Turkey - Taxation of cross-border mergers and acquisitions

Taxation of cross-border mergers and acquisitions for Turkey.

Taxation of cross-border mergers and acquisitions for Turkey.


The Turkish tax environment for mergers and acquisitions (M&A) has been affected by a number of tax developments, raising some uncertain issues that have yet to be resolved. The Turkish government has introduced numerous measures, including tax amnesty programs and investment incentives, which also affect cross-border M&A investors.

This report begins by explaining recent tax and legal developments that could potentially be important when planning a cross-border merger or acquisition. The report then discusses the key issues to consider when developing a tax-efficient transaction structure.

Two types of capital company are typically used in Turkey for cross-border M&A transactions: a joint stock company (Anonim Sirket — AS) and a limited liability company (Limited Sirket — LTD). The following discussions relate to these types of companies unless otherwise stated.

Recent developments

Limitation on financing expense deduction

A new law (Law no: 6322) entered into force on 15 June 2012 that amends certain provisions of the corporate tax law.

Among other changes, up to 10 percent of the sum of financing expenses (e.g. interest, commissions, foreign exchange losses, and similar costs and expenses) related to the borrowings that exceed the shareholders’ equity of the companies are not tax-deductible. There are exclusions from this rule that must be analyzed case-by-case.

The law gives the authority to the Council of Ministers to determine a rate (i.e. up to 10 percent) for the restriction of financing expense deduction. The Council of Ministers has not yet used this authority, so the limitation is not yet in force.

Turkey’s corporate tax law already has a thin capitalization regime that restricts the deductibility of financing expenses incurred on borrowings from shareholders/related parties that exceed three times the shareholders’ equity as of the opening balance sheet. Previously, no such restriction applied for financing expenses incurred on borrowings from external parties. Under the new law, a certain percentage of financing expenses on external debt that exceeds the shareholders’ equity in the companies can be also rejected as a non-deductible expense. This measure is intended to discourage use of excessive debt by companies that do not have strong equity.

In view of these developments, investors interested in Turkey should consider the tax implications of financing in more detail when determining investment models.

Tax relief for angel investors

Turkey introduced new provisions in 2012 (through Law no: 6327) regarding tax incentives for individual investors to encourage investments in start-up companies.

Individual investors (referred to as ‘angel investors’) can benefit from a tax deduction (limited to 1 million Turkish lira (TRY) per year) for a certain percentage of equity contributions made to start-up companies in certain encouraged sectors, subject to certain conditions. Under regulations issued in 2013, investors who want to benefit from this regime can apply to the Ministry of Economy to obtain a license for qualification as ‘individual investor’.

Incentive for contributions to venture capital funds

Turkey also introduced new provisions in 2012 (through Law no: 6322) regarding tax incentives for corporate investors regarding their contributions to venture capital funds.

The provisions allow corporate investors to set up reserves from their current-year profits to invest in ‘venture capital investment funds’ or ‘venture capital investment partnerships’ established under Turkish Capital Market Board regulations.

The amount reserved for the venture capital fund can be deducted from the corporate tax base for the relevant year, which helps reduce the corporate tax amount.

However, the following conditions should be met in order to benefit from the tax advantage.

  • The fund amount should be limited to up to 10 percent of declared profits and up to 20 percent of shareholders’ combined equity.
  • The fund should be invested until the end of the year in which such fund is reserved.
  • The fund should be reserved under a temporary account in the liabilities section of the balance sheet. If the fund is withdrawn, previously accrued taxes must be paid with late payment interest.

Investors should reinvest this fund within 6 months following the disposal date of shares/interests in the venture capital trust or investment fund. Dividends to be received by Turkish companies from a venture capital trust or investment fund are entitled to benefit from a participation exemption for corporate tax purposes under the new law.

These incentives for individual and corporate investors aim to create an alternative channel to meet the financing requirements of start-up companies. It is expected that such companies will be ready for a more structured investment or M&A transaction in the future.

Exemption for the income derived from intellectual property

As of 1 January 2015, a corporate tax exemption applies to 50 percent of the income derived from the leasing, transfer, sale, mass production in Turkey, and marketing of inventions of corporate taxpayers that have a patent or utility model registration and result from research, development, innovation, and software activities (generally referred to as intellectual property (IP)) carried out in Turkey, provided that certain conditions are met. If the invention is used in the manufacturing of a product, 50 percent of the income derived from the product’s sale can also be tax-exempt (limited to the portion of income attributable to the patented innovation). Certain procedural requirements in the law must be met to benefit from this exemption.

Incentive for cash capital increases (notional interest deduction)

As of 1 July 2015, stock corporations (except for those operating in the finance, banking and insurance sectors) may deduct from taxable income 50 percent of the interest to be calculated over cash capital increase amounts registered in the Trade Registry or over cash capital contributions to newly established corporations. This treatment is similar to the so-called ‘notional interest deduction’ applied in some other countries. The deductible interest amount is calculated by applying the latest annual weighted average interest rate announced by Turkish Central Bank to the TRY-denominated commercial loans granted by banks. The deductible interest is computed for the period from the date of the capital increase to the end of the financial year. In June 2015, the deduction rate (50 percent) was increased for publicly held corporations and for investments in the context of an investment incentive certificate.

Recent law changes in 2021

Income tax rate

The income tax rate is applied at progressive rates in Turkey. The brackets indicated within Article 103 of the Income Tax Law is changed and the highest income tax rate is increased to 40 percent from 35 percent. Income over TRY650,000 will be subject to 40 percent income tax for fiscal year 2021. Additionally, individuals will be liable to file an annual tax return if their income exceeds this threshold.

Corporate tax rate

The corporate income tax rate was increased to 22 percent for 3 consecutive years: 2018, 2019 and 2020. From 2021 onwards, the corporate tax rate is reduced back to the statutory rate of 20 percent for corporate taxpayers.

Digital Service Tax

Digital Service Tax (DST) regulated under Code on Digital Services Tax and Amending the Provisions of Some Codes and Legislative Decree no: 375 entered into force on 1 March 2020. The communiqué indicates that revenues generated from all kinds of digital advertising services, sale of any audio, visual or digital content, services for the provision and operation of digital media, etc., along with intermediary services for these will be subject to DST at the rate of 7.5 percent. Please note that taxpayers generating revenues less than TRY20 million in Turkey or less than EUR750 million (or equivalent in TRY), worldwide over their digital services, are exempted from DST.

Services related to workplace rentals

According to the Official Gazette numbered 31343 and dated 21 December 2020, Value Added Tax (VAT) relating to workplace renting services is reduced to 8 percent from 18 percent and withholding tax (WHT) relating to certain rent payments is reduced to 10 percent from 20 percent. According to the Presidential Decree numbered 3318 and 3319, the reduced VAT taxes will be applicable until 31 May 2021 (unless an extension is provided).

Recycling Contribution Fee (RCF)

Turkish Environmental Law has been amended various times in order to protect the environment. Through the regulation published on 31 December 2019, companies started paying a fee called ‘RCF’ that will be calculated per kilo or cubic meter of packaging used for products. Additionally, through Communiqué on RCF no: 2, which was implemented on 5 February 2020, the RCF will apply for goods that are harmful for the environment unless recycled such as tires, batteries, accumulators, electrical and electronic appliances, medicine, etc.

Accommodation tax

Law no: 7194 introduces of a new tax of 2 percent on accommodation services rendered by hotels, motels, holiday resorts, guesthouses, etc. The application of the accommodation tax will start from 1 January 2021 due to the COVID-19 pandemic.

Tax on high-value residences

An additional property tax will be imposed for residential houses located in Turkey with a value of over TRY5 million. The tax rates vary depending on the value of the residence. The maximum rate is 1 percent for a residence valued more than TRY10,455,000. The taxable base is the property’s value for real estate tax purposes, or the valuation made by the General Directorate of Land Registry and Cadaster, whichever is higher. The taxpayers are required to declare this tax by an annual filing, which should be made by20 February every year. The tax is payable in two instalments: in February and in August.

Tax Amnesty Law

The Law on the Restructuring of Public Receivables, also known as Tax Amnesty, entered into force in November 2020. The law is applicable to receivables finalized before 31 August 2020. Receivables that are not finalized or at litigation are not included within the scope of this law.

To be paid

To be waived

Whole tax/customs tax amount

Whole amount of penalties based on tax basis (tax loss) or administrative penalties

50 percent of the tax penalties imposed with no relation to the principal tax amount

The remaining 50 percent of the tax penalties imposed with no relation to the principal tax amount

50 percent of the tax penalties imposed due to participation, inducement and support actions

The remaining 50 percent of the tax penalties imposed due to participation, inducement and support actions

Delay charges will be calculated based on the ‘Domestic Producer Price Index’ rather than a monthly fixed rate.

The entire amount of auxiliary receivables such as interest, delay penalty, delay interest, etc.

The application period for the above restructuring opportunity was until 31 December 2020, hence terminated.

Asset Amnesty

Restructuring of Public Receivables Law also includes provisions for the repatriation of assets. Accordingly, cash, gold, foreign exchange, securities and other capital market instruments owned by Turkish residents in and outside of Turkey and immovable properties located in Turkey are in the scope of this law. Amounts of these instruments should be declared byl 30 June 2021.

According to the regulations of Asset Amnesty, the real persons and entities bringing their money, gold, foreign currency, securities and other capital market instruments that are kept abroad into Turkey until 30 June 2021 will be able to use those freely and they shall not be subject to taxation or tax inspection with respect to the assets declared.

Capital companies’ acquisition of their own shares

With the amendment to Article 94 of the Income Tax Code, the following regulations concerning the full-resident capital companies that have acquired their own shares have been introduced.

  • In the event that these shares are extinguished through a capital reduction, the difference between the acquisition value and the nominal value of the shares shall be treated as a dividend distributed as of the date on which the resolution regarding the capital reduction is registered on the Trade Registry and 15 percent WHT will be applied thereon.
  • In the event that these shares are disposed of at a price lower than the acquisition value, the difference between the acquisition value and the disposal value shall be treated as a dividend distributed as of the date on which the disposal takes place and 15 percent WHT will be applied thereon.
  • In the event that these shares are neither extinguished through a capital reduction nor disposed of within 2 years following the acquisition date, the difference between the acquisition value and the nominal value of the shares shall be treated as a dividend distributed as of the last day of the 2-year timeframe and 15 percent WHT will be applied thereon.

Short-term Employment Allowance due to COVID-19

Short-term employment is defined as temporal shortening of the employment period in the whole or part of the workplace by at least one-third, complete or partial suspension of operation. To apply for this allowance, the employer makes a written notification to the Turkish Employment Agency or the labor union that is party to the collective labor agreement, if any. The employees are also notified of this situation by an announcement in the workplace. Granting this allowance is subject to certain conditions. As per Presidential Decree numbered 3316, employers could apply for Short-term Employment Allowance until 31 January 2021. Application of the allowance was extended until 28 February 2021.

The amount of daily short-term employment allowance is 60 percent of daily gross average earning calculated by taking into consideration the earnings of the insurant for the last 12 months subject to premium, not exceeding 150 percent of the gross amount of monthly minimum wage for those older than 16 years of age in accordance with Article 39 of the Labor Law.

Transfer pricing regime and impact on M&A market

Following global trends, the Turkish Revenue Administration relies on indirect taxes and has implemented new compliance rules and tax audits in accordance with the transfer pricing provisions.

Since the implementation of Turkey’s transfer pricing regime in 2007, the tax authorities have increased their focus on transfer pricing to protect and widen the domestic tax base. Key developments are as follows.

  • In August 2009, the Turkish Revenue Administration issued guidance relating to the Mutual Agreement Procedure in the Treaties for Avoidance of Double Taxation.
  • The Turkish Revenue Administration published guidelines regarding disguised profit distribution through transfer pricing in November 2010.
  • The Turkish Revenue Administration negotiated and signed the country’s first unilateral Advance Pricing Agreement (APA) in 2011. KPMG in Turkey expects this will lead to more unilateral APA applications, paving the way for bilateral and multilateral APAs in the future.
  • In 2017, the Turkish Revenue Administration issued a Transfer Pricing Communiqué with guidance and details on the APA process.
  • In 2016, new transfer pricing provisions were enacted in Tax Law no: 6728. The new law adds a threshold of 10 percent to ‘related party’ definition, removes the hierarchy of transfer pricing methods, enables a 50 percent penalty reduction in the case of timely and proper transfer pricing documentation, and allows for the roll-back of APAs.
  • As a member of both the G20 and the OECD, Turkey supports BEPS) initiatives. In line with BEPS Action 13, the Turkish Revenue Administration published a draft communiqué covering Masterfile, country-by-country reporting (CbCR) and local file requirements. A draft Council of Ministers’ decision (CMD) was published in 2017 accordingly and was finalized as of 2018.

With the Presidential Decree no: 2151, OECD BEPS 13 rules including CbCR, Masterfile and local file are in force in Turkey effective from 24 February 2020. The MNEs that have consolidated revenue equivalent of more than EUR750 million are required to file CbCR. The first reporting year was 2019 and submitted until 31 December 2020. As of today, there are no activated Qualifying Agreements between Turkey and other Competent Authorities that would enable automatic exchange of CbCR. Taxpayers should report these CbC notifications to tax authorities by the end of June for each year.

In view of these developments, cross-border investors considering an M&A investment in Turkey should evaluate the transfer pricing rules applicable to the operations in the past and how they might change after the investment of a foreign company. In particular, if an investor intends to change the operating model (e.g. from an independent sales agent to a limited risk distributor), the likely impact on the financial and tax status of the Turkish company should be analyzed in detail to avoid potential disputes with the Turkish tax authorities.

Turkish Commercial Code: a new legal and financial landscape

The new Turkish Commercial Code (TCC) took effect as of 1 July 2012. As of 1 January 2013, it is mandatory for Turkish companies to prepare their standard financial statements in Turkish Financial Reporting Standards (TFRS, similar to International Financial Reporting Standards (IFRS)). There is also a mandatory independent audit requirement under the new TCC, similar to regimes applied in many western economies. Certain exemptions were introduced for small and medium-sized companies.

Needless to say, the new TCC is changing the legal and financial landscape for Turkish companies. The law aims for more transparency of the companies and more accountability for shareholders and directors who manage those companies.

These developments are also likely to bring important benefits to M&A players in the market. Historically, the accounts of Turkish companies (except for listed and/or regulated entities) were usually maintained for tax purposes and were not required to be audited or disclosed in any manner. Under the new rules, there is more reliable and standard financial data about Turkish entities. External audit reports can be expected to increase the level of confidence of a foreign investor in evaluating a Turkish target and reduce the time and effort required for due diligence or partnership negotiations.

The new TCC brings new concepts into Turkish company law that may be of special interest for M&A investors.

  • The new TCC covers the legal framework of company reorganizations, such as mergers and demergers (previously covered mostly by tax laws), aiming to smooth the legal implementation of such reorganizations.
  • Re-domiciliation of companies will be possible under the new TCC. Re-domiciliation of an existing company is an alternative to liquidation and allows for the transfer of assets and liabilities to an entity incorporated in another jurisdiction. The related guidelines and corresponding amendments in the Turkish tax legislation are not yet available; they are expected to be adopted by Turkish authorities in the future during the phase of application of the new TCC.
  • The new TCC clearly defines the status and rights of minority shareholders and provides specific rules for ‘minority squeeze-outs’, which are a major consideration in an M&A of a target company involving minority shareholders.
  • With the new TCC, it is now possible for a company to acquire its own shares (limited to 10 percent of the capital).
  • The new TCC restricts shareholders from being indebted to their companies (except for advance dividend distributions), which creates a major obstacle to repatriation. This restriction also limits the possibility of leveraged buy-outs in Turkey since it is no longer possible to use the assets of a target company to receive a loan for a potential share acquisition of that company.

OECD Action Plan on Base Erosion and Profit Shifting

As a G20 member, Turkey was one of the first countries to support the OECD’s Action Plan on BEPS, which set a framework for developing internationally agreed upon means to deter harmful tax actions and improve tax transparency.

Turkey is now evaluating and implementing the plan. Among other things, Turkey is working to conclude exchange of information treaties with certain countries and to revise current tax treaties to cover the new exchange of information rules. In July 2015, Turkey signed the automatic information exchange agreement (together with 97 jurisdictions) under the OECD’s Standard for Automatic Exchange of Information in Tax Matters. This is particularly important for the Turkish tax base, as material amounts of funds are known to be kept offshore primarily for tax avoidance purposes.

The Turkish government has tried to overcome this problem through some local initiatives; for example, by implementing Asset Peace Acts and Tax Amnesty Acts in previous years.

However, a permanent solution has not been obtained, so Turkey has put strong emphasis on the Action Plan on BEPS to encourage Turkish businesses, for example, to stop keeping unrecorded accounts offshore.

In addition, on 7 June 2017, Turkey (together with 67 other jurisdictions) signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (MLI) at a signing ceremony hosted by the OECD in Paris.

On signing, Turkey designated a list of 90 tax treaties as covered tax agreements, which are tax treaties that would be amended through the MLI. Turkey also submitted a provisional list of reservations and notifications for various provisions of the MLI. The formal procedures for the MLI to be effective (i.e. ratification and approval by parliament and the president) are not yet complete. However, a Draft Law on the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS was submitted to the Turkish Parliament Plan and Budget Committee on 2 June 2020, thereby officially starting the ratification process of the MLI.

A significant amount of cross-border M&A and investment in Turkey has been structured through favorable tax jurisdictions or tax treaty countries. The impact of the Action Plan on BEPS on those structures should be analyzed. This review should extend to potential changes adopted by the other countries.

Further, Turkish and foreign investors and Turkish taxpayers who hold foreign properties should analyze the impact of the changes under the Action Plan on BEPS for their current investments and future investment plans.

Asset purchase or share purchase

A foreign company can acquire a Turkish company by acquiring either its assets or its shares.

An asset acquisition can be affected either through a branch of the foreign entity, which is taxable in Turkey as a non-resident, or through a Turkish subsidiary of the foreign company.

Purchase of assets

Goodwill (i.e. a positive difference between the purchase price and the fair market value of assets acquired, if any) can be recognized and depreciated over 5 years.

Tangible and intangible assets can be amortized, based on the rates determined in accordance with the useful life of the assets as announced by the Ministry of Finance.

Transfers between the related parties must be at fair market value.

Purchase price

In principle, the transfer of assets under an asset transaction should be conducted at fair value, which should be the market value. Transfers between related parties must be documented to comply with transfer pricing requirements.

For the buyer to book the individual assets at their transfer value and determine the goodwill amount (if any), the purchase price must be allocated to individual assets being transferred. It is generally advisable for the purchase agreement to specify the allocation, which is normally acceptable for tax purposes provided it is commercially justifiable.

The allocation of purchase price is more important if there are any assets in the deal that may be exempt from corporate tax and/or VAT on transfer, such as real estate property or shares/participation rights in another entity.


In the case of an asset deal, an excess of the purchase price over the fair value of the assets being transferred represents goodwill, which can be capitalized by the buyer and depreciated for tax purposes over a period of 5 years.

Turkish tax law does not require recognition of internally developed goodwill and rights in the tax basis balance sheet, so there is usually no tax basis cost for the goodwill in the seller’s books and it represents pure taxable income.


The depreciation period of an asset is refreshed in an asset deal. The selling entity may deduct all remaining net book value of assets as the tax basis cost against the transfer value. The buyer must book the assets at their transfer value and start depreciating a new term of useful life for each asset (as prescribed by communiqués of the Ministry of Finance).

Tax attributes

Tax attributes, such as tax losses and incentives, are not transferred to a buyer in an asset deal. The selling entity has the right to use its existing tax losses and VAT credits against the taxable profits (such as capital gains) and VAT obligations arising from the asset transfer.

Where the target has used an Investment Incentive Certificate (common in energy investments), the transfer of assets for the first 5 years is subject to the permission of the Turkish Treasury. The transfer may also cause a denial of potential tax exemptions to which the seller is already entitled under the certificate.

However, the potential tax liabilities of the seller should not transfer to the buyer in the course of an asset deal. An exception is identified in the Law Regarding Collection of Public Receivables. Under this provision, the tax office may put aside the legal nature of a transaction and pursue the assets if the deal is structured to avoid payment of the seller’s tax liabilities (which may only be possible in the case of related-party transactions).

Value Added Tax

Tax-free mergers (including tax-free mergers of small and medium-sized enterprises) and tax-free divisions that meet certain conditions in the corporate tax law are exempt from VAT.

Taxable mergers and asset transactions (including transfers of goodwill) are generally subject to VAT at 18 percent. There is an exemption for real estate property and for shares/participation rights held by a company for at least 2 years and transferred through an asset deal.

The buyer is entitled to recover the VAT incurred against its output VAT generated from its operations. As a result, the recovery of input VAT may impose a financial burden (time value of money) if the capacity to generate output VAT is limited after the acquisition.

Sales of shares in an AS company are exempt from VAT. A sale of shares in an LTD company by another company is exempt from VAT, provided the participation is held for at least 2 years.

A sale of shares (in either an AS or LTD company) by an individual is not subject to VAT.

Transfer taxes

Certain documents prepared in Turkey (e.g. loan contracts, mortgage instruments) are subject to stamp duty, usually at 0.948 percent. The maximum stamp tax payable on a document is capped at TRY3,534,679.90 for the year 2021. Loan contracts (and security documents, e.g. mortgages) for loans from local and foreign banks as well as financial leasing contracts are exempt from the stamp duty.

Merger agreements are also subject to stamp duty. A stamp duty exemption is available for documents related to tax-free mergers and tax-free divisions (that meet conditions in the corporate tax law) and for documents related to the sale of real estate property or shares/participation rights held by a company for at least 2 years.

In an asset deal involving a transfer of title to real estate, the seller and buyer are each subject to a title deed registration fee of 2 percent for 2021.

Purchase of shares

An acquisition of shares by a foreign entity has no immediate Turkish income tax consequences.

If the acquisition is made through a Turkish branch or subsidiary, goodwill implicit in the share price cannot be recognized for tax amortization purposes. Further, it is not possible to achieve a tax basis step-up for the target company assets.

A change in the shareholders does not affect the tax attributes of the target company.

Tax indemnities and warranties

In a share deal transaction, the historical tax liabilities of the target (known or unknown) remain in the company and are acquired by the new shareholder(s). The buyer usually asks for tax indemnities and warranties in a share acquisition.

In Turkey, the accounts of a company are open for tax audit for 5 years. There is no procedure to reconcile the tax status of a company with the tax authorities. In view of this, and due to insufficient coverage of tax audits in Turkey (i.e. tax authorities can only review a limited number of taxpayers and tax litigation cases usually take a long time to resolve), indemnities and warranties are even more stringently applied in share acquisitions in Turkey.

Tax losses

Tax losses can be carried forward for 5 years. No carry back is possible.

After the acquisition of shares, the target company can continue to carry forward its tax losses without any further requirements.

Tax losses of the merged entity can be used by the merging entity (limited to the amount of the net shareholders’ equity of the merged entity) under a tax-free merger if certain other conditions are also satisfied.

Crystallization of tax charges

Since the transfer of shares in a company has no effect on the tax status of the assets, this issue is not applicable for Turkey.

Pre-sale dividend

If the target entity has retained profits available for distribution as dividends, the potential tax implications of a pre-sale dividend versus a capital gain should be considered in light of the circumstances of the buyer and seller.

Transfer taxes

According to a recent change in stamp tax law (No: 6728), enacted on 29 September 2016, documents concluded for share transfers of joint stock companies, limited liability companies and limited partnerships are exempt from stamp tax.

Tax clearances

It is not possible to ask for tax clearances from the Turkish tax authorities regarding the tax status of a company.

It is only possible to ask for an official statement from the tax office outlining the reported but unpaid tax liabilities of the company or confirming that there are no overdue and unpaid tax obligations. Such statements do not provide assurance against contingent tax liabilities that may be identified in the course of a tax audit.

It is possible to ask for advance tax rulings for specific structural tax uncertainties in a merger or acquisition.

Choice of acquisition vehicle

This section discusses the acquisition vehicles that may be used in structuring a merger or acquisition in Turkey.

In all cases, there is no capital duty or stamp duty on injecting equity into a Turkish company or branch. The equity contribution is subject to a fund (i.e. contribution to the Competition Board) of 0.04 percent (4 per 10,000).

Local holding company

A Turkish holding company is usually structured as an AS or LTD company, or as a specific holding company, which the TCC defines as a special type of an AS formed with the primary purpose of investing in other companies. There is no material difference in the taxation of these forms. However, the special holding company is advantageous because it has a higher dividend capacity than other forms.

Turkish corporate tax law also sets out a special holding company regime entitled to additional tax incentives for the purpose of holding the shares or foreign investments through a holding company in Turkey.

A Turkish holding company is not usually seen as efficient for tax purposes. The absence of a tax grouping regime in Turkey means that acquisition costs and interest expenses at the holding company level cannot be offset against the target’s profits. In theory, it is possible to achieve deductibility of acquisition costs and interest expenses through a post-acquisition merger of the holding company into the target. However, such structures are under scrutiny by the Turkish tax authorities and have been challenged through the substance-over-form principle. Such structures should be analyzed carefully, and professional advice should be sought case-by-case.

A Turkish holding company may be a tax-efficient option if the acquisition in Turkey is financed with equity rather than debt and the foreign investor intends to reinvest in Turkey. In this case, the Turkish holding company can receive dividends from the target entity without any tax leakage (i.e. due to participation exemption rules) and use such dividends for reinvestment in other Turkish businesses.

Foreign parent company

The foreign buyer may choose to make the acquisition itself, perhaps to shelter its own taxable profits with the financing costs, without causing any direct taxation problems in Turkey. However, because Turkey charges WHT on interest and dividend payments to a foreign party, an intermediate company resident in a more favorable treaty territory may be preferable.

Non-resident intermediate holding company

To ensure a more tax-efficient flow of payments from the Turkish entity to its foreign parent and eliminate potential capital gains tax on a subsequent exit, an intermediate holding company resident in another territory could be used. When determining the applicability of treaty benefits, Turkish tax authorities usually rely on a tax residency certificate issued by the tax authorities of the territory in which the intermediary holding is located. As a result, any substance tests should be considered from the perspective of the tax laws of the territory in which the intermediary holding is to be located.

Local branch

A foreign company may hold the shares of a Turkish target through a branch established in Turkey. Although the branch is regarded as a non-resident for tax purposes, it is subject to tax rules similar to those applying to other company forms in terms of its Turkish income and transactions.

In practice, a branch is not seen as a favorable option for several reasons.

  • Dividends paid from a Turkish target to the branch are not entitled to participation exemption.
  • The remittance of profits and dividends from the branch to its foreign parent is subject to WHT.
  • It is an inflexible structure because the branch cannot be legally transferred to a third party later on exit.

Joint venture

A joint venture can be established between a Turkish company and one or more local or foreign entities. If such a joint venture company is incorporated, it takes an ordinary legal form of either an AS or LTD and is subject to the same tax implications. An incorporated joint venture may be registered for tax purposes, but it can only be used for specific contractual works and is not available as a holding company structure.

Choice of acquisition funding

A buyer structuring an acquisition in Turkey needs to consider whether to fund the vehicle with debt or equity. Hybrid financing instruments are not recognized for tax purposes in Turkey, so it is usually necessary to follow the legal definition when classifying a financing structure as debt or equity and assessing the tax implications.

The principles underlying these approaches are discussed below.


There is no limit on the amount of debt that can be put into a Turkish company and no general restriction on the deductibility of interest. Interest expenses incurred for business purposes are deductible on an accrual basis.

Interest expenses incurred for financing an asset acquisition need to be capitalized as the depreciated cost of the asset until the end of the year in which the asset is acquired. Interest expenses incurred thereafter can either be recognized as period expenses or capitalized.

The deductibility of interest may be restricted by thin capitalization or transfer pricing rules (discussed later in this report).

Debt financing from a foreign source may attract a surcharge (0 to 3 percent) if it is in the form of a foreign loan and based on the average maturity of the loan. This can be avoided by structuring the loan in a foreign currency and with an average maturity of 3 years or more.

Debt financing from a local source in Turkey (e.g. a bank) does not attract the surcharge. However, the interest payments are subject to a banking transaction tax, generally at 5 percent.

Deductibility of interest

As noted earlier, Turkish tax laws do not impose a general restriction on deductibility of interest. Some specific restrictions are explained below.

Thin capitalization rules

Where the amount of debt (measured at any time during the year) provided to a Turkish entity by its shareholders (or related parties) exceeds three times the equity (i.e. shareholders’ equity measured as per the statutory accounts opening balance sheet of the period concerned), the excess of debt above the 3:1 ratio is re-characterized as disguised equity. Consequently:

  • Financing expenses incurred on the disguised equity (related-party debt exceeding three times shareholders’ equity) cannot be deducted for corporate tax purposes.
  • Interest actually paid on the disguised equity is re-characterized as disguised dividends and subject to dividend WHT at 15 percent (unless reduced by treaty).

Injecting equity or reserves into the company within a period does not help to overcome the thin capitalization status for the current period, because the shareholders’ equity is measured as at the opening balance sheet, but it may help for subsequent periods.

When debt is obtained from an external bank against cash guarantees provided by the shareholders, the thin capitalization rules still apply.

Transfer pricing rules

When a Turkish entity receives funding from its shareholders (or related parties), the interest and other expenses charged on the loan should be at arm’s length. Any excess interest/expense paid by the Turkish entity above an arm’s length rate cannot be deducted for corporate tax purposes. The excess amount is re-characterized as disguised dividends and subject to dividend WHT at 15 percent (unless reduced by treaty).

Turkey’s transfer pricing regulations are similar to the OECD guidelines; normally any report or documentation prepared in a foreign country employing the same rules should be suitable as supporting documents in Turkey.

Interest incurred on share acquisition

Generally, expenses incurred for the purpose of tax-exempt activities are not deductible against income from other taxable activities of a company. Previously, this general rule posed problems for a holding company with interest expenses incurred for the purpose of acquiring shares in another Turkish entity, which potentially led to tax-exempt dividend and capital gains income.

The corporate tax law stipulates that a holding company in a similar position has the right to deduct such interest expenses against taxable income derived from other activities. In practice, however, a pure holding company does not generate taxable income. Thus, interest expenses carried forward as tax losses may not be utilized and expire after the carry forward period of 5 years. In such cases, further post-acquisition structuring may be required.

Withholding tax on debt and methods to reduce or eliminate it

Interest payments to non-resident corporations are subject to WHT at varying rates of 0, 1, 5 and 10 percent. The WHT rate is reduced to 0 percent where the interest is paid to a lender who qualifies as a foreign bank or financial institution.

Interest payments to foreign parties other than banks may attract 18 percent VAT on a reverse-charge basis if the foreign party receiving the interest does not qualify as a bank or financial institution. Such VAT is normally recoverable by the Turkish borrower unless the underlying interest is not tax-deductible.

A stamp tax of 0.948 percent applies on the loan contract unless the loan is received from a bank or financial institution.

Therefore, it is usually less efficient for the Turkish entity to borrow directly from its foreign parent/group entity. These tax inefficiencies may be improved through some additional structures.

The corporate tax law contains certain anti-avoidance rules for transactions with entities in low-tax jurisdictions (tax havens). A 30 percent WHT applies to various types of payments to residents of those jurisdictions, which will be named on a list to be published in the future by the Ministry of Finance. The impact of these rules on the ultimate WHT application should be considered.

Checklist for debt funding

  • The use of external bank debt may avoid thin capitalization and transfer pricing problems, but debt obtained from an external bank against cash guarantee provided by the shareholders is still subject to thin capitalization rules.
  • The use of external bank debt (even with a guarantee by shareholders) should eliminate the WHT and VAT implications on interest payments unless the structure is open to challenge on substance grounds.
  • In addition to thin capitalization rules that apply to borrowings from related parties, up to 10 percent of the financing expenses incurred on all borrowings that exceed the shareholders’ equity of the company can be classified as non-deductible expense (this rule will enter into force when the Council of Ministers issues a decree to determine the rate of restriction, up to 10 percent).
  • The absence of tax grouping means interest expenses incurred by a holding company in Turkey cannot be offset against taxable profits of the target. Such an expense can be carried forward as a tax loss to be offset against any other taxable gains that may arise in the future.
  • Contributions to the equity and reserves of the Turkish entity in one year are included in the debt-to-equity calculation for the following year. When considering the required related-party debt capacity of the following year, any required injection to equity or reserves by the shareholders should be completed before the current period ends.
  • Tax deductions may be available at higher rates in other territories.
  • A debt from a foreign source may attract a surcharge (0 to 3 percent), if it is in the form of a foreign loan and based on the average maturity of the loan. This surcharge can be avoided by structuring the loan in a foreign currency and with an average maturity of 3 or more years.
  • A debt from a local source (e.g. a bank) in Turkey does not attract this surcharge. Interest payments may be subject to a banking transaction tax, generally at 5 percent.


Equity injections are subject to a Competition Board fee of 0.04 percent, with no limit and including additional capital injections to the corporation. The fee is also payable on capital in kind contributions. No other taxes or duties are levied on equity funding.

The level of equity funding in a Turkish entity may need to be considered for other reasons, such as:

  • More equity may lead to an increased legal reserve requirement in the entity (as a percentage of the equity), and so reduce the dividend capacity.
  • Equity is less flexible should the parent subsequently wish to recover the funds because the reduction of equity in a Turkish company is subject to a regulated process that requires, among other things, the approval of a trade court.
  • In view of Turkey’s thin capitalization rules (3:1 debt-to-equity ratio), a tax-efficient related-party financing structure may require a review of the equity level in the entity.
  • There may be other non-tax grounds for preferring equity. For example, in certain circumstances, it may be desirable for a company to have a pre-determined debt-to-equity ratio. This may apply to companies that are subject to industrial regulations (e.g. Turkish holding company of a bank or insurance company) or that expect to submit public bids (e.g. privatization projects or license applications).

Tax-free reorganizations

Turkish corporate tax law allows for tax-free mergers, divisions and share swaps, provided that certain procedural obligations are met. Such tax-neutral reorganizations are performed on the basis of book values (i.e. no step-up for the value of the assets), and the historical tax liabilities, if any, are assumed by the surviving entities.


Hybrid financing instruments are not recognized for tax purposes in Turkey. It is usually necessary to follow legal definitions to classify a financing structure as debt or equity and determine the tax implications.

The thin capitalization rules also need to be considered where the lender is a related party.

Discounted securities

The tax treatment of securities issued at a discount differs from the accounting treatment in the sense that the issuer cannot immediately deduct the difference between nominal and discounted values. In Turkey, the main borrower is the government. Few private debt securities are issued by the private sector so the tax treatments on special cases are not tested in practice.

Deferred settlement

An acquisition often involves an element of deferred consideration, the amount of which can only be determined at a later date on the basis of the business’ post-acquisition performance. The right to receive an unknown future amount is not regarded as an asset that must be valued for Turkish tax purposes. Such amounts should represent a part of the transaction (as a tax-triggering event) at the date when the due amounts can be calculated and claimed by the parties according to the terms and conditions of the contract.

For example, in a normal share acquisition structure, the deferred settlement amounts should be included in the final purchase price as a price adjustment and may be taxed or exempted, depending on the tax status of the original transaction. The tax treatment of such transactions also depends, to a certain extent, on the legal definition and interpretation derived from the relevant agreements.

Other considerations

Turkey normally does not tax the gains of non-residents except where the non-resident has a permanent establishment or a permanent representative in Turkey and the income can be attributed. A specific tax regime applies to capital gains derived from disposal of shares by a non-resident. The gain on a sale of shares/participation rights of a company in Turkey may become taxable in Turkey where:

  • the transaction occurs in Turkey
  • the transaction is evaluated in Turkey (i.e. paid by or borne as expense by a Turkish taxpayer).

Such transactions have to be evaluated for Turkish tax purposes, depending on the status of the buyer and the seller, the type of the entity whose shares are being transferred, and the method used to affect the share transfer.

Concerns of the seller

The seller is liable to tax on gains realized on the sale of the assets of a business. Losses arising from the sale of assets can be immediately deducted or carried forward.

The seller is liable to tax on gains arising from the sale of shares. Losses are available to offset income from other activities of the corporation.

Fifty percent of gains derived from the sale of real estate property and 75 percent of gains derived from the sale of shares of a Turkish company by another Turkish company may be exempt from corporate taxation, provided the property was held for at least 2 years and the exempt gains are retained in a special reserve account for 5 years. This requirement not to repatriate funds for 5 years may be impossible to satisfy, of course, if the seller plans to leave the business entirely.

Since gains derived by a Turkish individual from the sale of shares of a Turkish AS after 2 years are tax-exempt, the seller would strongly oppose structuring the transaction as an asset deal or expect the buyer to bear the resulting tax by way of a corresponding increase in purchase price.

Moreover, apart from taxation reasons, a seller in need of cash would be reluctant to agree to an asset deal because the repatriation of cash from the selling entity to its shareholders would also pose problems.

Company law and accounting

A foreign company may do business in Turkey by operating as a contractor, establishing a branch or forming a subsidiary. All became subject to the TCC as of 1 July 2012.

The uniform chart of accounts (as defined by the Turkish Tax Procedural Code) is compulsory for all companies except those subject to regulatory and/or supervisory agencies, which should use TFRS for their sectors, including banks, brokers, and insurance, leasing and factoring companies. TFRS is aligned with IFRS. The annual accounts for all companies must include an income statement, balance sheet and notes to each. Accounts must be drafted and approved at the general shareholders’ meeting within 3 months of the end of the financial period.

With the implementation of the TCC, all companies have continued keeping their legal books in accordance with Turkish Tax Procedural Code and applying the uniform chart of accounts. Companies that meet criteria set out in the law are also required to present their financial statements in line with TFRS (which is identical to IFRS), as of 1 January 2013. TFRS is mandatory for companies that issue financial statements subject to an external audit requirement.

Group relief/consolidation

Consolidation for tax purposes is not allowed. Each entity is subject to tax on a standalone basis.

Transfer pricing

Turkey’s transfer pricing regulations, in effect since 2007, generally align with the OECD model. The regulations are applicable to domestic and cross-border transactions between related parties. However, a transfer pricing adjustment is not required for domestic transactions between Turkish tax-registered entities as long as there is no ultimate fiscal loss for the government.

The regulations require prices, fees and charges for intercompany transactions (including interest on intragroup financing) to be determined on an arm’s length basis, as determined by an acceptable methodology.

Dual residency

Dual residency status is not mentioned in Turkish tax laws, so it is not relevant from a Turkish tax perspective when structuring an M&A transaction in Turkey.

Foreign investments of a local target company

Turkey has introduced a controlled foreign company (CFC) regime in the new corporate tax law. CFC status is determined by a number of criteria. Normally, an operating company with an active business should not be classified as a CFC. By contrast, an intermediary holding company owned by a Turkish company would likely be deemed as a CFC where the intermediary holding company benefits from a participation exemption regime and effectively pays no taxes in its territory. The acquisition of shares in a Turkish target should not lead to a change in the CFC status of its foreign investments.

Turkey also introduced a holding regime in the new corporate tax law to encourage holding foreign investments through a company established in Turkey. The form of the company can be the usual AS or LTD.

There are no particular requirements from a company law perspective to qualify as a holding company.

If the holding company meets the conditions stipulated in the corporate tax law, the dividends and potential capital gains on investments of the Turkish target can be fully exempt from corporate taxes. Further, the dividend WHT to be applied during the ultimate repatriation of profit from the Turkish target to its shareholders is reduced to 7.5 percent (instead of 15 percent).

Comparison of asset and share purchases

Advantages of asset purchases

  • Purchase price can be depreciated or amortized for tax purposes.
  • Step-up in tax basis (through revaluation) is obtained.
  • Previous liabilities of the seller are not inherited.
  • Possible to acquire part of the business.
  • More flexibility in funding.
  • Possible to absorb a profitable business into a loss-making company.

Disadvantages of asset purchases

  • Potential need to renegotiate existing agreements and renew licenses, among others.
  • More transaction costs (e.g. stamp taxes, title deed registration fees).
  • Exemptions on sale of shares are not applicable.
  • Tax losses remain with the seller.
  • Not favorable for the seller in terms of cash flow.

Advantages of share purchases

  • Purchase on net asset basis, so lower capital outlay.
  • Likely more attractive to the seller due to available tax exemptions and cash flow.
  • Buyer acquires tax attributes of the target, including tax losses.
  • Buyer continues to enjoy existing contracts and licenses, among others.

Disadvantages of share purchases

  • Acquisition of potential tax liability (difference between market value and tax basis of assets in the target company, which would be crystallized in future on disposal of such assets).
  • Inability to recognize goodwill for tax depreciation.
  • Acquisition of contingent (unknown) tax liabilities of the target.

KPMG in Turkey

Eray Büyüksekban
Is Kuleleri Kule 3 Kat:2-9 Levent,

T: +90 212 316 60 00
E: ebuyuksekban@kpmg.com

This country document does not include COVID-19 tax measures and government reliefs announced by the Turkish government. Please refer below to the KPMG link for referring jurisdictional tax measures and government reliefs in response to COVID-19.

Click here — COVID-19 tax measures and government reliefs

This country document is updated as of 1 January 2021.