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Key issues to consider for investors looking into Turkey

By Ayhan Üstün
Posted: 8th June 2016 09:50
As an important emerging market, Turkey has been perceived as a relatively volatile but promising investment environment. The investors that have previous experience in Turkey are, to a certain extent, used to the local political and economic challenges which may also represent certain opportunities. However, Turkey has recently passed through a more stressed period in 2015 due to recurring elections, regional military conflicts in our borders and volatility in the financial flows to other emerging markets.
Nevertheless, foreign investors still continued to have an interest in the Turkish economy during this period. The FDI to Turkey accounted for approximately US$ 10 billion/year during last five years while the reported activity in the M&A market has been approximately US$ 15 billion as an average in recent years. The foreign investors’ share in the M&A activity, which used to be above 50% in the previous periods, has recently fell to 30% of the total deal value.
Turkey is still a promising country with its young population and long term growth potential and it is expected that more investments opportunities will be on the horizon if Turkey can resolve its local conflicts and initiate structural changes to improve the macro economic status (i.e. reduce dependency on short term foreign currency flows).
Overview of Turkish Tax Regime from Foreign Investors’ Perspective
Turkey has a mainstream corporate tax rate of 20%, which represents one of the lowest corporate tax rates amongst OECD countries. There is also an opportunity for entitlement to a reduced corporate tax rate under an “investment incentive regime”; however such regime is only applicable to physical investments in certain strategic sectors or large scale investments and is not automatically entitled for each new investor. It is possible to benefit from corporate tax exemptions in the Free trade zones or Technology Development Zones subject to certain conditions.
Note that the effective tax rate may differ from the standard rates due to certain restrictions on deductibility of expenses (such as financing expenses incurred for acquisition or related party borrowings) or applicable incentives. Therefore, a meaningful comparison would require the analysis of alternative structures with all these factors being taken into account.
On the other hand, Turkish economy relies heavily on indirect taxes, namely VAT (general rate 18%) and Special Consumption Tax (that applies on different rates/amounts on certain product categories; such as cars, electronic devices, cosmetics, fuel-oil, alcohol and tobacco products). This is mainly due to the existence of an unrecorded market where it is difficult to collect tax on income (in particular for individual businessman and small & medium size companies) therefore tax collection is realised mainly through the capturing of expenditures on these products. Other transactional taxes like stamp tax, real estate transfer tax, banking and insurance transaction tax, etc., should also be considered by investors as they may represent significant costs as well. For example, stamp tax apply as 0.948% of contractual documents, agreements, etc., which may represent a cost as high as 1% of total transaction volume or total turnover of a company if all covered by such contracts subject to stamp tax.
Key Issues While Structuring an M&A Transaction in Turkey
The following represent some of the key issues that need to be considered by a foreign investor when planning an investment in Turkey:
  • Turkish tax regime does not allow a tax consolidation. Every entity is subject to taxes on a standalone basis. Therefore, usually multi-entity structures (such as establishment of a separate SPV for holding or financing purpose) would not be recommended unless there is a commercial or legal reason to do so
  • Dividend distribution to a non-resident shareholder is subject to withholding tax at 15%, which can be reduced to 10% or 5% under certain Double Tax Treaties. One should consider the whole structure in terms of dividend flow up to the ultimate parent entity in order to be able to conclude on the overall effective tax burden.
  • Turkey has a wide withholding tax regime, where most payments (e.g. professional fees, royalty payments, interests, leases) from a Turkish company to a non-resident entity will be subject to withholding tax (generally at a rate of 20%) which represents a final taxation unless the non-resident entity has a tax registration in Turkey. These withholding taxes may be reduced or in some cases totally avoided by virtue of Double Tax Treaty provisions.
  • The application of the DTT rates is subject to certain conditions such as issuance of a tax residency certificate and underlying substance requirements. Turkey does not have a stringent regime at the moment to impose further substance tests. However, with the impact of the new OECD (BEPS) action plan, Turkish government may also impose new regulations and restrictions on use of cross-border structures and application of DTT benefits. Nevertheless, since Turkey is mainly an inbound market that needs to attract foreign investment, a very heavy restriction would not be expected.
  • Turkey has certain tax-free reorganisation structures such as tax exempt mergers and de-mergers. However, application of such tax exempt structures are subject to various conditions. Also such structures have been under scrutiny of Turkish tax authorities from substance perspective even if all objective conditions in the tax law may be satisfied.

In general, Turkish tax law has a specific clause (Article 3 of Tax Procedural Law) which is interpreted as a “substance over form” principle. This principle has been widely used by tax inspectors in recent years through tax investigations. However the use of this principle is subjective in nature and may sometimes be used to re-characterise the whole case/transaction in order to make tax assessments.
Turkish tax law also has specific anti avoidance regimes for “transactions with tax havens” (the list of those countries to be qualified as tax havens yet to be announced by Council of Ministers) and “controlled foreign companies” (the passive companies owned by more than 50% Turkish shareholders and established in low-tax jurisdictions)
Expected Tax Law Changes
Turkish Government has announced that there will be a series of tax law changes throughout FY2016 with the purpose to increase the efficiency of the taxation system and to encourage new investment which also include a comprehensive revision of Income Tax Law (expected to limit certain tax exemptions on capital gains and enhance the tax filing obligations of individual tax payers) and Tax Procedural Law. It is also expected that the Investment Incentive Regime of Turkey will be revised to enable a more investor friendly environment. These proposed changes and their impacts should be followed closely for both existing and new investments in Turkey.

Ayhan Üstün is a Partner from KPMG Tax practice in Turkey. He is leading the International Tax and Mergers & Acquisitions Tax Advisory team in Turkey who consists of more than 20 full time dedicated tax professionals with also sector expertise in key areas; such as Financial Sector, Energy, Private Equity and Real Estate. The Tax Advisory team of KPMG in Turkey has been named as a market leader through recognitions and awards from various reputable business magazines and organisations.

Ayhan can be contacted on +90 216 681 90 00 / 90 20 or by email at 

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