Turkey

Foreign tax credit

A tax credit is granted for foreign tax paid, up to the amount of Turkish corporate income tax attributable to the foreign income. Any unused credit may be carried forward to the following three years. The foreign tax paid must be documented through foreign tax office receipts approved by the Turkish consulate in the country in which the foreign tax was paid. 

Participation exemption for dividends

There is an unconditional corporate income tax and dividend withholding tax exemption for dividend payments between Turkish companies. If a Turkish company has a shareholding in a foreign company, this dividend income is exempt from corporate income tax, under certain conditions. (for details please see "Dividend Income" in the Corporate- Income determination" section. )

Exemption for income from foreign construction and repair activities

The profit from construction and repair activities carried out by Turkish corporations in foreign countries may be exempt from CIT in Turkey under the Turkish CTL. It should be noted that if loss occurs from these activities, it is not possible to deduct this loss amount from the income generated through domestic activities since deduction of a loss relating to foreign activities that are exempt from CIT in Turkey is not allowed for deduction.

Capital gains exemption

For capital gains generated from the sale of shares in a company, a 75% corporate income tax exemption is applicable under certain conditions. 

In the event a foreign subsidiary is sold by a Turkish company, a corporate income tax exemption at the rate of 100% is applicable subject to certain conditions under the holding company regime. (for details please see "Capital Gains" in the Corporate- Income determination" section)

Investment incentives

The investment incentive system comprises five investment models, two investment programs, and 12 incentive elements.

General incentives

Regardless of the region, all projects that meet certain conditions and minimum fixed investment amounts are supported within the framework of general incentives.

Supporting elements of general incentives

• VAT exemption
• Customs duty exemption + RUSF + additional customs duty
• Stamp tax support
• Municipality revenues support
• Real estate tax support
• Income tax withholding allowance (for 6th region)
• Social security premium support (for shipbuilding investments of shipyards)

Regional incentives

The industries categorised by region in the relevant Decree will benefit from incentive elements under the conditions determined for each relevant region.

Supporting elements of regional incentives

• CIT deduction
• VAT exemption
• Customs duty exemption + RUSF + additional customs duty
• Stamp tax support
• Municipality revenues support
• Real estate tax support
• Income tax withholding allowance (for 6th region)
• Land allocation
• Social security premium support
• Interest support
• Social premium support (for 6th region)
• VAT refund

Medium-high technology investments

The investments below can benefit from the regional supports applied in the 4th region, excluding in Istanbul. These investments are subject to regional support if they are located in the 4th, 5th, or 6th zone.

Preferential investment projects

The new investment incentive system defines some investment areas as ‘preferential’ and provides them with regional supports given to the 5th region within the scope of regional investment incentives, regardless of the region of the investment. If the preferential investments are made in the 6th region, existing regional incentives will be applied for this region. 

Strategic investments

The Program Evaluation Committee, within the scope of the Technology Oriented Industry Move Program, may decide to support the investment projects that are suitable for the production of the products in the Preferential Product List and meet the criteria to be determined by the Communiqué, as strategic investments.

Based on the related legislation, investments in production of products that are highly dependent on imports and meet all the following criteria will be regarded as strategic investments:

• Minimum fixed investment amount should be more than TRY 50 million.
• Total domestic production capacity for a given product that is the matter of investment should be below the import amount.
• Added value to be generated with the investment should be at least 40%.
• The total import amount realised related to the invested product within the prior year should be more than USD 50 million.

Technology Focused Industry Move Program

The Technology Focused Industry Move Program is a special program with the purpose of increasing the value-added production in Turkey. The support and incentives provided by the Ministry and its affiliated/related organisations are aimed at being intensified for the industries with medium-high and high-tech level. Increase in the local production capacity of the products with high future potential and critical importance is the aim of this program.

Preferential Product List: Products in medium-high and high technology sectors, according to the definition of the OECD, as well as products that have critical importance for the development of these industries as determined by the Ministry, taking into account various criteria, such as foreign trade data, demand development, and competition intensity.

Project-based investments

In order for projects to be evaluated within the scope of the Decision, the minimum fixed investment amount for the Technology Focused Industry Move Program should be TRY 50 million. For other investments, the minimum fixed investment amount should be TRY 500 million.

The incentive items may be as follows:

• Reduction of CIT rate up to 100%.
• Investment contribution rates up to 200%.
• Employee income tax withholding incentive.
• Customs tax exemption.
• Social security premium employer share support for ten years.
• Provision of free treasury land for 49 years.
• During the operating period, 50% of the energy consumption expenditure for the investment should be met up to ten years.
• Up to ten years interest support for investment loans.
• For qualified personnel of special importance, minimum wage support up to 20 times wage support for five years.
• Capital support up to 49%.
• Guarantee of purchase for the goods produced through the investment supported.

Recent changes in the investment incentive system in Turkey

• Regional changes: With the President’s Decree No. 2846, dated 21 August 2020, the regions of 12 provinces included in the investment incentive practice have changed. Additionally, with the new decision, a new table numbered 7 is added with the decision numbered 2012/3505, and the provinces that would benefit from sub-regional supports are determined.
• Changes made for the Province of Istanbul: For the medium-high tech investments that are realised in the organised industrial zones or industrial zones in the province of Istanbul, the regional supports in the 1st region are applied to the investments amounting to a minimum of TRY 5 million in the subjects specified, except for completely new investments. For investments of a minimum amount of TRY 10 million outside organised industrial zones or industrial zones, which will be realised in the subjects specified in 18/3 of the Decree of State Aids for investments, regional supports in the 1st region are applied.
• Changes in preferential investment issues: According to the amendments made on 29 June 2021, data centre investments have been added to the preferential investments that provide 5th region incentives.
• According to the amendments made on 17 December 2020, research and development (R&D) and environment investments have been added to the preferential investments that provide 5th region incentives.

• Changes in interest or dividend support.
• Change in ‘investment issues that will not be incentivised or whose incentives depend on certain conditions’.
• Changes in the insurance premium employer’s share support: With a provision added to the article titled ‘Insurance Premium Employer’s Share Support’ of Decree No. 2012/3305 by the President’s Decree No. 2846 dated 20 August 2020, it is assigned that if the incentive certificate is requested at the application stage, the rate that determines the upper limit for the insurance premium employer’s share support will be increased by half of the investment contribution rate, on condition that no tax reduction is benefited.
• Additional support will be provided to women employment and youth employment (between the ages of 18-25) according to the amendments made on 29 June 2021.
• Changes in importation of machinery and equipment: According to the amendments made on 29 June 2021, the Annex-8 was published. Machinery and equipment included in Annex-8 can be imported without exemption from customs duty and included in the fixed investment amount. Additionally, the importation of used equipment included in Annex-8 of the Decree is prohibited.
• Changes in minimum investment amounts: The minimum fixed investment amount has been increased from TRY 1 million to TRY 3 million for the investments realised in the 1st and 2nd regions. Additionally, the minimum fixed investment amount has been increased from TRY 500,000 to TRY 1.5 million for the investments realised in the 3rd, 4th, 5th, and 6th regions.

Free trade zones

Free trade zones are special sites that lie geographically within the country but are deemed to be outside the customs territory. In these regions, the normal regulations related to foreign trade and other financial and economic areas are either inapplicable, partly applicable, or superseded by new regulations.

In general, activities such as manufacturing, storage, packing, general trading, banking, insurance, and trade may be performed in Turkish free trade zones. Goods moving between Turkey and the zones are treated, for all purposes, as exports or imports. However, operations within the zones are subject to the supervision of the zone management (and customs authorities), to whom regular activity reports must be submitted. Consequently, there is a requirement for zone users to maintain full accounting records (in Turkish) with respect to their activities. These accounting requirements extend to inventory records. Customs duty is levied on any unexplained inventory losses as though the goods had been imported into the country.

The right to operate in a free trade zone is conferred by an operating licence obtained from the Ministry of Economy, which reviews the application for conformity with the objectives and types of activity specified by the Economic Affairs Coordination Council.

Portfolio investment income

Under the WHT regime introduced on 1 January 2006, certain portfolio investment income (e.g. capital gains derived from listed equities acquired after 1 January 2006 or capital gains or interest from Turkish local government bonds issued after 1 January 2006) derived by eligible entities are subject to 0% WHT. However, the WHT rate is 10% for other resident and non-resident entities. In the case of repo income, 15% WHT should be applied for all non-resident investors (the provisions of double tax treaties [DTTs] are reserved).

Furthermore, 0% WHT is applicable for all type of investors with respect to capital gains derived from listed equities on the Istanbul Stock Exchange (ISE) purchased after 1 January 2006 (excluding securities investment trust shares), income derived from transactions on equity index futures carried out under Turkdex, warrants with underlying of equities traded on ISE, and participation shares of investment funds that intensively invest in listed shares (equity intensive funds).

Under the Communiqué No: 277 of Income Tax Law, the following qualify for the eligibility criteria for 0% WHT:

• Turkish resident capital corporations (limited liability companies, joint stock companies, and commandite companies whose capital is divided into shares).
• Non-resident corporations that have the same characteristics as Turkish capital corporations.
• Turkish investment funds (regulated in accordance with the Capital Markets Board).
• Non-resident investment funds similar to Turkish investment funds.
• Those non-residents similar to Turkish investment funds and trusts that engage in investment in securities and other capital markets instruments as their only business in Turkey to derive income and capital gains from these instruments and to exert the rights attached to these instruments.

Under the aforementioned Communiqué, the investor should be an institutional portfolio investor. However, what is meant by 'institutional' is not crystal clear. It seems to us that the intention of the MoF is to treat all non-resident portfolio investors (other than the individuals) as institutional portfolio investors. The Communiqué does not have a principle based approach; rather, it enlists a number of 'institutional investor' examples, such as limited liability partnerships (LLPs), sovereign funds, investment funds, investment institutions, and investment companies.

In terms of interest income from deposits, the WHT rates on interest income from bank deposits (excluding interbank deposits and money market operations of intermediaries) differ depending on the currency (Turkish lira or the foreign exchange) and maturity, which are as follows:

• Interest income derived from foreign exchange deposit:
  • In current call accounts and deposit accounts with maturity of less than six months (including six months): 18%.
  • In deposit accounts with maturity of less than one year (including one year): 15%.
  • In accounts with maturity of more than one year: 13%.
• Interest income derived from a Turkish lira deposit:
  • In current call accounts and deposit accounts with maturity of less than six months (including six months): 15%.
  • In deposit accounts with maturity of less than one year (including one year): 12%.
  • In accounts with maturity of more than one year: 10%.

However, the level of WHT on Turkish lira bank deposits has been lowered for three months to protect the value of the Turkish lira and ensure that savings are kept in deposit and participation accounts opened in Turkish lira. Meanwhile, the tax rates on forex deposits were not changed. Accordingly, interest income derived from a Turkish lira deposit from October 2020 to December 2022 is subject to the following WHT rates:

• In current call accounts and deposit accounts with maturity of less than six months (including six
• months): 5%.
• In deposit accounts with maturity of less than one year (including one year): 3%.
• In accounts with maturity of more than one year: 0%.

The withholding will be applied by local intermediary banks, brokerage houses, or local custodian banks, instead of the conventional self-declaration mechanism, and this withholding will be the final taxation in Turkey for both non-residents and Turkish individuals.

On the other hand, certain portfolio investment income (e.g. capital gains from unlisted shares) is taxed under permanent tax rules. In some cases, a non-resident fund may need to file a tax return within 15 days following the sale of securities and subject to a 32% effective tax rate. However, DTTs may provide relief except in special cases. Certain income, such as interest and dividends, are usually taxed via the WHT regime, so no filing is required for a non-resident investor.

Moreover, Turkish corporate bonds that are issued after 1 January 2006 and sold outside of Turkey are not taxed under the WHT regime, and rather taxed as per permanent tax rules. The WHT rates on interest income from such corporate bonds issued by all type of resident corporations (including Turkish banks and corporations) vary depending on the maturities of the bonds and are regressive. The WHT rates are as follows (please note that DTT provisions are reserved):

• 10% if the maturity is under one year.
• 7% if the maturity is between one and three years (including one year).
• 3% if the maturity is between three and five years (including three years).
• 0% if the maturity is five or more than five years (including five years).

The interest income derived from bonds that are issued by the Turkish Treasury outside of Turkey (i.e. Eurobonds) is subject to a 0% WHT. Capital gains derived by non-residents from Turkish Eurobonds issued by the Treasury are exempt from capital gains taxation.

The responsibility to apply this WHT belongs only to the issuer of the corporate bond, regardless of the fact that a payment agent exists or not, and the WHT liability of the issuer is not disregarded even if the payment agents make any withholding.

Research, development, and design activities

In the last decade, the Turkish Parliament has enacted several regulations to provide incentives for R&D and design activities in Turkey. Tax incentives and support mechanisms that are provided to companies carrying out R&D, innovation, and design activities in Turkey are as follows:

R&D legislation:

• Law No. 5746 on Support for Research, Development, and Design Activities.
• Law No. 4691 on Technology Development Zones.
• Institutions providing cash supports on project basis:
  • Scientific and Technological Research Council of Turkey (TÜBİTAK).
  • Ministry of Industry and Technology.
  • Small and Medium Industry Development Organization (KOSGEB).
  • Development Agency.
  • European Commission.

Law No. 5746 on Support of R&D and Design Activities

R&D deduction (100%)

All eligible innovation and R&D or design expenditures made in technology centres, R&D centres (which must employ at least 15* full-time equivalent R&D personnel), design centres (which must employ at least 10 full-time equivalent design personnel), R&D and innovation or design projects supported by governmental institutions, foundations established by law, or international funds can be deducted from the CIT base at a rate of 100%. The same expenditures should also be capitalised and expensed through amortisation over five years in the case of successful projects, whereas failed projects’ R&D and design expenditures can be expensed immediately.

In addition, in the event of providing an increase of at least 20% in any of the following indicators in R&D or design centres compared to the previous year, then 50% of the increase in the amount of R&D, innovation, or design expenses compared to the previous year will also be taken into consideration as an extra deduction in the calculation of the CIT base:

• R&D or design expenditures share in total turnover.
• The registered number of national or international patents.
• The number of internationally funded projects.
• The ratio of researchers holding graduate degrees to total R&D personnel.
• The ratio of the number of total researchers to total R&D personnel.
• The ratio of new products (output of successful R&D projects) turnover to total turnover.

* With the Council of Ministers’ decision, the minimum number of full-time equivalent R&D personnel that should be employed in R&D centres is reduced to 15 according to Law No. 5746 on Supporting Research, Development and Design Activities. However, the aforementioned number will continue to be considered as 30 for sectors (29.10.01, 29.10.02, 29.10.03, 29.10.04, and 29.10.07 classes and 30.30, 30.40, and 30.99 classes under the C - Manufacturing section) according to the Statistical Classification on Economic Activities for European Community (NACE Rev. 2).

Income tax exemption (95%, 90%, or 80%)

The salaries of R&D, design, and support personnel, at a rate of 95% for the personnel with a PhD degree or master’s degree on 'supported programs' declared by the Ministry, 90% for the personnel with a master’s degree or undergraduate degree on supported programs declared by the Ministry, and 80% for others, is exempt from income tax.

Social security premium support (50%)

Half of the employer portion of social security premiums for R&D, design, and support personnel (maximum of 10% of the number of full-time R&D and design personnel) will be funded by the MoF for each R&D and support personnel.

VAT exemption and amortisation on machines and equipment acquired for R&D and design activities

Deliveries of machines and equipment that will be used for R&D, innovation, and design projects by the R&D Centres are exempt from VAT.

In addition, the depreciation rates and periods to be applied for new machinery and equipment purchased can be calculated by taking into account half of their useful life, until the end of 2023. 

Stamp tax exemption

The documents prepared for the R&D and design activities, including the payrolls of R&D, design, and support personnel, are exempt from stamp tax.

Customs duty exemption

Goods imported for the usage of studies in R&D, innovation, and design projects are exempt from customs duties. Additionally, any funds, held papers, and applied transactions are exempt from stamp tax and fees.

Additional support for personnel graduated from 'supported programs' declared by the Ministry

The minimum gross wage portion of monthly salaries of each R&D or design personnel that have at least a bachelor’s degree in 'supported programs' declared by the Ministry employed in R&D and design centres will be financed from the budget of the Ministry of Industry and Technology for two years, under the specific circumstances stated in the R&D legislation.

Please note that, contract-based R&D activities will be out of the scope as stated in the aforementioned Decision, as the companies do not need any intellectual property (IP) registration for contract-based R&D activities to utilise CIT exemption.

If the project results in a loss, it is not possible to deduct this loss from the CIT base. In addition, the income from other activities (other than R&D and software income) is subject to CIT. 

Law No. 4691 on Technology Development Zones

CIT exemption

The profits derived from the software activities or products developed as a result of the R&D activities in techno parks are exempt from CIT.

In accordance with the decision of the Council of Ministers issued in the official gazette dated 19 October 2017, in order for companies operating in technology development zones to benefit from CIT exemption over the income that is derived from the sale, transfer, or lease of IP, these IPs should be subjected to patents or patent equivalent documents (utility model certificate, design registration certificate, copyright registration certificate, integrated circuit topography registration certificate, certificate of breeding of new plant varieties, etc.).

Please note that, contract-based R&D activities will be out of the scope as stated in the aforementioned Decision, as the companies do not need any IP registration for contract-based R&D activities to utilise the CIT exemption.

If the project results in a loss, it is not possible to deduct this loss from the CIT base. In addition, the income from other activities (other than R&D and software income) is subject to CIT.  

Income tax exemption (100%)

The salaries of R&D and support personnel carrying out R&D and software development activities in techno parks are exempt from income tax until 31 December 2028. The salary for the activities other than software development and R&D activities cannot benefit from income tax exemption.

Social security premium support (50%)

Half of the employer portion of social security premiums for R&D and support personnel (maximum of 10% of the number of full-time R&D personnel) will be funded by the MoF for each R&D and support personnel.

Stamp tax exemption (only on payrolls)

The payrolls prepared for the R&D activities are exempt from stamp duty.

VAT exemption on machines and equipment acquired for R&D and design activities

Deliveries of machines and equipment that will be used for R&D, innovation, and design projects by the companies located in techno parks are exempt from VAT. In addition, the depreciation rates and periods to be applied for new machinery and equipment purchased can be calculated by taking into account half of their useful life, until the end of 2023.

VAT exemption on deliveries of certain type of software and services

Deliveries of software and services (system management, data management, business applications, Internet, games, mobile and sector applications, military command control applications) arising from software development activities by the companies operating in the techno parks are exempt from VAT until 12 December 2028.

Customs duty exemption

Goods imported for the usage of studies in R&D, innovation, and design projects are exempt from customs duties. Additionally, any funds, held papers, and applied transactions are exempt from stamp tax and fees.

Additional support for personnel graduated from 'supported programs' declared by the Ministry

The minimum gross wage portion of monthly salaries of each R&D and design personnel that have at least a bachelor’s degree in 'supported programs' declared by the Ministry will be financed from the budget of the Ministry of Industry and Technology for two years, under the specific circumstances stated in the techno park legislation.

Additional support for Ph.D. students

The minimum gross wage portion of monthly salary of each Ph.D. student employed in techno parks may be financed from the budget of the Ministry of Industry and Technology for two years, under the specific circumstances stated in the techno park legislation.