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Overview of the Turkish economy from an investors' perspective

Ayhan Üstün, KPMG, Turkey

Turkey has been one of the global hot points in attracting foreign investment through the last decade. The FDI to Turkey accounts for approximately US$ 12 billion / year, while the reported activity in the M&A market has been in the range of US$ 15-20 billion as an average of these recent years. More than 50% of this M&A activity has been generated by foreign investors except for last year, when foreigners share in the M&A market fell to 30% of the total deal value.

Nevertheless, Turkey has its own challenges (for example, political challenges due to rising social conflicts between social classes, economic challenges due to an unresolved current account deficit and the connected fragile macro-economic structure, and security challenges arising from the recent developments in neighbouring countries like Syria, Iraq, Iran) which limit its capacity to attract a fair share of global investment flow. Also the lack of standardized and audited financial statements (which has only recently been mandatory for certain large size companies and regulated corporations) impairs the quality of information presented to potential investors.

Overview of Turkish Tax Regime

Turkey has a mainstream corporate tax rate of 20%, which represents one of the lowest corporate tax rates in the OECD countries. There is also an opportunity to get entitled 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.

Note that the effective tax rate may differ from these 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, the 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 the tax collections is realized mainly through capturing of expenditures on these products.

Also other transaction taxes like stamp tax, real estate transfer tax, banking and insurance transaction tax… etc, should 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 Investment into Turkey

  • The 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) 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 repre-

sents 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 re-organisation 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 the tax inspectors may sometimes try to re-characterize the whole case/transaction in order to make tax assessments.
  • There is a possibility to make a settlement with the tax authorities to close a tax investigation case, either before or after a tax assessment report is issued. This is applied commonly by local taxpayers hence there is no extensive tax court practice in Turkey / it is difficult to find judicial or administrative precedent that can be used to make a reliable estimate for contentious cases. Therefore the practical experience brought by the tax advisors would create an added value in case of tax disputes and litigations.

AYHAN ÜSTÜN / Partner, Tax

Company: KPMG in TURKEY

Address: Kavacýk Rüzgarlý Bahçe Mahallesi, Kavak Sok, No:29 Beykoz 34805 ISTANBUL

Telephone: +90 216 681 90 00



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