INVESTMENT IN TURKEY* Zeki Gündüz 25 April 2006 www.pwc.com/tr www.vergiportali.com/english *connectedthinking PwC
Table of Contents 1 2 3 4 5 6 7 8 9 10 Annex Turkey and EU Incorporation of Companies and Branches in Turkey Real Estate Investments Accounting and Taxation Customs and Foreign Trade Investment Incentives Related Party Transactions Exit Route- Capital gains Treaties of Turkey PwC Sources Comparison of Taxable Entities in Turkey
Section 1 Turkey and EU PricewaterhouseCoopers Page 3
Memberships in international organizations Turkey and EU UN (1946) NATO (1952) OECD (1961) WTO (1995) Council of Europe (1949) EU relations with Ankara Agreement (1963) EU customs union (1996) Candidate for membership of the EU Membership talks started in October 2005 Close relations with the Turkic Republics and Middle East countries Page 4
Turkey and EU Turkey has Association Agreement with EU since 1964, Customs Union since 1996, December 2004, EU decision to start accession negotiations "without delay, 3 October 2005, full accession negotiations started, Turkey is projected to have the EU s largest population with more than 80 million by 2015 and as populous as ten new states that joined EU in May 2004. Total Population in Selected European Countries 2003 2015 2025 2050 Austria 8,116 8,058 7,979 7,376 Belgium 10,318 10,470 10,516 10,221 Bulgaria 7,897 7,167 6,609 5,255 Czech R. 10,236 10,076 9,806 8,553 France 60,144 62,841 64,165 64,230 Germany 82,486 82,497 81,959 79,145 Greece 10,976 10,944 10,707 9,814 Hungary 9,877 9,324 8,865 7,589 Italy 57,423 55,507 52,939 44,875 Netherlands 16,149 16,791 17,123 16,954 Poland 38,587 38,173 37,337 33,004 Portugal 10,062 10,030 9,834 9,027 Turkey 71,325 82,150 88,995 97,759 Source: A report by Friends of Europe, September 2005
Section 2 Incorporation of Companies and Branches in Turkey PricewaterhouseCoopers Page 6
Incorporation for Foreign Investors Type of presence Joint Stock Companies (A.Ş) Limited 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 on salaries Fund levy of 0.04% over capital ( Contribution to Competition Authority ) Incorporation procedures take 2-3 weeks
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 service, 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
Section 3 Real Estate Investments PricewaterhouseCoopers Page 9
Section 3 Real Estate Investments Real Estate Investments Non-residents of certain countries are eligible for real estate investment in Turkey, based on the reciprocity principle In this context, Spanish residents are eligible to make real estate investments in Turkey Transfer of the legal title of a real estate is subject to 1.5% real estate tax over the purchase price, which is applied separately for the purchaser and the seller 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
Section 4 Accounting and Taxation PricewaterhouseCoopers Page 11
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
Bookkeeping Accounting books are kept in compliance with the Turkish statutory chart of accounts (CoA) Capital market companies, and financial institutions keep their books in accordance with IFRS Harmonization with Basel 2 standards is also envisaged Harmonization of the statutory CoA with the IFRS is expected with the new Turkish Commercial Code
Audit Requirements There is no independent audit requirement in Turkey, except for capital market companies and banks Statutory audits under the current Turkish Commercial Code are carried out by legal auditors and is different from independent audit standards However, an amendment is expected for independent audit requirement based on the new Turkish Commercial Code In practice, many taxpayers prefer to obtain tax certification services, a sort of tax audit, to ensure accuracy of their tax calculations
Taxation of Corporations Corporate Income Tax (CIT) Current rate of 30% is expected to decrease to 20% Business expenses are tax deductible in general Dividend Withholding Tax Payable upon profit distribution to foreign shareholders Current rate is 10% - Council of Ministers is authorized to amend the rate, which may be increased to 15% based on the draft CIT The current consolidated corporate tax rate is 37% for foreign investors (can be amended to range from %32 to %28 due to the draft CIT law) If certain conditions are fulfilled, the dividend withholding tax rate can be reduced to 5% for intermediary holding companies; making the effective rate as 33.5%
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)
Taxation of Corporations Cost Allocation Has been a disputed issue in the Turkish tax legislation, however the draft CIT law is expected to eliminate former discussions and ambiguities The draft CIT law determines the taxable income of the non-resident corporations generated from their branches in Turkey The cost- allocation of general administration expenses from the headquarters are 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 the Turkish branch must be calculated in line with the cost allocation keys determined in compliance with the arm s length principle
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 Over a wide range of documents, such as agreements, financial statements and payrolls. Rates ranging from 0.15% to 0.75% over the monetary value of the document Maximum tax amount and is YTL878,400 (approximately USD660,000) per document
Taxation of Employees Income Withholding Tax Taxed through withholding At progressive rates ranging from 15-35% Stamp Tax on Payroll At the 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 YTL3,451.50 (approximately USD2,555) Total unemployment insurance premium rate is 3% (Government also contributes by 1%) over the above cited ceiling
Section 4 - 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 the worldwide income, Non-resident, then merely the Turkish income source will be taxed in Turkey To be employed in Turkey, foreign national individuals need; work permit working visa residence permit
Taxation of Other Payments Withholding Tax Royalty payments 22% (may be reduced to 10% by virtue of tax treaties) Independent professional services 22% (expected to be reduced to 15%) Interests 10% Reverse Charge VAT Applied on the payments to foreign companies VAT is calculated and paid by the Turkish company, while it treats this VAT as input VAT and offsets against output VAT No tax burden but may have a cash flow effect
Tax Credit Mechanism A tax credit for foreign taxes paid in foreign countries against Turkish taxes is available under certain conditions Draft CIT Law also introduces new regulations with respect to taxes paid abroad According to the draft; Income tax or CIT paid abroad by the foreign subsidiaries of resident joint stock companies over the profit out of which dividends are distributed to the Turkish resident can be offset against the taxes payable in Turkey The tax amount that may not be offset in the relevant year can be carried forward for three years, and the deduction can also be made in the advance corporate income tax periods
Section 4 - 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 realized on a random basis
Section 5 Customs and Foreign Trade PricewaterhouseCoopers Page 24
Customs Union Turkey signed a Customs Union Agreement with the E.U (European Union) on 01.01.1996 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 the trade between Turkey and E.U.
Section 5 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
Section 5 - Customs and Foreign Trade Cross-border Toll Manufacturing In the ideal form, toll manufacturer produces finished goods to the order and specifications of the Principal using raw materials owned by the Principal Thus, toll manufacturer bears minimal risks or responsibilities and charges a fee for the conversion process 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 goods has no Turkish residency PE issue should also be considered for cross-border toll manufacturing Such a structure may be realized through inward processing regime, but should be analyzed in detail
Section 6 Investment Incentives PricewaterhouseCoopers Page 28
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 Investment Incentives Certificate) - VAT Exemption (in the scope of Investment Incentives Certificate) - Resource Utilization Support Fund (in the scope of Investment Incentives Certificate)
Investment Incentives 2. Incentives regarding the priority and less industrialized regions - Regions with a maximum USD 1,500 per capital - Income withholding tax and social security premium reductions, energy support incentives and free land allocation 3. Incentives in free zones - No VAT - No CIT for production companies until full membership to the EU - No customs duties - No personal income tax for salaries till 31.12.2008 (or until the date of expiry of the license, if earlier) for the licenses obtained before 06.02.2004 - No tax, duty, fee on operations for the licenses obtained before 06.02.200
Investment Incentives 4. Incentives for R&D activities in Technology Development Zones - Income tax exemption - Corporate income tax exemption - VAT exemption - Income tax exemption on wages 5. 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 in abroad - Employment aids
Section 7 Related Party Transactions PricewaterhouseCoopers Page 32
Treatment of Group Companies No tax consolidation for group companies
Section 7 - Related Party Transactions Thin Capitalization Current thin capitalization rules are quite strict, where; Debt to equity rate is considered as 1:2 Vague definitions and regulations Based on the draft CIT law, thin cap rules are being amended: Clear definitions of terms Debt to equity rate is 2:1 for ordinary related party borrowings Rate is 4:1 for borrowings from banks and financial institutions within the group Borrowings not deemed as thin cap are regulated in the draft law: 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 by the same conditions Interest expenses and fx losses corresponding to the thin cap cannot be tax deductible
Transfer Pricing (TP) Currently, there is no definitive TP legislation, except the arm s length principle Draft CIT law provides TP regulations in line with OECD guidelines. Prescribed methods in the draft law: 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 The profit distributed in a disguised manner will be reclassified as dividends distributed and necessary adjustments on taxes will be made at the hands of the party receiving the deemed dividends
Foreign Exchange Regulations and Debt Financing No limitations are introduced for the 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 make loans to abroad
Section 8 Exit Route- Capital Gains PricewaterhouseCoopers Page 37
Share Disposals Capital gains from sale of shares in a Turkish company are, in principle, taxable No separate capital gains taxation in Turkey Share sale between non-residents differs 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 sale by a non-resident to a Turkish resident is 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
Asset Disposals Taxable as a part of the commercial income of the seller Subject to VAT Real estate transfer tax burden for real estate disposals Resident sellers, fulfilling certain conditions, may benefit from a special exemption, where sales proceeds would be: exempt from CIT (expected to be limited to 75% of the gains) exempt from VAT exempt from stamp tax
Section 9 Treaties of Turkey PricewaterhouseCoopers Page 40
Double Tax Treaties (DTT) of Turkey Turkey has DTT s with 61 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 Lithuania Luxemburg Macedonia Malaysia Moldova Mongolia The Netherlands Northern Cyprus Norway Pakistan Poland Romania Russia Saudi Arabia Singapore Slovakia Slovenia Spain Sudan Sweden Syria Tajikistan Thailand Tunisia Turkmenistan Ukraine United Arab Emirates United Kingdom United States Uzbekistan
DTT between Turkey and Spain Signed on 05.07.2002 and enforced on 01.01.2004 One of the most advantageous DTT of Turkey Dividends; - 5% (if minimum holding of 25%); - otherwise15% Royalty payments; 10% Interest payments; - 10% (on bank loans or if the interest is paid for the sale on credit of merchandise or equipment; - otherwise 15% Technical assistance; 22% (based on 183-days rule)
Section 9 - Treaties of Turkey Social Security Agreement Turkey has social security agreements with 21 countries Currently, there is no social security agreement between Turkey and Spain
Section 10 PwC Sources PricewaterhouseCoopers Page 44
Section 10 PwC Sources PwC Turkey Publications You may find information in English on the following issues through our publications on our websites: http://www.vergiportali.com/english http://www.pwc.com/tr 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 Individual Labour Law 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 Turkey, Special Expense Allowance Guide
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$3,700 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$37,000 at the current foreign exchange rate) CONTROL Power of attorney to branch manager Partners assembly meeting General assembly of the shareholders meeting CORPORATE INCOME TAX Mainstream corporate income tax at 30% (20% for 2006 and onwards) Mainstream corporate income tax at 30% (20% for 2006 and onwards) Mainstream corporate income tax at 30% (20% for 2006 and onwards) 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
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 FIXED ASSETS Inflation accounting Inflation accounting Inflation accounting TAXABLE STATUS Liability to taxation only over Turkish sourced income (non-resident for tax purposes) Liability to taxation on worldwide income. (tax resident) Liability to taxation on worldwide income. (tax resident) BILLING Billing in foreign currency to Turkish entities is not allowed Indexation of YTL amount on the invoice to foreign currency is possible Billing in foreign currency to Turkish entities is not allowed Indexation of YTL amount on the invoice to foreign currency is possible Billing in foreign currency to Turkish entities is not allowed 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/ OUTSIDE TURKEY Not applicable Allowed Allowed