Tax Liability of Companies in Turkey

In Turkey, companies are obliged to pay taxes due to certain legal regulations and economic reasons. Companies pay taxes to certain public institutions. These taxes differ according to the type of company in question or according to the income of the company.

There are 2 types of companies in Turkey: capital companies and sole proprietorships. The first thing that people or persons who want to make a profit through their commercial activities should do is to establish one of these companies. Thus, these commercial gains will be taxed through the established company.

Capital and sole proprietorships are also divided into some types within themselves. Firstly, let us examine what a capital company and a sole proprietorship are, and then examine their subheadings.

Capital Companies

A capital company is a type of company that meets its power entirely from its capital. In other words, in a capital company, the capital of the company is the basis, not the individuals. Shareholders have rights in proportion to their participation in the company capital.

Capital companies have legal personality. Legal personality means that the company is a legally separate entity; thus, the company can acquire assets, enter into contracts and be a party to lawsuits in its own name. For this reason, partners or owners do not have personal liability for company debts.

Capital companies are divided into 3 different types: joint stock company, limited liability company and limited partnership company. Under the Turkish Commercial Code No. 6102, the establishment, scope and management of these companies are explained separately.

1. Joint Stock Company

A joint stock company (JSC) is a capital company whose capital is determined and divided into shares, and the shareholders are only liable for the amount of capital they have subscribed. These shares are represented by share certificates and are transferable.

The shareholders are liable in proportion to the amount of capital they have subscribed to the company. It is also possible for legal entities to become partners in a joint stock company. In addition, a joint stock company can be established with a single shareholder. In other words, one person can establish a joint stock company alone.

Since joint stock companies have legal personality, they need a management unit. These managerial units are responsible for the company’s movements, auditing, tax liability, illegal activities, etc.

2. Limited Company

A limited liability company (Ltd. Şti.) is a capital company that can be established by one or more real or legal persons, whose capital is certain and limited to this capital amount. Each shareholder has partnership rights and responsibilities up to the capital share that he/she undertakes to put into the company. It is also possible to establish a limited liability company by a single person.

A limited liability company gains legal personality with a company articles of association. The management of the company is carried out by the managers specified in the articles of association. The managers act in line with the decisions of the general assembly formed by the shareholders. Limited liability company can join the partnership of another company with its own legal entity.

3. Limited Company (Capital Divided into Shares)

A limited partnership, which is another capital company, is a type of company formed by two different types of partners (limited partner and limited partner). A limited company can be established with at least 2 persons, one of whom is a limited partner and the other is a commanding partner. Limited partners can only be real persons. Limited partners can be real persons or legal entities.

Limited partners are the partners who are responsible for the management and daily operation of the company. Comanditary partners are partners who provide capital to the company but do not interfere in management affairs. For this reason, due to the debts of the company, the limited partners have unlimited liability including their personal assets, while the limited partners do not have any liability other than the capital they have committed.

Limited partnership companies have legal personality, therefore the company is liable for the debts of the company with its own assets. In addition, the personal liability of the limited partners against the debts of the company continues.

Sole Proprietorships

Sole proprietorships are commercial organisations in which the owners or partners have unlimited liability over the company. The debts and receivables of the company are considered as personal debts and receivables of the partners or owners. Likewise, in the tax debt of the company, the individuals become debtors on their own behalf.

Sole proprietorships may merge with capital companies and co-operatives, provided that the company is the transferee company. It is also possible for sole proprietorships to merge among themselves.

According to the Turkish Commercial Code No. 6102, sole proprietorships can be established in two different ways: collective companies and limited partnership companies.

1. Collective Company

A collective company is a type of sole proprietorship whose partners are real persons and each partner has the right to manage the company. The company is primarily liable for the debts and commitments of the company, but the partners are jointly and severally liable for the debts and commitments of the company with all its assets. Management tasks may be assigned to one, more than one or all of the partners by the company agreement or by the decision of the majority of the partners.

A collective company gains legal personality upon registration in the trade registry. In other words, it may have rights and debts in its own name, may sue or be sued.

2. Limited Company

A company established for the purpose of operating a commercial enterprise under a trade name, the liability of one or more of the partners against the creditors of the company is not limited and the liability of the other partner or partners is limited to a certain capital is a limited partnership.

What are the Taxes Paid by Companies?

Company taxes constitute one of the main sources of income for the state to finance public services. In order for the state to finance public services such as education, health, security, infrastructure and social services, it must levy certain taxes. At the same time, it is a legal obligation for companies to pay taxes in order to ensure economic balance, regulate income distribution and contribute to society.

Companies are legal entities with tax obligations in Turkey and are subject to various taxes. Let us examine what these taxes are in order.

Corporate Tax (by Capital Companies)

In Turkey, corporate tax is a type of tax that applies to joint stock companies (A.Ş.), limited liability companies (LTD. ŞTİ.), co-operatives and other capital companies. It is a direct tax levied by the state on the profit generated by an enterprise. It is calculated on the annual net profit of the enterprise and is collected at a certain rate.

The subject of corporate tax is the commercial earnings and other income generated by the enterprise. These taxpayers submit the tax return showing the annual financial status and profit of the enterprise to the tax office.

NOTE: Corporate tax is not a type of tax that must be paid by sole proprietorships. In other words, collective companies and ordinary limited companies do not pay corporate tax. The owner of a sole proprietorship declares the profits of the company as personal income and income tax is calculated on this income. Capital companies and co-operatives are obliged to pay.

Income Tax (Sole Proprietorships)

Income tax is a type of tax paid only by sole proprietorships and natural persons. In other words, capital companies do not pay income tax, instead they pay corporation tax.

Although collective and limited partnership companies have a separate personality (legal entity) from their founders, their earnings are taxed through the income tax liability of their partners. Sole proprietorships that generate income declare their income and pay a certain amount of tax on this income.

NOTE: Income tax is not paid by capital companies. Capital companies pay corporation tax instead of income tax. The two tax types are equivalent to each other.

Value Added Tax (VAT)

Capital and sole proprietorships are obliged to pay tax at certain rates on the sale of goods and services they realise. This rate may vary depending on the sales made or the status of the company.

Provisional Tax

Advance tax, called advance tax, is paid on earnings accrued periodically during the year. Provisional tax is deducted from the annual corporate tax or expense tax declared at the end of the year.

Stamp Tax

Capital and sole proprietorships have to pay stamp tax for certain documents and contracts.

Withholding Tax

Companies that are obliged to pay income or corporate tax are subject to a deduction at a certain rate while they are in the process of earning the income. This deduction is called withholding tax.

Environmental Cleaning Tax

Environmental cleaning tax is a type of tax paid by those who actually use the building. It is allocated together with the water bill. Company owners are obliged to pay this tax for their workplaces.

What is a co-operative and what taxes do they pay?

Cooperatives are organisations that operate for the purpose of generating economic income that can sustain their livelihoods and professions without the aim of profit. Co-operative companies are collective structures working in a group. It is not possible for a natural or legal person to establish a co-operative company alone. In order to establish a co-operative, at least 7 members must sign.

Co-operatives have legal personality. For this reason, they are obliged to pay all taxes, including corporate tax, which must be paid by capital companies. However, in some cases, co-operatives may be exempt from corporate tax.

According to the Corporate Tax Law:

• Not distributing earnings on capital,
• The chairman and members of the board of directors are not entitled to a share of the earnings,
• Failure to distribute the reserve funds to the shareholders,
• Conducting business exclusively with its partners
• Compliance with the exemption conditions in practice
• Becoming a member of an active supreme union.

Cooperatives do not pay corporate tax if the conditions are met and actually fulfilled. If even one of these conditions is not complied with, the exemption is cancelled.

Tax Liability of Foreign Companies in Turkey

It is possible for foreigners to establish a company in Turkey. They can establish a new company or they can open a branch office in Turkey in connection with their companies headquartered abroad. As a result, there is tax liability for foreign companies.

In Turkey, foreigners are allowed to establish all kinds of companies. Foreigners can open either a capital company or a sole proprietorship. However, in order to open a sole proprietorship, the relevant foreigner must have a work permit. In addition, if a branch of a company headquartered abroad is to be opened in Turkey, the capital of the company must be divided into shares.

There is no difference in terms of the taxation of persons or organisations with foreign capital in case they open a branch or establish a company in Turkey. In both cases, they are taxed on the earnings and revenues obtained in Turkey. However, in terms of ‘corporate tax ’, it is important whether the head office of the company is located in Turkey or not.

Foreign companies whose earnings are subject to corporate tax are divided into two categories as full taxpayers and limited taxpayers in the Corporate Tax Law.

1. Full Taxpayer

Foreign companies having their legal or business headquarters in Turkey shall be subject to full taxation as domestic corporations and shall be taxed on all of their profits both inside and outside Turkey. They are taxed exactly like a Turkish company.

2. Narrow Taxpayer Status

Foreign companies headquartered abroad may continue their activities in Turkey through the ‘branch opening’ procedure without establishing a separate company in Turkey. Companies which do not have both their legal and business headquarters in Turkey are taxed only on the profits generated in Turkey.

Earnings arising from the exportation of goods purchased in Turkey by corporations to foreign countries without selling them in Turkey are not considered to have been earned in Turkey. Selling in Turkey means that the buyer or seller or both of them are in Turkey or the sales contract is concluded in Turkey.

The tax liability of branches opened by foreigners in Turkey varies depending on the taxes paid in the country of origin and the commercial activity carried out.

Why Us?

As Güneş & Güneş Law Firm, we would like to state that legal support is of vital importance in determining company types and managing tax responsibilities. Companies can be established in various types with different structures and levels of responsibility; this leads to different tax liabilities. Choosing the right type of company enables taxpayers to benefit from tax advantages and minimise potential risks. Obtaining legal support is of great importance to ensure that companies comply with tax legislation, to carry out objection processes when necessary and to protect against possible tax penalties. In addition, the guidance of a lawyer specialised in tax liabilities varying according to the field of activity of companies plays a critical role in decision-making processes. You can contact us for further information and support regarding company types and tax liability.

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