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Turkey

General Information

Country Name: Republic of Turkiye (Türkiye Cumhuriyeti)
Currency: Turkish Lira (TRY)
Primary Tax Authority: Revenue Administration (Gelir İdaresi Başkanlığı)

Key Legislation

  • Constitution of Turkey: Provides the legal foundation for tax collection.
  • Tax Procedure Law (Vergi Usul Kanunu): Establishes the rules for tax procedures and administration.
  • Income Tax Law (Gelir Vergisi Kanunu): Covers personal and corporate income tax rules.
  • Value Added Tax Law (Katma Değer Vergisi Kanunu): Governs the VAT system.

Fiscal Authority Allocation

Turkey operates under a centralized tax system, with the majority of taxes being collected at the national level. Regional governments have limited authority in tax matters, primarily in relation to property and municipal taxes.

Taxes Collected by Central Authorities:

  • Corporate income tax
  • Personal income tax
  • Value-added tax (VAT)
  • Special consumption tax (SCT)
  • Customs duties

Taxes Collected by Regional Authorities:

  • Property tax
  • Motor vehicle tax

Revenue Sharing Mechanisms:

Regional and municipal governments receive a share of national tax revenues through transfers from the central government, allowing them to finance local projects and services.

Corporate Income Tax (CIT)

  • Standard CIT Rate: 20%, though a 25% rate applies for the fiscal years 2021 and 2022.
  • Deductions: Businesses can deduct expenses such as wages, utilities, and depreciation from taxable income. Special allowances are provided for R&D and technological investments.
  • Loss Carryforwards/Carrybacks: Tax losses can be carried forward for up to 5 years, but carrybacks are not allowed.
  • Tax Incentives: There are incentives for companies operating in technology zones, free zones, and organized industrial zones, which may offer reduced or exempted corporate taxes.

Value-Added Tax (VAT)

  • Standard VAT Rate: 18% on most goods and services.
  • Reduced VAT Rates: 1% for essential goods such as basic food products and 8% for pharmaceuticals, books, and other selected goods and services.
  • Exemptions: Health and education services, banking, and insurance transactions are exempt from VAT.
  • VAT Refunds: Businesses involved in export activities can claim VAT refunds on inputs.

Personal Income Tax (PIT)

  • Progressive PIT Rates: Turkey has a progressive tax rate system, with rates ranging from 15% to 40% depending on income levels.
  • Dividends: Dividend income is taxed at a rate of 15% for residents, with the possibility of crediting withheld taxes against the final liability.
  • Capital Gains: Capital gains from the sale of shares held for more than two years are exempt, while other capital gains are subject to regular income tax rates.
  • Deductions and Allowances: Various personal allowances are available, including deductions for healthcare expenses, educational expenses, and contributions to private pension schemes.

Additional Mandatory Contributions

Social Security Contributions:

  • Employer Contributions: Employers must contribute approximately 22.5% of an employee’s salary to social security, covering pensions, healthcare, and unemployment benefits.
  • Employee Contributions: Employees contribute 14% of their gross salary to social security.

Withholding Taxes

  • Dividends: 15% withholding tax on dividends paid to non-residents.
  • Interest: A withholding tax on interest payments to non-residents ranges from 0% to 10%, depending on the type of interest and the recipient’s country of residence.
  • Royalties: 20% withholding tax on royalties paid to non-residents.
  • Service Fees: A withholding tax of 20% applies to payments for services rendered by non-residents.

Transfer Pricing Rules

Turkey follows OECD transfer pricing guidelines and requires related-party transactions to comply with the arm’s length principle. Companies must prepare transfer pricing documentation to support their pricing policies and avoid penalties.

Special Tax Regimes

  • Free Zones: Companies operating in free zones can benefit from full or partial exemptions from corporate income tax, VAT, and customs duties, provided that they meet certain criteria, such as engaging in export activities.
  • Technology Development Zones (Teknoparks): Income derived from software development and R&D activities is exempt from corporate income tax, VAT, and income tax for a certain period.
  • Investment Incentive Programs: Turkey offers investment incentives, including tax deductions, exemptions from VAT and customs duties, and reductions in employer social security contributions for qualifying investments.

Other Taxes

  • Special Consumption Tax (SCT): Imposed on luxury goods, fuel, tobacco, and alcoholic beverages, with rates varying by product.
  • Property Tax: Property owners pay an annual property tax based on the value of the real estate, typically between 0.1% and 0.6%.
  • Motor Vehicle Tax: An annual tax on motor vehicles, with the rate determined by the vehicle’s engine size and age.
  • Stamp Duty: Imposed on documents, contracts, and legal transactions, with rates ranging from 0.189% to 0.948% of the transaction value.
  • Customs Duties: Turkey levies customs duties on imports from non-EU countries and countries without free trade agreements.

Double Taxation Agreements (DTAs)

Turkey has signed more than 90 DTAs with countries across the globe. These agreements aim to prevent double taxation and reduce withholding tax rates on dividends, interest, and royalties.

Compliance and Reporting

  • Corporate Tax Filing Deadline: CIT returns are due by April 30 of the following year.
  • VAT Filing: VAT returns are filed monthly.
  • PIT Filing: Individuals must file their returns by March 31 of the following year.
  • Penalties for Late Filing: Non-compliance with tax filing and payment obligations can result in fines and interest on unpaid taxes.

Recent Developments

  • Digital Services Tax: Turkey has introduced a 7.5% digital services tax on revenues from digital advertising, streaming, and e-commerce platforms provided by foreign entities.
  • Economic Reform Package: In 2021, the government announced a new economic reform package aimed at improving tax compliance, expanding the tax base, and reducing the informal economy.
  • Corporate Tax Increase: The corporate income tax rate was temporarily raised to 25% for the years 2021 and 2022 as part of efforts to boost revenue during the pandemic.

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