Tax Guide for US Expats Living and Working in Turkey
Who Is Liable For Income Taxes in Turkey
Individuals who are resident in Turkey (full liability taxpayers) are subject to tax on their worldwide income. Non-residents (limited liability taxpayers) are taxed only on earnings and revenues derived in Turkey.
Residents include individuals with legal permanent residence in Turkey and those who reside in Turkey for more than six months during one calendar year. Temporary absence does not interrupt the continuity of residence in Turkey.
The civil law defines residency as an “intention to settle down.” The law does not specify any objective criteria for the determination of residency. However, factors, such as purchasing an apartment in Turkey, closing business operations abroad or having vital social and economic interests in Turkey, may be considered in determining Turkish residency.
An exception to the six-month rule described above applies to expatriates such as businesspersons, scientists, experts, employees of governments or journalists who come to Turkey to perform temporary and predefined work as well as those who have arrived for the purpose of education, medical treatment, rest and travel. Such persons are considered to be nonresidents even if they stay in Turkey longer than six months in a calendar year.
In general, if an individual is a nonresident of Turkey under these rules, the individual is also a nonresident for purposes of the application of Turkey’s tax treaties. This may affect the taxation of non-Turkish income in the source country.
Income subject to tax. Turkey has a unitary tax system under which income derived from different sources is aggregated and tax due is computed on the total aggregate income. Under the unitary system, withholding taxes are considered advance payments of tax and are credited against the tax due in the annual return. Income derived in Turkey by residents and nonresidents are allocated to the following categories:
- Commercial income
- Agricultural income
- Employment income (remuneration)
- Self-employment earnings
- Revenues from immovable properties (including royalties)
- Income from capital investments (dividends and interest)
- Other earnings and gains (capital gains)
The above categories of income and the rules for determining the sources of such income are described below. For a table outlining the taxability of income items.
Commercial income. Income derived from every kind of commercial and industrial operation through a place of business in Turkey, or through a permanent representative in Turkey, is considered to be income derived in Turkey.
Agricultural income. Income arising from agricultural operations carried out in Turkey is considered to be derived in Turkey.
Employment income. Salary and wages are defined as money and goods given as compensation to employees in connection with a specific place of business as well as benefits provided to them that can be represented in terms of money. No distinction is made between salary and wages in Turkey. Wages include amounts paid as cash, indemnities, allowances, overtime, advances, subscriptions, premiums, bonuses, expense accruals or percentages of profits of enterprises that are not partnerships. Certain payments made by employers on behalf of employees, such as payment for rent and utilities are grossed up and taxed as salary and wage income.
Wage income is considered to be derived in Turkey by nonresident individuals if either of the following conditions is satisfied:
- The employment service is performed in Turkey.
- The services are evaluated in Turkey. Services are considered to be evaluated in Turkey if the payment for the services is made in Turkey or if the payment for the services is made abroad and the amount of the payment is transferred to the account of or deducted from the profit of a Turkish resident entity.
An employment service is considered to have been evaluated in Turkey if the salaries are booked as a cost or expense by a Turkish entity.
Individuals in Turkey who work for liaison offices and are compensated in foreign currency are not taxed on their salaries if all of the following conditions are met:
- The nonresident entity pays the salaries out of earnings derived abroad.
- The salary payments are not charged as expenses against profits taxable in Turkey.
- The amount of compensation is brought into Turkey as foreign currency.
Self-employment earnings. Self-employment earnings include services rendered by a person who satisfies the following conditions:
- He or she works on behalf of himself or herself in his or her name.
- He or she uses his or her own professional knowledge.
- He or she works without being dependent on an employer.
If benefits are derived from self-employment activities performed in Turkey or if the self-employment activities are evaluated in Turkey, the income derived from such activities is considered to be income derived in Turkey and is accordingly taxable to non-residents.
Recipients of services provided by resident and nonresident self-employed individuals must withhold a 20% tax from the amounts paid to the individuals and remit the withholding tax to the tax offices on behalf of the individuals. If the service provider is a nonresident, provisions of an applicable double tax treaty need to be taken into account.
Revenues from immovable properties. Revenues derived from the rental of immovable properties and rights by their owners, by their holders, by those holding easement and usufruct rights or by their tenants are taxable in Turkey if the immovable property is located in Turkey or if such properties and rights are used or evaluated in Turkey.
Rental income derived by resident and nonresident individuals from immovable assets and royalties for patents and rights are subject to withholding tax at a rate of 20%. For nonresidents, this withholding tax may be eliminated or reduced under applicable double tax treaties.
Capital investment income. The following types of income are included in investment income:
- Dividends from all types of share certificates
- Earnings arising from participation shares
- Profits distributed to the chairman and members of the board of directors of companies
- Interest income derived from bonds and bills
- All interest income (time deposits, repurchase [REPO] agreements and others)
Resident and nonresident individuals are subject to withholding tax on dividends and interest. A 15% withholding tax is imposed on dividends. The general rate of withholding tax on interest is 15%. The withholding tax rates may be reduced under applicable double tax treaties.
Other earnings and gains. The following types of income are included in other earnings and gains:
- Earnings arising from the sale of securities, rights, copyrights and patents
- Earnings arising from the disposal of land, immovable properties and ships within five years after the acquisition of the assets
- Earnings arising from the transfer of rights of partnership shares
- Earnings arising from the disposal of a whole operation whose activities were halted or from the disposal of part of such operation
- Incidental earnings
Capital gains. Capital gains are normally considered to be ordinary income. However, capital gains derived from transfers of shares are exempt from income tax in certain cases. The rules applicable to capital gains derived from the transfer of shares acquired on or after 1 January 2006 are summarized below.
Under a Council of Ministers’ Decree, the withholding tax rate is reduced to 0% for capital gains derived by resident and nonresident individuals from the sale of shares traded at the ISE. This is the final taxation.
Capital gains derived from the disposal of the shares without the intermediation of a bank or an intermediary institution (that is, capital gains derived by resident and nonresident individuals from the sale of shares not traded on the ISE) are subject to tax at the general progressive income rates and reported in the annual income tax return. However, if the shares are issued by Turkish resident companies and held for more than two years, the gain is not subject to income tax.
Taxation of employer-provided stock options. No specific rules in Turkey govern the tax treatment of employer-provided stock options. Under the general tax provisions, options are taxable as employment income at the time of exercise. The time of taxation may vary depending on the stock option plan. In addition, under certain circumstances, stock options are subject to stamp tax at a rate of 0.66% and may be subject to social security contributions (see Section C).
Deductions. In determining taxable income, expenses allowable under the income tax law are deducted from gross revenue. Individuals who render independent professional services or who carry out commercial activities may deduct ordinary business-related expenses from taxable income, including salaries, rental payments, fees and the cost of utilities. Depreciation on fixed assets is also allowed. Penalties are not deductible.
The employee portions of social security contributions and unemployment insurance premiums are deductible from gross employment income.
Premiums paid by the employee for himself or herself, his or her spouse or children with respect to personal insurance policies covering life, death, accident, illness, disablement, unemployment, maternity, birth and education, as well as contributions made to the Individual Retirement System, are deductible if the following conditions are satisfied:
- The insurance policy and the retirement contract are concluded with an insurance company that is located in Turkey and whose headquarters is in Turkey.
- The amount of the monthly premium, membership fee or contributions that are paid to the Individual Retirement System, may not exceed 10% of the salary earned in that month. The premiums paid for personal insurance policies other than amounts paid to the Individual
Retirement System must not exceed 5% of the wages earned in the month in which the premium was paid.
• The annual total of the monthly premiums, membership fees and contributions that are paid must not exceed the annual legal minimum wage determined by the law (currently TL 796.50 per month). Lighting, heating, water, elevator, administration, insurance, interest, tax, depreciation, and maintenance expenses paid by an individual who earns rental income can be deducted from taxable rental income.
Rates. In principle, individual income and gains calculated on a cumulative basis are subject to income tax at progressive tax rates which vary between 15% and 35% and are calculated on a cumulative basis.
Credits. The minimum living allowance may be claimed as a credit against the tax on employment income. The minimum living allowance applicable for each month of employment may not exceed 50% of the monthly gross amount of the legal minimum wage that is effective at the beginning of the calendar year in which the wage is earned. The percentage is 10% for a spouse who is unemployed and does not earn income, 7.5% for the first two children and 5% for other children. The tax credit is calculated by multiplying the total minimum living allowance amount by 15%. However, the credit cannot exceed the total tax calculated on the employment income, and no refund is granted in the event of an excess amount.
The minimum living allowance does not apply to nonresident individuals who derive employment income in Turkey.
Relief for losses. Self-employed individuals engaged in a business or individuals who carry out commercial activities may carry forward business losses for five years. No loss carrybacks are allowed.
B. Other taxes
Inheritance and gift tax. For 2011, beneficiaries of inheritances and gift recipients are subject to inheritance and gift tax at rates ranging from 1% to 30%. The tax is paid over three years in two equal installments, in May and November. For 2011, inheritances amounting to TL 118,438 and gifts amounting to TL 2,730 are exempt from tax. The following are the tax rates.
Motor vehicle tax. The persons in whose names motor vehicles are registered may pay motor vehicle tax for each year in two equal installments in January and July. The amount of tax is determined separately for each group of vehicles by taking into consideration the age and engine capacity of the vehicles.
Real estate tax. Buildings and land in Turkey are subject to real estate tax. The taxpayer is the owner of the building or land, the owner of any usufruct over the building or land, or if neither of these exist, any person that uses the building or land as its owner. A partial exemption of 25% of the tax value is granted for buildings or apartments used as residences. This partial exemption applies for five years from the year following the year of the completion of construction.
The tax base for the real estate tax is the tax value of the building or land. The tax value is the value recorded at the Land Registry. The rate of building tax is generally 0.2%, but this rate is reduced to 0.1% for buildings used as residences. The rate of land tax is 0.1%, and the rate of parceled land tax is 0.3%. These rates are increased by 100% within the frontiers of a metropolitan municipality and contiguous regions as defined by law.
A declaration is submitted to the municipality where the building or land is located if a modification is made that might lead to a change in the tax value. Taxes are paid annually in two equal installments, the first at any time during the period from March through May and the second in November.
Social security
The Turkish social security system was previously based on three institutions each regulated by its own law. These institutions were the Social Security Institution (for private sector employees), the Pension Fund (for public sector employees) and the Bag-Kur (for self-employed people). Effective from 1 October 2008, the Social Security and General Health Insurance Law No. 5510 unified the prior three social security regimes.
Under the new law, all employees of Turkish private entities are subject to a national social insurance system that covers work-related accidents and illness, general social security, disability and death. The new law also provides retirement benefits.
Employers and employees pay monthly contributions at varying percentages calculated on gross salary, subject to upper and lower limits stated in the law. For the period of 1 January 2011 through 30 June 2011, the upper limit for monthly salary subject to social security contributions is TL 5,177.40, and the lower limit for monthly salary subject to social security contributions is TL 796.50. Employees pay contributions at a rate of 14%. Employers pay contributions at a rate between 19.5% and 25%, depending on the risk class of the business. Five percent of the employers’ contribution can be reimbursed by the Republic of Turkey Prime Ministry Undersecretariat of Treasury if certain conditions are fulfilled by the employer. The rate of unemployment insurance premiums is 1% for employees and 2% for employers.
Employees who are subject to social security contributions in their home country may not be subject to social security contributions in Turkey if they prove their social security status by submitting legal documents obtained from the relevant foreign social security institution.
To provide relief from double social security premiums and to assure benefit coverage, Turkey has entered into bilateral totalization agreements, which usually apply for a maximum of two years, with the following countries.
Albania
Denmark
Northern Cyprus
Austria
France
Norway
Azerbaijan
Georgia
Quebec
Belgium
Germany
Romania
Bosnia-Herzegovina
Libya
Sweden
Luxembourg
Switzerland
Canada
Macedonia
United Kingdom
Czech Republic
Netherlands
Turkey is also a party to the European Social Security Agreement. Article 15-1/a of the agreement contains the following provision:
“Workers employed by a corporation which has a normal employer in one of the contracting states, who are sent to another contracting state for a specific piece of work for the corporation, are subject to the legislation of the state where they were originally employed, provided that the estimated period of employment in that state does not exceed 12 months and that such workers are not sent to replace workers whose periods of employment have ended.
In cases where the work takes longer than 12 months for unforeseen reasons, the employment law of the country of origin will continue to apply until the end of the work, subject to the agreement of the authorities in the country where the work is being carried out.”
Double tax relief and tax treaties
Tax resident individuals may claim a credit for taxes paid abroad on income derived outside Turkey and subject to tax in Turkey. This credit can be applied against the tax payable in Turkey. A foreign tax credit is not available to nonresidents. The tax amount allowed as a foreign tax credit for a resident is limited to the amount of tax to be paid in Turkey for the same amount of income. Accordingly, if the tax rate applied in the other country is greater than the tax rate applicable in Turkey the difference cannot be considered in calculating the foreign tax credit. The portion of the income tax corresponding to the earnings derived in foreign countries is calculated based on the ratio of such income to worldwide income.
To claim the foreign tax credit, both of the following conditions must be satisfied:
- The tax paid in the foreign country must be a personal tax levied on the basis of income.
- The payment of the tax in a foreign country must be substantiated with documents obtained from competent authorities and attested to by the local Turkish Embassy or Consulate, or if these institutions do not exist, by similar representatives of Turkey in that country.
Turkey has entered into double tax treaties with the following countries.
Albania
Iran
Qatar
Algeria
Ireland
Romania
Austria
Israel
Russian
Azerbaijan
Italy Federation
Bahrain
Japan
Saudi Arabia
Bangladesh
Jordan
Serbia
Belarus
Kazakhstan
Montenegro
Belgium
Korea (South)
Singapore
Bosnia- Herzegovina
Kuwait
Slovak Republic
Kyrgyzstan
Slovenia
Bulgaria
Latvia
South Africa
China
Lebanon
Spain
Croatia
Lithuania
Sudan
Czech Republic
Luxembourg
Sweden
Denmark
Macedonia
Syria
Egypt
Malaysia
Tajikistan
Estonia
Moldova
Thailand
Ethiopia
Mongolia
Tunisia
Finland
Morocco
Turkmenistan
France
Netherlands
Ukraine
Georgia
Northern Cyprus
United Arab Emirates
Germany
Norway
Greece
Oman
United Kingdom
Hungary
Pakistan
United States
India
Poland
Uzbekistan
Indonesia
Portugal
Yemen
To learn more about the history, culture, economy and other information about Turkey
We have been preparing US income tax returns for US Citizens and permanent residents living in Turkey for over 15 years. As a US Citizen or permanent resident (green card holder) you are required to file a US return each year regardless of the fact that you file and pay taxes in your residence country. The expatriate earned income exemption ($100,800 for 2015) can only be claimed if you file a timely tax return. It is not automatic if you fail to file.
We have scores of clients located in Turkey and know how to integrate your US taxes into the local income taxes you pay. Any income tax you pay there can be claimed as a dollar for dollar credit against the tax on your US return on the same income.
As an expat living abroad you get an automatic extension to file until June 15th following the calendar year end. (You cannot file using the tax fiscal year for US tax purposes). You must pay any tax that may be due by April 15th in order to avoid penalties and interest. You can get an extension to file (if you request it) until October 15th.
There are other forms which must be filed if you have foreign bank or financial accounts; foreign investment company; or own 10% or more of a foreign corporation or foreign partnership. If you do not file these forms or file them late, the IRS can impose penalties of $10,000 or more per form. These penalties are due regardless of whether you owe income taxes or not.
There are certain times you may wish to make elections with respect to your Corporation or Investment Company which will give you US tax benefits. There are other situations where forming a US corporation to receive your business income may be more advantageous than using a corporation in your resident country. We can help you with these decisions.
If you are self-employed, you will have to pay US self-employment taxes (social security). If you are a bona-fide employee you do not have to worry about paying US social security on your wages earned in Turkey.
We have helped hundreds of expats around the world catch up because they have failed to file US returns for many years. Unfortunately, unlike India, Canada, UK, etc. you must also file so long as you are a US citizen or resident. You can if you follow proper IRS and State Department procedures surrender your US Citizenship and therefore cut off your obligation to pay US taxes in the future. You must surrender that Citizenship for non-tax avoidance reasons and then can usually not return to the US for more than 30 days per year for the subsequent ten years.
Let us help you with your US tax returns, US tax planning and other US tax and legal concerns. Download our expat tax questionnaire or request a request a consultation by phone, skype or email