GRANT THORNTON PROFILE OF TURKEY FOR BUSINESSMEN DOING BUSINESS IN TURKEY

GRANT THORNTON PROFILE OF TURKEY FOR BUSINESSMEN DOING BUSINESS IN TURKEY December 2009 1

This document reflects current information as of August 2009. The latest available version may be followed at our web site : www. gtturkey.com If you would like more detailed on the subjects covered in this business profile, please do not hesitate to contact Grant Thornton offices are follows: Grant Thornton Turkey Address : Abide-i Hürriyet Cad, Bolkan Center, C Blok, No. 211, Kat 3, Sisli, Istanbul Phone : (0212) 373 00 00 aykut.halit@gtturkey.com This booklet has been prepared by Grant Thornton to provide foreign businessmen with introductory information about Turkey. The information and views appearing in this booklet may change in parallel to changes in the regulations. For a final opinion resort must be made to related professional advisers. 2

1 Introduction 5 1.1 Geography 5 1.2 Population 6 1.3 Currency 7 1.4 The Political System 7 2 International Economic Relations 9 2.1 The Legal System 9 2.2 Court System 9 2.3 Foreign Investment 9 2.4 Turkish Commercial Law TCL 10 2.5 Uniform chart of Accounts 10 2.6 Capital Market Board (CMB) Regulations 11 2.7 Banks and financial institutions like leasing and factoring companies 11 2.8 Insurance companies 11 2.9 Social security 11 2.10 Labour Law 12 3 Business Entities 13 4 Grants and Incentives 15 4.1 Research and Development Expenditure 15 4.2 Free Trade Zones 15 4.3 Techno Parks 15 4.4 Incentives to increase Investment and Employment 16 4.5 General Investment Encouragement Program 16 4.6 State Aid to SMEs 16 4.7 KOSGEB Support for SMEs 17 5 Taxation 17 5.1 Corporation Tax 18 5.2 Significant Corporate Taxation Issues 23 5.2.1 Taxation of foreign transportation companies 23 5.2.2 Thin capitalization 23 5.2.3 Transfer pricing 23 5.2.4 Payments to Havens 25 5.3 Individual Income Tax 25 5.3.1 Income Tax on Salaries 25 5.3.2 Self employed individuals 26 5.3.3 Wages remitted from abroad 26 5.4 Withholding taxes 27 5.4.1 Withholding tax rates (Individuals) 27 5.4.2 Withholding tax rates (Corporations) 28 5.4.3 Corporate Withholding Tax on Dividends 29 5.4.4 Withholding tax on long term construction works 29 3

5.5 Value Added Tax (VAT) 29 5.5.1 General 29 5.5.2 Tax Rates 30 5.6 Stamp Duties 31 5.7 Banking and Insurance Transaction Tax (BITT) 31 5.8 Special consumption tax 31 5.9 Property Tax 32 5.10 Resource Utilization Support Fund (RUSF) 32 6 Mergers, reduction of capital, share swap 32 6.1 Merger 32 6.2 Reduction of capital 33 6.3 Share Swap 34 7 Real Estate Law 34 7.1 Real estate acquisition by foreign individuals 34 7.2 Real estate acquisition by foreign legal entities 34 7.3 Real estate acquisition by Turkish subsidiaries of foreign legal entities 35 7.4 Taxes on acquisition of real estate 35 7.5 Latest developments 35 8 Competition Law 36 Appendix 1 : Double Tax Treaties 37 Appendix 2 : Bilateral Social Security Agreement 40 Appendix 3 : Free Trade Zones and Techno Parks 41 Appendix 4 : First Priority Regions for Development 42 4

1 Introduction 1.1 Geography Turkey has land area of 779,452 sq.km, surrounded by a long coastline, the Black Sea in the north, the Marmara Sea and the Aegean Sea in the West and the Mediterranean in the South. To the East Turkey has borders with Georgia, Armenia, Iran, Iraq and to the South East with Syria. Bulgaria and Greece borders the Thrace region in the North West. 5

1.2 Population According to the latest census (2007), the population of Turkey as of December 2007 has reached 70.6 million, increasing at an annual rate of 1.2 percent. Around 70.5% (49.7 million) was urban population and the rest 29.5% (20.8 million) lived in rural areas. Male and female population numbered respectively 35.3 million and 35.2 million. The average age was 28.3 years and one half of the population was under 28 years. Major cities 2007 Population % of total cities over 1,0 million in 000 s population Istanbul 11.174 15.8 Ankara 4.141 5.9 Izmir 3.175 4.5 Bursa 1.980 2.8 Adana 1.611 2.3 Konya 1.412 2.0 Gaziantep 1.343 1.9 Antalya 1.128 1.6 Mersin 1.056 1.5 --------- ------- Sub-total 27.020 38.3 --------- ------- Cities between 500 1000 Şanliurfa 919 1.3 Kayseri 895 1.3 Izmit 894 1.3 Diyarbakir 855 1.2 Eskişehir 625 0.9 Samsun 725 1.0 Hatay 681 1.0 Balikesir 649 0.9 Sakarya 594 0.8 Aydin 537 0.8 Van 512 0.7 --------- ------- Sub-total 8.727 12.4 --------- ------- Total 35.747 50.7 --------- ------- 6

Division of the population by sectors is summarized below: % Industry 31 Agriculture 10 Services 59 ------- Total 100.0 ------- On basis of the above statistics published by the State Institute of Statistics for year 2007 over 50% of the Turkish population lived in cities with population of over 500.000. 1.3 Currency The currency unit of the Republic of Turkey is the Turkish Lira. The value of YTL against major foreign currencies has been allowed to fluctuate on basis of international currency movements. Developments in the value of the Turkish Lira over the last 5 years were as follows: As of 31 December 2002 2003 2004 2005 2006 2007 2008 2009 Euro 1.70 1.75 1.83 1.61 1.85 1.71 2.15 2.18. US $ 1.64 1.40 1.34 1.35 1.41 1.15 1.51 1.52 58 GP Pounds 2.62 2.48 2.58 2.35 2.76 2.33 2,20 2.44 1.4 The Political System Turkey is a republic in which, power is divided between the legislature, the executive and the judiciary. Under the 1982 constitution the Turkish parliament (TBMM) is the sole legislative body, exercising supreme power. Executive power is exercised by the President and the Council of Ministers, in accordance with the constitution and the law. The Judiciary operates independently on behalf of the state. The parliament (TBMM) consists of 550 deputies who are directly elected by universal adult suffrage. Elections take place every four years or less at the discretion of the government. The Council of Ministers (the cabinet) is headed by the Prime Minister and is responsible to the Parliament. After an election the President invites the leader of the largest party to form a government. If successful, he or she is then appointed Prime Minister and nominates ministers who are in turn approved by the President. The President is elected by the members of the parliament for a period of seven years. 7

1.5 International Economic Relations Turkey has been a member of The UN since 1946, The WHO since 1995 The NATO since 1951, The OECD since 1961, Joined the Customs Union with EU as from January 1996, EU Council decided to open talks for accession to full EU membership in October 2005 In addition Turkey has bilateral agreements on preferential free trade, on the promotion and protection of investments, on the prevention double taxation between the countries (see Appendix 1), and on social security (see Appendix 2). 1.6 Turkish economy Prior to 1980 the Turkish economy was strongly influenced by the State through the State Economic Enterprises which were active in textiles, iron and steel production, mining, petroleum refining, communications, port operation, shipping and other sectors. After 1980 the economy started to undergo transition from a nearly closed economy to an export oriented economy which meant that the share of manufacturing industry led by the private textile sector began to increase. Simultaneously increased were years of high inflation which ranged from 45% to 106% per year. Nevertheless with the exception of the years 1984, 1999 and 2001 the GNP showed increases in real terms of 1.5% to 9.9% per year. GNP per head adjusted to international standards has been calculated to around USD 9.000. The increase of GNP in real terms from between 2002 2007 varied between 5% to 9.9%. The rate of increase came down to 1.1% in 2008 and the expectation for 2009 is minus 3.5%. A growth of 2.0% is forecast for 2010. The elections in November 2002 ended the period of coalition governments and placed a single party Government in power. The pro private attitude of this government added impetus to economic development. Based on the Producer s Price Index inflation came down from around 11.6% per year to expected 4.5% in 2009. The Consumer price index came down from around 9.7% per year to expected 5.5% in 2009. The declared aim of the Turkish Central Bank is to reduce inflation to around 5%. However the revised expectation for both indices for 2010 may be somewhat comparatively higher due to the measures taken to stimulate the economy. 8

2 Legal background 2.1 The Legal System Turkish jurisprudence is split into three main sections: Criminal law, civil law and administrative law. Administrative Law deals with disputes between individuals and legal entities and the departments of the state namely, the local councils and tax and customs authorities. 2.2 Court System The Constitutional Court deals with cases related to the functioning of the rules laid down in the Turkish Constitution. The Court of Appeal (Yargitay) re examines the decisions and judgments taken by Courts of Justice and by Commercial Courts. The Council of State Court (Daniştay) is the last place of review for decisions and judgments given by the Administrative Courts and Tax Courts. It oversees the interpretation of the law by the Other Administrative Courts. 2.3 Foreign Investment The Direct Foreign in Investment Law published on June 17, 2003 guarantees the treatment of foreign investors in Turkey in equal manner as local investors. Currently a foreign investor does not need to obtain advance permission from the authorities in order to invest in Turkey, but has to submit statistical information to the Turkish Treasury after the investment has taken place. Companies with foreign capital are subject to the same Commercial Law and all other laws and are committed to bear the same taxes as their Turkish counterparts. Therefore foreign investors rights come under the protection of the Turkish Constitution including guarantees like no expropriation of property without compensation, transfer of dividends, repatriation of capital, purchase of real estate and employment of expatriate personnel and international arbitration. Accordingly foreign investors are allowed to operate as follows: - Investment in industrial and commercial companies - Portfolio investments - Opening of liason office - Licence, know how, technical assistance and management agreements - International loan agreements Further information please contact www.hazine.gov.tr 9

2.4 Turkish Commercial Law TCL TCL is the law which regulates the business environment. If covers all aspects of business including the regulations for the following: - sole traders - all types of ordinary partnerships and limited liability companies and cooperative companies - commercial registry - commercial and trading name - unfair competition - books of account - agencies - brokerage - shipping and sea transportation - cheques and promissory notes - land transport - insurance A draft TCL has been prepared and has been under discussion for past two years. The draft aims at harmonizing TCL with EU and introduces important changes related to corporate governance, unfair competition, consumer rights, electronic commerce. It also contains far reaching changes related to appointment of company auditors and their qualifications and adoption of International Financial Reporting Standards. Estimations for the time of adoption of the final draft by the Turkish Parliament varies, but an optimistic guess is that it may go into effect as from January 01, 2009. 2.5 Uniform chart of Accounts 4 All companies in Turkey except banks and other financial institutions and insurance companies have to apply the Uniform Chart of Accounts promulgated by the Ministry of Finance. Valuation standards, depreciation methods and provisions for expenses are determined by the Tax Procedural Law (TPL). According to the Law: - Tangible and intangible fixed assets are valued at cost. Up to end of 2005 revaluation was allowed on basis of the rules laid down by the Ministry of Finance. - Stocks may be valued at average cost or on FIFO basis. LIFO is not allowed. - Provision for obsolete, damaged etc. stocks or fixed assets is allowed only if approval of an official committee appointed for this purpose is obtained. - provision for bad debts is not allowed unless it is supported by action in Court. - provision for accrued severance pay to personnel is not allowed. However actual payments made are allowed to be written off. 10

2.6 Capital Market Board (CMB) Regulations The following entities are subject to the regulations of CMB: - companies listed at the Istanbul Stock Exchange - intermediary companies (dealing in purchase and sale of shares), - Real Estate Investment Funds, - Investment Funds and Investment Trusts - Investment companies - Companies more than 250 shareholders CMB companies are subject to International Financial Reporting Standards (IFRS). All entities subject to CMB regulations are subject to independent audit by firms of qualified accountants approved by CMB. 2.7 Banks and financial institutions like leasing and factoring companies. These are regulated by the Banking Regulatory and Supervision Board (BRSB) and are obliged to comply with the accounting and other standards set by BRSB. They are also subject to independent audit by firms of qualified accountants approved by BRSB. 2.8 Insurance companies These are regulated by the Treasury of the Turkish Government and are subject to independent audit by firms of qualified accountants approved by the Treasury. 2.9 Social Security All employees in the private sector companies must be covered by the Social Insurance Institution of Turkey. The coverage of this system comprises: - illness - maternity - disability - old age pension - death and job accidents Citizens of countries with reciprocal social security agreements with Turkey are exempt from the Turkish Social security system. Countries with bilateral social security agreements are listed on Appendix 2. Premiums have also to be paid to the Fund for Unemployment. 11

Social security premiums payable are as follows: % Employee s share - Social insurance 14.0 - Unemployment fund 2.0 Employer s contribution - social insurance 19.5 25.0 - unemployment fund 1.0 Unemployment Fund : Contribution by the State 1.0 Social Insurance premiums are paid on salaries up to a maximum per month which is revised every six months. The current ceiling up to 31.12.2009 is YTL 4,504.50 per month. 2.10 Labor Law The relations between employers and employees are regulated by the Labour Law (nr. 4857). The official working hours in Turkey is 45 hours per week. Overtime may not exceed 270 hours per year. There is a Committee which sets the minimum gross wages. Currently the minimum monthly wage is YTL 693 until 31.12.2009. This limit is subject to revision every six months. Annual Vacation After completion of one year of employment, employees are entitled to a paid annual vacation as follows: Length of Employment Paid Annual Vacation 1-5 years 14 days 5-15 years 20 days 15 and over 26 days Annual vacation days include Saturdays (six days per week). 12

Retirement Pay (Indemnity) Where the employer terminates the employment contract through no fault of the employee departure for military service and in case of female employees, marriage the employer has to pay a lump sum of money based on the latest salary and other benefits and accumulated years of employment. This indemnity is equivalent to 30 days pay for each full year of service starting from the date of employment and is limited by a ceiling fixed by the Government. If the gross salary exceeds this ceiling, the service award is calculated up to the ceiling. Currently the ceiling amount up to 31.12.2009 is YTL 2,365.16 which is adjusted every six months. Employment of Foreign Personnel Expatriates need a work permit from the Ministry of Labour and Social Security and a residence permit from the Ministry of Interior in order to be employed in Turkey. Further information on the web is provided by the Ministry of Labor and Social security. htpp://www.yabancicalismaizni.gov.tr/english/index_eng.htm 3 Business Entities Business may be carried out in a variety of entities as defined in the Turkish Commercial Law: These include : The Joint Stock Company (A.S.) (has limited liability) The private limited company (Ltd. Sirket) Ordinary partnerships Joint Ventures Liaison offices Joint ventures are possible only for specific contracts. Liaison offices are possible only if they are not engaged in commercial activity. Personnel employed in liaison offices are not subject to income tax and therefore less costly to the liaison office. 13

Joint Stock Company (A.Ş.) In an A.Ş. is a company the capital is split up into shares each of equal value, and the liability of the shareholders is limited to the nominal value of the shares. An A.Ş. must have at least 5 (five) shareholders and a minimum capital of YTL 50.000. An A.Ş. company must have a board of directors of minimum three members each of whom must be a shareholder. Each board member has unlimited liability in respect of all taxes and social insurance premiums plus late payment interest and penalties payable by the company. A legal entity (local or foreign) maybe a shareholder in an A.Ş. Annual general meeting must be held each year and accounts are filed at the Commercial Registry together with the minutes of the general meeting. Private Limited Company (Ltd. Şirket) Share capital is not split into shares each of equal value (no share certificates are issued). A Ltd. Şirket may be formed with minimum two and maximum 50 shareholders. Appointment of a board is optional. Shareholders may act as managers or they may decide to appoint a manager who may not be a shareholder. The manager and all shareholders have unlimited liability in respect of taxes and social insurance premiums plus late payment interest and penalties. Registration formalities All A.Ş. and Ltd. Şirket companies must be registered at the Commercial Registry and publicized in the Commercial Gazette. There are documents to be prepared (articles of association etc.) which must accompany the application to the Commercial Registry. All companies must also register with : - the Tax office and have the legal books of accounts duly notarized. - the Chamber of Commerce of the city where they are located. Liaison Offices A liaison office must keep records of its expenditure and income and submit the same to and make them available for inspection by the Ministry of Finance. Liaison offices shall regularly report their activities to the Foreign Investment Directorate of the Treasury; they are allowed to be set up for an initial period of three years which may be extended upon application. 14

4. Grants and Incentives These are summarised below : 4.1. Free Trade Zones Free Trade Zones (FTZ) are accepted as falling outside the boundaries of Turkey for customs duty purposes. Before 06 February 2004 Companies or branches of companies which obtained a permit to operate in FTZ s before 06 February 2004 benefit from the following tax incentives: Profits arising from operating in FTZ are exempt from income or corporation tax but only up to the expiry date of their permits. Although not known definitely it is estimated that most of these permits will expire by latest around 2012. However no exemption will apply to withholding taxes on dividends and withholding taxes payable on other transactions. Wages/salaries paid to personnel employed in these zones are exempt from income tax until 31 December 2008, The exemptions applicable if 85% export is reached will be valid up to the date when EU membership is attained. The Cabinet of Ministers is empowered to reduce the ratio of 85% to 50%. After 06 February 2004 Profits arising from export of products manufactured in these zones are exempt from income or corporation tax until the date when EU membership is attained or the date when the permit expires whichever date happens earlier. Stamp Tax Transactions carried out in FTZ are exempt from stamp taxes, duties and charges until the date when EU membership is attained. VAT Goods and services manufacturer purchased or sold in FTZ are free from VAT. 4.2. Research and Development Expenditure Corporate and individual income taxpayers are allowed 100% of the R & D expenditure as a deduction from their taxable income. Expenditure not deducted in one year may be carried forward to future years as adjusted for inflation. 15

Wages salaries paid to personnel employeed on R & D project are exempt from income tax up to 90% for personnel with a doctorate degree and up to 80% for other personnel. Transactions related to R & D operations are exempt from stamp tax. 4.3 Techno Parks Technology Development Zones (techno parks) are allowed to be set up under the Technology Development Zone Law nr.4691 for promotion of innovations in products and production techniques in information technology to support technology intensive products and to provide the technological basis that will attract foreign investment. Advantages offered by techno parks are as follows: Corporate and income tax exemption from profits derived from R & D and software production until 31 December 2013. Income tax exemption (90% for employees with doctorate degree and 80%for other research/development personnel) on salaries of personnel until 31 December 2013. Social Insurance premium support of equaling 50% of the social insurance premium payable by the employer until 31 December 2013. VAT exemption on software sales. Stamp Tax exemption Grant of capital of TL 100,000 by public authorities. 4.4. Incentives to increase Investment and Employment These incentives promulgated by Law nr.5084 aim at increasing investments and employment in priority regions, namely, provinces where per capita income is below USD1.500. There are around 49 provinces listed as priority regions mainly in the east and south east of the country. Available incentives are summarised below: Income tax support : Income tax exemption for organized industrial zones 100%, for others 80% of income tax payable on salaries of personnel employed by entities which recruit a minimum of 10 employees or by existing entities which employ minimum of 30. Contribution to employers share of social insurance premium of 100% and 80% to same entities which satisfy the requirements for income tax exemption. Grant of land for investment: Entities which intend to employ minimum of 10 employees may be allocated land belonging to the Treasury free of charge. Energy support: This comprises a subsidy amounting to 20% of electricity consumed for entities employing minimum of 10 personnel. Sales of land and property to enterprises for purpose of creating an organized industrial zone are exempt from VAT. 16

New buildings in organized industrial zones are exempt from property tax for a five years. The land registry charges payable in respect dividing or uniting real property in organized industrial zones are not payable. 4.5 General Investment Encouragement Program These were published on 14 July 2009 on basis of the Ministerial Decree 2009/15199. The purpose of this program is to encourage, support and orient investments, in conformity with the objectives of Development Plans and Annual Programs. Upon application the Undersecreteriat of Treasury may grant an Investment Incentive Certificate whereby eligible projects can benefit from the incentives explained below: Exemption from customs duties and levies V.A.T. exemption for imported and domestically purchased machinery and equipment Interest support for investment loans to be used in certain sectors and regions VAT exemption from imported and locally purchased machinery and equipment listed in the Investment Incentive Certificate. Exemption from customs duties and levies on imported and locally purchased machinery and equipment; the VAT exemption is applicable provided investments are made during the investment period shown on the Investment Incentive Certificate. VAT on investment in a Complete Production Plant may also be exempted if approved by the Incentives Department of the treasury. Interest support for Investment Loans. This is applicable only to Investments in regions III and IV; the loan must be from a bank and for a minimum period of one year; the Treasury will meet interest costs of up to equivalent of 70% of the investment for a maximum period of five years. 17

Region I Region II Region III Region IV TR10 TR22 TR52 TR82 Đstanbul Balıkesir Konya Kastamonu Çanakkale Karaman Çankırı (Bozcaada, Sinop Gökçeda hariç) TR21 TR32 TR63 TR90 Tekirdağ Aydın Hatay Trabzon Edirne Denizli Kahramanmaraş Ordu Kırklareli Muğla Osmaniye Giresun Rize Artvin Gümüşhane TR31 TR61 TR71 TRA1 Đzmir Antalya Kırıkkale Erzurum Isparta Aksaray Erzincan Burdur Niğde Bayburt Nevşehir Kırşehir TR41 TR62 TR33 TRA2 Bursa Adana Manisa Ağrı Eskişehir Mersin Afyonkarahisar Kars Bilecik Kütahya Ardahan Uşak Iğdır TR42 TR72 TRB2 Kocaeli Kayseri Van Sakarya Sivas Muş Düzce Yozgat Bitlis Bolu Hakkari Yalova TR51 TR81 TRB1 Ankara Zonguldak Malatya Karabük Bartın Elazığ Bingöl Tunceli 18

4.6 State Aid to SMEs Investments by SMEs can benefit from similar encouragement elements explained in the paragraph above. There are restrictions by sectors and certain upper limits set in respect to total investment amount and the amount of loan to be allocated and so on. 4.7 KOSGEB Support for SMEs Entities operating in manufacturing and employing between 1 to 50 workers may benefit from KOSGEB subsidies (Development organization for small and medium sized entities). The rules and procedures for identifying sub-categories, upper and lower limits, regional support elements, evaluation and approvals for these subsidies have all been specified in the Subsidies Regulations of KOSGEB. 19

Subsidies include, the following : 5 Taxation General Consultancy and General Testing/Analysis for CE Marking Technology Research and Development Information Networks and e-business Machinery and Equipment Intended for Common Use Training Identifying Overseas Markets Overseas Business Trips for Export Purposes Participation in Overseas Fairs at a National Level Individual Participation in overseas Fairs Participation in locally organized international Industry Fairs Participation in locally organized KOSGEB Fairs Project Support provided for export orientation Branding and Promotion Business Development Centers Recruitment of Qualified Personnel Computer software Patents useful models industrial designs Infrastructure and superstructure project support The taxes of major importance in Turkey are as follows: Corporation Tax (Kurumlar Vergisi) Income Tax for Individuals (Gelir Vergisi) Value-added tax (Katma Değer Vergisi) Bank and insurance transactions tax (Banka ve Sigorta Muameleleri Vergisi) Stamp duty (Damga Vergisi) Special consumption tax (Özel Tüketim Vergisi) Property Tax Resource Utilisation support Fund (RUSF) 20

There are various other taxes, such as municipal, taxes, motor vehicles taxes etc. Both corporations and individuals can be either full or limited taxpayers. Full taxpayers are liable for tax on their worldwide income. Limited taxpayers are subject to tax only on their income derived in Turkey Companies are regarded as full tax payers if either their head office or business center is located in Turkey. For individuals, the tax status is determined according to residency. Turkish citizens are accepted as resident unless they have proof of residence abroad. Foreigners are regarded as resident if they stay in Turkey for a continuous period of more than six months in a calendar year other than for reasons of imprisonment, illness or assignment for temporary projects, education etc. In the case of partnerships (joint ventures and consortia) partners residence status is taken into account for tax treatment. Full taxpayers are liable to tax on all of their world income. Limited taxpayers are liable only on their income or profits earned in Turkey. 5.1 Corporation Tax The rate of Corporation Tax is 20%. Tax is assessed on the profits of a company after addition of tax disallowable expenses and deduction of tax exempt income. The accounting year is 31 December, however, permission may be obtained for a different accounting year. This permission is granted by the Ministry of Finance upon application by the taxpayer who should offer an acceptable reason for the different year i.e. seasonality of business or adoption of different accounting period by foreign parent of Turkish subsidiary, etc. Advance Corporation Tax Companies must prepare a statement of income for each quarter and pay tax on the quarterly profits at the rate of 20%. Quarterly declarations have to made by 14 th and payment made by 17 th of the second month following the end of the quarter. 21

Annual corporation tax An annual corporation tax must also be submitted by 25 th and payment made by the end of the fourth month following the accounting year end. The quarterly corporation tax (advance corporation tax) payments are deductible from the final annual corporation tax assessment. Branches of foreign companies Branches of foreign companies (i.e. companies not resident in Turkey) established in Turkey are subject to corporation tax as above only on their income or profits earned in Turkey. Joint ventures A joint ventures of a foreign company with a Turkish entity is subject to corporation tax on its share of profits earned in Turkey. Turkish subsidiaries of foreign companies These are not subject to any favourable tax treatment compared to locally owned companies. Exemptions from Corporation Tax These are shown below: Dividends received from other Turkish resident companies, Dividends received from foreign resident subsidiaries or branches subject to complying with certain conditions Capital gains of holding companies from foreign subsidiaries with certain conditions Earnings of the following funds and companies established in Turkey: - Earnings from portfolio management of investment funds/companies - Real estate investment funds/companies - Venture capital funds/companies - Pension funds - Housing financing funds and assets financing funds, 75% of the capital gains arising from disposal of shares in investee companies and immovable properties provided that companies these have been owned for more than two years; profits resulting from the disposal must not be distributed but must be added to share capital or are transferred to special reserve for minimum of five years. 22

Tax allowable deductions For corporate and income tax purposes an expense is deductible if it relates to the generation of income or the operation of a business. The following items which may be of special interest are allowed as deductions for Turkish tax purposes: Travel and accommodation expenses commensurate to the size of business Meals provided to employees on site, Employer s share of social security contributions (if actually paid in cash) Compensation and losses incurred according to a contract or a court decision, Expenses of leased or owned vehicles that are used for business purposes, Depreciation expenses calculated on basis of the rates and methods of the Tax Procedural Law, Employer s contributions to labor unions and to the private pension plan of the employees (subject to ceiling) Donations to certain institutions and associations for charitable works (up to a limit), Bad debt provisions only if legal action towards enforcing the payment has been taken, Interest paid for business purposes Business losses inherited from a merger/reduction of capital transaction (subject to a limit), Losses incurred in foreign jurisdictions (subject to certain conditions) Disallowable Expenses Disallowable expense items include: Legal reserves and other reserves set aside from profits Tax penalties Late payment interest related to corporate tax and income tax, calculated in accordance with the regulations Interest and foreign exchange losses on disguised capital Disguised profit distribution through transfer pricing Interest paid or calculated on basis of capital Depreciation Rates and Methods of fixed assets As from 01.01.2004 depreciation rates are derived from the depreciation lists prepared by the Ministry of Finance. In general these rates have been based on expected useful lives of related fixed assets. 23

Taxpayers may choose either the Straight-Line or Declining Balance method. Taxpayers who start with the declining balance method are allowed to switch to the straight-line (a reverse switch is not possible). With the declining method, the depreciation rate is twice the rate of straight-line method applied to the net after depreciation balance brought forward at beginning of each year. The ceiling rate is 50%. Below is a summary of the depreciation rates promulgated by the Ministry of Finance which are usually encountered in practice: Straight-Line Useful Life Rate Type of Assets Films, tapes, CD, DVD 2 years 50% Mobile phones, IT software 3 years 33.33% IT hardware, light trucks 4 years 25% Cars, heavy trucks, buses, TV, copiers, camera, start-up costs 5 years 20% Railways, chemical facilities, poultry facilities 10 years 10% Intangible fixed assets 15 years 6.66% Cement facilities, wooden buildings 20 years 5% Energy transmission lines, half-timbered buildings 30 years 3.33% Stone buildings, steel constructions 50 years 2% Fixed assets acquired before January 1, 2004 shall continue to be depreciated on basis of previously applicable rates where taxpayer is free to choose a depreciation rate of up to 20% per year. Carry-forward Losses Tax losses may be carried forward and set off against profits of subsequent two years. There are no loss carry-backs. Returns No further return must be filed by those taxpayers whose income is taxed at source; however, taxpayers may file an optional tax return if they are willing to set off their losses arising from a trading with another line of business. 24

Sample Corporate Tax Calculation Data - Corporate Profit 1,000 - Disallowable Expenses 20 - Corporate Tax base 1,020 - Corporate Tax (20%) 204 Distributable profit and withholding tax assuming 100% dividend distribution Corporate profit 1,000 Corporation Tax (204) 1 st compulsory reserve 5% of profit until 20% of share capital is reached (50) ------- 746 2 nd Legal Reserve 10% of distributable profit which exceed 5% of share capital (say) (76) ------- Net distributable 700 Withholding tax (15%) (105) ------- Distributable net after tax 595 ------- Total tax burden - Corporate Tax 204 - Withholding 105 ------- 309 ------- It has been assumed the whole of profit is distributed to the shareholders. The allocation of reserves are compulsory according to Turkish Commercial Law and these remain in the structure of the company. Please refer to Appendix 1 for preferential withholding tax rates in line with the tax treaties. 25

5.2. Significant Corporate Taxation Issues 5.2.1 Taxation of Foreign Transportation Companies Profits of foreign transportation companies in Turkey are calculated by multiplying their sales revenue by the ratios as follows: Road and railway transportation - 12% Marine transportation - 15% Air transportation - 5% For marine and air transportation, sales revenue of non-resident carriers consists of all the amounts (including passenger ticket fares, freight, cargo carrying and expense allowances) collected by the carrier for the route from departure ports in Turkey to arrival ports in foreign countries (i.e. only transportation which originate from Turkish ports are recognized in revenue calculation regarding marine and air cargo). 5.2.2 Thin Capitalization Where borrowings from related parties exceed three times the equity of a company at beginning of accounting period the interest, foreign exchange losses and other expenses related to the portion which exceeds three times the equity will be disallowed for tax purposes. In case of borrowings from related banks and/or similar financial institutions the ratio is six times the equity. The term related parties refers to shareholders and real or legal persons that own 10% or more of the shares, voting rights or right to receive dividends of a company. Besides, payments or accruals related to the portion of borrowings over three times the equity shall be subject to withholding tax as they are regarded as distributed dividend. Non-cash guarantees provided by related parties, and loans which are obtained from banks/financial institutions by related parties and given over to a company with the same credit terms are out of the scope of thin capital definition. 5.2.3 Transfer pricing Earnings from goods or services traded with related parties on basis of prices or values contrary to the arms length principle will be deemed as totally or partially disguised through transfer pricing. Trading in goods or services include buying, selling, production and construction, renting of assets, borrowing and lending money, and other transactions including payments such as bonuses and salaries. 26

The related parties refer to individual or legal entity shareholders of a company and its members of management to which the corporations or the partners are related, the real persons or institutions to which she is related or that he/she influences directly or indirectly its capital or control. The spouses of the partners, ascending and descending lines of partners and their spouses and the cognates including the third generation and their matrimonial allies are also considered as the related persons. All businesses carried out with persons located in countries or regions announced by the Council of Ministers are deemed to have been carried out with the related persons on condition that the tax system in the country where the income is obtained provides a taxation opportunity that is at the same level with the taxation capacity created by the Turkish tax system. As described in OECD transfer pricing guidelines prices and values in transactions to be carried out with related parties shall be ascertained by using one of the following methods depending on which method is most appropriate to the nature of business: Comparable price method Cost-plus method Resale price method In case it is not possible to reach an appropriate transfer price through any of the foregoing methods the taxpayer use may any other methods considered appropriate to the nature of the business. It is compulsory to keep as proof the records, lists and documents pertaining to the calculations concerning the prices and values determined in compliance with arm s length principle. Upon request of taxpayer it is possible to make an APA (advance pricing agreement) with the Ministry of Finance regarding the method for determination of the price or value to be applied to goods and services traded with related parties. The method agreed upon in this way becomes applicable for a maximum period of three years. Any profit deemed in whole or in part as disguised profit under these regulations is treated as dividend distributed on the last day of accounting period. It is considered as a disallowable expense for corporation tax purposes and also become subject to dividend withholding tax. 27

5.2.4 Payments to Havens All payments made to individuals and legal entities in countries or regions announced by the Council of Ministers (called tax havens) are subject to a withholding tax of 30%. This is not applicable to insurance/reinsurance payments, and principal/interest payments of loans obtained from financial institutions. 5.3. Individual Income Tax Turkish residents are liable to tax on their world income. However, a resident may deduct from its tax liabilities in Turkey the taxes paid on income arising in foreign countries provided the rate of tax in the foreign country does not exceed the rate in Turkey. Non resident individuals are liable to income tax only on their income earned in Turkey. Such income may include, inter alia, income from immovable items like rents and also royalties, technical know how fees, dividends and interest received. 5.3.1. Income tax on salaries An individual whose income consists of salary, bonus etc from only one employer does not have to submit a tax declaration. The employer is responsible to withhold tax from salaries etc. and pay the same over to the tax office. However an individual earning a salary from a second employer has to submit an income tax declaration if the income from second employer exceeds total of YTL 19,800 for the calendar year. Income Tax rates are progressive and subject to revision every calendar year. The rates for 2008 are as follows: Annual income bracket YTL Approximate Euro equivalent Rate of Tax % Up to 8,700 4,100 15 Next 13,300 6,300 20 Next 28,800 13,300 27 ---------- 50,000 ---------- 23,700 Above 50,000 23,700 35 28

5.3.2. Self employed individuals These include individuals carrying on trade or other business or performing professional services on their own account. They are responsible for keeping books of account and documents and filing tax declarations as required by Income Tax Law. Wage/salary and other costs incurred for the generation of income are deductible from earnings. They must also submit quarterly profit declarations and pay tax thereon (advance tax) at the rate of 15%. Quarterly tax declarations have to be made by 10 th and paid by 17 th of the second month following the end of each quarter. Annual income tax declarations have to be submitted by 15 th of the third month (March) following the calendar year end. The income tax due is payable in two installments one in March and another in July. Advance tax payments are deductible from the final assessment at end of the year based on the income bracket and tax rates for income tax as given above 5.3.1. A withholding tax at the rate of 20% has to be applied upon payment of invoices issued by self employed professionals. 5.3.3. Wages Remitted from Abroad Salary of an employee who works for an employer with limited tax liability in Turkey is exempted if salary payments are made as follows: - It is paid by a limited taxpayer employer whose statutory head office and actual business center is outside Turkey. - It is paid out of the employer s earnings from outside Turkey and in foreign currency. - It is not accounted for as cost or expense item in Turkey. The salaries within the scope of this exemption are not subject to tax declaration. In this context salaries of personnel employed in liaison offices are exempt from income tax. However, social insurance premiums must be paid. 29

5.4. Withholding taxes Tax has to be withheld in respect of earnings of individuals and of corporationsat the following rates: 5.4.1 Withholding Tax Rates (Individuals) WT Rate WT Rate for For Resident Non-resident Payment Type Individuals Individuals Professional services - General 20% 20% - Specified copyright payments to authors, artists, etc. 17% 17% Long term construction and repair works 3% 3% Rents from premises used for business 20% 20% Royalties - use of rights 20% 20% - transfer and assignment of rights - 20% Dividends 15% 15% Interests from - private bonds, G-bonds and T-Bills 10% 0% - Turkish Eurobonds 0% 0% - deposit accounts 15% 15% - repo (repurchasing agreement) transactions 15% 15% Capital Gains on Securities - on trading the stocks in Istanbul Stock Exchange within 3 month holding period 10% 0% - on trading investment fund certificates 10% 0% - on private bonds, G-Bonds and T-Bills 10% 0% - on TR Eurobonds 0% 0% - on futures and options contracts 10% 0% 30

5.4.2 Withholding Tax Rates (Corporations) WT Rate WT Rate for Payment Type For Residents Non-residents Professional services - 20% Long term construction and repair works 3% 3% Rents - 20% Royalties - use of rights - 20% - transfer and assignment of rights - 20% Dividends - to the non-residents who is paid through their permanent establishments or representatives in Turkey - 0% - to other non-resident corporations - 15% Interests from: - loans from foreign banks and financial institutions - 0% - loans from other foreign institutions - 10% - private bonds, G-bonds and T-Bills 10% 0% - Turkish Eurobonds 0% 0% - deposit accounts 10% 0% - repo (repurchasing agreement) transactions 10% 0% Capital Gains on Securities - on trading the stocks in Istanbul Stock Exchange 10% 0% within 3 month holding period - on trading investment fund certificates 10% 0% - on private bonds, G-Bonds and T-Bills 10% 0% - on TR Eurobonds 0% 0% - on futures and options contracts 10% 0% All sorts of payments to entities in tax havens - 30% (except for payments to financial institutions, and insurance and reinsurance companies) 31

5.4.3. Corporate Withholding tax on dividends Upon actual distribution in cash dividends are subject to a corporate withholding tax of 15%. Dividends to local company shareholders are exempt from withholding tax but dividends to foreign (non-resident) shareholder companies or foreign individuals are subject to withholding tax. However if the withholding tax rate in the country of the foreign parent is below 15%, say it is 10%, then Turkish withholding tax is also reduced to 10% after compliance with procedure laid down in the tax regulations. Dividends distributed by way of bonus shares are not subject to withholding tax. 5.4.4. Withholding tax on long term construction works Long term means that period of construction project will extend to more than 12 months. Repair, assembly and similar works lasting longer than 12 months also come under the same regime. Works which are not completed within the same accounting year and extend into the following accounting years are also treated as long term. A withholding tax of 3% is applicable on all progress payments made under long term construction works. Progress payments and expenses incurred on each project have to be accumulated until the date when the project is accepted as completed by an appropriate take-over completion protocol or certificate. The accounting year in which the take over is accepted is considered as the final year of the project and the difference between all project income and accumulated expenses is transferred to the accounts either as profit or loss for inclusion in the corporation tax declaration of the same year. The accumulated 3% withholding taxes on progress payments are deductible from the tax liability due in the year of completion of the project. 5.5. Value Added Tax (VAT) 5.5.1 General Value added tax is levied on all goods and services supplied in Turkey within the scope of commercial, industrial, agricultural and professional activities and on the import of goods and services. 32

VAT paid by a taxpayer entity on purchase and/or import of goods and services is deductible from the VAT calculated on its sales of goods and services and the difference is accounted for the tax office. Hence the ultimate tax burden of VAT falls on the end user of goods and services. VAT is declared and paid monthly. In the event that the input VAT exceeds the output VAT, the balance is carried forward to be offset in the following months. There is no refund in cash of the VAT so carried forward. 5.5.2 Tax Rates The standard VAT rate is 18%. Presently, reduced rates (VAT Law: List I -1% and List II- 8%) are applicable to two different groups of goods and services. List I contains goods such as: agricultural products (dried food, cotton, wheat, olives), newspapers, magazines, used cars, houses under a size of 150 square meters. List II contains goods and services such as: basic food items (milk, macaroni, oils, poultry and fishery products), medicines, medical equipment, books, textile and leather products, shoes bags, carpets, natural gas. Exemptions VAT exemptions include but not limited to the following examples: Exports of goods and services Certain types of transit transport and transportation between Turkey and foreign countries Deliveries of sea, air and railway transportation vehicles Services rendered for sea and air transport vehicles in seaports and airports Deliveries and services to those who perform gold, silver and platinum prospecting, processing, enrichment, and refining activities Petroleum exploration activities in line with the Petroleum Law Deliveries of machinery and equipment to taxpayers who possess an Investment Incentive Certificate, Services for pipeline transport of foreign crude oil and gas, and crude oil and gas products, Transactions of banks and insurance companies within the scope of Banking and Insurance Transaction Tax Sales of investments and immovable properties which are held for over two years by corporation Diplomatic immunity 33

In cases where a residual amount of VAT arises as a result of above exemptions this residual amount may be refunded to taxpayer after an examination by the tax office. Sworn Financial advisers are permitted to certificate VAT refunds subject to certain limits and principles. 5.6. Stamp Duties Stamp duty is charged on a wide range of legal documents such contracts, promissory notes, letters of guarantee etc. Stamp duty may be either fixed or proportional. Proportional rates range between 0.15% to 0.75%, examples are - Contracts, guarantee documents etc 75% - Rent contracts 1.5% - Gross salaries 0.6% 5.7. Banking and Insurance Transaction Tax (BITT) Banks, insurance and reinsurance companies are exempted from VAT. However, all transactions of banks and insurance companies are the subject to the BITT. The BITT arises on all income of banks and insurance/reinsurance companies (interest, commission, service charge etc). Standard rate of the tax is 5%. Banks, bankers, insurance and reinsurance companies, finance companies, factoring companies are the taxpayers. They have to declare their monthly taxable transactions until 15 th day of the following month. 5.8. Special Consumption Tax This tax is levied on four group s (lists) shown below. Each good on the lists is subject to the tax at different rates: List I covers petroleum products, natural gas, lubricating oil, solvents and derivatives of solvents List II covers automobiles and other vehicles, motorcycles, planes, helicopters, yachts. List III covers tobacco and tobacco products, carbonated and alcoholic beverages and soda ash. List IV is related to durable consumer articles and luxury goods. The tax is charged only once at importation and/or production stages of the products. Examples of tax rates are : - 20% for white and brown durable goods - 27% for alcoholic beverages - 58% for Tobacco products - around YTL 1.30 per litre of gasoline - YTL 0.78 per litre of motorin 34