Drawing down duties: A look at how tax law deals with corporations

At present there is no definitive definition for corporations under the law and there are no defined criteria. However, it is possible to draw some conclusions making use of applicable provisions from the Turkish Commercial Code No. 6102 and various other regulations as outlined below.

Commercial Code

As stated in Section 40 of the Commercial Code, the location of the company headquarters can determine whether a business is considered to be local or foreign. Under Section 40 of the Commercial Code, “The branch offices of businesses with headquarters in Turkey will also be registered and promulgated in the Trade Registry of the jurisdiction they are in.” However, “branch offices in Turkey of businesses with headquarters outside Turkey will be registered as local businesses without prejudice to the provisions of the laws of their own countries in connection with business title.”

Banking Act Regulations

The Banking Act outlines the distinctive features of companies established in Turkey and outside Turkey. Section 6 of the Banking Act deals with obtaining permission for opening a branch office or representation office in Turkey. It states that the “establishment of a bank in Turkey or opening of the first branch in Turkey of a bank established outside the country will be permitted, provided the requirements set in this law are met.”

The opening of representations office in Turkey by banks established outside the country is dealt with as follows in paragraph four of Section 6, “Banks established outside the country may open representation offices in Turkey with the permission of the Council of Ministers, provided they do not accept deposits or participation funds and operate in line with rules to be set by the council”.

Foreign Investment Regulations

Corporations regulated by the Direct Foreign Investments Act No. 4875 designates businesses established under the laws of other countries as foreign investors. Section 2 of the act defines foreign investors as:

  • Natural persons who are citizens of foreign countries and Turkish citizens domiciled abroad; and
  • Legal entities and international organisations established under laws of foreign countries.

In light of the above, it is possible to find regulations to assist in the identification of legal entities in the Commercial Code, the Banking Act, and the Direct Foreign Investments Act, as well as the Mining Act. However, there is presently no definition in Turkish laws dealing with the nationality of corporations.

An assessment of applicable legislation shows that the predominant opinion in Turkish law is that companies established in Turkey under the rules of Turkish law will have Turkish nationality.


The major forms of taxation in Turkey are:

  • Income tax;
  • Corporation tax;
  • Taxation on consumption;
  • Value-added tax (VAT);
  • Special consumption tax;
  • Customs tax;
  • Banking and insurance transactions tax;
  • Stamp duty;
  • Valuable papers duty;
  • Fees duties on wealth;
  • Motor vehicles tax;
  • Property tax; and
  • Inheritance and transfer tax.

Income Tax

This tax is collected on the earnings of natural persons. Income tax in Turkey is calculated on a progressive basis and contains various allowances, exemptions and exceptions. Income taxpayers must meet the following criteria:

  • Income must belong to a natural person. Under the Civil Code, a natural person is a person who can be a rightful owner under provisions of the Civil Code and can incur a liability;
  • The income must be income derived in a calendar year. The taxation period for the purposes of income tax is a past calendar year;
  • Income can be defined as the sum of any earnings and revenues. The sum of all earnings, claims and earned income for the year is subject to income tax. This is the case even if it has not come into possession directly; and
  • Income is the net total of all earnings and revenues.

Any expenses incurred and to be incurred in deriving the income are deducted and the remaining portion becomes subject to taxation. In calculations of net earnings and revenue, expenses that are specified in law will therefore be deducted from the gross income. There are two types of taxpayers, full-fledged taxpayers and foreign-based taxpayers. Natural persons residing in Turkey who are taxed in Turkey on all income derived within and outside the country’s borders are treated as full-fledged taxpayers.

Conversely, natural persons not residing in Turkey are defined as foreign-based taxpayers and are taxed solely on income obtained in Turkey. Income derived by such taxpayers as a result of their operations abroad are excluded from income tax.

Corporation Tax

Corporation tax is levied on corporate earnings. The same elements deemed to be income under income tax regulations also apply to corporation tax. Regardless of which elements a corporation has obtained an income from, these continue to be classified as corporate earnings.

In short, the income elements are the same for both income tax and corporation tax. As a result, the income must be annual, real, net, overall and accrued. Income that is not covered by income tax will not be considered under corporation tax either.

Corporation Tax Act No. 5520 has been put into effect and was published in the Official Gazette of June 21, 2006, No. 22205, as a result revoking the Corporation Tax Act of June 3, 2005, No. 5422. The current rate for corporation tax is at 20%. The earnings of the various types of corporations listed below are subject to corporation tax:

  • Share capital companies;
  • Cooperatives;
  • Economic state enterprises;
  • Economic enterprises of associations or foundations; and
  • Business partnerships.

Corporation tax is calculated on corporate income derived by taxpayers and specified in the first section of the act during a given accounting period. Taxes that are imposed on spending can be categorised into three main groups:

  • Taxes on consumption items;
  • Taxes on transactions; and
  • Taxes on value-added goods.

VAT was introduced into the taxation system by an act of October 20, 1984, No. 3065, and was put into effect as of January 1, 1985. The tax covers the following subjects:

  • Deliveries and services as part of commercial, industrial and agricultural operations;
  • Imports of any goods and services; and
  • Deliveries and services arising from operations that are required to be covered by the tax but are not included among these specified lines of business which has special taxation characteristics.

VAT payers may be listed as follows:

  • In the delivery of goods and rendering of services, those who deliver such goods or render such services;
  • In importing of goods and services, those importing the good or services; and
  • In leasing deemed to be property leasing under the Income Tax Act, those leasing out such goods and rights.

In terms of an event that leads to VAT, the concepts of the delivery of goods and the rendering of services are extremely important and must be clarified. Delivery is the transfer of the right of disposition on a good by the owner or his agent to the purchaser or his agent. Services, on the other hand, may take place by doing, processing, creating, manufacturing, repairing, cleaning or safekeeping something or pledging not to do something.

Stamp Duty

This is a tax collected on documents showing the validity of legal transactions between individuals and corporations. The payer of the stamp duty is the person who signs the instruments subject to the stamp duty.

If one of the signatories is exempt or a government office, the taxpayer of the stamp duty will be the non-exempt person. If the provisions of the instrument executed abroad are implemented and inured from benefitting domestically, such transactions will be subject to the payment of stamp duty.

Creating an Effective Structure

Taxation systems must adapt to the broader changes occurring in economic and social life. This dynamic structure enables a tax system to become more rational and able to balance the competing demands of fairness and efficiency that drive a modern economy.

Tax reform consists of the redistribution of the national tax load among various social segments. Objectives of tax reform should be the following:

  • To ensure tax justice;
  • To enlarge the tax base;
  • To prevent the growth of an informal economy;
  • To make tax legislation simple to understand and easily implementable; and
  • To employ the fairness function in income distribution of taxes most effectively.

A skewed income distribution weakens the middle segments of society even as the number of significantly rich individuals continues to grow. That there are fewer wealthy individuals in Japan, one of the most developed economies of the world, than in Turkey, illustrates the extent of the disparity in wealth.

To resolve this situation, we propose that individuals should be asked to declare the sources of their wealth. To this end, the authority included in section 30/7 of Tax Procedure Act revoked by Act No. 4783 regarding questioning the source of expenses and savings should be re-issued to audit agents.