Investment in Turkey for Dutch investors*

Transcription

1 Investment in Turkey for Dutch investors* As of February 2007 *connectedthinking p w c

2 Table of Contents 1 General Outlook 2 Incorporation of Companies and Branches in Turkey 3 Accounting and Taxation 4 Customs and Foreign Trade 5 Investment Incentives 6 Related Party Transactions 7 Exit Route-Capital gains 8 Real Estate Investments 9 Treaties of Turkey Relations between Turkey and the Netherlands PwC Sources Annex Comparison of Taxable Entities in Turkey Page 2

3 Section 1 General Outlook

4 S Section 1 General Outlook e c One of the fastest growing economies in the world t i o n 1 - G e n e r a Exceptionally high levels of real GDP growth: last two years average of 7.3% per annum Consecutive 16 quarters of growth is record high growth for the Turkish Republic GDP at current prices (US$ Bn) Source: The Central Bank of the Republic of Turkey ,000 5,000 4,000 3,000 2,000 1,000 - Turkey s per capita income is 29% of the EU25 average as of Uneven income distribution: 10% of the population gets 30% of total income GDP Per Capita (US$) 5, Page 4

5 S Section 1 General Outlook e c Disinflation trend unlocks many opportunities t i o n 1 - G e n e r a Inflation is at its lowest level since 1970 s Six digits were removed from the TL in 2005,and TL was renamed as new Turkish Lira (YTL) YTL was in an appreciation trend against the Euro and dollar until May 2006 BUT Due to recent market volatility and the depreciation of YTL, expectations are more conservative for the near future (5.6) 2006E Source: The Central Bank of Turkey Survey /TLY (Year Average) CPI Inflation Page 5

6 S Section 1 General Outlook e c Record high FDI t i o n FDI reached US$9.6bn in 2005 (from US$2.8bn in 2004), Banking sector has benefited from FDI inflows, and Further M&A activities are expected in the near term. BUT 1 - G e n e r a USD m n 20,000 15,000 10,000 5, ,352 Source: State Planning Organization FDI growth may decelerate because big item privatizations have been completed and political risk is increasing due to expected elections. FDI 1,137 1,752 2,847 9,673 17, T Page 6

7 S Section 1 General Outlook e c EU Countries in FDI t i o 7,000 n EU Countries have a very important part in increasing FDI 6, G e n e r a FDI Amounts 5,000 4,000 3,000 2,000 1,000 Source: State Planning Organization Years Italy England Holland France Germany Page 7

8 S e c t i o n 1 - G e n e r a Section 1 General Outlook Strong alliances with international organizations Candidate for membership of the EU UN (1946) NATO (1952) OECD (1961) WTO (1995) Membership talks started in October 2005 Council of Europe (1949) EU relations with Ankara Agreement (1963) EU customs union (1996) Close relations with the Turkic Republics and Middle East countries Page 8

9 S e c t i o n 1 - G e n e r a Section 1 General Outlook Labour Force in Turkey The relatively low cost of a diligent workforce, and the outstanding graduates from the country s universities make Turkey a country of opportunity for carefully planned foreign investment and external trading. More than 4000 foreign firms, including 204 of the Fortune 500, have established a presence in Turkey. Labour Force In Turkey, the labor force is, on the whole, disciplined, trainable and highly motivated. While unskilled labor is available in all parts of Turkey, skilled and semiskilled labour and middle management employees are generally to be found only in the major centres of Istanbul, Izmir, Adana and Ankara. Highly skilled labour is in short supply. Employment In year 2003, total employment decreased by 207,000 in Turkey, and 383,000 for rural areas, but it increased 176,000 for urban areas according to the results of the previous year. Page 9

10 Section 2 Incorporation of Companies and Branches in Turkey

11 Section 2 - Incorporation of Companies and Branches in Turkey Incorporation for Foreign Investors Type of presence Joint Stock Companies (A.Ş.) Limited Liability Companies (Ltd.) Branches Partnerships A liaison office can also be established, where: It cannot engage in any commercial activity or partnerships with other companies; activities are limited to preparatory and auxiliary functions Its employees are exempt from income tax and stamp tax on salaries Fund levy of 0.04% over capital ( Contribution to Competition Authority ) Incorporation procedures take 2-3 weeks Page 11

12 Section 2 - Incorporation of Companies and Branches in Turkey Foreign Investment Regulations No approval requirement for foreign investment just notification to the Treasury Availability to establish a corporation of 100% foreign investment. No additional capital requirement or any restriction on shareholding ratio for foreign investors No approval/notification requirement to a governmental authority for management services, technical assistance or royalty agreements signed with foreign companies Liberal foreign exchange regulations in Turkey, where; companies can have deposits both in Turkey and abroad cash movements (except extending loans) to abroad are freely realized Page 12

13 Section 3 Accounting and Taxation

14 Section 3 - Accounting and Taxation Bookkeeping Bookkeeping is: in Turkish and in New Turkish Lira (YTL) and New Kurus (YKr) terms. Bookkeeping in functional foreign currency may be allowed, provided that: there is a minimum paid-up capital equivalent of US$100 million, at least 40% of the shares of the company is held by nonresidents the Council of Ministers grants permission Page 14

15 Section 3 - Accounting and Taxation Bookkeeping Accounting records are maintained and statutory financial statements are prepared in accordance with the Turkish Commercial Code, tax legislation and the Uniform Chart of Accounts (CoA) issued by the Ministry of Finance Public companies, financial institutions and insurance companies report their financial statements in line with accounting rules and principles issued by the Capital Markets Board, which is quite similar to IFRS Harmonization with Basel 2 standards is envisaged Page 15

16 Section 3 - Accounting and Taxation Audit Requirements There is no independent audit requirement in Turkey, except for public companies, banks, financial institutions and insurance companies Statutory audits under the current Turkish Commercial Code are carried out by legal auditors and are different to independent audit standards In practice, many taxpayers prefer to obtain tax certification services, a sort of tax audit, to ensure accuracy of their tax calculations Page 16

17 Section 3 - Accounting and Taxation Taxation of Corporations Corporate Income Tax (CIT) CIT rate is 20% Business expenses are tax deductible in general Dividend Withholding Tax Payable upon profit distribution to foreign shareholders Dividend withholding tax rate is 15% Total corporate tax burden is 32% for foreign investors upon dividend distribution If certain conditions are fulfilled, the dividend withholding tax rate can be reduced to 7.5% for intermediary holding companies; making the effective rate 26% Page 17

18 Section 3 - Accounting and Taxation Taxation of Corporations Participation Exemption Dividend income of Turkish resident corporations received from; Turkish resident corporations is exempt from CIT Foreign subsidiaries or branches is also CIT exempt, if certain conditions are fulfilled Capital gains of intermediary holding companies from foreign subsidiaries are also CIT exempt (if certain conditions are realized) Page 18

19 Section 3 - Accounting and Taxation Taxation of Corporations Controlled Foreign Corporation (CFC) Corporations established abroad and controlled directly or indirectly by tax resident companies by participation of a minimum 50% to the capital thereto are considered as CFC, provided that the foreign subsidiary s: gross revenue (minimum 25%) composed of passive income; effective income tax rate is lower than 10% in its home country; and gross revenue exceeds the equivalent of YTL100,000 in foreign currency terms If a foreign subsidiary is considered as CFC, its profit will be included in the CIT base of the Turkish resident corporation at the rate of the shares controlled, irrespective of whether it is distributed or not. This profit will not be subject to additional taxation in Turkey, if it is distributed to the Turkish resident in the future. Page 19

20 Section 3 - Accounting and Taxation Taxation of Corporations Cost Allocation Costs of the parent company allocated to its Turkish branch is deductible in the determination of the taxable income of the nonresident corporation generated from its branch in Turkey The cost allocation of general administration expenses from the headquarters is subject to the conditions below; - The expenses concerned must be related to the generation and maintenance of income in Turkey; and, - The portion of the costs to be allocated to the Turkish branch must be calculated in line with the cost allocation keys determined in compliance with the arm s length principle Page 20

21 Section 3 - Accounting and Taxation Taxation of Corporations Value Added Tax (VAT) Deliveries of goods and services are subject to VAT Rates vary from 1% to 18% - General rate is 18% Offset mechanism is available in Turkey Stamp Tax Applicable to a wide range of documents, such as agreements, financial statements and payrolls. Rates range from 0.15% to 0.75% over the highest calculable monetary value of the document Maximum tax amount is YTL 946, (approximately USD671,000) per document Page 21

22 Section 3 - Accounting and Taxation Taxation of Employees Income Withholding Tax Taxed through withholding At progressive rates ranging from 15-35% Payroll taxes are the final tax for employment income taxed via a single local payroll Stamp Tax on Payroll Rate of 0.6% over gross salaries Social Security and Unemployment Insurance Premiums 33.5% for office-based employees over gross salaries up to a ceiling of YTL3, (approximately USD2,593) (YTL 3, from onwards) Total unemployment insurance premium rate is 3% (Government also contributes 1%) over the above-cited ceiling Page 22

23 Section 3 - Accounting and Taxation Taxation of Expatriates There is no special tax regime for expatriates If the foreign national is considered as: Resident, then Turkish tax will apply to worldwide income Non-resident, then merely the Turkish income source will be taxed in Turkey Generally expatriates will be liable for tax on work done in Turkey In order for a foreign national to be legally eligible to work in Turkey the following need to be obtained; work permit working visa residence permit Page 23

24 Section 3 - Accounting and Taxation Taxation of Other Payments Withholding Tax Royalty payments 20% (may be reduced to 10% by virtue of tax treaties) Independent professional services 20% Interest 10% (applied as 0% if interests are paid to a bank or a financial institution) Reverse Charge VAT Applied on payments to foreign companies VAT is calculated and paid by the Turkish company, treats this VAT as input VAT and offsets against output VAT No tax burden on both parties but may have a cash flow effect for the Turkish company Page 24

25 Section 3 - Accounting and Taxation Tax Credit Mechanism A tax credit for foreign taxes paid in foreign countries against Turkish taxes is available under certain conditions In the event of a foreign subsidiary being held by at least 25% by a Turkish resident joint stock company, income tax or CIT paid abroad by the foreign subsidiary over the profit out of which dividends are distributed to the Turkish resident can be offset against the taxes payable in Turkey Tax credits are also available for taxes paid abroad by the CFCs The foreign tax amount in excess of the Turkish taxes payable which cannot thus be offset in the relevant year can be carried forward for three years Tax credits can also be made in advance corporate income tax periods Page 25

26 Section 3 - Accounting and Taxation Tax Administration A self-assessment system is used in Turkey Taxpayers can file their tax returns with reservation, and appeal to court without the risk of penalty Courts of First Degree: Tax Courts (cases last for approximately 9 months) Court of Appeal: Tax Supreme Court (cases are finalized within approximately 2 years) The statute of limitations is five years Tax authorities have the right to exercise tax audits within the statute of limitations. This right is exercised without warning and is realized on a random basis Page 26

27 Section 4 Customs and Foreign Trade

28 Section 4 - Customs and Foreign Trade Customs Union Turkey signed a Customs Union Agreement with the E.U (European Union) on and has amended its customs code and legislation in line with those of the E.U customs code According to the Customs Union Agreement, with the exception of certain goods such as agricultural products, no customs tax is incurred on trade between Turkey and the E.U. Page 28

29 Section 4 - Customs and Foreign Trade Customs Regimes with Economic Impact 1. Customs Warehousing Regime 2. Inward Processing Regime 3. Outward Processing Regime 4. Processing Under Customs Control Regime 5. Temporary Importation Regime Page 29

30 Section 4 - Customs and Foreign Trade Cross-border Toll Manufacturing In the ideal form, a toll manufacturer produces finished goods upon the order and specifications of the principal using raw materials owned by the Principal Thus, the toll manufacturer bears minimal risks or responsibilities and charges a fee for the conversion process A cross-border toll manufacturing structure in the ideal form cannot be employed in Turkey, since VAT and customs issues would arise once the importer of the goods has no Turkish residency A PE issue should also be considered for cross-border toll manufacturing Such a structure may be realized through the inward processing regime, but should be analyzed in detail Page 30

31 Section 4 - Customs and Foreign Trade Free Trade Zones - No VAT - No CIT over the sales of manufactured goods for production companies until full membership to the EU - No customs duties - No personal income tax for salaries till (or until the date of expiry of the license, if earlier) for the licenses obtained before No tax, duty, fee on operations for the licenses obtained before Page 31

32 Section 4 - Customs and Foreign Trade Free Trade Agreements Turkey has Free Trade Agreements with the following countries; EFTA ISRAEL HUNGARY ROMANIA CZECH REP. SLOVAK REP. LATVIA LITHUANIA ESTONIA SLOVENIA POLAND MACEDONIA CROATIA BOSNIA AND HERZEGOVINA MOROCCO PALESTINE SYRIA TUNISIA EGYPT BULGARIA Page 32

33 Section 5 Investment Incentives

34 Section 5 - Investment Incentives Investment Incentives 1. State Aids - Investment allowance is newly abolished but tax holidays for significant investments are currently under discussion - Customs Duty Exemption (in the scope of an Investment Incentives Certificate) - VAT Exemption (in the scope of an Investment Incentives Certificate) - Resource Utilization Support Fund (in the scope of an Investment Incentives Certificate) Page 34

35 Section 5 - Investment Incentives Investment Incentives 2. Incentives regarding priority and less industrialized regions - Regions with a maximum USD1,500 per capital - Income withholding tax and social security premium reductions, energy support incentives and free land allocation 3. Incentives for R&D activities in Technology Development Zones - Income tax exemption - Corporate income tax exemption - VAT exemption - Income tax exemption on wages Page 35

36 Section 5 - Investment Incentives Investment Incentives 4. Other Incentives Support on R&D activities Support on domestic specialization fairs with international attributes Incentives for fairs and exhibitions Support on store establishment, management and brand publicity Support on brand awareness of Turkish products abroad Employment aids Page 36

37 Section 6 Related Party Transactions

38 Section 6 - Related Party Transactions Treatment of Group Companies No tax consolidation for group companies Page 38

39 Section 6 - Related Party Transactions Thin Capitalization For intra-group borrowings: Debt to equity ratio is 3:1 for ordinary related party borrowings Rate is 6:1 for borrowings from banks and financial institutions within the group (but not serving only within the group) Borrowings not deemed as thin cap are regulated as: Non-cash guarantees of related parties to the third party lender Loans obtained by related parties from banks and other finance institutions that are wholly or partially on-lent with the same conditions Interest expenses, fx losses and other financial expenses corresponding to the thin cap cannot be tax deductible In addition, interest expenses and other financial expenses on the thin cap are re-classified as distributed dividends and taxed accordingly as at year-ends Page 39

40 Section 6 - Related Party Transactions Transfer Pricing (TP) With the new CIT Law, TP regulations are in line with OECD guidelines Prescribed methods: Comparable Uncontrolled Price Method Cost-Plus Method Resale Price Method If the arm s length principle is violated for related party transactions, then the related earnings would, partially or entirely, be deemed as a disguised distribution Profit distributed in a disguised manner is not tax deductible In addition, such profits will be reclassified as dividends distributed and necessary adjustments on taxes will be made at the hands of the party receiving the deemed dividends Page 40

41 Section 6 - Related Party Transactions Foreign Exchange Regulations and Debt Financing Foreign exchange regulations are quite liberal: No restriction on money transfers to abroad through banks Opening deposits in foreign banks is allowed No limitations are for third party loans Internal loans are also available provided that provisions of thin capitalization and transfer pricing are respected One-way cash pooling is possible, since Turkish companies are not allowed to grant loans abroad Page 41

42 Section 7 Exit Route - Capital Gains

43 Section 7 - Exit Route - Capital Gains Share Disposals Capital gains from sales of shares in a Turkish company are, in principle, taxable No separate capital gains taxation in Turkey Share sales between non-residents differ based on the legal status of the local company: Limited company shares - subject to tax in Turkey through the filing of a special tax return Joint stock company shares - not taxed in Turkey In principle, share sales by a non-resident to a Turkish resident are subject to taxation in Turkey Taxation may be avoided by virtue of double tax treaties, on the condition that the holding period exceeds one year For disposal of shares obtained through the Turkish Stock Exchange after by foreign investors, no Turkish tax arises Page 43

44 Section 7 - Exit Route - Capital Gains Asset Disposals Taxable as part of the commercial income of the seller Subject to VAT Real estate transfer tax burden for real estate disposals Stamp tax burden over the asset transfer agreement and the transferred contracts, if any Resident sellers, fulfilling certain conditions, may benefit from a special exemption, where sales proceeds would be: exempt from CIT, limited to 75% of the gains exempt from VAT exempt from stamp tax Page 44

45 Section 8 Real Estate Investments

46 Section 8 - Real Estate Investments Real Estate Investments Legal Background for Real Estate Acquisitions in Turkey: Non-resident; - Individuals can directly acquire real estate in Turkey up to 2.5 hectares based on the reciprocity principle - Corporations can directly acquire real estate in Turkey if their direct investment falls into the scope of Petroleum Law, Tourism Law or Foreign Direct Investment Law For non-residents it is always possible to establish a 100% foreign owned Turkish company and acquire real estate via this company with the same conditions as the Turkish residents Page 46

47 Section 8 - Real Estate Investments Real Estate Investments Transfer of the legal title of real estate is subject to 1.5% real estate tax (title deed charge) over the purchase price, which is applied separately for the purchaser and the seller In principle real estate transfers in Turkey are subject to VAT at the rate of 18% (some exemptions may apply) Annual real estate tax rate is; - 0.3% for vacant land allocated for construction purposes and - 0.1% for other land and buildings over the market value of these assets. These rates are applied twice for property located in the metropolitan municipality areas Page 47

48 Section 9 Treaties of Turkey

49 Section 9 - Treaties of Turkey Double Tax Treaties (DTT) of Turkey Turkey has DTTs with 64 countries Albania Algeria Austria Azerbaijan Bangladesh Belarus Belgium Bulgaria China, P.R. Croatia Czech Republic Denmark Egypt Estonia Finland France Germany Greece Hungary India Indonesia Iran Israel Italy Japan Jordan Kazakhstan Korea, Rep. of Kuwait Kyrgyzstan Latvia Lebanon Lithuania Luxemburg Macedonia Malaysia Moldova Mongolia Morocco The Netherlands Northern Cyprus Norway Pakistan Poland Romania Russia Saudi Arabia Singapore Slovakia Slovenia South Africa Spain Sudan Sweden Syria Tajikistan Thailand Tunisia Turkmenistan Ukraine United Arab Emirates United Kingdom United States Uzbekistan Page 49

50 Section 9 - Treaties of Turkey Social Security Agreements Turkey is a party to the European Social Security Convention and has social security agreements with 21 countries listed below: Current Social Security Agreements of Turkey UK GERMANY NETHERLANDS BELGIUM AUSTRIA SWITZERLAND FRANCE LIBYA DENMARK SWEDEN NORWAY TURKISH REPUBLIC OF NORTHERN CYPRUS MACEDONIA ROMANIA AZERBAIJAN GEORGIA BOSNIA HERZEGOVINA CANADA QUABECK CZECH REPUBLIC ALBANIA Page 50

51 Section 10 Relations between Turkey and the Netherlands

52 S Section 10 Relations between Turkey and the Netherlands e c Foreign Direct Investment Amount Sourced by the Netherlands in t Turkey i Netherlands o 6,000 5,005 n 5, G e n e r a USD ml 4,000 3,000 2,000 1, Data is available for the months between January and October Source: Undersecretaries of Treasury * Years Page 52

53 Section 10 Relations between Turkey and the Netherlands Double Tax Treaty with the Netherlands Signed on 27/03/1986 and entered into force on Dividends; 10% (7.5 % for repatriation of profits from Turkish branch to the Dutch parent company) Royalty payments; 10% The WHT rates for interest payments offered in the DTT are 10% and 15%. However, based on the local regulations, the WHT rate is applied as 10% Technical assistance; 20%, if : services are provided in Turkey, fixed base is regularly available present in Turkey to perform services for 183 days or more in any continuous period of 12 months Page 53

54 Section 10 Relation between Turkey and the Netherlands Social Security Agreement with the Netherlands Turkey has a social security agreement with the Netherlands Page 54

55 Section 11 PwC Sources

56 Section 11 - PwC Sources PwC Turkey Publications Taxation of Construction and Repair Works In Turkey Doing Business and Investing in Turkey Transition to New Turkish Lira A Guide for Customs and Foreign Trade Foreign Nationals Working in Turkey A General Tax Guide for Foreign Investors Investment Funds in Turkey Mergers and Acquisitions Turkey, Investment Incentives Acquisition of Intellectual and Industrial Property Rights in Turkey Turkey, Transaction Taxes on Banking & Capital Markets Turkey, Private Pension System Turkey, A VAT Guide Individual Labour Law Turkey, Special Expense Allowance Guide Page 56

57 Section 11 - PwC Sources Comparison of Taxable Entities in Turkey Branch Limited Company (LC) Joint Stock Company (A.S./SA) LIABILITY OF Liability limited with mother Limited with the share capital Limited with the SHAREHOLDERS company s liability except for tax liabilities share capital DIVIDENDS Repatriation of branch profit is Allowed Allowed allowed SHAREHOLDERS Not applicable Two persons (min)/fifty persons (max) Five persons (min) MANAGEMENT Branch manager Director(s) Board of min. 3 members/ (no board) foreigners allowed EQUITY No minimum capital requirement Min YTL25 per partner regardless of tax residency status Minimum total capital requirement is YTL5,000 (approximately US$3,225 at the current foreign exchange rate) Min Ykr.1 (i.e. YTL0.01) per shareholder regardless of tax residency status Minimum total capital requirement is YTL50,000 (approximately US$32,250 at the current foreign exchange rate) CONTROL Power of attorney Partners assembly meeting General assembly of the shareholders to branch manager meeting CORPORATE INCOME TAX Corporate income tax at 20% Corporate income tax at 20% Corporate income tax at 20% DIVIDEND WITHHOLDING TAX Not applicable unless the profit is transferred to the parent company Not applicable unless profits are distributed to individual and foreign corporate shareholders Not applicable unless profits are distributed to individual and foreign corporate shareholders Page 57

58 Section 11 - PwC Sources Comparison of Taxable Entities in Turkey Branch Limited Company (LC) Joint Stock Company (A.S./SA) INFLATION ACCOUNTING Applicable on non-monetary items in the case of certain conditions being realized simultaneously Applicable on non-monetary items in the case of certain conditions being realized simultaneously Applicable on non-monetary items in the case of certain conditions being realized simultaneously REVALUATION OF Inflation accounting Inflation accounting Inflation accounting FIXED ASSETS TAXABLE STATUS Liability to taxation only Liability to taxation on Liability to taxation on over Turkish sourced income worldwide income. worldwide income. (non-resident for tax purposes) (tax resident) (tax resident) BILLING Billing in foreign currency to Billing in foreign currency to Billing in foreign currency to Turkish entities is not allowed Turkish entities is not allowed Turkish entities is not allowed Indexation of YTL amount on the invoice to foreign currency is possible Indexation of YTL amount on the invoice to foreign currency is possible Indexation of YTL amount on the invoice to foreign currency is possible LEGAL Part of a foreign entity Independent (considered as a Turkish company) Independent (considered as a Turkish company) FOREIGN CURRENCY USAGE Allowed Allowed Allowed DEPOSIT ACCOUNT IN TURKEY/ABROAD Allowed Allowed Allowed AVAILABILITY OF INCENTIVES Available, but difficult in practice Yes Yes TRANSFER OF SHARES INSIDE/ Not applicable Allowed Allowed OUTSIDE TURKEY Page 58