Setting up a Business in Turkey | Important Note 2019
Principal Business Entities
Principal Business Entities
There are different forms of business setups which can be incorporated in Turkey. Following are the form of businesses:
- The Joint Stock (Anonim) – In local language, it is known as Anonim Şirket (AŞ)
- The Limited Liability Company – It is also known as Limited Sirket (Ltd. Sti.) in the local language
- The Ordinary Partnership
- The Limited Partnership
- The Sole Proprietorship
- Branch office an international business
Turkish government welcomes all the foreign investors to explore options in the country by implementing flexible FDI rules and regulations and eliminating several restrictions for foreign investors to similar kind of legal support as the local companies in Turkey as per the Commercial Code.
Companies incorporated in Turkey can enjoy several benefits and advantages along with the free of cost transfer of company profits, repatriating local profits to the parent company, fees, and royalties. Just like the local business owners enjoy different incentive schemes, foreign investors will be to leverage the same benefits. In order to make the joint venture company incorporation more popular and flexible for the foreign investors in the oil exploration segment, the government has liberalized the rules and regulations of import controls. In order to incorporate a company in Turkey, equity participation of local citizens is not required, the foreign business incorporated can be 100% owned by foreign nationals.
The foreign exchange system of Turkey is very flexible and liberal. The entire delegation and administration of the exchange control rest with the central bank but however the ultimate authority remains with the Under-secretariat of the Treasury of the PMO. As the currency of Turkey is recognized by IMF, it can be fully converted as per the “article 8 status”. As per the article number 8 status, the buying and selling of the currency can occur within the scope of in the balance of payments for the purchased or sold items. Profits gained from these transactions can be fully and freely converted.
Individuals and corporates entities can transfer their funds by opening foreign exchange accounts without any charges banking systems like savings deposit banks, development & investment banks and participation banks. As such there are no obligations on the export limit but however, the company has to submit the special form to the Under-secretariat of the Turkish Treasure. The form should be submitted within 3 months of transferring the capital.
If more than 50,000 USD of the amount has to be transferred then the banks involved in the transaction should inform the central bank of turkey within 30 days of the transaction. This applies to only the capital fund transfer and not for the transactions of import/export/intangibles assets.
The transfer pricing rules applied in Turkey are as per the standard of guidelines mentioned in the OECD transfer pricing. The transfer pricing rules are applied on the transactions like sales or purchase of intangible goods, services, etc., between the parties whether they are resident or non-resident, it is calculated as per the conditions of arm’s length principle. Profits arising from such transactions will be subject to the 20% of income tax and 15% withholding tax applicable on dividends.
As per the guidelines of OECD there are three different types of methods mentioned to calculate the transfer pricing:
Comparable Uncontrolled Price Method | Cost Plus Method | Resale Price Method
There are few other transfer pricing methods which are also accepted in Turkey: Profit Split Method | Transactional Net Margin Method
The other method also includes the best option that is suitable to the taxpayer’s circumstances. Based on the type of transactions and circumstances of the taxpayers, the best suitable transfer pricing method that allows them to get the arm’s length prices has to be selected for the transactions.
Controlled Foreign Companies
When 50% of the share capital or dividends or the voting power of an international company is directly or indirectly controlled by a residential individual or residential company of Turkey then following conditions are applied as per the Controlled Foreign Corporation (CFC):
- if 1/4th or more amount of gross income of the CFC is gained from passive income like interest, license fees, the sale of securities, dividends, agriculture, professional income or dividends
- if the tax rate in the resident country of the CFC is lower than 10%;
- if foreign currency revenue of the CFC is more than the local currency 100,000 Turkish Lira.
During the accounting period of the company, if the ratio of debt to equity exceeds 3:1 then thin capitalization rules are applied. Until the amount of borrowed amount increases 6 times, the equity amount of the shareholder the banks or financial institutions cannot apply the rules. For these transactions, related parties to the shareholders owning at least 10% or more of shares or voting rights or rights to receive the dividends of the company directly/indirectly are known as related parties. As per the code mentioned in the taxation procedures, the equity amount is determined during the accounting period of the year.
In case the ratio of debt to equity increases then the interest payments, losses incurred by the foreign exchange, or similar kind of expenses adding up to the additional portion are deemed to receive a hidden profit sharing or remittance during the accounting period when the thin capitalization rules are calculated. This process is applied on the last day of the accounting period. Such type of expenses are non-deductible and the dividends incur 15% of withholding tax unless a prior tax treaty is signed between the parties.
Loans defined below are not considered as part of the thin capital:
- Any loan that is received from the third party under the non-cash guarantee of the shareholder or related parties;
- Any loan received from the shareholders or related parties that is taken from third party banks
- Any pass through loans obtained from the third party banks or financial institution or capital market institutions that grant loans under the same conditions;
- Any loan that is obtained from the financial institutions through leasing or factoring companies using banks.