Tax | MHR & Partners https://mhrpartner.com Vergi Denetimi & Yurt Dışında Yatırım Sun, 02 Mar 2025 10:56:46 +0000 en-US hourly 1 https://wordpress.org/?v=6.9.1 Germany Tax System for Companies https://mhrpartner.com/en/germany-tax-system-for-companies/ Sat, 08 Feb 2025 16:54:33 +0000 https://mhrpartner.com/?p=24815 Mehmet Akif Özmen | Sworn Financial Advisor – CPA | Founder, CEO Germany stands out as one of the most attractive business destinations in Europe with its strong economy, central location and opportunities for entrepreneurs. However, it is of great importance to have information about the tax system for entrepreneurs who want to establish a company or do business here. …

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Mehmet Akif Özmen | Sworn Financial Advisor - CPA | Founder, CEO

Germany stands out as one of the most attractive business destinations in Europe with its strong economy, central location and opportunities for entrepreneurs. However, it is of great importance to have information about the tax system for entrepreneurs who want to establish a company or do business here. Although the tax system in Germany may seem complicated with its varying practices depending on the type of company, various tax types and obligations, it is possible to benefit from the advantages of this system with the right roadmap.

In this article, we have brought together the most up-to-date and necessary information on the German tax system for entrepreneurs who want to do business in Germany. When stepping into the business world full of opportunities in Germany, you can make an advantageous start with a solid tax knowledge.

Basic Principles of the German Tax System

The German tax system offers a comprehensive structure for both individuals and companies based on the principles of fairness, transparency and efficiency. Progressive taxation according to income, different tax rates according to the type of business and international tax treaties are the key elements of the system. Tax liability is applied equally to all, while exemptions and exceptions set by law are clearly defined. Under the principle of fairness, taxpayers with higher incomes pay more tax, while individuals with similar economic status have similar tax obligations. The ability to pay tax principle ensures that taxpayers are taxed according to their income, wealth and consumption levels. 

One of the cornerstones of the system is the principle of legality of taxation; taxes can only be determined by law and cannot be changed arbitrarily by the administration. In calculating the tax base, the principle of netting is applied, taking into account business expenses and other deductions. At the same time, the principle of tax neutrality aims to ensure that tax policies do not directly influence economic decisions. While the transparency and comprehensibility of the tax system helps taxpayers to fulfil their obligations easily, the principle of continuity enables long-term planning by ensuring that tax rules do not change frequently. 

While tax collection in Germany is carried out in a cost-effective manner, international co-operation and information sharing are of great importance. In line with the principle of social state, higher income groups pay more tax, contributing to the reduction of income inequalities. In addition, sustainable development is supported by applying carbon emission and energy taxes within the scope of environmentally friendly policies. Tax administration accelerates processes through digital systems and prevents tax evasion through audits. Taxpayers, on the other hand, have the right to object to tax decisions and to apply for judicial remedy.

The taxation process is generally based on self-declaration (Selbstveranlagung), i.e. taxpayers are obliged to declare their income and gains. In Germany, the tax authorities (Finanzamt) ensure the proper functioning of the system by supervising the tax obligations of businesses and individuals. Tax administration is shared between federal, state and local governments, which allows the system to be shaped according to regional differences rather than a centralised structure.

An important feature of the tax system in Germany is the various advantages and double taxation agreements provided for international companies and investors. This system, which is in line with European Union regulations, provides a predictable and reliable business environment for both domestic and foreign entrepreneurs.

Main Types of Taxes in Germany for Companies

Corporation Tax (Körperschaftsteuer)

Companies operating in Germany are liable to pay corporate tax on their profits. The corporate tax rate is 15%, plus a solidarity surcharge (Solidaritätszuschlag) of 5.5%. Thus, the total corporate tax rate is calculated as 15.825%.

Trade tax (Gewerbesteuer)

Business tax is a tax levied by local authorities in Germany and is calculated on the profits of companies from their business activities. The rate of trade tax varies from municipality to municipality and usually ranges between 7% and 17%. Trade tax is deductible from corporate income tax.

Important Note: The effective tax rate for companies in Germany is calculated by combining the federal corporate tax rate (15%) with additional taxes imposed by the municipalities, such as the trade tax (Gewerbesteuer) and the solidarity surcharge (Solidaritätszuschlag). Together with these additional taxes, the total effective corporate tax rate is usually around 30 per cent. However, this rate may vary depending on the region in which the company operates and other factors.

VAT (Mehrwertsteuer or Umsatzsteuer)

Value Added Tax (VAT) is a tax levied on goods and services sold in Germany. The standard VAT rate is 19%, with a reduced rate of 7% for certain goods and services (e.g. food, books, hotel services). Small businesses with an annual income of less than EUR 22,000 may be exempt from VAT under the Kleinunternehmerregelung. Companies are obliged to pay VAT to the government for VAT received from their customers and can deduct VAT received from suppliers.

Withholding tax (Quellensteuer)

In Germany, withholding tax is levied on certain types of payments. For example, withholding tax is withheld on income such as dividends, interest payments and licence fees. The standard withholding tax rate is 25%, which increases to 26.375% with the solidarity surcharge. Under double taxation agreements, lower rates may apply for some countries.

Property Tax (Grundsteuer)

In Germany, property owners are obliged to pay property tax. Property tax rates may vary depending on the municipality where the property is located. Property tax is usually calculated annually on the value of the immovable property.

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Taxation of Individual Enterprises in Germany

Individual enterprises refer to persons who run their businesses in Germany on their own behalf. In Germany, individual enterprises (Einzelunternehmen) are generally subject to income tax (Einkommensteuer) and value added tax (Mehrwertsteuer/Umsatzsteuer). Individual entrepreneurs declare their business earnings directly as their personal income and pay progressive income tax on this income.

Income tax rates vary between 0% and 45% depending on annual earnings. For small businesses, a regulation called Kleinunternehmerregelung allows entrepreneurs with an annual turnover of less than EUR 22,000 to be exempt from VAT. However, if this exemption is not preferred, individual entrepreneurs are obliged to apply the standard VAT rates (19% or 7%).

Individual entrepreneurs may also be required to pay trade tax (Gewerbesteuer), which varies according to the municipality in which they are located. However, there is a trade tax exemption for earnings up to EUR 24,500 per year. In Germany, it is recommended that individual entrepreneurs file regular tax returns and manage their accounting processes meticulously.

The ability to deduct losses incurred by companies in their early years from profits in the following years (Verlustvortrag and Verlustrücktrag) is also an important tax advantage. Furthermore, R&D expenditures, investment incentives and regional support programmes offer additional opportunities to reduce the tax burden of companies. Therefore, it is recommended that newly established companies work with a tax advisor to make the best use of tax advantages.

Reading Advice

Explore our comprehensive guide for all the details on starting a business and opening a branch in Germany!

Additional Tax Liabilities for International Companies Operating in Germany

International companies operating in Germany are subject to similar tax obligations as local companies, but may also face additional obligations arising from their international activities. These obligations relate to double taxation, transfer pricing, VAT and other special regulations. Here are important additional tax obligations for international companies operating in Germany:

Double Taxation Agreements (Doppelbesteuerungsabkommen – DBA)

Germany has entered into agreements with many countries to avoid double taxation. Through these agreements, international companies can avoid taxation of the same income both in Germany and in another country. Companies can claim tax refunds or obtain tax exemptions in accordance with the terms of the agreements.

Transfer Pricing (Verrechnungspreise)

International companies must comply with transfer pricing rules for intra-group transactions (e.g. purchase and sale of goods or services, licence fees).  Germany has adopted the OECD transfer pricing guidelines. Companies are obliged to prepare transfer pricing documentation and submit it to the tax administration.

Taxation of Foreign Earnings

Companies resident in Germany are liable to tax their worldwide earnings. Earnings from foreign branches or subsidiaries may be subject to double taxation treaties. In some cases, tax exemptions or deductions may apply to foreign earnings.

VAT and Intra-EU Transactions

Germany applies special VAT rules for transactions within the European Union (EU). For supplies of goods and services within the EU, VAT declaration and Intrastat notification may be required. For transactions with countries outside the EU, export and import VAT rules must be observed.

Foreign Capital Rules (Fremdfinanzierungsregeln)

Germany has introduced limitations on interest paid by companies on financing from foreign sources. Interest payments are tax deductible within certain rates and conditions. In case of excessive borrowing, interest payments can be added to the tax base.

Controlled Foreign Company Rules (Hinzurechnungsbesteuerung)

German resident companies may be taxed on the passive income (e.g. interest, rent, licence fees) of their foreign subsidiaries. This rule aims to prevent profit shifting abroad for tax purposes.

Tax on the Digital Economy and Digital Services

Germany may apply special tax rules for international companies offering digital services. Regulations such as the EU’s digital services tax may affect international companies.

Tax Investigations and Documentation

International companies may be subject to more frequent tax inspections in Germany. Comprehensive documentation on transfer pricing, foreign earnings and other international transactions must be prepared.

Permanent Representation (Betriebsstätte)

When foreign companies open a permanent establishment (e.g. branch or office) in Germany, they can be taxed on this establishment. The permanent establishment is considered an independent taxpayer and must file its own tax returns.

EU Tax Harmonisation Rules

Germany has harmonised with the EU’s tax harmonisation directives. For example, the ‘Anti-Tax Avoidance Directive’ (ATAD) seeks to prevent hybrid mismatches, earnings deferral and other tax avoidance methods.

Tax Planning and Structuring

When tax planning in Germany, international companies should comply with the law and avoid aggressive tax avoidance methods. When fulfilling their tax obligations in Germany, they must comply with both local and international regulations. Tax declarations, documentation and payments must be made on time.

Professional tax advisory services help companies to comply with the law and minimise tax risks. By cooperating with tax advisors and lawyers, it is possible to optimise the company’s tax burden.

How to Make a Tax Declaration in Germany?

The tax declaration process in Germany is of great importance for businesses to fulfil their legal obligations. Companies must declare their income and earnings through the Finanzamt (tax office) every year. The tax declaration process is usually carried out via digital platforms and the ELSTER (Elektronische Steuererklärung) system allows companies to submit their declarations online.

Here are some of the main points to be considered when making a tax declaration:

– Annual Tax Declaration: Companies subject to corporation tax and trade tax must file their annual tax return each year within the deadline set after the close of the financial year.

– Value Added Tax (VAT) Declaration: Companies subject to VAT are obliged to file VAT returns on a monthly or quarterly basis. For small businesses, this process can also be carried out annually.

– Advance Tax Payments: For companies with high revenues, prepayments may need to be made during the year based on the estimated tax amount. This practice is applied to prevent the accumulation of large tax debts.

The timely and complete submission of tax returns is important to avoid possible criminal sanctions. In addition, since tax audits are carried out regularly in Germany, companies are required to keep their financial records meticulously and act in accordance with legal regulations. Due to the complexity of the tax process, it is recommended that businesses work with a tax advisor or financial advisor.

Tax Deductions and Incentives for Companies in Germany

Germany offers various tax advantages to support the growth of companies and innovation. The country, which attaches particular importance to R&D activities, provides significant tax deductions to companies working in this field. A portion of the expenses incurred to develop new products, processes or services can be deducted from the tax base. In addition, patent protection expenses can also benefit from tax advantages.

Investment incentives are another factor that attracts companies in Germany. There are additional tax deductions especially for investments made in the eastern regions and in the renewable energy sector. Incentives for environmentally friendly technologies also support companies in achieving their sustainability goals. There are also special tax breaks and grant programmes for SMEs.

Companies in Germany can also benefit from funds and grants from the European Union. In particular, the EU supports companies investing in areas such as digitalisation, green energy and innovation. These incentives encourage entrepreneurs to develop more sustainable and innovative business models in Germany.

 

Advantages and Challenges of the Tax System in Germany

The tax system in Germany offers several advantages for both domestic and foreign entrepreneurs. Firstly, the system is transparent and predictable, making it easier for companies to carry out long-term financial planning. Tax regulations are clearly defined and digital tax filing systems (such as ELSTER) make transactions fast and efficient. Furthermore, R&D incentives, investment incentives and special tax advantages for certain sectors make it attractive to start a business in Germany. In particular, double taxation agreements provide a significant advantage for businesses operating internationally.

However, Germany’s tax system brings some challenges. High tax rates can increase costs, especially for small and medium-sized enterprises (SMEs). Corporate tax, value added tax (VAT) and income tax rates are higher than in other European countries. Moreover, the complexity of tax legislation may cause businesses to incur additional costs and bureaucratic burdens in the harmonisation process. As financial transactions and accounting records need to be meticulously maintained, companies often need professional tax advisors.

In general, while the tax system in Germany provides a stable and reliable business environment, high tax rates and complex legal processes are among the elements that need to be considered for businesses. Therefore, it is important for entrepreneurs planning to do business in Germany to make strategic planning with expert support in order to make the most of the opportunities offered by the tax system.

 

Tax Audits and Criminal Sanctions in Germany

The tax system in Germany is highly regulated and tax evasion is considered a serious offence. Therefore, the tax authorities regularly audit companies. During audits, the financial records of companies are examined in detail and it is checked whether the tax base is calculated correctly. Companies caught in tax evasion may face serious consequences.

Both administrative and criminal sanctions can be imposed as penalties for tax evasion. Administrative sanctions include additional tax, delay interest, tax penalties and tax assessment. Criminal sanctions are more severe and may result in imprisonment, fines and ban from commercial activity.

Being prepared for tax audits helps companies minimise the risks they may face. Companies can protect themselves by keeping detailed and up-to-date records, following tax legislation and getting support from a tax advisor.

What Can We Do For You?

As MHR & Partners, we are directly and indirectly active in more than 20 countries worldwide. We aim to operate with 10 branches in 100 countries in 10 years. We offer you end-to-end consultancy and support services in establishing a company, obtaining a residence permit, and in all operational processes abroad, primarily financial issues.

Our priority is to provide consultancy services to companies with a growth vision and business strategy abroad. We attach particular importance to the uninterrupted continuation of our services with the assurance of MHR & Partners (Mühür YMM AŞ) after the company establishment stages. Our core mission is to be a safe harbor and provide sustainable services.

We want to be a bridge to our customers’ business plans for growth and development, even in the most remote parts of the world.

To establish a business in Turkey or Europe (Germany, The Netherlands, Belgium, UK, Romania, Bulgaria, Montenegro), you can contact Sworn-in Certified Public Accountant Mehmet Akif Özmen directly (+90 542 830 3408 or akif.ozmen@mhrpartner.com).

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]]> Export Value-Added Tax (VAT) Refund Guide For Turkey https://mhrpartner.com/en/export-value-added-tax-vat-refund-guide-for-turkey/ Sun, 02 Apr 2023 14:13:45 +0000 https://mhrpartner.com/?p=21149 MHR & Partners Academy Exports ranks first in Turkey’s source of foreign currency revenues. One of the issues that exporting companies in Turkey are most curious about is how to collect VAT refund receivables in exports. In this guide, we clarify the issues that taxpayers are curious about the export VAT refund. What is Export VAT Refund? Value Added Tax …

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MHR & Partners Academy

Exports ranks first in Turkey’s source of foreign currency revenues. One of the issues that exporting companies in Turkey are most curious about is how to collect VAT refund receivables in exports. In this guide, we clarify the issues that taxpayers are curious about the export VAT refund.


What is Export VAT Refund?

Value Added Tax (VAT) is a type of tax levied on the final consumer. There is a delivery of goods or services between companies until it reaches the final consumer. The companies collect the Value Added Tax from the buyer as responsible and declare the remaining amount as responsible after deducting the VAT amount paid by them.

In cases where companies do not calculate or collect VAT in the deliveries they have made within the scope of the full exemption in the VAT law, they can request the return of the VAT amount they have paid or burdened from the tax office. The issues in the VAT General Communiqué are valid when requesting VAT refund.

In VAT legislation, deliveries within the scope of full exemption are listed. Export deliveries are also within the scope of full exemption. The VAT amount that is incurred for export deliveries and cannot be eliminated through discounts can be refunded.

Amount Limits in Export VAT Refund Claim

VAT amounts not exceeding 5.000 TL (10.000,00-TL to be applied in returns arising from transactions after 01.05.2022) can be refunded in cash without the need for a Certified Public Accountant or Tax Inspection Report. In cash refund requests exceeding this amount, a Certified Public Accountant or Tax Inspection Report is required.

The Path to be Followed in Cash VAT Refund Requests

VAT Law No. 3065 (11/1-a) Article (10.000,00-TL to be applied in refunds arising from transactions after 01.05.2022) in cash refund requests exceeding 5.000 TL related to the export of goods made within the scope of Article (10.000,00-TL), the stages to be followed by taxpayers and the issues regarding the refund process are given below.

 

1. Determination of VAT Declaration Period

According to Article (11/1-a) of the Value Added Tax Law, export deliveries and services related to these deliveries and services performed for customers abroad are exempted from value added tax. According to Article (12/b) of the same Law, in order for a delivery to be considered as an export delivery, the goods subject to delivery must leave the customs territory of the Republic of Turkey and arrive in a foreign country.

The exemption related to the export of goods is declared with the VAT declaration for the taxation period that includes the “closing date” of the customs declaration, which is the date of export.

In export deliveries, the date on which the customs declaration is closed by the border customs is accepted as the date of export realisation.

Accordingly, the event giving rise to the exemption and VAT refund right in export deliveries occurs on the date when the exported goods leave the Turkish Customs Territory. Therefore, even if the date of issuance of the export invoice and opening of the customs declaration is earlier, export deliveries should be declared in the taxation period that includes the actual export date when the goods leave the Turkish Customs Territory.

– The export price shall be converted into TL at the foreign exchange buying rate of the Central Bank of the Republic of Turkey, which was first published before the closing date of the customs declaration.

– Journal entries must be made taking into account the “actual export date”. The export price should be written in the declaration, including freight and insurance costs.

On the other hand, unless the goods are actually exported – except for the delivery of the goods at the seller’s workplace in Turkey – the sales contract is considered incomplete. Then, no accrued profit can be mentioned. In this case, since the sale is realised as of the date the goods leave the customs territory, the income is accrued as of this date. The fact that the invoice is issued first in export transactions has no effect on the period in which the income is generated in terms of corporate tax. In terms of determining the period of income, the taxable event in export transactions occurs on the date the goods leave the customs territory. In this case, the earnings of the company arising from the mentioned exports should be associated with the period earnings based on the date the goods leave the customs territory.

2. VAT Return Request Process

Article 32 of VAT Law No. 3065 states:

“The Value Added Tax shown on invoices and similar documents related to the transactions exempted from tax pursuant to Articles 11, 13, 14 and 15 of this Law and subparagraph (s) of paragraph (4) of Article 17 shall be deducted from the Value Added Tax to be calculated over the taxable transactions of the taxpayer. In cases where the taxable transactions do not exist or the calculated tax is less than the tax to be deducted, the Value Added Tax that cannot be deducted is refunded to those who make these transactions according to the principles to be determined by the Ministry of Finance and Customs, provided that it is requested until the end of the second calendar year following the period in which the transaction took place.” This provision is valid as of 01.01.2019.

In the return requests arising from the deliveries and services subject to the reduced rate, the application must be made by the end of the year following the taxation period in which the delivery and service is performed (with the VAT declaration of November of the following year).

Taxpayers can make a VAT refund request with a standard refund request petition throughthe internet tax office after submitting the VAT Declaration No.1.

The following documents are required in the export VAT refund request:

– Standard refund request petition

– Sales invoices list

– Customs declaration or list (Free zone transaction form for exports to the free zone, electronic trade customs declaration for exports via mail or cargo)

– VAT list to be deducted for the period in which the export is declared

– Loaded VAT list

– Return Requested VAT Calculation Table.

All of the above-mentioned lists are sent virtually via the internet tax office. However, for cash refunds over 5 thousand (10.000,00-TL to be applied for refunds arising from transactions after 01.05.2022), if a Certified Public Accountant report is written, copies of export invoices and Customs Exit Declarations are attached to the report.

3. Evaluation of VAT Refund Request


The fulfilment of the VAT refund request to be made by the taxpayer by the tax office is as follows:

1)  The VAT refund request petition and the documents listed above are completed and uploaded to the VATIRA system.

2) “VAT Refund Control Report” is generated by KDVIRA system.

3) Some documents need to be confirmed.

4) The following conditions (Collateral / Certified Public Accountant Report / Tax Inspection Report) are expected to be realized.

a) VAT Refund Against Collateral

In the cash refund requests of the taxpayers arising from this transaction, VAT refund is made if collateral is shown without submitting the Certified Public Accountant report. The collateral in question is resolved according to the result of the tax inspection report or Certified Public Accountant report.

In the event that the Certified Public Accountant report related to this return is not submitted within six months from the date of VAT refund against collateral, the collateral in question is resolved according to the result of the tax inspection report.

b) VAT Refund Based on Sworn Financial Advisor Report

In the cash refund requests of the taxpayers arising from this transaction, the cash refund request is fulfilled if the Certified Public Accountant report is submitted.

c) VAT Refund with Tax Inspection Report

In the following cases, the refund requests of the taxpayers are fulfilled according to the result of the tax inspection report issued by those authorised to carry out tax inspection.

– They want to receive their refunds as a result of the tax inspection report,

– Failure to provide collateral or declare that they will receive their refunds with a Certified Public Accountant report

d) Returns to Taxpayers with “HİS Certificate”

“HİS Certificate” is an application that aims to quickly finalise the VAT refund requests of taxpayers who pay their taxes on time, are not on the black list in terms of VAT application and are called large taxpayers in terms of their financial statements.

The refund requests of the taxpayers holding the HİS certificate are fulfilled regardless of the amount, without collateral, Tax Inspection Report or Certified Public Accountant report.

In the cash refund requests of these taxpayers, the amounts that are not found to be negative as a result of the query made by the KDVIRA system regarding the submitted documents are refunded within five business days following the completion of the report. The refund of the VAT amounts related to the purchases for which a negativity is detected is fulfilled provided that the negativity is eliminated or the required conditions are met.

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]]> Taxation of Dividend Transfers Between Companies Established in Turkey and Germany https://mhrpartner.com/en/taxation-of-dividend-transfers-between-companies-established-in-turkey-and-germany/ Sun, 02 Apr 2023 09:20:53 +0000 https://mhrpartner.com/?p=20955 MHR & Partners Academy 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?  …

The post Taxation of Dividend Transfers Between Companies Established in Turkey and Germany first appeared on MHR & Partners.

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MHR & Partners Academy

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.

  1. 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.

  1. 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.

  1. 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.

  1. 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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The post Taxation of Dividend Transfers Between Companies Established in Turkey and Germany first appeared on MHR & Partners.

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