The pace of growth and development in the Turkish economy and its foreign trade implications over the last decade, coupled with the deepening interconnectedness of markets across the globe and the interdependence of national economies - both those in geographical proximity to each other and those in distant continents - has brought topics related to direct and indirect foreign investment to the top of the agenda. Taxation of firms with investments in foreign countries according to the respective tax jurisdictions where they operate is a principal subject in this regard.
Historically all income generating entities be it local lor foreign, individuals or corporations alike, have been subjected to tax provisions according to their tax-statute in Turkey. In other words, individuals and corporations, before being designated as taxpayers by the tax authorities, are classified either within the context of full tax liability or limited tax liability.
Foreign corporations with investments in Turkey are deemed limited-liable taxpayers and are subjected to taxation on their income elements derived in Turkey by the provisions of the relevant tax laws, provided that they neither have legal headquarters or a center of transactions established in Turkey.
Income elements derived by foreign corporations on their activities carried out in Turkey that are liable to taxation according to the principles of limited tax liability are articulated one by one in the Turkish Corporate Tax Law (TCTL) as the following:
-Income derived from commercial and agricultural activities,
-Income derived from the rental of real estates and rights and returns on stocks and bonds,
-Income derived from conducting independent professional activities,
-Other income and earnings derived from activities specified by the law.
Foreign corporations with a limited tax liability are expected to declare their aggregate income elements through filing different tax returns depending on their type of income and their activities.
Annual tax return
Similar to domestic corporations with full tax liability, foreign corporations file an annual tax return depicting all their revenue elements generated from their commercial and agricultural activities and operations conducted in the course of the calendar year.
This particular tax return is submitted to the tax office of the district in which their branch or permanent representative is located. In the absence of such a branch or permanent representative, the tax return is filed with the tax office of the business partners who provide the concerned income elements. Normally, the tax return regarding income elements derived from commercial and agricultural activities during the course of a specific year should be submitted between April 1-25 of the following year. And the payable tax calculated and assessed on behalf and account of managers or representatives of foreign corporations is paid at the end of the same month. But upon the recent calls from business circles demanding the Government to grant extra time for filing tax returns, the deadline of both annual tax return submission and the payment of calculated tax was extended to May 2, 2017 for the income and revenues of 2016.
Foreign corporations stopping their activities in Turkey altogether are also held responsible for filing a final tax return declaring all income derived from their commercial and agricultural activities carried out between the beginning of the accounting period(be it the calendar year or a special period) and the date of departure. That tax return shall be submitted within 15 days before the departure and the tax amount calculated is paid within the same period.
Special tax return
On the other hand, those foreign corporations that have merely “other income and earnings” derived from the disposal of movable and immovable capital elements or profit-generating incidental activities (specified between articles 80-82 of Personal Income Tax Law) have the legal obligation to file the so-called “special tax return” that encompasses only cited income elements.
Since there is no specific taxation period such as accounting period or calendar year for the declaration of the incomes cited above, special tax returns shall be filed with the concerned tax office within 15 days from the date of the disposal of capital elements or fulfillment of the incidental activity. The tax office with the authority to receive these types of tax returns varies according to nature of the income element. The payable tax computed and finally assessed by the relevant tax office shall be paid within the filing period.
On the assumption that foreign corporations do not have any commercial and agricultural activities in Turkey (with all their revenues derived from the disposal of intangible rights such as copyrights, royalties, franchises, patents, company names, trademarks etc.), they are taxed by the buyers of these rights, who are held responsible by Article 30 of TCTL, to withhold 15 percent of the revenue paid to foreign corporations on behalf of the tax authority. Filing a tax return displaying these income elements is voluntary.
*Diyadin Yakut is a tax inspector at the Finance Ministry