Table of contents
• Introduction • Tax exemptions for corporations in Turkey • Exemption of profits from foreign participations • Reduced corporate tax rate for IPOs • Capital gains tax exemptions • Research and development incentives • International holding company regime • Conclusion
Introduction
Are you tired of paying high corporate taxes in Turkey? Well, we've got some good news for you! Turkey offers various tax exemptions and incentives for corporations to help boost the economy and attract investors. Let's take a closer look at Turkey's corporate tax system and the benefits it provides. Firstly, a quick overview: Turkish residents must pay income tax on their worldwide income, while companies with legal or business headquarters in Turkey are subject to corporate tax on their worldwide income. Limited liability taxpayers outside of Turkey are only taxed on income earned within the country. Now, let's talk about tax exemptions. These are breaks on tax that corporations can claim, which can lead to significant savings. Some key tax exemptions in Turkey include reduced corporate tax rates for IPOs, capital gains tax exemptions, and research and development incentives. But what do these benefits mean for you? Simply put, they can help increase your bottom line and make your business more profitable. So, if you're looking to expand your business, invest in Turkey, or simply save on your tax bill, be sure to take advantage of these incentives.
Tax Exemptions for Corporations in Turkey
Turkey's Incentives and Benefits Tax exemptions are an essential part of any country's taxation system. They create an environment that fosters investment and growth, encouraging businesses to expand operations. Turkey is no exception to this system. The country offers several tax incentives that attract international investors to its market. In this blog post, we will explore some of the tax exemptions available to corporations in Turkey. Exemption of Profits from Foreign Participations Turkey's taxation system offers exemptions to corporate taxpayers from capital gains tax on profits derived from foreign participations. To qualify for this exemption, the foreign participation must have been held for at least two years by a holding company resident in Turkey. The exemption is subject to certain conditions and is not applicable to gains realized from the sale of partnerships, securities or other capital market instruments. Reduced Corporate Tax Rate for IPOs Another tax incentive available to corporations in Turkey is the reduced corporate tax rate for initial public offerings (IPOs). Companies that offer at least 20% of their shares to the public on the Borsa Istanbul Equity Market for the first time are eligible for a discounted corporate tax rate of 2 points (23% for 2023) for five accounting periods, commencing from the fiscal year in which their shares were offered to the public.
This incentive aims to encourage more companies to go public in Turkey. Capital Gains Tax Exemptions All companies in Turkey are subject to corporate tax on capital gains derived from the sale of assets. However, 75% of capital gains from the sale of shares and 50% of capital gains from the sale of immovable properties owned by corporate taxpayers for at least two years are exempt from corporate tax, provided that the gains from the sale are kept in a special account until the end of the fifth year following the year of sale. Research and Development Incentives To drive innovation and growth in its economy, Turkey offers several incentives for research and development (R&D) activities. Companies that engage in qualifying R&D and design activities can enjoy an allowance of 100% of R&D and design expenditure until December 31, 2023. Further, 80% (95% for employees with a PhD or master's degree in fundamental sciences, and 90% for employees with a master's degree in any field or an undergraduate degree in fundamental sciences) of the income tax computed on the wages of R&D and design personnel is exempt from income withholding tax.
Moreover, 50% of the social security premium contributions paid for each R&D and design employee will be reimbursed by the Ministry of Treasury and Finance (up to 10% of the total number of full-time R&D employees). Import Duty Exemptions Turkey allows corporations that import goods to be used for research as part of a qualifying R&D or design project to be exempt from import duties. International Holding Company Regime To qualify as an international holding company, a Turkish company must meet specific criteria. It must be a corporation, at least 75% of its total assets (excluding cash items) must be comprised of foreign participations held for a continuous period of at least one year. The company must hold at least 10% of the capital of each foreign participation, which must be in the form of a corporation or limited liability company. Capital gains derived from foreign participations held for two years by a Turkish international holding company are exempt from corporate tax. Tax incentives are crucial in attracting investors to any country. Turkey's taxation system offers several incentives that create an enabling environment to encourage business growth and expansion. The exemptions available to corporations in Turkey range from IPO tax discounts to exemption from corporate tax on capital gains. All these incentives work together to build a tax system where investors can thrive.
Exemption of Profits from Foreign Participations
If you’re a corporate taxpayer in Turkey and make profits from foreign participations, we have good news for you. 75% of your capital gains, derived from selling shares, are exempt from corporate tax. To qualify for this exemption, you must have held the shares for at least two years and keep the gains from the sale in a special account until the end of the fifth year following the year of sale. But wait, there’s more! A foreign participation that’s been continuously held for at least one year and accounts for at least 75% of a corporation's total assets is also tax exempt. Just remember to satisfy certain other conditions.
Reduced Corporate Tax Rate for IPOs
Got an IPO coming up? Turkey has got your back with a 2% discount on corporate tax rates! That's right; if at least 20% of your company's shares are available for public trading on the Borsa Istanbul Equity Market for the first time, your corporate tax rate will be discounted by 2% - for five accounting periods starting from the fiscal year that your shares are launched. That means your company can enjoy a 23% corporate tax rate for 2023! But wait, there's more. Your company can also enjoy exemptions from capital gains tax, courtesy of Turkey's corporate tax incentives. To qualify for the corporate tax rate reduction, your company needs to have at least 20% of its shares traded publicly on the Borsa Istanbul Equity Market, come November 17, 2020. And if you meet the eligibility criteria, you can enjoy the discounted rate for five accounting periods starting from the fiscal year of your IPO. The tax incentive could have significant financial implications for your company. Just make sure you meet all the eligibility criteria for the corporate tax rate discount.
Capital Gains Tax Exemptions
When it comes to capital gains in Turkey, all companies must include them in their ordinary income and pay corporate tax accordingly. However, some exemptions apply, such as when 75% of capital gains derived by corporate taxpayers from the sale of shares or 50% of capital gains from the sale of immovable property owned for at least two years, as long as the gains are kept in a special account for five years. Holding companies also receive exemptions for capital gains, but only if they meet certain requirements. To qualify, the holding company must be a Turkish corporation, at least 75% of its total assets (excluding cash items) must be comprised of foreign participations held for a year or more, and it must hold a minimum of 10% of the capital of each foreign participation. The foreign participation must also be in the form of a corporation or limited liability company. Another exemption for capital gains is for foreign participations that have been held by a resident holding company in Turkey for at least two years. However, certain conditions need to be met for this exemption to apply.
Branch taxes are another matter. Since branches are considered non-resident for Turkish purposes, they are exclusively taxed on income generated within Turkey. As a result, branch profits are subject to Turkish corporate income tax at a rate of 25% for 2023. Any branch profit transferred to headquarters is subject to dividend withholding tax at a rate of 10%. It's important to remember that all companies must file an annual corporate income tax return, and quarterly advance corporate income tax returns if they have a permanent establishment in Turkey. The corporate tax base is determined by deducting expenses from the revenue of a company. All related business expenses are deductible, with some exceptions, such as interest on shareholders' equity or on advances from shareholders, foreign exchange differences or similar expenses calculated or paid on disguised capital, reserves set aside from profits, and more. Overall, while capital gains are included in ordinary income in Turkey and subject to corporate tax, there are significant exemptions that corporations can take advantage of, provided they meet certain criteria. Incentives are also available for research and development activities and international holding companies, and taxpayers must ensure that they meet all applicable requirements to take full advantage of these tax benefits.
Research and Development Incentives
Research and development (R&D) incentives are available to companies that carry out qualifying R&D and design activities, making it easier for them to innovate and grow. An allowance equal to 100% of R&D and design expenditure is provided until December 2023, in addition to a deduction for such expenditure in the statutory accounts. The incentives further provide for 80% of the income tax computed on the wages of R&D and design personnel to be exempt from income withholding tax. R&D and design companies also enjoy 50% reimbursement of social security premium contributions paid for each employee by the Ministry of Treasury and Finance, making it cost-effective for companies to conduct experiments and expand their market. As a bonus, the import of goods to be used for research as part of a qualifying R&D or design project is also exempt from import duty, thereby reducing the financial burden on companies.
International Holding Company Regime
If you are looking to set up an international holding company, Turkey may be just the right place for it. To qualify as an international holding company, your Turkish corporation must meet certain criteria: it must be a corporation, with at least 75% of its total assets being comprised of foreign participations that have been held for a continuous period of at least one year. The company must hold at least 10% of the capital of each foreign participation, which must be in the form of a corporation or limited liability company. The best part? The capital gains derived by a Turkish international holding company are exempt from corporate income tax, provided that the foreign participation has been held for at least two years. Not only does this regime offer great tax benefits for international companies, it also shows that Turkey is well positioned to be a hub for international business operations.
Conclusion
Tax incentives for corporations in Turkey are crucial for maintaining competitiveness and driving growth. Some of the key tax exemptions and incentives include reduced corporate tax rates for IPOs, exemptions for profits from foreign participations, and incentives for research and development activities. A range of international holding company regimes exist to encourage foreign investment. By taking advantage of these tax incentives, businesses can lower their tax burden, increase their profitability, and enjoy a more favourable investment climate. Overall, Turkey’s tax system offers significant benefits for businesses seeking new growth opportunities.
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