33. Offsetting Taxes Paid Abroad
33.1. Possibility of Offset
For profits earned abroad that are taxable in Turkey, taxes previously paid abroad will be offset against the corporate tax calculated in Turkey for these profits.
The exchange rate applicable to taxes paid abroad in foreign currency will be the rate at the time of the transfer of the relevant earnings to the general accounts.
33.2. Offset Period
Subject to the limitations below, if no taxable corporate profit is generated in Turkey in the relevant year due to losses or exemptions, and if the taxes paid abroad cannot be fully or partially offset against the corporate tax calculated in Turkey, this offsetting right can be used until the end of the third accounting period following.
33.3. Limit of Offsetting Foreign Taxes
The amount of foreign corporate taxes and similar taxes paid abroad that can be offset against corporate taxes to be assessed in Turkey cannot exceed the amount calculated by applying a 20% corporate tax rate to the earnings obtained abroad.
When requesting to offset taxes paid abroad against corporate taxes calculated in Turkey, the foreign earnings included in the tax base in Turkey must be grossed up to include these taxes.
For example, if Company (A) earned 100,000 YTL of corporate profit at its workplace in Country (B), and a 25% corporate tax and similar taxes were paid according to the foreign tax legislation, then Company (A) will include the 100,000 YTL in its corporate earnings in Turkey. However, it will not be able to offset the amount of foreign tax exceeding the tax calculated in Turkey for this income, which is [25,000 – (100,000 x 20%)] = 5,000 YTL. This tax cannot be offset in the current year or future years.
On the other hand, if the foreign earnings are exempt from corporate tax, it is not possible to offset the foreign taxes paid against the corporate tax calculated domestically.
33.4. Taxes Paid by Controlled Foreign Entities
In cases where Article 7 of the Corporate Tax Law applies, income and corporate taxes paid by the controlled foreign entity can be offset against the corporate tax calculated on the earnings of this entity in Turkey.
33.5. Offset of Taxes Paid on Dividends from Foreign Subsidiaries
For fully liable entities owning at least 25% of the capital or voting rights in foreign subsidiaries, taxes paid in the countries where the dividends are distributed can be offset against the corporate tax to be paid in Turkey. The dividend amount will include the taxes paid abroad on the profits from which the dividends are distributed.
Example: The details regarding the dividend income obtained by Company (A) from its 30% stake in the foreign Company (C) are as follows:
(Dividend income and taxes paid abroad have been converted into YTL.)
- Stake Ratio: 30%
- Foreign Corporate Tax Rate: 10%
- Tax Withholding Rate on Distributed Dividends in the Foreign Country: 20%
- Total Corporate Profit of Company (C): 1,000,000 YTL
- Corporate Tax Paid Abroad by Company (C) (%10): 100,000 YTL
- Dividend Income of Company (A) (gross): 300,000 YTL
- Taxes Paid Abroad on the Dividend Income of Company (A) (300,000 x 10%): 30,000 YTL
- Distributable Profit of Company (C): 900,000 YTL
- Dividend Received by Company (A) After Taxes: 270,000 YTL
- Tax Withheld Abroad on the Dividend (270,000 x 20%): 54,000 YTL
- Net Dividend Received by Company (A): 216,000 YTL
In this case, Company (A) will add the gross amount of 300,000 YTL to its corporate earnings in Turkey, and will be able to offset up to [100,000 x 30% + 54,000 =] 84,000 YTL of the taxes paid abroad against the corporate tax calculated in Turkey. The remaining 24,000 YTL of foreign taxes cannot be offset.
33.6. Offset of Taxes Paid Abroad from Interim Tax
Taxes paid abroad can be offset against interim taxes. If there is income earned abroad during an interim tax period, the taxes paid or withheld in the countries where the income was earned can also be offset against the interim tax amount for that period. However, the deductible amount cannot exceed the amount calculated by applying a 20% interim tax rate to the earnings obtained abroad.
33.7. Certification of Taxes Paid Abroad
Foreign taxes paid must be certified by the Turkish embassy or consulates in the foreign country, or, if not available, by representatives of a country protecting Turkish interests. Without such certification, foreign taxes paid will not be deductible from the taxes assessed in Turkey.
If the documents proving that taxes were paid abroad cannot be provided during the assessment, the tax on the foreign taxes will be calculated based on the known rates in the foreign country, not exceeding the 20% corporate tax rate. If these documents are submitted within one year from the assessment date, the assessment will be corrected based on the exact amount stated in the documents.
If the documents are not submitted within the specified period without force majeure, or if it is found that the offset amount is lower than the postponed tax amount, a late fee will be calculated according to Law No. 6183.
Source: Corporate Tax Law
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