Turkish Tax System
Istanbul has been witnessing an explosion in purchasing of lands, properties and commercial units through foreign investors. The biggest factor in this development was the change which was made in Reciprocity Law in 2012.
The Turkish Government lifted the reprocity requirement for property sales, which enables more foreign nationalities to be able to become a house owner in Turkey. The new reciprocity law regarding property sales to foreigners expresses the details about under what conditions citizens of 183 countries can buy a property in Turkey. This Law allows foreignors to buy residential, commercial properties and land all over Turkey up to 30 hectares (74 acres) per person.
On the other side, there is also no limit for foreign companies in Turkey to take place in the same process which includes to buy any real estate as they wish. For the plotted or unplotted land, approval must be taken from the related ministry within two years after the blueprints of the project has been designed.
Closing costs which will be paid by the purchaser refer to an average of 6 percent of the sales price of the related apartment. We usually do not recommend foreign citizens to take mortgage loan or any other loan because Turkish banks generally demand 50 percent down payments at interest rates of around 8 percent. Further by the lack of credit history of Foreigners most banks re unlikely to give any loan.
Closing Costs & Tax Payments for the Property Buying Process:
(Will be paid only once)
Purchase Tax: 4%
VAT: 1% or 18%
Stamp Duty Tax: 0.948%
Annual Property Tax: 0.1%
The Turkish Tax regime is an important part of the economy and can be divided into three main categories:
• Income Taxes, such as Income Tax Individuals and Income Tax on Corporates • 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 Tax on Individuals
An individual is subject to the income tax over his/her income and wages. The Income Tax Law 1960 sets the rules of taxation for income and earnings of the individual.
Turkey has a compound tax system where income acquired from various sources is gathered and tax due is evaluated on the total emerged income. Tax payment needs to be done on a calendar year basis.
All income emerged by the above-mentioned legal entities that are subject to corporate tax is taxable except if discharged from tax or excluded under the incentive rules. Expenses acquired in the development of the business are usually deductible. The income components by Corporate Tax Law are the same as those included in the Income Tax Law as stated previously.
In the submission of income tax, partnerships are not reflected to be separate corporations and each partner is taxed independently on their specific share of profit. An individual’s income can consist of one or more income components listed below:
• Salaries and wages,
• Incomes of Self-employed individuals,
• Business profits,
• Agricultural profits,
• Income from movable property (income from capital investment)
• Revenues from immovable properties and rights (rental income)
• Other incomes and earnings regardless of its source.
Turkish Residents who have complete tax liability status in Turkey are taxed on their income obtained both in and outside Turkey.
Turkey taxes individuals both on the basis of citizenship and residency unlike most countries. All individuals, even if they are domestic or foreign, together with corporations residing in Turkey, are prone to pay income tax on all income sources which we call a full-fledged taxpayer.
Any non-resident person who gains an income in Turkey through working in a corporation, business transactions, owning a property or any other income- producing activity is off course also prone to pay taxes as being considered a “foreign-based taxpayer”. The goal of foreign -based tax liability is not to tax the individual but to tax the incomes gained out of activities done only in Turkey.
Foreign-based taxpayers are defined in the Corporate Tax Law as a legal individual whose neither legal nor are the business headquarters are located in Turkey. In terms of a natural person of Income Tax Law states the foreign-based taxpayer as natural people who are not situated in Turkey. Corresponding to the the same law, individuals who are residing in Turkey for an nonstop period (including temporary absences) of more than six months in any given calendar year are considered to be resident for tax purposes. However, foreign individuals who are on assignment in Turkey for any business project or mission, or those in Turkey for holiday, health care or educational purposes are not seen as resident, regardles if they stay longer than six months.
There is no diversity between foreign-based tax liability and full-fledged tax liability. But on the other side, the obtaining of gains and consideration of such gains derived in Turkey has been regulated clearly and conditioned to norms that are different from the normsof full-fledged tax liability.
Income tax is alleged on a business or trade, professional services, agriculture and rentals, dividends, employment and interest.
The overall rule is that taxpayers have to pay the amount of tax due in two equal payments. Taxpayers who are on business or professional activities should make quarterly income tax payments during the tax year.
Assessment of the Tax
For the foreign-based taxpayers, it is very significant to determine under what conditions income is acquired in Turkey. The issue is dealt by the Article seven of the Income Tax Law which offers the following conditions;
A individual must have a permanent company or permanent representative in Turkey and the income should result from business in this permanent company or through such representatives only.
Any agricultural activities emerging income should take place in Turkey only.
• If the employment service is performed in Turkey or,
• If the services are “evaluated” in Turkey.
Any employment service will be considered to have been assessed in Turkey, if the earnings amount of the employees is paid in Turkey or it is booked as cost or expense by the Turkish corporation.
Incomes of Self-employed individuals
If the self-employment activities are done in Turkey or the self-employment activities are evaluated in Turkey, this indicates that self-employment income has been obtained in Turkey for individuals with foreign-based taxpayers’ liability.
Revenues from immovable properties and rights
Revenues obtained from rental of immovable properties, by their holders/owners, by those holding easement and usufruct rights or by their tenants are taxable in Turkey;
• if the immovable property is located in Turkey; or
• if such properties and rights are used or assessed in Turkey.
Property and rights that are subject to a rental income are stated in Article 70 of Income Tax Law No.193.
Rental income gained by resident and non-resident individuals from immovable assets and royalties for patents and rights are subject to withhold a tax rate of 20%. This withholding tax may be removed or decreased under related double-taxation treaties.
The regulations on Property Tax in Turkey are comparable to the taxes that you might have to pay in any country and its local government. The tax is determined on the value of the property (land or buildings). The tax rate changes depending on the category of the property. Residential properties and land are taxed at 0.1% of their value. The tax rate is 0.1%. For building sites or vacant land the tax rate is 0.3%. Every 4 years Property tax returns are filed in and annual taxes are to be paid in 2 equal installments which are; March, April or May and the second one is in November.
Annual rental income that is up to 3.200 TL for houses and up to 26.000 TL for offices and up to 1.390 TL for other commodities and rights (this is not an exemption in nature but rather lower limit for the taxable income)
Capital Gains Tax
Capital gains are considered as a simple corporate income. Capital gain that comes from the sale of shares in a local company by either a local or foreign company is also taxable.
Taxation of capital gains obtained from the sales of shares between non-residents (individuals or corporations) varies according to the legal clasification of the company. The presence of a bilateral tax treaty between the country of residence of the non-resident shareholder and Turkey may generally result in capital gains tax being avoided in Turkey on the condition that the holding period exceeds one year.
75% of the capital gains come from the sales of domestic participations are excluded from corporation tax if the following conditions are satisfied;
• the stated shares must have been held for two years previous to the disposal.
• the amount of the gain must be kept in a special reserve account for at least five years.
• the exempted profits are not moved within the specified period to another account (except for transfers to the capital account by way of a capital injection).
• the consideration for the sale is collected by the end of second calendar year following the year of the sale.
• The sale revenue must be collected by the end of the second calendar year following the year of sale.
On the other hand, the draft law provides different percentage of exemption for different period of time in which the capital gains occurred. According to the draft law, if the shareholding is sold at the end of two exact year of the time the shareholding obtained, 40%; if sold at the end of three exact year, 50%; if sold at the end of four exact year, 60%; and if sold at the end of five exact year 75% of capital gains derived from such sale is exempted.