INCOME TAX:
Taxable Income:
The income tax is levied on the income of individuals. The term individuals mean natural persons. In the application of income tax, partnerships are not deemed to be separate entities and each partner is taxed individually on their share of profit. An individual’s income may consist of one or more income elements listed below:
- Business profits,
- Agricultural profits,
- Salaries and wages,
- Income from independent personal services
- Income from immovable property and rights (rental income)
- Income from movable property (income from capital investment)
- Other income and earnings without considering the source of income
Tax Liability:
In general residency criterion is employed in determining tax liability for individuals. This criterion requires that an individual who has his place of residence in Turkey is liable to pay tax for his worldwide income (unlimited liability). Any person who remains in Turkey more than six months in a calendar year is assumed as a resident of Turkey. However, foreigners who stay in Turkey for six months or more for a specific job or business or particular purposes which are specified in the ITL are not treated as resident and therefore, unlimited tax liability does not apply to them.
In addition to residency criterion, within a limited scope, nationality criterion also applies regardless of their residency status, Turkish citizens who live abroad and work for government or a governmental institution or a company whose headquarter is in Turkey, are considered as unlimited liable taxpayers. Accordingly, they are subject to the income tax on their worldwide income.
Non-residents are only liable to pay tax on their income derived from the sources in Turkey (limited liability). For tax purposes, it is especially important to determine in what circumstances income is deemed to be derived in Turkey. The provisions of Article 7 of the Income Tax Law deal with this issue. In the following circumstances, the income is assumed to be derived in Turkey.
Business profit: A person must have a permanent establishment or permanent representative in Turkey and income must result from business carried out in this permanent establishment or through such representatives.
Agricultural income: Agricultural activities generating income must take place in Turkey.
Wages and Salaries:
- Services must be rendered or accounted for in Turkey.
- Fees, allocations, dividends and the like paid to the chairmen, directors, auditors and
liquidators of the establishment situated in Turkey must be accounted for in Turkey.
Income from Independent Personal Services: Independent personal services must be performed or accounted for in Turkey.
Income from Immovable Property:
- Immovable must be in Turkey;
- Rights considered as immovable must be used or accounted for in Turkey.
Income from Movable Capital investment:Investment of the capital must be in Turkey.
Other Income and Earnings: The activities or transactions generating for other income,
specified in the Income Tax Act, must be performed or accounted for in Turkey.
The term accounted for used above to clarify tax liability of the non-residents means that a payment is to be made in Turkey, or if the payment is made abroad, it is to be recorded in the books in Turkey.
Determination of Net Income:
Business Profit:
Business profit is defined as profit arising from commercial or industrial activities. Although this definition is very comprehensive and includes all types of commercial and industrial activities, the ITL excludes some activities from the contents of business profits. Generally, activities performed by tradesmen and artisans who do not have permanent establishments are not assumed as commercial and industrial activities and are exempt from income tax.
Furthermore, in order to tax income resulting from commercial and industrial activities there has to be continuity in performing these activities. In other words, incidental activities in that nature are not treated as commercial or industrial activities and therefore, the Income Tax Law deals with these activities as the other income and earnings.
The ITL does not list each commercial and industrial activity and only refers to the Turkish Commercial Law for the scope of these terms. Yet several activities are listed namely for clarification in Article 37. These are as follows:
- The operation mines, stone and time quarries, extraction of sand and pebbles operations of brick and tile kilns;
- Stock brokerage;
- Operating of private schools, hospitals and similar places;
- Regular operations of sale purchase and construction of real estate;
- Purchase and sale of securities on someone's behalf and on a continued basis;
- Fully or partly sale of land which has been obtained by purchase or barter and subdivided within five years of its date of purchase and sold during this period or in subsequent years;
-Earnings from dental prosthesis.
Basically, the taxable income of a business enterprise is the difference between its net assets at the beginning and at the end of a calendar year.
Two methods are used to compute business profits: Lump-sum basis and actual basis. In the former method, the Income Tax Law specifies estimated business profits for taxpayers who are qualified for such treatment according to the relevant provisions of the Law. The main assumption is that those taxpayers specified by the Law have difficulty to keep accounting books and to determine then income on the actual basis. Therefore, their income taxes are assessed on their estimated profits determined by the Law.
In the latter method business profits is determined on the actual basis: Taxpayers are required to keep accounting books to record their actual revenues and expenses which occur within the calendar year. In general, business related expenses paid or accrued related to business are deducted from revenues:
Expenses to be deducted:
In order to determine net amount of business profits on the actual basis, the following expenses may be deducted from revenues:
- general expenses made for earning and maintaining business profit;
- food and boarding expenses provided for employees at the place of business or in its annexes;
- expenses for medical treatment and medicine;
- insurance and pension premiums;
- clothing expenses paid for employees;
- losses, damages, and indemnities paid based upon written agreements, juridical decrees, or by order of law;
- expenses for travel and lodging relevant to the business;
- expenses for vehicles which are part of the enterprise and used in the business;
- taxes in kind such as building, and consumption, stamp and municipal taxes and fees and charges, related to the business;
- depreciations set aside according to the provisions of the Tax Procedure Law;
- payments to the unions;
Payments, which are not accepted as expenses:
Those payments listed below are not considered as deductible expenses;
- funds withdrawn from the enterprise by the owner or by his spouse or children, or
other assets in kind taken by them;
- monthly salaries, wages, bonuses, commissions and compensation paid to the owner of the enterprise, to his spouse, or his minor children;
- interest on the capital invested by the owner of the enterprise;
- interest based on the current account of the owner of the enterprise, his spouse, his minor children including interests on all form of receivables;
- all fines and tax penalties as well as indemnities arising from unlawful actions. Indemnities incurred as penalty clauses of contracts shall not be considered indemnities of a punitive nature;
- % 0 per cent of the advertising expenses for all kind of alcohol and alcoholic beverages, tobacco and tobacco products (current rate has been reduced to 0 percent by a Governmental Decree).
Agricultural lncome:
Income derived from agricultural activities is also subject to the income tax. The term agricultural activity means any activity performed in land, sea, lakes and rivers in forms of cultivating, planting, breeding, fishing, hunting and etc. For tax purposes, persons who engaged in such activities are referred to farmers.
Small farmers are exempt from tax if a farmers gross revenue or operational size of his farming enterprise is less than the amount specified by the Income Tax Law, then he is accepted as a small farmer for the application of income tax and exempt from the income tax.
The farmers who are not exempt from the tax fall into two categories in determining their agricultural income. The income of farmers, whose annual proceeds or yields are less than the amount specified by the Council of Ministers for each year, is determined on a lump-sum basis. In this method, only the gross revenues of farmers are calculated on the actual basis. While expenses are determined simply by applying an estimated expense rate to the gross revenues. On the actual basis, both revenues and expenses are computed in their real amounts. Therefore, farmers need to keep accounting books to record their revenues and expenses accrued in the relevant year.
Gross revenue arising from agricultural activities consists of the following elements:
- sales revenues earned from selling every kinds of agricultural products produced,
purchased or obtained in other ways including the products remained from the previous years,
- proceeds received in return of using agricultural machinery and equipment in the agricultural works of other farmers.
- sales revenues derived from the selling of items expensed previously,
- insurance compensations received for the products damaged before or after they were produced.
- revenue arising from the selling of the fixed assets (except immovable used in agricultural activities).
The Tax Procedure Law specifies the rates that will be applied to gross revenue in determining the amount of the estimated expenses on the lump-sum basis. Thus, 80 per-cent of gross revenue is accepted as the amount of expenses in determining net income resulted from the sales of animals, animals' products and fishing and hunting products. This rate has been laid down as 70 per-cent for other agricultural products.
On the actual basis, the following expenses are deducted from the gross revenue to reach taxable income for the year.
- expenditures made for obtaining seed, fertilizers, seedling plants, animal feeds and similar materials;
- expenditures made for purchasing animals, agricultural products and other materials which are acquired for the purpose of resale;
- salaries and wages paid to the employees;
- operation and maintenance expenses of agricultural machinery; equipment, and vehicles;
- depreciation expenses;
- rents and fees paid for machinery and equipment,
- interest injured for loans received and used for enterprise,
- general expenses made for earning and indemnities paid based upon written agreements, juridical decrees, or by order of law;
-losses injured in the selling of fixed assets (except immovable used in agricultural activities) which are part of the enterprise;
-full depreciation expenses and half of other expenses of the vehicles which are part of the enterprise and also used for personal and family needs.
Salaries and Wages :
Income derived from dependent personal services is subject to the income tax. This income comprises such income from all kinds of employment in both public and private sector as salaries and wages, as well as associated supplementary income such as allowances, bonuses, anniversary gifts, gratuities, commissions, premiums, compensations and other wage and salary related remunerations including benefits in kind at market value.
In determining taxable amount of salaries and wages the following expenditures are allowed to be deducted from gross amount:
- Legal deduction made according to various laws or regulations,
- Payments made for pensions,
- Payments made for various insurances,
- Payments made for labor union membership,
Income from Independent Professional Services :
The term independent professional services means any activity performed by a person who is self-employed, and based on professional and scientific expertise rather than capital, income from such activities is subject to the income tax.
The term includes services given by such independent professionals as lawyers, accountants, doctors, consultants and engineers.
Revenues received from independent professional services within a year as well as expenses paid are recorded on a simple accounting book. In general, all expenses related to independent professional services can be deducted from revenues. But, the scope of those expenses are narrower than those specified for the commercial and business and business activities. The following expenses are allowed to be deducted from the gross revenue in reaching the profit from independent professional services:
- rents paid for the leased premises in which the professional services are carried out.
- overhead expenses;
- expenses paid for illumination, heating, phone, wages and salaries of bureau employees, and other office overheads;
- vocational and advertisement taxes as well as taxes in kind, including excises and fees paid occupational purposes;
- expenses for occupational books and periodicals;
- payments made for membership of occupational associations;
- traveling and lodging expenses regarding the profession carried on;
- expenses made for tools, equipment, and other materials necessary to perform the profession;
- depreciation expenses for the fixed assets in performing the profession;
- retirement payments;
- losses, damages, and indemnities paid based upon written agreements, juridical decrees, or by order of law.
Income from Immovable Property :
Immovable property means real property which includes land buildings, and permanent leasehold rights. Ships, boats, aircraft and other types of transportation vehicles are also regarded as immovable property in the application of the Income Tax Law. Income from immovable property comprises:
- rental income arising from the lease land, buildings (furnished or unfurnished), and the rights to work mineral deposits, sources and other natural sources including mines, sand and gravel quarries, and property accessory to immovable property; - rental income from fishing place of every kind;
- rental income from property to immovable property which may be subject to independent leasing;
- rental income from the right to use any copyright of literary, artistic or scientific work, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience or for the use of or the right to use, industrial, commercial or scientific equipment;
- rental income from the lease of ships, boats, aircraft and other transportation vehicles.
In computing net income from immovable property, costs related to maintenance, management, renovation and running, and depreciation may be deducted from the gross income on the actual basis, it is also allowed to make a lump-sum deduction instead of actual costs, except for the income from the lease of the rights mentioned above. In such cases, lump-sum deduction is 25 per-cent of the rental income.
Income from Movable Property :
Income from movable property means any income such as interest, dividend, rent and the like derived from capital in cash or capital in kind. (Income from business activities, agricultural activities and independent personal services is not considered as income from movable property.)
However, such capital income is not considered as income from movable property, should they are earned (gained) through business, agricultural or independent professional activities.
Regardless of their sources, the following earnings are deemed to be income from movable property:
- dividends from stocks of every kind including joussance shares, founder's shares and interests and other remunerations paid to the stockholders in the preparatory stage of the corporation and earning from the securities issued by investment funds and investment trusts;
- earnings from participation shares including the shares of limited companies, cooperatives and joint ventures;
- dividends paid to the chairmen and the members of the board of directors;
- after tax income of the corporations which are subject to annual declaration or special declaration;
- interests of every kind from bonds, treasury bonds, and earning from the securities issued by the Mass Housing Administration (MHA) and the Public Participation Administration (PPA);
- interest from debt-claims of every kind particularly interest from banks and other financial institutions;
- profits from selling coupons of stocks and bonds before their maturity;
- income from selling of dividends not accrued yet to the owners of the shares;
- dividends paid to those who lend money without interest and dividends paid in return of profit-Ioss participation notes and profit-Ioss participation accounts;
- tax claims, calculated one third of dividends received by the stockholders;
- income from repurchasing agreement on bonds and securities issued by the MHA and the PPA.
In determining net income from movable property, costs related to and allowed to be deducted from gross income include insurance costs, collection costs, and taxes and other levies, excluding income tax, paid for securities.
The mentioned elements are included in business profit when they are connected to the business activity of the recipient. In such case, this income is treated as business profit and become subject to the rules described earlier related to the rules described earlier related to the business profit.
Other Income and Earning :
Capital gains non-recurring is dealt with by the Income Tax Law under the heading "Other Income and Earnings". Capital gains specified in the ITL are as follows:
- earning exceeding certain amount TL from the selling of securities before or within one year after acquisition, except those acquired free of charge;
- income exceeding certain amount TL from the selling of intellectual rights which are treated as immovable property for tax purposes;
- income from the selling of participation rights and shares;
- profits from the wholly or partly alienation of an enterprise which ceased its operations,
- profits derived from the alienation of land, buildings, the rights to operate mineral deposits, sources and other natural sources, fishing place of every kind, the rights registered as immovable property, and ships, boats, aircraft and other transportation vehicles, within four years after their acquisition.
Net amount of capital gains is determined by deducting acquisition costs and the costs incurred to the alienation of the capital assets from the proceeds received in return of the alienation.
Non-recurring income comprises:
- income derived from the business activities and independent professional services
performed on occasion;
- proceeds received not to start or to stop a business activity, agricultural activity or independent professional service, or in return for not bidding for contracts;
- proceeds received to transfer leasehold rights or to evacuate leased immovable property;
- income derived by the taxpayers from their previous operations;
-income derived by the limited liable taxpayers from transportation activities performed on occasion.
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