Foreign investment in Turkey has been on a rising trend over the years, mainly driven by the country's advantageous strategic location, sizable consumer base, and investor-friendly business environment. However, as foreign investors seek opportunities in Turkey, it is crucial for them to have a clear understanding of the diverse tax regulations they are subject to in the country. Here, we will offer a comprehensive overview of the taxes applicable to foreign investors in Turkey, shedding light on key aspects and significant considerations.
Foreign investors who do not reside in Turkey are subject to limited tax liability for the rental income and sale of their real estate properties. Additionally, the leasing and sale of real estate may be subject to Value Added Tax (VAT) in certain circumstances. The taxes applicable to foreign investors in Turkey can be listed as follows:
Title Deed Fees
During the transfer of real estate, transfer tax is levied. The taxpayers for this tax are both the transferor and the transferee. The tax rate is the same for both parties and is determined as 4% of the sales price. The fact that the buyer is a foreign individual or legal entity does not change the transfer tax rate. Transfer tax is applicable to all types of real estate (residential, commercial, land, etc.) in Turkey.
Property Tax
According to real estate law, any property, whether residential, commercial, or land, within the borders of Turkey is subject to property tax. The taxpayer is the owner of the property. Therefore, foreign individuals who purchase real estate in Turkey are required to pay property tax. The property tax rates are as follows: 0.1% for normal areas for buildings, 0.2% for commercial properties, 0.3% for land, and 0.1% for agricultural land. If the property is located within the borders of a metropolitan municipality or its environs, the rates are doubled. The property tax payment obligation starts one year after the acquisition of the property, and payments are made in two equal installments in May and November.
Taxes on Income
Foreign investors can earn two types of income from real estate: rental income and property sale income. The tax treatment varies depending on whether the property owner is a foreign individual or a company.
Rental Income from Property
If the recipient of rental income is a foreign individual, it is subject to real estate income tax. If there is no double taxation agreement in force between the Republic of Turkey and the country where the foreign property owner resides, the rental income is subject to taxation in Turkey. If such an agreement is in force, the relevant provisions of the agreement will apply.
Income from Property Sale
If a foreign individual engages in frequent buying and selling procedures, the gains from property sales are considered as commercial income, and the income derived from the property sale is subject to capital gains tax.
Rental Income Earned by Companies
If rental income is earned by a company established in Turkey, it is considered as commercial income. For rental income, companies are subject to corporate income tax, and they can benefit from deductions based on personnel and financial expenses. For the year 2022, the corporate income tax rate is 23%, and for the year 2023, it is 20%.
Income from Property Sale Earned by Companies
As mentioned earlier, corporate income is treated as commercial income for companies. As such, the deductions mentioned above are subtracted from the property sale income.
Rental Income Earned by Foreign Companies
Foreign companies operating in Turkey are considered as limited taxpayers. They are subject to tax withholding on rental income earned from properties or buildings owned within the borders of Turkey. Limited taxpayers are required to apply a withholding tax rate of 20% to rental payments. The taxpayer must submit a tax declaration and report the rental income to the tax office.
Income from Property Sale Earned by Foreign Companies
When limited taxpayer foreign companies sell their properties in Turkey, the income earned is considered as corporate income and is subject to corporate income tax. As previously mentioned, whether this gain is considered as commercial or capital income depends on the nature of the company's activities. The income from property sales is taxed at a rate of 23% for the year 2022 and 20% for the year 2023.
Inheritance and Transfer Tax
If a foreign individual's property in Turkey is transferred or inherited to another foreign individual, inheritance and transfer tax is applied regardless of the country of residence of the transferee. Since the transfer transaction takes place within the borders of Turkey, the foreign country's residence is not relevant. The tax treatment is not affected by whether the parties to the transaction are real or legal persons. The inheritance and transfer tax are subject to an increasing rate tax system.
It is important to note that tax regulations may change over time, and foreign investors should seek professional advice from tax experts or consultants to ensure compliance with the latest tax laws and to optimize their tax planning in Turkey. Understanding the tax implications is crucial for foreign investors to effectively manage their investments and ensure legal compliance in the Turkish market.
With its strategic location, diverse economy, and business-friendly environment, Turkey offers a wealth of investment opportunities for foreign investors. However, navigating the intricate tax landscape can be challenging without the right support.
At our firm, we ,as tax lawyers in İstanbul, specialize in providing comprehensive tax consultancy services for foreign investors in Turkey. Our team of experienced tax experts is well-versed in the intricacies of Turkish tax laws, ensuring that you navigate the tax landscape with confidence and ease. You can contact us to schedule a consultation and discover how we can optimize your tax strategy in Turkey. Unlock the full potential of your investments with our expert guidance.
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