III- Taxation and Payment Based on Limited Tax Liability
22. Net Corporate Profit
Article 22 of the Corporate Tax Law includes the following provisions regarding the taxation of limited tax liability institutions:
22.1. Determination of Corporate Profit
According to the second paragraph of Article 3 of the Corporate Tax Law, institutions whose legal and business centers are not located in Turkey will be taxed only on the income they earn within Turkey. Therefore, institutions listed in Article 2 of the Law will be taxed either on a full or limited tax liability basis depending on whether their legal and business centers are located in Turkey.
The legal center refers to the center specified in the founding laws, regulations, articles of association, or contracts of the taxable institutions. The business center is considered as the center where transactions are effectively gathered and managed. Institutions whose legal and business centers are not in Turkey will be taxed on a limited tax liability basis only on the income they earn in Turkey.
For taxation under the Corporate Tax Law, it is necessary to determine the net corporate profit. Net corporate profit is calculated by subtracting deductible expenses or cost elements and other allowable deductions from the taxpayers’ revenues and adding non-deductible expenses.
22.2. Components of Corporate Profit
In limited tax liability, corporate profit consists of the following earnings and revenues:
- Commercial profits derived by foreign institutions with a workplace or permanent representative in Turkey from activities conducted there or through these representatives (Earnings from goods purchased in Turkey for export and sent to foreign countries without being sold in Turkey are not considered earned in Turkey. Selling in Turkey means that the buyer or seller, or both, must be in Turkey, or the sales contract must be made in Turkey).
- Profits derived from agricultural enterprises located in Turkey.
- Profits from self-employment activities carried out in Turkey.
- Revenues from leasing movable and immovable property and rights in Turkey.
- Income from movable capital earned in Turkey.
- Other gains and revenues earned in Turkey.
The Income Tax Law’s relevant provisions apply to the issues of earnings and revenues being earned in Turkey and having a permanent representative in Turkey.
22.2.1. Commercial Profits
Commercial profits derived from activities conducted in Turkey or through representatives by foreign institutions with a workplace in Turkey are considered a component of limited tax liability profits. However, earnings from goods purchased in Turkey for export and sent to foreign countries without being sold in Turkey will not be considered as earned in Turkey.
For institutions without a legal and business center in Turkey, if a workplace or permanent representative is established solely for the purpose of supplying goods and these goods are sent to foreign markets without being offered to the Turkish domestic market, technically no profit is considered to be earned in Turkey, and no tax liability will arise. However, if the goods undergo processes that do not alter their nature, do not convert them into another product, or do not create added value, the export exemption cannot be utilized.
Invoices must be issued to the main center if the transaction occurs between the workplace or permanent representative in Turkey and the main center. However, sending goods to another branch abroad does not prevent benefiting from this exemption.
For instance, if shelled hazelnuts obtained domestically are sent to a factory abroad with an invoice issued to the overseas center, the institution abroad will benefit from the export exemption.
22.2.2. Agricultural Profits
Profits derived from agricultural enterprises in Turkey are subject to taxation under the rules concerning the determination of commercial profit in the Income Tax Law. Foreign institutions must have an agricultural enterprise in Turkey to earn agricultural profits.
22.2.3. Self-Employment Profits
Self-employment activities, primarily conducted by real persons and defined in Article 65 of the Income Tax Law, generate profits for limited tax liability institutions through their employed staff. For these profits to be considered earned in Turkey, the self-employment activity must be conducted or evaluated in Turkey.
If the activity is evaluated in Turkey, payments must be made in Turkey or, if paid abroad, must be transferred to or deducted from accounts or profits in Turkey.
The previous Law No. 5422 did not include “salaries earned in Turkey” among the earnings considered under limited tax liability. If foreign institutions obtain salary income in Turkey or assign personnel to work in Turkey, such salary and self-employment income are generally treated the same. However, it is not possible for a limited tax liability institution to earn a salary in the literal sense in Turkey.
22.2.4. Revenues from Leasing Movable and Immovable Property and Rights in Turkey
Revenues from leasing movable and immovable property and rights in Turkey are classified as corporate income for limited tax liability institutions. For these revenues to be considered earned, the property and rights must be located and used in Turkey.
22.2.5. Movable Capital Income Earned in Turkey
The only condition for earning movable capital income in Turkey is that the capital must be invested in Turkey. Capital investment in Turkey means bringing capital into Turkey, providing it as a loan in Turkey, or similar methods of earning interest in Turkey. The income earned from such capital, including dividends, interest, and rents, will be considered as movable capital income.
22.2.6. Other Gains and Revenues Earned in Turkey
For other gains and revenues to be considered earned in Turkey, the asset that generates the income must be located in Turkey, and the activities or transactions must occur or be evaluated in Turkey.
For example, value appreciation gains obtained from transferring shares held in a Turkish bank account to another account within the same bank or another bank are taxable in Turkey.
22.3. Non-Deductible Expenses
Certain expenses are not deductible for limited tax liability institutions. These include:
- Interest, commissions, and similar payments made by the institution’s head office or branches abroad for purchases made by the institution’s Turkish account.
- Shares allocated for general management expenses or losses incurred by the head office or branches abroad.
Expenses related to the acquisition and maintenance of income in Turkey are deductible, provided they comply with the arm’s length principle.
22.4. Hidden Capital Application
In the application of hidden capital provisions for borrowings used by limited tax liability institutions, the requirement of a 10% capital share or voting rights is not applicable. Consequently, borrowings from partners or related parties that exceed three times the equity are considered hidden capital.
Source: Corporate Tax Law
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