BASIC TAX CONCESSIONS GRANTED TO INVESTORS

This section is prepared by Pricewaterhouse Coopers

Investment Allowance

Investment allowance is one of the major investment incentive for direct investment in Turkey. The amount of investment expenses which is determined by multiplying with the investment allowance rate granted by the Treasury is deductible in determining corporate income subject to corporation tax.

The State Council has very recently seized the execution related to the withholding tax on the investment allowance applied at a rate of 16,5%, regardless of profit distribution. However, the decision of the State Council dated 3.5.2000 is subject to the settlement of the Court of Appeal and the Ministry of Finance intends to introduce a new amendment in the law as to impose the withholding tax in the new fiscal year.

Under the current legislation, investors holding investment incentive certificates (IIC) issued after 1.1.1999 are able to calculate investment allowance for the investment expenses that are projected to be made in the following year. The investment allowance for the year will be calculated based on the relevant investment expenditures made in the current year and projected for the following year. The realised one is a must but the projected one is at the company's discretion. In other words, tax benefit from investment allowance may be available depending upon budgeted expenditure. However, deferral interest will be applicable if the investment expenses actually made in the following year remain more than 10% below the projections.

Investment allowance must be consumed when companies have sufficient taxable income. Unconsumed investment allowance is subject to indexation in the following years until it is fully utilised. The rate used in the indexation is the revaluation rate which is, in general, slightly below the inflation rate. However, this provision is applicable for investment expenses incurred under IICs obtained after 1.1.1998. For the investment certificates obtained between 1.1.1995 and 1.1.1998, the investment allowance that could not be deducted in the related year can be revalued only for 3 years using the revaluation rate announced by Ministry of Finance.

The latest amendment in the law has increased minimum investment allowance rate from 30 % to 40 %. This rate will be 100 % for the investment in the priority regions and organised industrial zones. Finally, for the industrial investments exceeding US$ 250 million, the investment allowance rate will be 200%.

Depreciation

Depreciation may be calculated by applying either the straight line or the double declining method, at the discretion of the taxpayer. Maximum rates of depreciation for fixed assets are set by the Ministry of Finance. The maximum rate determined in the legislation is currently 20 % for straight line or 40 % for double declining method. However, in either of the methods, assets shall not be written off in less than five years. The depreciation rate for certain assets such as goods of which value has been diminished or that became obsolete owing to the technological progression may be determined by the Ministry of Finance.

Taxpayers who have opted to depreciate their fixed assets according to straight line method, cannot switch the method to accelerated depreciation, however the reverse is, that is switch from accelerated to straight line method is possible.

Revaluation of fixed assets

Revaluation of fixed assets is allowed in Turkey. A statutory revaluation rate, which is approximation of the inflation rate, can be applied to both fixed assets and accumulated depreciation. With effect from 1.1.1999, it is possible to subject leasehold improvements to revaluation.

In line with the provisions of the Corporate Tax Law, should revaluation be applied, a portion of financial expenses have to be treated as disallowable expenses due to "financial expense limitation" implementations. Concession companies cannot re-value their assets. The difference between the increase in fixed assets and their accumulated depreciation is booked as revaluation surplus as a part of the capital reserve, which can be included into nominal capital. Revaluation reserve cannot be withdrawn from the company or used against any other account. Should this be the case, then the amount will be subject to corporate tax.

VAT exemption for machinery and equipment purchases under Investment incentive Certificate (IIC)

Purchases of machinery and equipment from local and overseas suppliers are subject to VAT at a rate of 17%. VAT paid on the purchase of goods and services, also referred to as "input VAT" is only offset against VAT calculated and collected on sales, which is also called "output VAT". In case the input VAT exceeds the output VAT, the balance is carried forward to the following months to be offset against future output VAT. No cash refund is available for input VAT except for the VAT incurred by taxpayers that engage in exportation activities.

Under the current investment incentive legislation, investors are not charged VAT for machinery and equipment purchases both from Turkey and abroad under IIC. Since it is likely to incur input VAT during the investment period and carry forward such input VAT until the initiation of operations due to lack of output VAT, companies face a financial burden of output VAT during the investment phase. In respect to this incentives, investors will not carry the financial burden of VAT on these goods particularly during the pre-operational years.

Renewal Fund

Companies are allowed to create a renewal fund reserve with the capital gains arising from the disposal of fixed asset should they decide to renew the asset sold within three years. The depreciation charge on the new asset should be offset against the reserve created. If the asset is not renewed in three years then the reserve should be included into the taxable of the third year.

Cost Revision

In determining the profits from disposal of depreciable assets that have been held by the company at least for two years it is possible to revalue the costs of the fixed assets by revaluation rates announced by the Ministry of Finance. The profits arising from the revision of the costs are not taxable profits. Instead they are treated as special reserves and may only be used to increase the equity capital. In case they are distributed or transferred to another account, they are subject to taxation in the year in which the distribution or transfer takes place. The difference between the sale price and adjusted costs are included to taxable corporate income.

Corporation Tax

Income tax for corporations is calculated in two stages. Under the current legislation, the corporation tax rate is 33% (30% corporate tax and 10% fund on the tax). In addition, a divided withholding tax is applicable only on distributed dividends. Therefore, retained earnings are not subject to withholding tax.

Distributed income adjusted for certain exemptions and deductions, is subject to dividend withholding tax at the rate of; 5,5% (including 10% fund levy) for public companies, 16,5%(including 10% fund) for other companies.

Incentives for investments in priority and regions

For the purpose of enhancing employment and investments in priority and least developed regions, corporate tax exemption (including dividend withholding tax) is provided to investors investing in the said regions between 1.1.1998 and 31.12.2000 and employing at least 10 employees for 5 fiscal years. The other major incentives provided are deferral of employee's tax payments for 2 years, energy support, provision of land, social security exemption for employer's contribution. However, it should be noted that the exemption is to be applied only to income obtained in the aforementioned regions provided that the minimum employment conditions is fulfilled for each entire taxation period. Additionally; after the expiration of the exemption period, the investors may benefit from a deduction from income or corporate tax, provided that the minimum employment condition is fulfilled until 31.12.2007. The deduction rates based on the number of employment are as follows:

These deductions are applicable for those investors who already operate a business in the said regions and start to employ an additional 10 employees over their employee number declared in the last 4 monthly Social Security Premium Payroll notices submitted before 31.10.1997.

Incentives in Free Zones

Free zones are considered to be special areas in which the state's intervention to economy is minimised. Companies operating in Free Zones are exempt from customs duties, corporate and income taxes, VAT and other taxes, fees and duties.

Bilateral Tax Treaties for the Avoidance of Double Taxation

Countries with which Turkey has bilateral tax treaty agreements came into force by 8.8.2000 are as follows: