• Double Taxation Avoidance Agreements and Taxation of Controlled Foreign Companies ("CFC") in Turkey
  • August 23, 2012
  • Law Firm: HERDEM&Co. Attorneys At Law - Istanbul Office
  • CFC rules of Turkey have came into effect with 5520 numbered Corporate Tax Law (“CTL”) of Turkey by being published in 26205 numbered Official Gazette dated 21 June 2006.

    According to the article 7 of CTL, in some circumstances, the profit of Turkish company or the share capital of the legal person is subject to taxation in Turkey for the foreign company's profit even not paid any dividend.

    Consistent with this regulation it has been aimed to prevent the tax inequality in non-commercial and non-industrial investments between the taxpayers investing in Turkey and forwarding the third low-tax countries.

    Accordingly, the presence of the foreign controlled company is accepted as it is subject to presence of the following conditions;

    • Unlimited taxpayer Turkish company and/or real persons should directly or indirectly, joint and/or severally control at least  %50 of foreign company.
    • Minimum 25% or more of the gross income of the control foreign company is comprised of passive income such of the interest, royalty, dividend, profit, rent and sale of security.
    • CFC shall bear income and corporate tax ( total tax burden not tax rate) lower than 10%. Taxes other than income or corporate income tax does not count towards the tax burden.
    • The annual total gross revenue of the CFC exceeds the foreign currency equivalent of TRY 100,000.

    In practice and  the detection of  controlled foreign company, in cases where indirect participation's comprised in several stages, the relationships with shareholders are be considered as a whole, to the final indirect participation and it is not necessary either real persons are related with legal persons or not.

    On the other hand commercial or industrial activities of foreign companies that derive the dividend of another foreign company does not change the nature of passive income of the company. 

    However, in cases where all the income of a foreign company is derived by commercial, agricultural or professional activity (even the other conditions occurs), this company is not deemed as a CFC.

    All of the above conditions take place, the unlimited taxpayer Turkish resident company's attributed income must be included in taxable income as of the month of the closing of the accounting period of the foreign subsidiary. In case of dividend distribution provided by foreign company, the previously taxed portion is not subject to corporate taxes again.

    The corporate tax, income tax or similar taxes that are paid in the residing country of foreign company, will be deducted from the corporate tax that shall be calculated on earnings of CFC will be taxed in Turkey in accordance with the provisions of article 33 of Corporate Tax Law.

    The provisions of double taxation avoidance agreements do not preclude taxation of CFCs. In other words, CFCs shall be subject to taxation regardless of such agreements.

    According to the provisions double taxation avoidance agreement; only in case of exemption of dividend in Turkey, the only amount corresponds to the distributed dividend that has been taxed and distributed by CFC shall be refunded.