Turkish Taxation System is an important part of the economy and can be divided into 3 main categories:
- Income Taxes, such as Individual Income Tax and Corporate Income Tax
- Taxes on Expenditure, such as Value Added Tax or Banking and Insurance Transaction Tax or Stamp Tax
- Taxes on Wealth, such as Property Tax or Inheritance and Gift Tax
1.INCOME TAXES
Turkish Taxation System includes two main income taxes, namely personal income tax and corporate income tax.
1.1. Personal Income Tax
Real persons’ income is subject to personal income tax. Income is defined as the net amount of all earnings and revenues derived by an individual within a single calendar year. An individual’s income may consist of one or more income elements listed as follows:
-Agricultural profits
-Business profits
-Salaries and wages
-Income from independent personal services
-Income from immovable property and rights (rental income)
-Income from movable property (income from capital investment)
-Other income and earnings
Individual income tax rates vary from 15% to 40%. Individual income tax rates applicable for 2020 are as follows:
15% up to 22,000 TL
20% up to 49,000 TL
27% up to 180,000 TL
35% up to 600,000 TL
40% more than 600,000 TL
1.2. Corporate Income Taxes
In case income elements specified in the Income Tax Law are derived by corporations, taxation is applicable on the legal entities of these corporations. Corporate taxpayers defined in the law are as follows:
Capital companies
Cooperatives
Public economic enterprises
Economic enterprises owned by associations and foundations
Joint ventures
In Turkey, the corporate income tax rate levied on business profits is 20%. The rate for corporate income tax has been increased to 22% for the tax periods 2018, 2019, and 2020; however, the Council of Ministers is authorized to reduce the 22% rate to a rate as low as 20%.
2.TAXES ON EXPENDITURE
Turkish Taxation System includes four taxes on expenditure as mentioned below.
2.1.Value Added Tax (VAT)
The generally applied VAT rates are set at 1%, 8%, and 18%. Commercial, industrial, agricultural, and independent professional goods and services, goods and services imported into the country, and deliveries of goods and services as a result of other activities are all subject to VAT.
VAT payable on local purchases and on imports is regarded as “input VAT” and VAT calculated and collected on sales is considered as “output VAT”. Input VAT is offset against output VAT in the VAT return filed at the related tax office by the 20th of the following month. If output VAT is in excess of input VAT, the excess amount is paid to the related tax office. On the contrary, if input VAT exceeds the output VAT, the balance is carried forward to the following months to be offset against future output VAT. There is no cash refund to recover excess input VAT, except for exportation.
There is also a so-called reverse charge VAT mechanism, which requires the calculation of VAT by resident companies on payments sent abroad. Under this mechanism, VAT is calculated and paid to the related tax office by the Turkish company on behalf of the foreign company. The local company treats this VAT as input VAT and offsets it in the same month. This VAT does not create a tax burden for the Turkish and the non-resident company, except for its cash flow effect.
2.2. Special Consumption Tax (SCT)
There are four main product groups that are subject to SCT at different tax rates:
Petroleum products, natural gas, lubricating oil, solvents, and derivatives of solvents
Automobiles and other vehicles, motorcycles, planes, helicopters, yachts
Tobacco and tobacco products, alcoholic beverages
Luxury products
Unlike VAT, which is applied on each delivery, SCT is charged only once.
2.3. Banking and Insurance Transaction Tax
Banking and insurance company transactions remain exempt from VAT but are subject to a Banking and Insurance Transaction Tax. This tax applies to income earned by banks, such as loan interest. Although the general rate is 5%, some transactions, such as interest on deposit transactions between banks, are taxed at 1%. No tax has been levied on sales from foreign exchange transactions since 2008.
2.4. Stamp Duty
Stamp duty applies to a wide range of documents, including contracts, notes payable, capital contributions, letters of credit, letters of guarantee, financial statements, and payrolls. Stamp duty is levied as a percentage of the value of the document at rates ranging from 0.189% to 0.948% or is collected as a fixed price (a pre-determined price) for some documents.
3.Taxes on Wealth
There are three kinds of taxes on wealth:
Property taxes
Motor vehicle tax
Inheritance and gift tax
Buildings, apartments, and land owned in Turkey are subject to real estate tax ranging at a rate between 0.1% and 0.6%, while Contribution to the Conservation of Immovable Cultural Property is levied at a rate of 10% of this real estate tax. Motor vehicle taxes are collected on the basis of fixed amounts that vary according to the age and engine capacity of the vehicles each year. Meanwhile, inheritance and gift taxes are levied at a rate of 1% to 30%.