Tax on corporate lending and bond issues in Turkey: overview

A Q&A guide to tax on finance transactions in Turkey.

This Q&A provides a high level overview of finance tax in Turkey and focuses on corporate lending and borrowing (including withholding tax requirements), bond issues, plant and machinery leasing, taxation of the borrower and lender when restructuring debt, securitisations, the Foreign Account Tax Compliance Act (FATCA) and bank levies.

To compare answers across multiple jurisdictions, visit the Tax on Corporate Lending and Bond Issues: Country Q&A tool.

The Q&A is part of the global guide to tax on transactions. For a full list of jurisdictional Q&As visit www.practicallaw.com/taxontransactions-guide.

Orhan Yavuz Mavioglu and Ali Yurtsever, ADMD Law Office
Contents

Tax authorities

1. What are the main authorities responsible for enforcing taxes on finance transactions in your jurisdiction?

The Ministry of Finance and the Revenue Administration are the main authorities responsible for enforcing any applicable taxes on finance transactions.

Pre-completion tax clearances

2. Is it possible or necessary to apply for tax clearances from the tax authorities before completing a finance transaction?

Taxpayers can request a tax ruling from the relevant local tax office for tax-related issues that are unclear or complex. However, those tax rulings are merely the opinion of the relevant Tax Office and therefore are not binding, and there is no specific procedure to obtain them. If a transaction is executed based on a tax ruling, that ruling provides protection against any potential tax penalty and delayed interest payments (but not in relation to any tax principal due).

Disclosure of finance transactions

3. Is it necessary to disclose the existence of any finance transactions to the tax authorities?

It is not necessary to disclose the existence of any finance transactions to the tax authorities.

 

Taxes on corporate lending/borrowing

Taxes potentially chargeable on amounts receivable

4. What are the main corporate taxes potentially chargeable on interest and other amounts receivable under a loan?

Corporate income tax

Key characteristics. Corporate tax is levied on the income and earnings derived by corporations and corporate bodies, including interest and other amounts receivable under a loan. The Corporate Tax Law sets out provisions and rules applicable to income resulting from the activities of corporations and corporate bodies, whereas the Income Tax Law concerns income derived by individuals. Corporations and corporate bodies specified by the Law as taxpayers are:

  • Capital companies and similar foreign companies.

  • Co-operatives.

  • Public enterprises.

  • Enterprises owned by foundations, societies and associations.

  • Joint ventures.

Calculation of tax. The corporate income generated by commercial entities is calculated based on the commercial income provisions of the Income Tax Code (Law No. 193, Official Gazette dated 1 June 1961, No. 10700) regardless of the source of that income. The tax rate is applied to that income in the financial year in which the income is accrued.

Triggering event. The receipt of income triggers the liability to tax.

Applicable rate. The basic corporate income tax rate levied on business profits is 20%.

Withholding tax

Key characteristics. Withholding tax applies to non-resident entities that receive Turkish-source interest (subject to any reduction under a double tax treaty).

Calculation of tax. The tax is calculated on the amount of interest paid.

Triggering event. The payment of the interest that is subject to corporate income tax to the relevant parties triggers the tax. The tax is deducted from the payment made and paid to the relevant tax office.

Applicable rate(s). The rates are 0% for banks and 10% for non-banks. This rate may be reduced by an applicable tax treaty.

Resource utilisation support fund (RUSF)

Key characteristics. RUSF is applied to TRL-denominated loans obtained by Turkish residents (other than banks and financial institutions) from abroad and foreign currency loans obtained by individuals from abroad. The lender is responsible for paying RUSF.

Calculation of tax. RUSF is calculated on loan interest (for TRL-denominated loans) or on the principal (for non-TRL-denominated loans).

Triggering event. The triggering event for payment of RUSF is the receipt of the interest.

Applicable rate(s). The rate depends on whether the loan is TRL-denominated or not:

  • TRL-denominated: 3% on the loan interest.

  • Non-TRL-denominated: 3% on the principal for loans with less than a one-year term, 1% for loans with less than a two-year term, 0.5% for loans with less than a three-year term, and 0% for loans of three years or longer.

VAT

Key characteristics. VAT is charged on all goods and services that are supplied or rendered in Turkey within the scope of commercial, industrial, agricultural, and professional activities (see Question 6, VAT). It applies to loan interest if the non-resident lender is not a financial institution (a bank or entity whose core business includes lending). The VAT must be paid by the borrower directly to the local tax office.

Calculation of tax. The VAT is charged on the loan interest and paid by the borrower.

Triggering event. Taxable events are determined under Article 1 of the VAT Code (see Question 6, VAT). The payment of the interest triggers the liability for VAT.

Applicable rate(s). The applicable rate is 18%.

Banking and insurance transactions tax

Key characteristics. The transactions of banking and insurance companies are not subject to VAT, but are subject to banking and insurance transaction tax on their financial transaction income, including interest. There are a number of exemptions (see Question 26).

Calculation of tax. The tax is charged on the income received by the bank or insurance company.

Triggering event. The collection of money as interest, commission or expenditure by banks and insurance companies (by cash or on account) triggers the payment of the tax.

Applicable rate(s). The tax rates are: repossession gains 1%, interbank exchange transactions 0%, interbank deposit transactions 1%, sale of government bonds and treasury bills 1%, sales from foreign exchange transactions 0.1%, other exchange transactions 0%, and other collections (commission, premium and interest) 5%.

Tax reliefs available for borrowing costs

5. What corporate tax reliefs are available for borrowing costs (including interest and other amounts payable under a loan)?

Amortisation

This can apply to the borrowing costs of loans of real assets obtained from abroad in foreign currency. In that case, the exchange difference at the date of import, and the capitalisation of the costs, will constitute the cost of the imported asset. The costs will be treated as an asset on the balance sheet and can be subject to amortisation.

Expense

Borrowing costs can be treated as a tax-allowable expense and deductible for the purposes of calculating for corporate income tax (see Question 4, Corporate income tax).

There is a potential limitation on expenses incurred on loans by a company. From 1 January 2013, a percentage of financial expenses (such as interest or commission) incurred on borrowings from external sources that exceeds the shareholder's equity of a Turkish company may be regarded as a disallowable expense. The Council of Ministers has authority to determine what percentage of these expenses will be treated as disallowable, up to a percentage of 10%, per business sector, although the Council of Ministers has not exercised this authority as yet. This does not apply to credit institutions, financial institutions, leasing, factoring and finance companies.

Withholding tax

Withholding tax will not be applied to:

  • Principal, interest and dividend payments for borrowings obtained from foreign countries, international institutions or foreign banks or institutions.

  • Insurance and reinsurance payments.

Tax payable on the transfer of debt

6. What corporate, transfer, stamp or other taxes are payable on the transfer of a debt under a loan?

VAT

Key characteristics. All goods and services that are supplied/rendered in Turkey within the scope of commercial, industrial, agricultural, and professional activities are subject to VAT. Each person and/or entity, can set off (and neutralise) their input VAT (VAT payable on their sales) from their output VAT (VAT receivable on their purchases/expenses) on their monthly VAT returns. VAT is payable on the transfer or assignment of debt that involves a financial benefit.

Calculation of tax. The amount subject to tax is the difference between the value of the loan and the amount payable by the acquirer.

Triggering event. Taxable events are determined under the Article 1 of the VAT Code.

Liable party/parties. The party transferring the debt is responsible for declaring and paying the VAT to the relevant tax office by submitting a VAT return. The seller must issue an invoice including the VAT.

Applicable rate(s). The main VAT rate (which is applicable to the transfer of debt) is 18%.

Banking and insurance transactions tax

Key characteristics. Transactions (except for certain financial leasing transactions) executed by banks and insurance companies, as a result of which those banks and insurance companies acquire money, are subject to banking and insurance transactions tax. This can include the transfer of debt under a loan, as a result of which a bank or insurance company realises a gain.

Calculation of tax. See Question 4, Banking and insurance transactions tax: Calculation of tax.

Triggering event. See Question 4, Banking and insurance transactions tax: Calculation of tax.

Liable party/parties. See Question 4, Banking and insurance transactions tax: Calculation of tax ( www.practicallaw.com/2-618-3078) .

Applicable rate(s). See Question 4, Banking and insurance transactions tax: Calculation of tax.

Stamp tax

Key characteristics. Documents that include monetary commitments such as agreements and undertakings, are subject to stamp tax. The documents are subject to stamp tax independently from the transactions that the documents cover.

Calculation of tax. The tax is levied either as a fixed tax (where there is no monetary value on the agreement) or a proportional rate over the quantifiable tax base, depending on the nature of the documents.

Triggering event. The triggering event for stamp tax on documents executed in Turkey is the signing of the document. For documents executed outside of Turkey, stamp tax will arise when those documents are either submitted to the relevant governmental bodies or used in Turkey and a benefit is derived as a result.

Liable party/parties. The signatories of the document that is subject to stamp tax are jointly and severally liable for payment. However, the agreement may provide that only one of the parties is liable.

Stamp tax on documents concerning transactions between governmental authorities and persons must be paid by the persons concerned.

Stamp tax on documents drawn up abroad and in foreign embassies, legations and consulates in Turkey must be paid by the person who either:

  • Submitted the documents to the relevant governmental authorities.

  • Provided the authorities with the formalities of transfer of endorsement.

  • Benefited from those documents.

Applicable rate(s). The applicable proportional and fixed taxes are set out in Table 1 attached to the Stamp Tax Law (Law No. 488, Official Gazette dated 11 July 1964, No. 11751). The rate differs depending on the nature of the documents, from 0.189% to 0.948%. The maximum amount is TRL1,487,397.70. However, it should be noted that agreements relating to the transfer and assignment of debts are exempt from stamp tax.

Withholding tax

7. Is there withholding tax on interest or any other payments under a loan?

Interest on loans payable to foreign states, international institutions, foreign banks and foreign corporations that qualify as financial entities in their country of residence and that provide loans to the public are subject to a 0% withholding tax. A 10% withholding rate is applicable to interest paid on loans from non-resident entities that are not authorised/qualified as "financial entities", or that provide loans only to specific group companies.

Guarantees

8. Do any particular tax issues arise on the provision of a guarantee?

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 at rates ranging from 0.189% to 0.948%, and collected as a fixed price (a pre-determined price) for some documents. The maximum amount is TRL1,487,397.70. Accordingly, the applicable stamp tax rate for guarantees is set at 0.948% (see Question 6, Stamp tax).

 

Bond issues

9. For corporate taxation purposes, are bonds treated any differently from standard corporate loans?

Different tax rates may be applicable for bonds issued in Turkey and abroad when compared to standard corporate loans (see Question 10).

Taxes payable on the issue and/or transfer of a bond

10. What stamp, transfer or similar taxes are payable on the issue and/or transfer of a bond?

Withholding tax

Key characteristics. Interest income from bonds is subject to withholding tax.

Calculation of tax. The income received is subject to withholding tax at a specific rate.

Triggering event. The payment of the interest triggers the withholding tax.

Liable party/parties. The bondholder is liable.

Applicable rate(s). All interest income from private sector bonds issued in Turkey after 1 January 2006 is subject to a withholding tax of 10% (Provisional Article 67, Income Tax Law). Interest income from bonds imported from abroad in foreign currency by fully accountable taxpayers is subject to the following withholding tax rates (Council of Ministers decision No. 2010/1182):

  • 10% from bond interests with a maturity period of up to one year.

  • 7% from bond interests with a maturity period of between one year and three years.

  • 3% from bond interests with a maturity period of between three years and five years.

  • 0% from bond interests with a maturity period of more than five years.

Stamp tax

Stamp tax may be applicable if the transactions involve an agreement (see Question 6, Stamp tax).

Exemptions

11. Are any exemptions available?

Withholding tax does not apply to interest income on bonds issued in Turkey before 1 January 2006 and bonds issued abroad that have a maturity period of more than five years (see Question 10, Withholding tax).

 

Plant and machinery leasing

Claiming capital allowances/tax depreciation

12. What are the basic rules for enabling the lessor or lessee of plant and machinery to claim capital allowances/tax depreciation?

Although not specifically relating to capital allowances or tax depreciation, it may be possible to obtain tax exemptions for imported machinery and equipment. The Turkish government grants incentives for projects where foreign investment is involved. The principal requirement is to obtain an investment incentive certificate (IIC) from the Ministry of Economy. The minimum investment required is based on the geographical location of the investment. Turkey is separated into six zones based on the development level of these regions, where zone one is the most developed. Imported machinery and equipment can benefit from these incentives. The machinery and/or equipment must be leased to a party that holds an IIC which lists the relevant machinery and equipment. To benefit from that exemption, the goods supplied/provided must:

  • Qualify as "machinery and equipment".

  • Be used in the production of goods and services.

  • Be included in the Global List (a list attached to the IIC that shows the machinery equipment that will be subject to tax exemptions as per the IIC).

Taxpayers may request a refund for VAT already paid in relation to supplied machinery and equipment that is a part of the exemption, in which case the refund will be calculated based on the VAT already paid for the goods (Article 1.1.6, The General Communiqué On Value Added Tax no. 69, published in the Official Gazette dated 14 August 1998 No. 23433). The taxpayer can claim for a tax refund or for the deduction of the excess VAT from present or future public debts (Article 3, General Communiqué On Value Added Tax No. 72). A full certification report from a certified public accountant is required for VAT returns that will be made in cash, when the refunded amount exceeds TRL200 (Article 3.1, Communiqué No. 72 and General Communiqué On Value Added Tax No. 73).

Apart from the VAT refund, qualifying investments are eligible for:

  • VAT exemption.

  • Customs duty exemption.

  • Corporate income or individual income tax reduction (according to the tax reduction rates set in the six Turkey regions for investment incentives).

  • Social security premium support (employer's and employee's share).

  • Income tax withholding allowance.

  • Interest rate support.

  • Allocation of state land.

Rate of capital allowances/tax depreciation

13. What is the rate of capital allowances/tax depreciation; does it depend on the type of assets?

The rate of capital allowances and tax depreciation depends on the asset and on the tax type exemption.

Lessees not carrying on business in the jurisdiction

14. Are there special rules for leasing to lessees that do not carry on business in your jurisdiction?

All corporations and institutions can be lessees in Turkey (Law on Leasing, Factoring and Financing Companies. No.6361). However, a lessee must be an authorised corporation to conduct leasing operations, which means that the lessee must be (Article 10):

  • Established as a joint stock company.

  • A branch of a foreign company in Turkey.

Therefore, foreign companies that do not conduct business within Turkey cannot be lessees.

Taxation of rentals

15. How are rentals taxed?

Customs duty

Goods brought to the country under a contract between a foreign lessor and a domestic lessee are subject to customs duty, unless an investment incentive certificate applies (see Question 12). A guarantee in an amount sufficient to cover taxes which may become payable in the future will be collected for the goods imported. The form and conditions of the guarantee will be regulated by an administrative order.

Corporate income tax

Income of corporations that derive from rentals are considered to be corporate and commercial income, and rental incomes are subject to a corporate income tax (see Question 4, Corporate income tax). It should be noted that individuals, unlike corporations, make separate submissions for rental incomes

Capital gains derived through the disposal of real estate are subject to corporation tax at 20%. However, 75% of the capital gain is exempt from corporation tax if certain conditions are met, including that the real estate is held for more than two years (Article 5(1)(e), Corporate Tax Law). Profits generated through finance lease transactions by way of sale and leaseback may now be able to benefit from an exemption of 100%, according to Article 42 of Law No. 6495, if the applicable conditions are met.

VAT

VAT applies to finance lease transactions at the general rate of 18%, including rental income of corporations (although rental incomes of individuals are exempt from VAT) However, a reduced 1% has been included under Decree No. 2011/2064, published in Official Gazette date December 27 2011 and No. 28155, which applies to (Articles 16 and 17):

  • Leasing of machinery and equipment by finance lease companies to taxpayers that have an investment incentive certificate (see Question 12).

  • Supply of machinery and equipment listed under the list attached to Decree No. 2011/2064 which have the characteristics of a depreciable asset, to:

    • finance lease companies;

    • VAT taxpayers;

    • corporation/income taxpayers that do not have VAT liability because their transactions are exempt from VAT.

Stamp tax

Finance lease contracts and related documents concerning their transfer, amendment and guarantee, are exempt from stamp tax, as are the procedures executed with regard to these documents (Article 37(1), Law No. 6361) (see Question 6, Stamp tax).

Title deed fees

Registration to the land registry of real estate leased within finance lease transactions through sale and leaseback are exempt from title deed fees (Article 37(2), Law No. 6361).

Rulings and clearances

16. Is a ruling or clearance necessary or common?

Rulings or clearances are not necessary.

 

Restructuring debt

Unpaid or deferred interest or capital

17. What is the tax treatment of the borrower and the lender if interest or capital is unpaid or deferred?

There are no special tax treatments for unpaid or deferred interest or capital. Tax assessments are made on an accrual basis.

Debt write-off/release and debt for equity swap

18. What is the tax treatment of the borrower and lender if a loan is:
  • Written off or released (wholly or partly)?

  • Replaced by shares in the borrower (debt for equity swap)?

Debt write-off or release

Corporation income tax is calculated on the net corporation profit of taxpayers within a single accounting period. The commercial income provisions of the Income Tax Law apply when determining net corporation profit. Bad or written-off debts that are deemed to be non-collectable are regarded as invaluable receivables (Article 322, Tax Procedure Law). Invaluable receivables are listed under company losses as expenses (a record confirming this, such as a bankruptcy commission releasing the debt, is required). The written-off loans will decrease the taxable base of the lender and therefore lower its corporation income tax.

Up to 10% of the sum of financing expenses (for example, interest, commission, foreign exchange losses and similar costs and expenses) related to the borrowings that exceed the shareholder's equity of the companies may be treated as a disallowable expense (see Question 5, Expense).

Debt-for-equity swap

If a debt or an equity swap is made in exchange for the debt, the debt cannot be deemed to be an un-collectable receivable. Accordingly, the share or equities swapped in exchange of the debt are listed as gains of the lender, and therefore included in determining the taxable base of the lender. However, such action will be listed as expenditure of the borrower, therefore decreasing its taxable base for corporate income tax and other applicable taxes.

 

Securitisation

19. Briefly explain the key features of the tax regime applicable to securitisations, including details of any specific tax rules that apply or issues that arise in relation to securitisations.

Onshore securitisation structures

These are generally made through funds which, although they are considered taxable entities, are exempt from corporate income tax in Turkey. The securitisations are subject to corporate tax on gains, VAT and stamp duty (see Questions 4 and 6). Exemptions apply for some types of securitisations, such as sukuk issuances under sale and leaseback models and mortgage-backed securities.

Offshore securitisation structures

These are treated as lending arrangements and special purpose vehicles (SPVs) defined as financing institutions, and are subject to the following tax arrangements:

  • 1% interest withholding tax on interest payments made to SPVs.

  • Resource utilisation support fund (RUSF) is applied to loans. Whether RUSF applies depends on the currency of the loan and the average maturity (see Question 4, Resource utilisation support fund (RUSF)). Turkish intermediary banks act as tax agents and it is usually a borrower's liability.

VAT and stamp duty do not apply.

 

Foreign Account Tax Compliance Act (FATCA)

20. Has your jurisdiction entered into an intergovernmental agreement (IGA) to implement FATCA, or do you intend to enter into an IGA to implement FATCA?

Turkey has not yet signed FATCA, however, it has been included in the list of countries that have agreed, in principle, the FATCA Model 1 IGA agreement text as of 3 June 2014. According to the notification published by the US Internal Revenue Service dated 28 April 2014, countries included in this list are deemed to be countries countries that have signed FATCA and are in compliance with FATCA. However, such countries, including Turkey, were obliged to sign FATCA by 31 December 2014.

 
21. Have there been any particular difficulties in light of your jurisdiction's domestic legislation with implementing the FATCA requirements?

To comply with FATCA, Turkey must introduce reforms into:

  • The laws and corporate structures of banks, investment funds and similar institutions to implement new control mechanisms and regimes.

  • The information systems of banks, such as account openings, customer's information storage, and so on, and necessary workshops organised.

  • Issues concerning service contracts, customer acceptance, organisational authorities and liabilities of financial corporations.

The period set for compliance has ended and such reforms must be implemented as soon as possible to fulfil all requirements.

 
22. Are there any provisions of your jurisdiction's IGA and/or domestic implementing legislation, if any, that are more onerous than the US FATCA requirements?

There are no other laws that are more onerous than the US FATCA requirements.

 

Bank levies

23. Are there any bank levies or similar taxes imposed specifically on financial institutions?

A tax specifically imposed on financial institutions is the banking and insurance transaction tax, set out in the Expenditure Tax Law No. 6802 (see Question 4, Banking and insurance transactions tax).

 
24. On what are any such levies or taxes charged?

Transactions and services produced by banks, bankers and insurance companies are subject to banking and insurance transaction tax on the gains from those transactions. Taxpayers are banks, insurance companies and bankers.

Banking and insurance transaction tax applies at the time of accrual regardless of when the income is actually received. The taxation period is each month, and taxpayers must file and submit their returns to the local tax office within 15 days of the end of each month. Banking and insurance transaction tax payments are made at the same date as the submission of tax returns to the relevant tax office.

 
25. At what rate(s) are the levies or taxes charged?

The tax rates are: repossession gains 1%, interbank exchange transactions 0%, interbank deposit transactions 1%, sale of government bonds and treasury bills 1%, sales from foreign exchange transactions 0.1%, other exchange transactions 0%, and other collections (commission, premium and interest) 5% (see Question 4, Banking and insurance transactions tax).

 
26. Are there any thresholds or exemptions?

There are a number of exemptions from banking and insurance transaction tax (Expenditure Tax Law No. 6802):

  • Income generated from the transactions carried out by Turkish-resident banks with their branch offices or agents and the transactions carried out between those branch offices and agents.

  • Income generated from the transactions carried out between Turkish branch offices or agents or non-resident banks.

  • Coupon and interest income of tax-exempt bonds and bills.

  • Cash obtained by the bank from its client and totally transferred to a third party service provider for the purpose of making a service fee payment on behalf of the client

  • Dividends obtained by banks, insurance companies and bankers from industrial subsidiaries, and other subsidiaries that qualify as bank, bankers or insurance companies, which arise from transactions over which banking and insurance transactions tax has already been calculated.

  • Fees from export transportation and life insurance policies, agricultural insurance policies for un-harvested agricultural products, cattle and herd, and nuclear risk insurance policies.

  • Commissions, premiums and other analogous fees obtained for transactions concerning reassurance and retrocession.

  • Income generated from arbitrage transactions and trading income generated by banks and financial companies operating in Turkey on derivative contracts performed in the Turkish exchange markets.

 

Reform

27. Please summarise any proposals for reform that will impact on the taxation of finance transactions described above.

There are no new reforms or proposals currently pending that will impact on the taxation of finance transactions.

 

Online resources

Revenue Administration

W www.gib.gov.tr

Description. This is the website of the Revenue Administration. It has Turkish-language copies of some of the legislation referred to in this Q&A. Some English-language resources are available.



Contributor profiles

Orhan Yavuz Mavioglu, Managing Partner

ADMD Law Office

T +90 212 269 56 61
F +90 212 269 56 69
E yavuz.mavioglu@admdlaw.com
W www.admdlaw.com

Professional qualifications. Turkey, Lawyer

Ali Yurtsever, Associate

ADMD Law Office

T +90 212 269 56 61
F +90 212 269 56 69
E ali.yurtsever@admdlaw.com
W www.admdlaw.com

Professional qualifications. Turkey, Lawyer


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