Will Turkey Be An Alternative For International Holding Structures?

Corporate Tax Law No. 5520 introduced provisions to the Turkish tax legislation designed to encourage the establishment of international holding structures in Turkey. This "international holding structure" refers to companies whose main activity is participating in foreign companies. The law is meant to attract foreign companies to invest in Turkey, and to incentivize local investors.

Pursuant to the regulations specified in Clauses (b) and (c) of Article 5 and Clause 4 of Article 30 of the Corporation Tax Code, if investments abroad are carried out through resident joint stock companies incorporated in Turkey (holding companies, investment companies), they enjoy a participation income exemption under certain conditions. An advantage is introduced on dividend withholding tax as well.

Corporation tax exemption granted to dividend income acquired by holding companies incorporated in Turkey Participation income acquired by companies participating in the capital of joint stock companies, and limited companies whose legal or business headquarters are not located in Turkey, shall be exempt from corporation tax only if:

The company that holds the participatory (interest) share owns at least 10% of the paid-in capital of the participation abroad;

The participatory (interest) share is held for at least 1 year on a continuous basis, as of the date the income is acquired;

The participation income acquired abroad bears a total tax burden of at least 15%, like income and corporation tax, including taxes paid over earnings used as the source of dividend distribution pursuant to the tax laws applicable in the country where the entity participated in is resident. If the main activity of the company participated in is providing financial or insurance services or securities investment, including financial leasing, it should bear a total tax burden at least equal to the corporation tax applicable in Turkey (20%), pursuant to the tax laws applicable in the country where the entity participated in is resident; and

The participation income is transferred to Turkey by the date of the corporation tax return for the period in which the participation income is acquired.

Corporation tax exemption granted to earnings acquired by disposing of the overseas participatory (interest) shares of the holding company incorporated in Turkey

Participation income acquired by companies that participate in the capital of joint stock companies and limited companies whose legal or business headquarters are not located in Turkey, and generated from disposal of this participation, shall be exempt from corporation tax if:

The entity acquiring the income is a resident joint stock company in Turkey;

75% or more of the total assets of the holding company - excluding liquid assets - consists of the shares of a joint stock or limited company that has not had its legal or business headquarters in Turkey for at least 1 year on a continuous basis, as of the date the income is acquired;

The minimum participation ratio is 10%; and

The participatory (interest) shares disposed of are held for at least two full years.

Low withholding tax applicable on dividend distribution of holding companies incorporated in Turkey Dividends distributed to nonresident shareholders that have the status of a joint stock or a limited company by holding companies that have resident joint stock company status in Turkey, on participation earnings acquired by these holding companies from their participation abroad and exempted from corporation tax as defined above, shall be subject to withholding tax of only 7.5%.

It is evident that the international holding regime brought into the Turkish Tax System, as applied in certain other countries, introduces serious tax advantages regarding international holding structures, especially for foreigners. In our opinion, this regime will become a source of interest for holding structures in Turkey, and will become much more visible internationally in the years ahead.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Mr Herguner Bilgen Ozeke

Herguner Bilgen Ozeke

Suleyman Seba Caddesi 55-57

Akaretler Siraevler

Besiktas

Istanbul

34330

TURKEY

E-mail: [e-mail]

URL: www.herguner.av.tr

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