Turkey’s direct taxation system consists of two main taxes: income tax and corporate tax. An individual is subject to income tax on his income and earnings, similar to a company, which is subject to corporate tax on its income and earnings. The rules of taxation for individual income and earnings are provided in Income Tax Law 1960 (ITL), while the rules concerning the taxation of corporations are contained in the Corporation Tax Law 1949 (CTL). Despite the fact that each is governed by a different piece of legislation, many rules and provisions of the Income Tax Law also apply to corporations, especially in terms of income elements and determination of net income.

Income Tax

The income tax is levied on the income of individuals, with the term “individuals” referring to natural persons. In the application of income tax, partnerships are not deemed to be separate entities and each partner is taxed individually on their share of profit. An individual’s income may consist of one or more of the following elements: business profits, agricultural profits, salaries and wages, income from independent personal services, income from immovable property and rights (such as rentals); income from movable property (such as capital investment); other income and earnings without considering the source of income. Tax Liability: In general a residency is the main criterion used in determining tax liability for individuals. This requires that an individual who is resident in Turkey is liable to pay taxes on worldwide income. Any person who remains in Turkey more than six months in a calendar year is assumed as a resident of Turkey.

However, foreigners who stay in Turkey for six months or more for a specific job or business, or for particular purposes specified in the ITL, are not treated as residents. Therefore, unlimited tax liability does not apply to them. Additionally, within a limited scope, a nationality criterion applies regardless of residency status. Turkish citizens who live abroad and work for a government body or a company headquartered in Turkey are considered as unlimited liability taxpayers. Accordingly, they are subject to income tax on their worldwide income. Non-residents are only liable to pay taxes on income derived from the sources in Turkey and are considered to be limited-liability taxpayers. For tax purposes, it is especially important to determine under what circumstances income is deemed to be derived in Turkey. The provisions of Article 7 of the Income Tax Law deal with this issue and lay out the following circumstances: Business profit: A person must have a permanent establishment or permanent representative in Turkey and income must result from business carried out through the establishment or representative(s). Agricultural income: Agricultural activities generating income must take place in Turkey. Wages and salaries: Services must be rendered or accounted for in Turkey. Fees, allocations, dividends and the like paid to the chairmen, directors, auditors and liquidators of the establishment situated in Turkey must be accounted for in Turkey. Income from independent personal services: Independent personal services must be performed or accounted for in Turkey. Income from immovable property: Property considered as immovable must be accounted for in Turkey. Income from movable capital investment: Investment of the capital must be in Turkey. Other income and earnings: The activities generating other income, as specified in the Income Tax Act, must be performed or accounted for in Turkey.

The term “accounted for” used above to clarify tax liability of non-residents means that a payment is to be made in Turkey. If the payment is made abroad, it is to be recorded in the records in Turkey.

Corporate Tax

Corporate tax is levied on the income and earnings derived by corporations and corporate bodies. The income elements in the Corporate Tax Law are the same as those covered in the Income Tax Law. In other words, the Corporate Tax Law sets provisions and rules applicable to the income resulted from the activities of corporations and corporate bodies, whereas the Income Tax Law deals with the income earned by individuals. Corporations and corporate bodies specified by the Law as taxpayers in respect to the corporate tax are as follows:

• Capital companies and similar foreign companies

• Cooperatives

• Public enterprises

• Enterprises owned by foundations societies and associations

• Joint ventures Tax liabilities: According to the Corporate Tax Law, to be covered by the law legal entities must have their legal head office situated in Turkey, or the place of effective management in Turkey. Legal entities are taxed on their worldwide income (unlimited liability). By specifying two criteria the law intends to prevent any problem that may arise in determining tax liability. The term “legal head office, as used in the context of the Corporate Tax Law, means the office specified in the written agreements of the mentioned entities. Therefore, it is not difficult to ascertain where the legal head office of a company is located. However, the place of effective management, which is defined as the place in which the business activities are concentrated and supervised, is not easy to determine in some cases.

The law defines the term “limited tax liability” in the same manner as the term “unlimited tax liability” (as the liability requiring to tax only the income derived in Turkey), provided that both the legal head office and the place of effective management are abroad. Corporate tax returns: Like income tax, corporate tax is also assessed on the basis of declared tax returns filed annually by taxpayers. Tax returns contain the results of the related taxation period. In principle, every taxpayer is required to file only one single tax return, even if he has derived the income through different business places or branches and those places and branches have their own accounting and allocated capital. The corporate tax return can be filed until the 25th day of the fourth month of the year following the month in which the fiscal year ends; further, the assessed taxes are paid until the end of that month. However, if a limited liability taxpayer leaves the country, the corporate tax return must be submitted to the authorised tax office 15 days prior. In such cases, taxes are paid in the same period of time as forth for the declaration.

If the income earned by the foreign companies subject to the corporate tax limited liability consists of the capital gains and non-recurring income discussed in the preceding sections (except for income earned from the sale and transfer of intangible rights like royalties), then the income is declared to the authorised tax offices of those taxpayers, or to the persons acting on their behalf. This is declared to the authorised tax offices in the 15 days after the income has been earned. This procedure is called “special declaration”.

If there is no presence in Turkey, withholding tax will generally be charged on income earned, such as income from the sale and transfer of intangible rights (such as licence, knowledge or royalties), income from movable and immovable property, and income from independent professional services provided in Turkey. However, if there is an avoidance of double taxation treaty, reduced rates of withholding tax may apply. Tax rates: Corporate income tax is applied at a 20% rate on corporate earnings. Taxpayers (only for income from commercial activities and agriculture in limited tax liability cases) pay provisional tax at the rate of corporate tax, and these payments are deducted from corporate tax of the current period.

Indirect Taxation System

In Turkey, there are several indirect taxes, but the most important indirect tax is the value-added tax (VAT). Turkey’s VAT dates back to 1970. In 1974, a draft VAT law, which was the result of the studies of a technical group, was prepared. The subject was widely discussed and some tests were conducted using volunteer enterprises. Seven draft laws were prepared between 1974 and 1984. The eighth draft was enacted on 2 November, 1984 and entered into force on 1 January, 1985. Through this law, eight indirect taxes on consumption were abolished. Goods are liable for VAT: (a) when a person or entity performs commercial, industrial, agricultural or independent professional activities within Turkey; and (b) when goods or services are imported into Turkey.

The VAT is levied at each stage of the production and distribution process. Although liability for the tax falls on the person who supplies or imports goods or services, the real burden is borne by the final consumer. This result is achieved by a tax credit method where the computation of the VAT liability is based on the difference between the liability of a person on his sales (output VAT) and the amount of VAT he has already paid on his purchases (input VAT). The VAT system employs multiple rates and the Council of Ministers is authorized to change the VAT rates within certain limits. Tax rates: The standard rate of VAT on taxable transactions is set at 10% in the VAT Law, but this rate was increased to 18% as of 15 May, 2001.

Stamp Tax

The Stamp Tax applies to a wide range of documents, including, but not limited to, contracts, agreements, notes payable, letters of credit and letters of guarantee, financial statements and payrolls. The stamp duty is levied as a percentage of the value stated on the document at rates ranging from 0.15% to 0.75%. The Stamp Tax Law provides that each relevant party shall be responsible for payment of the total amount of Stamp Tax on the agreements. Each original document is separately subject to the tax.

Motor Vehicle Tax

A taxable event is the registration of a motor vehicle. Taxpayers are real and legal persons who have motor vehicles that are registered in their own names in the traffic, municipality and docks register, as well as in the civilian air vehicle register that is maintained by the Ministry of Transportation. Motor vehicle taxes are paid in two equal instalments, in January and July each year.

As of January 2013 the Motor Vehicle Tax has been increased to 7.8%. The Ministry of Finance has begun reformulating its Motor Vehicle Tax and Private Consumption Tax calculations. Currently, these taxes are being calculated by considering the engine capacity, age and weight of the vehicles. However, many European countries use a “Pay as You Pollute” system. Turkey’s Ministry of Finance has decided to implement a similar system by increasing the weight of carbon emissions in the calculation. This system is expected to provide two vital benefits: first, a cleaner environment; second, an incentive for clean technology development.

The Turkish Finance Ministry has announced plans to correlate motor vehicle tax rates with emission rates, following the examples of Germany and the UK. The ministry intends to be fair when taxing vehicle owners while seeking to reduce the level of environmental pollution. The current vehicle taxes are set on the basis of motor engine capacity and the age of the vehicle. Taxes relating to these two factors might be reduced to set a higher tax on carbon dioxide emissions. The new system will be applied to cars manufactured after the regulation comes into force. Cars entering the market and those already in stock prior to the new system will not be covered by the new legislation.

After reviewing the policies of many different countries in this area, the ministry settled upon the British and German models as examples for Turkey to follow. In the UK, after a 2011 change in the law, tax charges for vehicles are now based on theoretical carbon dioxide emission rates per kilometre. Germany also adopted a scheme in 2009 whereby all new cars are to be taxed according to both engine size and emissions per kilometre travelled. Transport is responsible for 29% of total carbon dioxide emissions in the 27 countries of the EU, and EU officials have long been urging member states to implement emissions-based tax systems for vehicles travelling on their roads. BANKING AND INSURANCE TRANSACTIONS TAX (BITT): The BITT taxes transactions and services produced by banks, bankers and insurance companies. Taxpayers are banks, insurance companies and bankers. The tax is levied on the money collected through interest, commission, and service-related expenditure. Certain transactions and services carried out by bankers and stated in the Law are subject to the tax. Other transactions carried out by bankers are subject to the VAT. Banks and insurance companies are exempt from the VAT, but are subject to the BITT at a rate of 5%, due on the gains of such companies from their transactions. The purchase of goods and services by banks and insurance companies is subject to the VAT, but is considered as an expense or cost for recovery purposes. Foreign exchange transactions are subject to a 0.1% BITT.

The taxation period for the BITT is each month of the calendar year. Taxpayers declare their taxable transactions up to the evening of the 15th day of the following month.

Gambling Tax

The Gambling Tax is applied to betting, lotteries and other forms of gambling and is calculated by applying a fixed or specific rate of tax. The taxation period under the Gambling Tax is each month of the calendar year. Taxpayers declare their taxable transactions and pay the accrued tax up to the evening of the 20th day of the following month.

Inheritance And Gift Tax

Items acquired as gifts or through inheritance are subject to a progressive tax rate ranging from 10-30% and 1%-10%, respectively, of the item’s appraised value. Tax paid in a foreign country on inherited property is deducted from the taxable value of the asset. Inheritance and gift taxes are payable in biannual instalments over a period of three years.

Property Taxes

Property taxes are paid each year on the tax values of land and buildings at rates varying from 0.1% to 0.3%. When a property is sold, a 1% levy is paid on the sales value by both the buyer and the seller. Property tax returns are filed every four years and annual taxes are paid in two equal instalments.

Communication Tax

All types of installation, transfer and telecommunication services given by mobile phone operators are subject to a 25% Special Communication Tax. The tax base for this tax is the same as the VAT base. Mobile phone operators will declare the communication tax on the VAT returns and pay the accrued tax by the 15th day of the following month.

Turkey is the world leader in the collection of mobile communication taxes. The government levies an 18% VAT and a 25% for Special Communication Tax. In European countries, there is only a VAT ranging from 7.5% to 20%. Therefore, a reduction in this tax rate tends to cause a huge decrease in tax revenue collection. On the other hand, decreasing these tax rates would likely significantly reduce consumer prices, and thus would have a positive impact on mobile phone usage, subscriber numbers, and the sector’s contribution to GDP.

Education Contribution Fee

Certain transactions are subject to an Education Contribution Fee, which varies in amount. This fee is taken as a fixed levy according to the document or the transaction. The Education Contribution Fee is a temporary fee applicable until December 31, 2010.

Customs Duty

Goods imported from abroad are the subject of this tax. Taxable events are the free circulation of goods, registration of Customs declarations, and temporary importations in case of partial exemption. The taxpayer is the person who declares to the Customs office. Customs duties are assessed based on a written declaration by the taxpayer and paid within 10 days of the communication.


The government levies different types of fees. These include judgment fees, notary fees, tax judgment fees, title deed fees, consulate fees, ship and harbour fees, permit of licence and certificate fees, traffic fees, passport, visa and Ministry of Foreign Affairs fees, and certification fees.

Special Consumption Tax

Goods in the lists attached to the Special Consumption Tax Law are subject to this tax. For goods on the lists, the Special Consumption Tax is charged only once.

Investment Income And Capital Gains Taxes

undefined The capital gains of resident individuals in Turkey are taxed as ordinary income. Non-Turkish investment income is taxable in Turkey if the individual is a resident of Turkey in the relevant calendar year. Exemptions may apply depending on the circumstances.

Immovable Capital Revenues

The property should be situated in Turkey and the goods and rights of this category should be used and assessed in Turkey.

Movable Capital Revenues

The capital should have been invested in Turkey.

Capital Gains

The business or transaction having created this revenue or earning should have been concluded or assessed in Turkey. The term “assessed” means that the payment has been made in Turkey, or that the payment has been transferred to the account of (or deducted from the profit of) the persons who made the payment. The term also refers to the persons on whose behalf the payment was made in Turkey, even if it was made abroad. The taxable amount is determined by indexing the capital gains with the producer price index announced by State Institute of Statistics. The month that the share is disposed will not be taken into account. In order to apply indexing, the rate of increment should be at least 10%. NEW TAX LEGISLATION FOR THE REAL ESTATE MARKET: New tax regulations for the real estate market took effect at the start of 2013. Under the new legislation, housing taxes will be calculated based on six variables: size, value per square metre, luxury house status, licence year, the neighbourhood, and the status of the city. In practice, properties in the city centre over 150 square metres will be taxed at 18% and smaller homes at just 1% . This system is expected to affect middle income individuals who want to buy houses near the city centre.

The changes have already produced increased short-term demand among buyers wishing to purchase new property licensed before 2013. Since the stock of properties is sold during 2013, the tax rate change will not affect extensively the real estate market in 2013. The new VAT rule is expected to affect the market in 2014 by boosting demand for second-hand houses and decreasing demand for first-hand houses. Some construction firms believe that there will be 25-30% decrease in demand for real estate after 2014 as a direct result of this legislation.

Experts argue that the growing demand for existing homes should also benefit investors who have already purchased real estate in Turkey, as demonstrated by the fact that values have increased significantly in recent years. Many larger developers believe that they may need to absorb all or most of this tax themselves to remain competitive in the market. From a buyer’s perspective, this change could become a useful bargaining tool, as all developers and builders will want to remain competitive. Therefore, these changes will likely not greatly affect what is already a buoyant market.

Finally, the new tax regime does not apply to houses that fall under the scope of “urban transformation projects” managed by the government via TOK . Contractors will need to work with TOK to apply for the 1% tax instead of the 18% tax. This means the role of the government in the real estate sector has effectively increased; however, on the positive side of the ledger, the urban transformation programme promises to eliminate 45% of “unsafe” homes from the local market.