02 April
Tax
Taxation of Dividend Transfers Between Companies Established in Turkey and Germany
- MHRPartner
- Germany, Tax, Turkey
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In this article, we deal with a highly technical taxation issue. Let us assume that a German resident company is a shareholder of a limited liability company established in Turkey. If the limited liability company established in Turkey wants to transfer its share of the profits to Germany, how will the taxation be for both companies?
Many entrepreneurs who own companies in Turkey establish companies in Germany. Sometimes the company established in Germany is a partner of the company in Turkey. Sometimes a foreign company resident in Germany establishes a company in Turkey and becomes a partner of this company. This article clarifies the taxation of dividend transfers between companies in different countries in such a partnership relationship.
In this article, we refer extensively to the relevant legislation when addressing the taxation of dividend transfers. In particular, the Corporate Tax and Tax Procedure Law in Turkey, as well as the agreement between the Republic of Turkey and the Federal Republic of Germany on the avoidance of double taxation and tax evasion in respect of taxes on income, constitute the decisive legal framework for this article. In addition, the methodology used to address the issue can be adapted to companies in Turkey in which other European resident companies are also shareholders. Although the issue has been explained in terms of limited liability companies, it can also be extended to other companies/institutions that are liable to corporate tax under the corporate tax law, such as joint stock companies. In this article, we also briefly mention the taxation of the dividends distributed by the company established in Germany in the event that a person or company resident in Turkey is a shareholder of a company established in Germany.
Summary / General Provisions Regarding the Taxation of a Limited Liability Company Established in Turkey According to the Turkish Tax System
How is a Limited Company Established in Turkey Taxed?
A “Limited Liability Company” established in Turkey is subject to corporate tax as a capital company in accordance with Article 1 and Article 2 of the Corporate Tax Law No. 5520. Pursuant to Article 3 of the same law, a limited liability company established in Turkey is subject to taxation as a “full taxpayer” corporation. Pursuant to Article 3 of the Corporate Tax Law, full taxpayer corporations are taxed on all of their earnings both inside and outside Turkey.
Pursuant to Article 6 of the Corporate Tax Law, limited liability companies established in Turkey are subject to corporate tax, and corporate tax is calculated on the pure corporate income of the taxpayers in an accounting period. In the determination of pure corporate income, the provisions of Income Tax Law No. 193 on commercial income are applied.
What Does Narrow Liability Corporate Income Consist of?
On the other hand, companies that are within the scope of “narrow taxpayership” as per the same article of the law (among the institutions listed in Article 1 of the law, those whose legal and business centres are not both located in Turkey) are taxed only on the earnings obtained in Turkey. In limited taxpayers, corporate income consists of the following gains and revenues
a) Commercial gains derived by foreign corporations having a place of business or permanent representative in Turkey in accordance with the provisions of the Tax Procedure Law No. 213 dated 4/1/1961 and numbered 213, from the works carried out in these places or through these representatives (Even if they meet these conditions, the gains arising from sending the goods purchased by the corporations in Turkey for export to foreign countries without selling them in Turkey are not considered to be obtained in Turkey. The meaning of selling in Turkey is that the buyer or seller or both of them are in Turkey or the sales contract is concluded in Turkey).
b) Earnings derived from an agricultural enterprise located in Turkey.
c) Earnings derived from self-employment in Turkey.
d) Income derived from the rental of movable and immovable property and rights in Turkey.
e) Income from movable capital obtained in Turkey.
f) Other gains and revenues obtained in Turkey.
The relevant provisions of the Income Tax Law dated 31/12/1960 and numbered 193 shall apply to the earnings or revenues and income elements mentioned in the narrow taxpayer status and to the issues of obtaining the income elements in Turkey and having a permanent representative in Turkey.
What is the Legal Headquarters and Business Centre for Companies?
Legal Centre: The headquarters of the taxable corporations indicated in their establishment laws, presidential decrees, by-laws, main statutes or contracts.
Business Centre: It is the centre where the transactions are actually gathered and managed in terms of business.
How does a limited liability company established in Turkey file a declaration?
Pursuant to Article 14 of the Corporate Tax, a limited liability company established in Turkey shall submit a declaration for all of its taxable income. The corporate tax return is submitted to the tax office to which the taxpayer is affiliated from the first day of the fourth month following the month in which the accounting period is closed until the evening of the twenty-fifth day. In accordance with Article 24 of the same law, corporate tax is paid until the end of the month in which the declaration is submitted. In accordance with Article 32 of the same law, corporate tax is applied as 20% to the net corporate income obtained in an accounting period. (23% will be applied to the earnings of 2022 in accordance with the Presidential decree, unless otherwise decided, 20% will be applied to the earnings of 2023)
VAT Liability of Limited Liability Company Established in Turkey
Pursuant to the Value Added Tax Law No. 3065, the deliveries of goods and services made domestically by a “limited liability company” established in Turkey are subject to value added tax as a general rule. However, pursuant to Articles 1/1-a and 12/2 of the Value Added Tax Law, services performed for customers abroad are exempt from value added tax. The term “customer abroad” refers to the buyers whose domicile, workplace, legal and business centre is abroad and the branches of a domestic company operating independently on its own behalf abroad. In order for a service to be considered as a service performed for customers abroad, the following conditions must be fulfilled.
– The services must be performed for a customer abroad.
– The service must be utilised abroad.
Pursuant to Article 1/1-a and 12/2 of the Value Added Tax Law, a limited liability company established in Turkey is exempt from value added tax in the event that the service to be provided abroad is provided to the customer abroad and the service is utilised abroad. VAT will not be calculated in the invoices to be issued for the services provided.
Tax liabilities arising from the Double Taxation Avoidance Agreement between Germany and Turkey in the event that a limited liability company established in Turkey distributes its profits to its German resident partner as dividends
Legislative Infrastructure
In the second paragraph of Article 3 of the Corporate Tax Law No. 5520, it is stated that, among the institutions listed in Article 1 of the Law, those whose legal and business centres are not both located in Turkey shall be taxed only on the income generated in Turkey; In the third paragraph, the income elements of the corporate income in limited taxpayers are listed and in subparagraph (a), commercial gains derived by foreign corporations having a place of business in Turkey in accordance with the provisions of the Tax Procedure Law or having permanent representatives, from the works carried out in these places or through these representatives, and in subparagraph (d), movable capital income derived in Turkey shall be taxed as corporate income; In the fourth paragraph, it is stipulated that the relevant provisions of the Income Tax Law shall apply to the earnings and revenues mentioned in this article and the income elements obtained in Turkey.
According to paragraph (6) of the first subparagraph of Article 7 of Income Tax Law No. 193, in order for the income from movable capital to be deemed to be derived in Turkey, the capital must be invested in Turkey.
In subparagraph (4) of the second paragraph of Article 75 of the same Law, the remaining portion of the corporate income before deducting deductions and exemptions from the corporate income before deducting deductions and exemptions, after deducting the calculated corporate tax, of limited taxpayer corporations submitting annual or special declarations in accordance with the Corporate Tax Law, regardless of their source, is defined as securities income.
According to the general provisions of the Turkish tax system (in the absence of a double taxation avoidance agreement between the two countries) Within the scope of Article 94 of the Income Tax Law No. 193 and Articles 15 and 30 of the Corporate Tax Law No. 5520;
“Except for those who obtain dividends through a place of business or permanent representative in Turkey, tax deduction at the rate of 10% should be made on dividends distributed to limited taxpayer corporations and limited taxpayer real persons.”
In Article 30 of the Corporate Tax Law, it is ruled that corporate tax deduction will be made by those who pay or accrue these earnings and revenues in cash or on account, including advances, over the earnings and revenues of the institutions subject to limited taxpayers, In the sixth paragraph of the same article, it is stipulated that corporate tax deduction at the rate of 10% will be made on the amount transferred to the head office by the limited taxpayer corporations submitting annual or special declarations from the amount remaining after deducting the calculated corporate tax from the corporate income before deducting discounts and exemptions.
How will the taxation be done?
Accordingly, the shareholder of the Limited Liability Company will be considered as a limited taxpayer due to the fact that he/she is a resident abroad and does not have a legal and business centre in Turkey. According to the sixth paragraph of Article 30 of the Corporate Tax Law, withholding tax is required to be withheld on the amounts of the corporate income obtained by the Limited Liability Company established in Turkey and transferred to the limited taxpayer resident abroad.
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Dividend Taxation in the Context of Double Taxation Agreement with Germany
As of 1 January 2011, there is an Agreement between the Republic of Turkey and the Federal Republic of Germany for the Avoidance of Double Taxation and Tax Evasion in Taxes on Income. The provisions of the double taxation avoidance agreement between the Republic of Turkey and the Federal Republic of Germany will be taken into consideration in the taxation of the dividends to be obtained by the non-resident limited taxpayer corporation from the company established in Turkey.
In Article 10 titled “Dividends” of the “Agreement between the Republic of Turkey and the Federal Republic of Germany for the Avoidance of Double Taxation and Prevention of Tax Evasion in Taxes on Income
“Dividends paid by a company which is a resident of one Contracting State to a resident of the other Contracting State may be taxed in that other State.
However, such dividends may also be taxed in and in accordance with the law of the Contracting State in which the company paying the dividend is a resident of that State, provided that, if the beneficial owner of the dividend is a resident of the other Contracting State, the tax so levied shall be
a) 5 per cent of the gross amount of the dividend if the beneficial owner of the dividend is a company (other than a partnership) holding directly at least 25 per cent of the share capital of the company paying the dividend
b) in all other cases, not exceed 15 per cent of the gross dividend amount.”.
Article 23 of the Agreement guarantees that undertakings of one State shall not be subjected to taxation in the other State which is heavier than the taxation and related obligations faced by the undertakings of the other State under the same conditions.
Considering the provision of subparagraph 2/a of Article 10 of the Treaty, it is seen that Turkey is entitled to levy a maximum of 5% tax on dividend payments made by a company resident in Turkey to real beneficiaries resident in Germany who have at least 25% of its capital share.
Within the framework of these provisions, in the event that the German resident company holds at least 25% of the capital shares of the company established in Turkey, the rate of 5% should be taken into consideration in the taxation to be made in Turkey over the dividend payment to be made to the German resident company from the remaining portion after deducting the calculated corporate tax from the corporate income of the company established in Turkey before deducting deductions and exemptions, instead of the 10% rate in our domestic legislation.
In the case where Article 7 and Article 10, paragraph 2, subparagraph (a) of paragraph 2 of Article 10 entitles Turkey to levy tax, an income arising in Turkey will be excluded from the base for the calculation of German tax in accordance with Article 22, paragraph 2, subparagraph (a) of Article 22 of the Agreement titled “Avoidance of Double Taxation”. In cases where Article 12 of the Agreement entitles Turkey to levy tax, the tax paid in Turkey shall be offset against the tax payable in Germany in accordance with subparagraph (b) of paragraph 2 of Article 22 of the Agreement.
In this sense, in the dividend distribution of the company established in Turkey to the company resident in Germany, which is the shareholder of the company, the tax deduction of 5% will be deducted by the company resident in Germany from the tax to be paid in Germany.
In cases where the provisions of the Agreement are amended according to the domestic legislation, in order to benefit from the provisions of the Agreement, it is necessary to prove that the enterprise resident in Germany is a full taxpayer in Germany and is taxed in this country on all world earnings with a document (residence certificate) to be obtained from the competent authorities of Germany and the original of this document and a copy of its Turkish translation certified by a notary public or Turkish consulates in Germany must be submitted to the tax authorities or the relevant tax office.
Taxation of Dividends Distributed by a Company Established in Germany in the Event that a Person or Company Resident in Turkey is a Shareholder of a Company Established in Germany
In accordance with the reciprocity principle of the double taxation agreement mentioned above, in the reverse case, if the company resident in Turkey has at least 25% capital share of the company established in Germany, the rate of 5% should be taken into consideration instead of the taxation rate in the domestic legislation in the taxation to be made in Germany over the dividend payment to be made to the company resident in Turkey from the remaining portion after deducting the calculated corporate tax from the corporate income of the company established in Germany before deducting discounts and exemptions.
In this sense, in the dividend distribution of the company established in Germany to the Turkish resident company, which is the shareholder of the company, the 5% tax deduction will be deducted by the Turkish resident company from the tax to be paid in Turkey.
Evaluation and Conclusion
If we briefly summarise the issues we have explained in detail in the above sections of our article;
A “Limited Liability Company” established in Turkey is subject to corporate tax as a “full taxpayer” capital company. Full taxpayer corporations are taxed on all of their earnings both inside and outside Turkey.
For limited liability companies established in Turkey, corporate tax is calculated on the net corporate income of the taxpayers in an accounting period. In the determination of pure corporate income, the provisions of Income Tax Law No. 193 on commercial income are applied. On the other hand, companies which are within the scope of “limited liability” as per the same article of the law (companies which do not have both their legal and business centres in Turkey among the institutions listed in Article 1 of the law) are taxed only on the earnings obtained in Turkey.
As of 1 January 2011, there is an Agreement between the Republic of Turkey and the Federal Republic of Germany for the Avoidance of Double Taxation and Tax Evasion in Income Taxes. The provisions of the double taxation avoidance agreement between the Republic of Turkey and the Federal Republic of Germany will be taken into consideration in the taxation of the dividends to be obtained by the non-resident limited taxpayer corporation from the company established in Turkey.
In accordance with the double taxation avoidance agreement, in the event that the German resident company has at least 25% of the capital share of the company established in Turkey, the rate of 5% instead of 10% in our domestic legislation should be taken into consideration in the taxation to be made in Turkey over the dividend payment to be made to the German resident company from the remaining portion after deducting the calculated corporate tax from the corporate income of the company established in Turkey before deducting deductions and exemptions. On the contrary, in accordance with the reciprocity principle of the double taxation avoidance agreement, in the taxation to be made in Germany over the dividend payment to be made to the Turkish resident company, which is the partner of the company resident in Germany, the rate of 5% should be taken into consideration instead of the taxation rate in the domestic legislation.
In the distribution of dividends between the two countries, the amount of 5% to be deducted from the taxes to be paid in their own countries can be deducted from the taxes to be paid in their own countries.
In cases where the provisions of the Agreement are amended according to the domestic legislation, in order to benefit from the provisions of the Agreement, it is necessary to prove that the enterprise in Germany is a full taxpayer in Germany and is taxed in this country on all world earnings with a document (residence certificate) to be obtained from the competent authorities of Germany and the original of this document and a copy of its Turkish translation certified by a notary public or Turkish consulates in Germany must be submitted to the tax authorities or the relevant tax office.
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