shareholders' rights under the Commercial Code (which are also applicable to publicly-held companies) include rights:
To postpone financial statement discussions.
To appoint an independent auditor.
To request a general assembly meeting and addition of an item to the meeting agenda.
In relation to settlement and release.
To request the dissolution of the JSC.
To request issuance of share certificates.
To request the replacement of the auditor.
Of representation on the board of directors.
In addition to the minority rights granted by the Commercial Code, the articles of association can contain provisions strengthening the rights and interests of minority shareholders, by increasing the meeting and/or decision quorums specified in the Commercial Code. For example, a provision requiring major decisions to be adopted only by the affirmative vote of the minority shareholders such as:
Capital increases and decreases.
Dissolution or liquidation.
See Question 18.
In joint stock companies (JSCs), unless a higher quorum is required by law or by the articles of association, the general assembly convenes with the presence of shareholders representing one-quarter of the share capital. This quorum must be preserved throughout the meeting. If, this quorum is not met at a first meeting, the shareholders are called to a second meeting. At the second meeting, the present shareholders can adopt resolutions on any matter, irrespective of the share capital they represent.
Resolutions are passed by a simple majority of votes. However, the Commercial Code introduces qualified meeting and resolution quorum requirements for certain issues such as:
Change of nationality of the company.
Change of scope of activities.
Creating privileged shares.
Change of legal form.
In limited liability companies (LLCs), all general assembly decisions, including election decisions, require the vote of one-half of the shareholders present at the meeting, unless otherwise provided in the articles of association. The Commercial Code introduces qualified meeting and resolution quorum requirements in LLCs for certain issues such as change of scope of activities, creating privileged shares and so on.
Quorum or voting rights must be proportionate to shareholdings. However, different classes of shares with different voting rights can be issued. It is possible for a company to issue privileged voting shares, although a privilege can only be granted to the share (or a class of shares) and not to the shareholder(s) per se.
Certain corporate actions require qualified quorum and voting requirements. For example, the following actions require a vote of three-quarters of all shareholders present at the general meeting:
Changing the company's scope of activities.
Creating privileged shares.
Decreasing the company's share capital.
The articles of association can specify different voting requirements to protect minority shareholders.
In a joint stock company (JSC), where the articles of association contain an express provision allowing it, minority shareholders may enjoy a cumulative voting system that provides them an opportunity to have their representatives elected as members of the board of directors. The Communique regarding Using of Cumulative Voting in Closely Held Companies regulates the principles of cumulative voting in the general assemblies of JSCs.
Under the cumulative voting system, the number of votes to be cast by a shareholder for the election of the members of the board of directors is calculated by multiplying the number of shares the shareholder is entitled to cast (either by himself or by proxy) with the number of positions for which elections are to be held. The shareholder can cast the total number of cumulative votes so calculated either for a single candidate or can divide its votes among several candidates. The number of cumulative votes that can be cast by shareholders is calculated separately for the elections to the board of directors.
Except for the required registration procedures for foreign individuals or entities residing in Turkey, or for regulated entities such as banks, brokerage houses, insurance companies or liaison offices of non-Turkish entities, there are no sectoral restrictions on establishing a business in Turkey. Foreign investors are not required to obtain the prior consent of a governmental authority or a regulatory authority when incorporating a company in Turkey or establishing a branch of a non-Turkish entity.
Certain companies must be incorporated in the form of a joint stock company (JSC), including holding companies, telecom companies, banks, financial institutions and insurance companies.
In addition, submitting a public tender may require the formation of a specific type of company (usually a joint stock company (JSC).
Foreign investment restrictions
Under the Foreign Direct Investments Law No. 4875, foreign investors are treated in the same way as Turkish investors and are subject to the same requirements. In principle, foreign investors can freely become shareholders in a Turkish company, regardless of shareholding ratios. However, there are certain qualification/approval requirements and restrictions on foreign ownership if the Turkish company operates in a regulated sector. Such requirements and shareholding restrictions vary for each regulated sector and are introduced by special laws and regulations. The regulated sectors include:
Financial intermediary institutions.
See Question 22.
Under Law the Foreign Direct Investments Law No. 4875 and the Council of Ministers Decree on the Protection of the Value of the Turkish Currency No. 32, there are no exchange control or currency regulations applicable to foreign investors remitting profits abroad (but see Question 28).
The Central Bank implemented the floating exchange rate in 2002. Exchange rates are determined according to the supply and demand conditions in the market. The main factors affecting foreign exchange supply and demand are government monetary and fiscal policies, international developments and economic fundamentals and expectations. The foreign exchange rate is neither a target nor a policy tool in the floating exchange rate regime.
According to the relevant communique of the Central Bank, exchange rates to be applied to the sale and purchase of foreign exchange in commercial and non-commercial transactions are freely determined in accordance with market conditions by banks, authorised foreign exchange offices, Turkish Postal Services and institutions acting as intermediary for precious metals and brokerage companies. Exchange rates announced at every close of business, as the indicator, are freely determined by the Central Bank according to developments in the international and domestic markets.
Under the Land Registry Law No. 2644, foreign legal entities cannot own real property or limited rights in rem in Turkey unless there is a special law (such as the Petroleum Law, Law on Encouragement of Tourism, or Industry Zones Law) allowing otherwise. The Council of Ministers can determine the scope of foreign ownership according to country of origin, geographical region, duration, number, percentage, type of property, surface area and amount to limit, stop, or prohibit such ownership.
Turkish companies in which foreign shareholders directly or indirectly hold more than 50% of the shares or management control are subject to an approval procedure (with the Governorships, General Staff and General Directorate of Security Forces) for the acquisition of real property or limited rights in rem. If a Turkish company becomes a foreign capital company as a result of share acquisition and such company owns real property or limited rights in rem, a similar post-closing permission process must be followed on notification of the share transfer to the General Directorate of Foreign Investment.
Under the Commercial Code, at least one member of the board of directors (for joint stock companies (JSCs)) or one manager (for LLCs) must have full capacity in exercising the legal rights of the company. Unless otherwise required by special laws and regulations, there are no restrictions regarding the nationality, residency of directors or managers, or a requirement to obtain work or residence permit to become a director or manager. However, foreign individuals who serve as a director or manager must obtain a Turkish potential tax number to be registered with the relevant trade registry office. Obtaining a tax number is a simple process involving either personal application to a tax office or application through a representative with a duly issued power of attorney.
Directors (of joint stock companies (JSCs)) or managers (of limited liability companies (LLCs)) can be elected and dismissed by the shareholders. Under the Commercial Code, the board of directors is responsible for governing the JSC and has a unitary structure. At least one shareholder of an LLC must be a company manager. Other managers can be appointed in addition to the shareholder-manager.
Both individuals and legal entities can be directors or managers. However, if a legal entity is appointed as a director or manager of a JSC or LLC, an individual representing the legal entity must also be appointed.
Number of directors or members
Boards of directors of JSCs, and boards of managers of LLCs can be composed of a single member, but for the sake of adopting resolutions, most companies prefer appointing an odd number of directors and/or managers. There is no maximum limit on the number of directors or managers.
Employees have no legal right to employee representation on the board of directors or managers.
Reregistering as a public company
Under the Capital Markets Law No. 6362, publicly-held companies are defined as joint stock companies (JSCs) if either of the following applies:
Their shares are traded in the stock exchange.
They have more than 500 shareholders.
The share capital of the company must be paid in full for the company to be registered as a public company.
The profits of both a branch and a company are subject to a corporate tax rate of 20% (liaison offices are not subject to any taxation since they cannot operate commercially). There is also a 15% withholding tax liability over profits distributed by the companies, or repatriated by the branches to headquarters, which brings the effective tax rate up to 35%. There is no withholding tax due where there is no distribution or repatriation.
Corporate tax is assessed on the basis of the Corporate Tax Law. This law applies to profits earned by:
Economic enterprises owned by associations and foundations.
Mutual funds and investment trusts governed by the Capital Markets Law.
To date, corporate tax is levied at a rate of 20% of a corporation's taxable income. The corporate tax base is determined by deducting expenses from an enterprise's revenue. A dividend withholding tax at a rate of 15% applies to dividend distributions to resident and non-resident individuals and non-resident companies.
Taxes on payroll
All wage payments to employees (whether in cash, indemnities, allowances, overtime, advances, subscriptions, premiums, bonuses, expense accruals or as a percentage of profit) are taxed at progressive tax rates between 15% and 35%.
Wage income is acquired in Turkey for individuals with limited liability if:
The employment service is performed in Turkey.
The services are evaluated in Turkey.
Stamp duty is applied to the gross salaries of both full taxpayers and limited taxpayers (see Question 27).
Value added tax (VAT)
VAT is assessed on the basis of the VAT Law. All deliveries of goods and services that take place in Turkey in the context of commercial, industrial, agricultural and professional activities are subject to VAT. Imported goods and services are also subject to VAT. The person liable for the payment of VAT is the one delivering the goods or services.
VAT on purchases can be offset against the VAT received on deliveries of goods and services made. Where the amount of VAT on sales is greater than the amount on purchases, the taxpayer pays the positive difference to the tax office. Where the reverse is true, the difference is not normally refunded to the taxpayer. Instead, it is carried forward and can be offset against future VAT collections.
The general VAT rate in Turkey is 18%. However, reduced rates apply to a number of deliveries of goods and services, such as deliveries of newspapers and magazines (1%), houses (up to net 150m2) (1%) medical products and devices (8%) and so on. VAT is reported and paid monthly.
Taxes on property
Buildings and land in Turkey are subject to real estate tax. The taxpayer is the owner of the building or land, the owner of any usufruct over the building or land, or, if neither of these exists, any person who uses the building or land as their owner.
Stamp tax is applied to a wide range of legal documents that deal with the transfer of value. The tax base differs depending on the nature of the document. For agreements signed in Turkey, the taxable event occurs when the documents are signed. For agreements signed abroad, it can be argued that no stamp tax arises until the agreement is brought into Turkey to be submitted to the official departments, or until the benefit of the subject matter of the document arises in Turkey.
Stamp tax is payable by the parties who sign the document. Parties to a taxable document are jointly responsible for the payment of stamp tax. Each and every signed copy of the agreement is separately subject to stamp tax.
Residence is of considerable importance for corporate income taxation purposes. Residents are fully liable under the Turkish tax system, meaning they pay taxes based on their worldwide income. Non-residents have limited liability and are subject to tax only on their business earnings derived in Turkey.
Corporations are fully liable for payment of Turkish tax if their legal headquarters (as indicated in the taxpayer's articles of incorporation) or their business centres are in Turkey. The business centre is the place where business transactions are actually concentrated or carried out.
All companies established with foreign capital under the Commercial Code have full tax liability. Foreign companies investing in Turkey usually have corporate status abroad, and their legal and business headquarters outside Turkey. For this reason, foreign companies or foreign members of joint-venture companies are usually regarded as having limited liability under the Corporate Tax Law, and are subject to tax only on their business income and earnings derived in Turkey.
Entities whose legal or business headquarters are located in Turkey are treated as resident companies and are responsible for the declaration and payment of taxes on their worldwide corporate income.
Entities that have no legal or business headquarters in Turkey are treated as non-resident companies and are liable for taxes only on corporate income earned in Turkey. For the income of a non-resident company to be taxable, the company must have a place of business or a permanent representative in Turkey and the earnings must have been realised either at this place of business or through this representative.
Even if these conditions are fulfilled, if a company's business headquarters are not in Turkey and it sells the goods purchased in Turkey for export purposes only, the company is not taxed on the earnings derived from this business. However, all commercial earnings derived in Turkey (in a place of business or through permanent representatives) by foreign legal entities having a fixed workplace or permanent representative in Turkey are taxable.
The Turkish concept of "fixed workplace" corresponds to that of a permanent establishment as used in the international tax terminology. Article 156 of the Turkish Procedural Tax Code contains a list of workplaces rather than providing a specific definition. A fixed workplace can be defined as any place assigned to commercial or industrial activities.
A permanent representative is a person attached to the principal by a service contract or power of attorney to carry out (on behalf of and for the account of the principal) commercial transactions over a definite or indefinite period.
For both residents and non-residents, corporate income and gains are subject to withholding tax at different rates, including:
Income from professional services.
Income from royalties and know-how.
Dividend income, including branch remittance.
Time deposit interest and repo gains.
Interest income from state and treasury bonds.
Turkey has 82 double taxation treaties, including treaties with most countries of the Organisation for Economic Co-operation and Development (OECD) and major emerging nations. In the presence of a double taxation treaty, applicable tax rates may be reduced or eliminated for the income and earnings derived by non-resident companies in Turkey.
Withholding tax is the final tax for income earned by non-residents. Non-residents that do not earn income through a permanent establishment or permanent representative in Turkey are not required to file an annual tax return for gains that are subject to withholding.
Borrowings from shareholders or from persons related to shareholders that exceed triple the shareholders' equity of the borrower company at any time within the relevant year are considered thin capital. The ratio can double for loans received from related banks or financial institutions (excluding institutions that provide financing only to related parties), meaning that borrowings from related party banks or financial institutions that exceed six times the shareholders' equity are considered thin capital.
Where thin capitalisation exists, interest paid or accrued, and foreign exchange losses calculated on such thin capital, are reclassified and taxed as dividends distributed by the borrower and as dividends received by the lender, and are treated as repatriated profit for non-resident lenders.
When the price of transactions regarding the sale or purchase of goods and services with related parties is not determined in accordance with the arm's-length principle, the distribution of related profits is considered to be disguised through transfer pricing.
Three traditional transfer pricing methods listed in the Organisation for Economic Co-operation and Development (OECD) Transfer Pricing Guidelines are accepted by Turkish tax authorities, and are clearly defined as the transfer pricing methods to be used, including:
The comparable uncontrolled price method.
The resale price method.
The cost-plus method.
Taxpayers are also allowed to adopt particular transfer pricing methods other than those listed above if the taxpayer's particular circumstances make the application of these methods impossible. Taxpayers can conclude a unilateral agreement with the Turkish Ministry of Finance to determine, in advance for a maximum of three years, the applicable transfer pricing method, assuming the conditions effective at the time of determination of that particular transfer pricing method remain stable. The agreement is binding on both the tax administration and the taxpayer, and therefore provides certainty for both parties.
Grants and tax incentives
The Turkish government provides incentives to encourage and support investments that are in line with international commitments. In general, a combination of tax and non-tax incentives is granted to domestic and foreign investors on an equal basis.
Investment incentives were introduced by the enactment of the Council of Ministers Decree No. 2009/15199 on Subsidies in Investments (Abolished Incentives Decree). The Abolished Incentives Decree was recently replaced by the Council of Ministers Decree No. 2012/3305 on Subsidies in Investments entered into force on announcement in the Official Gazette dated 19 June 2012 and numbered 28328 (New Incentives Decree). These incentives are designed to assist with meeting the government's development targets and its annual programmes to increase production and employment, and to increase direct foreign investment in line with international treaties. The incentive items set out under the New Incentives Decree include:
Reduced corporate tax rates.
Value added tax (VAT) exemptions.
Exemptions on social security premium (employer's portion).
Customs duty exemptions.
Allocation of land for investments.
VAT refunds (for strategic investments).
Investors can benefit from these incentives based on the investment incentive certificates that can be obtained from the relevant authorities. According to the New Incentives Decree, incentive certificate applications must be addressed to the Ministry for Economy, together with the necessary information and documents. For an investment to benefit from the support elements covered under the New Incentives Decree, sectoral, financial, and technical evaluations are made. These take into consideration macro-economic programmes and the balance of supply and demand. In addition, an incentive certificate must be issued.
Among the incentives listed above, the VAT exemption and customs duty exemption are set out as general incentive items. These two exemptions are applicable to all investments, without being subject to any regional or sectoral restrictions.
The New Incentives Decree provides reduced corporate tax rates and investment contribution rates applicable to certain investments that are made within certain regions of Turkey. These must be made in the regions and sectors that are specified in the New Incentives Decree (such as the generation of refined petroleum products, transportation through transit pipelines or investments in ports and port services).
Under the New Incentives Decree, reduced corporate tax rates apply not only to the proceeds arising from relevant investments but also to all commercial activities investing in the company during the investment period for companies making investments within specified regions of Turkey (for example, Diyarbakır, Van and Mardin).
The New Incentives Decree also amends the list of the regions and changes the priority of the cities subject to investment.
Incentives other than investment incentive certificates include:
Corporate tax benefits. Tax-free mergers, spin-offs and share swaps are recognised, provided certain criteria listed under the Corporate Tax Law are fulfilled. Similarly, on fulfilment of certain criteria, carried-forward losses of acquired companies or spin-off companies can also be deducted. Corporate tax benefits are available for research and development activities. Corporate taxpayers' gains arising from their shareholdings in legal entities with full liability are corporate tax exempt. In addition, except in certain cases, 75% of the following capital gains are exempt from corporate tax on fulfilment of certain criteria:
income arising out of the sale of an immovable that is retained as part of the company's assets for a period of at least two years;
participation shares, founders' share certificates (kurucu senet), redeemed shares (intifa senedi) and pre-emptive rights retained as part of the company's assets for a period of at least two years.
Value added tax (VAT) benefits. Under the VAT Law, various transactions are exempt from VAT (such as exports, deliveries made within the framework of an investment incentive certificate and sales of shares and real property held by legal entities for two years). In addition, unless otherwise stipulated under the VAT Law, taxpayers can deduct VAT resulting from deliveries and services received by them and the VAT paid in connection with the imported goods and services. If the deductible VAT amount is more than the VAT calculated in a fiscal year (except in some cases) the difference is not returned but carried to subsequent years (see Question 26, Value added tax (VAT)). Certain VAT benefits are available for research and development activities and small and medium-sized enterprises.
Stamp tax benefits. Documentation issued for the establishment or share capital increase of joint stock companies (JSCs) and limited liability companies (LLCs), loans extended by domestic or foreign banks, insurance policies and so on are stamp tax-exempt. In addition, under the Law on Support of Research and Development and Designing Activities (Araştırma ve Geliştirme Faaliyetlerinin Desteklenmesi Hakkında Kanun), which came into force on 1 March 2008, all documents to be executed regarding research and development and innovation activities as well as designing related activities are stamp tax-exempt. This exemption is subject to the application of certain implementation rules.
Income tax benefits. Individual foreign investors' profits and gains are taxed according to whether the investors are deemed resident or non-resident taxpayers (see Question 27). There are income tax benefits available for employees hired for:
for research and development and designing activities; and
by non-resident employers that do not derive any commercial income in Turkey.
Several employment-oriented incentive regimes are also applied under the Turkish social security laws.
In 2011, the Turkish National Assembly passed Law No. 6111 (published in the Official Gazette dated 25 February 2011 and numbered 27857). This law made a number of amendments to the existing tax and social security legislation. These amendments stipulated that unemployment premiums (which had generally been paid by the employer) for employees recruited as of 1 March 2011, would be compensated from an Unemployment Insurance Fund rather than by the employer. This provision is set to end on 31 December 2020.
In addition, the Social Insurance and General Health Insurance Code No. 5510 contains a five-point social security premium discount in favour of employers, to be paid by the State Treasury instead. An additional incentive regime was introduced for certain geographic regions of the country in a recent law passed by the Turkish National Assembly (Law No. 6486, published in the Official Gazette dated 29 May 2013 and numbered 28661) that enables up to six additional social security premium points (in addition to the five-point discount) for employers who employ at least ten employees. This regime has been recently amended and it will be applicable to all private sector employers regardless of number of employees employed by them as of 1 March 2016. The geographical scope of the law is to be determined by the Council of Ministers, and the application period of the incentive will vary between the determined cities as stipulated by the Council of Ministers.
Turkish labour and social security laws also provide various other incentive regimes, such as incentives for employers that employ disabled workers.
These regulations can change frequently. For the most current information, please visit www.invest.gov.tr .
Laws applicable to foreign nationals
Employment laws in Turkey apply equally to Turkish nationals and foreign nationals. In addition, special provisions regulate the employment and residence permits of foreign nationals who intend to work in Turkey.
The main employment- related legislation applicable to both Turkish nationals and foreign nationals are as follows:
Turkish Labour Code (No. 4857).
Turkish Code of Obligations (No. 6098).
Social Insurance and General Health Insurance Code (No. 5510).
Code of Work Permits for Foreigners (No. 4817) and the applicable regulation.
Code on Trade Unions and Collective Bargaining (No. 6356).
Workplace Health and Safety Code (No. 6331).
Under the Code on International Private and Procedural Law (No. 5718), the parties' choice of law in an employment agreement bearing a foreign element is valid and enforceable on the condition that the minimum standard of protection ensured by the laws of the country where the work is being performed is reserved. Where the parties have not explicitly chosen an applicable law, the laws of the country where the work is performed is applicable.
In addition, where international or bilateral treaties are in place between Turkey and the employee's country of origin, the related terms of that treaty are applied to the extent possible.
Laws applicable to nationals working abroad
There is no specific legislation regulating different or specific principles for Turkish nationals working abroad. However, if an international or bilateral employment treaty is signed with the country where Turkish nationals are employed, the provisions of that treaty will apply.
Procedure for obtaining approval. Foreign nationals must obtain a work visa and a work permit before starting work in Turkey. The work visa is obtained from Turkey's foreign embassy and is granted by the Ministry of Labour and Social Security. Work permits are not valid without a work visa (Code of Work Permits for Foreigners).
Foreign nationals who have obtained a residence permit valid for at least six months do not need to obtain a work visa through Turkey's foreign embassy, as they can directly apply for a work permit in Turkey. The residence permit must be amended in accordance with the obtained work permit (if a work permit is successfully obtained).
Cost. The cost for obtaining a work visa depends on the country where the application is filed. Visa costs should be checked with the Turkish foreign embassy in that country.
Time frame. There is no specific time frame envisaged for Turkish foreign offices to grant a work visa. However, it is suggested that the application is filed at least one month before the desired departure date, as there can be delays in the visa process.
Procedure for obtaining approval. Foreign nationals must also obtain a work permit to be employed in Turkey. The application for a work permit can be filed either in Turkey or abroad:
Outside of Turkey. The foreign national must apply to Turkey's foreign embassy with a passport, a work visa, a copy of the employment agreement and a single passport picture.
Inside Turkey. Foreign nationals who have obtained at least a six-month residence permit can apply directly to the Ministry of Labour and Social Security to obtain a work permit.
The applicant must also file a residence permit application with the police department in the city they will work to obtain a residence permit within 30 days following their arrival in Turkey and before starting work (if the applicant has not already obtained a residence permit). The work permit becomes valid with the grant of the residence permit.
The work permit can be issued for a definite or an indefinite term. The definite-term work permit can initially be granted for a maximum period of one year. At the end of one year, the permit can be renewed for up to three years, and then renewed again for up to six years in total (that is, for a further three years).
An indefinite-term work permit can be granted to foreign nationals who have resided in Turkey for at least eight years, or to those who have been working in Turkey for at least six years.
Cost. The fee for obtaining a definite-term work permit is TRY537.50 for a permit of up to one year and TRY1075 for a permit of up to two years and TRY1,612 for a permit of up to three years. Renewal of permits are subject to the same relevant fee according to the renewal period. The fee for obtaining an indefinite-term work permit is TRY5,375. These fees are subject to revision every year.
Time frame. Following the submission of the required documentation by the applicant, the Ministry of Labour and Social Security finalises the application within one month, provided it is complete.
Sanctions. Employers who employ foreign nationals who do not have a work permit are subject to a fine of TRY6,000 for each employee who does not have a work permit. In addition, each employee who works without a work permit receives a fine of from TRY2,400 to TRY4,800. These fines are subject to revision every year.
Proposals for reform
The Law on Movable Pledges in Commercial Transactions came into force on 1 January 2017. It is intended to encourage the use of moveable pledges not requiring delivery as a security. The purpose of this is to imake it easier for commercial enterprises to obtain funding by expanding the scope of movables that can be pledged, ensuring the transparency of these pledges, and introducing alternative mechanisms for foreclosure. An implementation regulation on this law is expected to be promulgated within the course of 2017.
The Law on the Amendment of Certain Laws for the Improvement of the Investment Landscape came into force on 9 August 2016, introducing significant investment-promoting amendments to certain provisions of the Commercial Code and tax legislation.
The regulatory authorities
Turkish Competition Authority
Main activities. The Turkish Competition Authority is responsible for enforcing Law No. 4054 on the Protection of Competition. Its goal is to facilitate and protect competition in markets.
Capital Markets Board of Turkey (CMB)
Main activities. The CMB is the regulatory and supervisory authority in charge of the securities markets in Turkey. Empowered by the Capital Markets Law, the CMB makes detailed regulations for organising the markets and developing capital market instruments and institutions.
Invest in Turkey
Description. The official website of the Turkish Prime Ministry, it includes binding information in relation to investment in Turkey. An English version is available.
Ministry of Economy
Description. The official website of the Ministry of Economy, it includes binding information in relation to economic matters. An English version is available.
Ministry of Labour and Social Security
Description. The official website of the Ministry of Labour and Social Security, it includes binding information in relation to labour matters. An English version is available.
Hergüner Bilgen Özeke
Professional qualifications. Georgetown University Law Center (LLM, 2000); Marmara University School of Law (Law Diploma, 1998)
Languages. English, French, Turkish
Professional associations/memberships. Member of the Istanbul Bar Association; Transparency International; Saint-Joseph Alumni Association; Georgetown Alumni Association; Corporate Governance Association of Turkey.
Hergüner Bilgen Özeke
Professional qualifications. Koç University, Faculty of Law (Bachelor of Law, 2010); Harvard University, Summer School (2008-2009)
Languages. English, German, Turkish
Professional associations/memberships. Koç University Alumni Association; German High School Istanbul Alumni Association.
Hergüner Bilgen Özeke
Professional qualifications. Istanbul Bilgi University, Faculty of Law (Law Diploma, 2012)
Languages. English, German, Turkish
Professional associations/memberships. Member of the Istanbul Bar Association; European Law Students Association (ELSA); Young International Arbitration Group (YIAG); Bucerius Law School Alumni Association; Corporate Governance Association of Turkey.