Comparison of Branches and Liaison Offices in Turkey: A Guide for Foreign Investors
Foreign investors who are looking to expand their businesses into Turkey often find themselves choosing between two key business structures: establishing a branch or setting up a liaison office. Both of these options allow foreign companies to operate within Turkey, but they have distinct legal, financial, and operational implications. In this article, we will provide a detailed comparison of branches and liaison offices in Turkey, highlighting their advantages, disadvantages, and the most curious aspects foreign investors typically seek information about. The aim is to help foreign businesses make informed decisions based on their strategic needs.
As financial advisors with 15 years of experience, we specialize in assisting foreign investors with setting up their businesses in Turkey. Whether you’re considering establishing a branch or a liaison office, our services include comprehensive financial and legal guidance, ensuring that your entry into the Turkish market is smooth, efficient, and compliant with local regulations. We can help you navigate the complexities of Turkish law, taxes, and corporate governance, offering tailored solutions to suit your business objectives.
Overview of Business Structures in Turkey
Turkey has become a strategic hub for foreign investors due to its dynamic economy, strategic location, and investor-friendly regulations. To facilitate foreign investments, Turkey allows businesses to operate through various legal entities, including joint-stock companies, limited liability companies, branches, and liaison offices. While joint-stock and limited liability companies are more common for full-scale operations, branches and liaison offices provide simpler alternatives for foreign companies.
- Branch: A branch is an extension of a foreign company that operates commercially in Turkey. It is not a separate legal entity but part of the parent company. As such, branches can engage in business activities, generate revenue, and sign contracts in Turkey.
- Liaison Office: A liaison office, on the other hand, cannot engage in any commercial activities. Its primary function is to conduct non-revenue-generating activities such as market research, promotion, and representation of the parent company in Turkey.
Let’s dive into a detailed comparison of these two business structures.
Legal Framework and Requirements
1. Legal Entity Status
- Branch: A branch is not a separate legal entity but an extension of the parent company. It operates under the full control of the foreign company, and the foreign parent company is responsible for all its liabilities.
- Liaison Office: A liaison office also does not have separate legal status but is subject to strict limitations regarding its operations. It cannot engage in commercial activities or issue invoices in Turkey. It is meant to represent the foreign company for research, communication, and other support functions.
2. Registration Process
- Branch: The process to register a branch in Turkey involves obtaining approval from the Ministry of Trade, preparing a range of documents including the parent company’s registration details, and appointing a legal representative for the branch. The process is somewhat complex and may take a few weeks to complete.
- Liaison Office: Setting up a liaison office is simpler compared to a branch. The registration must be approved by the General Directorate of Incentive Implementation and Foreign Investment, and the liaison office can be set up without the need to apply to the Trade Registry. The key requirement is that the liaison office must renew its permit annually, and any changes in the office’s operations or personnel must be reported to the authorities.
3. Tax Obligations
- Branch: Since branches are allowed to engage in commercial activities, they are subject to Turkish corporate income tax and VAT (value-added tax) on their revenue-generating activities. The foreign parent company will also need to comply with local tax regulations, including withholding taxes for employees.
- Liaison Office: A liaison office is exempt from corporate income tax, VAT, and other commercial taxes, as it does not engage in any revenue-generating activities. However, it is still required to pay withholding tax on the salaries of its employees and file annual reports to the Turkish Revenue Administration to maintain its non-commercial status.
4. Corporate Governance
- Branch: A branch is managed by a representative appointed by the parent company, who must be registered with the Turkish authorities. The branch must adhere to Turkish corporate governance rules, which include maintaining accounting records in Turkish and complying with local regulations on financial reporting.
- Liaison Office: A liaison office also has an appointed manager, but its governance requirements are far simpler than those of a branch. Since it does not engage in commercial activities, its reporting obligations are minimal. The main requirement is submitting annual reports to the Ministry of Trade to demonstrate that it is not conducting commercial activities.
Advantages and Disadvantages of Branches in Turkey
Advantages of Branches
- Commercial Activities: One of the biggest advantages of establishing a branch is that it can carry out commercial activities such as sales, invoicing, and contracting. This allows the foreign company to generate revenue in Turkey and operate on a larger scale.
- Full Ownership: Since the branch is an extension of the parent company, foreign investors retain full ownership and control over its operations.
- Reputation: Establishing a branch can enhance the foreign company’s presence and reputation in the Turkish market, giving it direct access to clients and partners.
- Tax Deductions: Branches can benefit from tax deductions and incentives available to companies in Turkey, such as deductions for R&D activities or employing local talent.
Disadvantages of Branches
- Tax Liability: A major disadvantage is that branches are subject to Turkish corporate tax and VAT, which can be a significant financial burden, especially for smaller operations.
- Complexity of Setup: The process to register a branch is more complex and time-consuming than setting up a liaison office. It involves more legal documentation and approvals.
- Full Liability: Since the branch is not a separate legal entity, the foreign parent company is fully liable for its debts and obligations, which can increase financial risk.
Advantages and Disadvantages of Liaison Offices in Turkey
Advantages of Liaison Offices
- No Corporate Tax: One of the biggest advantages of setting up a liaison office is that it is exempt from corporate tax, VAT, and other commercial taxes, making it a cost-effective option for foreign businesses looking to establish a non-commercial presence.
- Ease of Setup: The registration process for a liaison office is relatively simple, with fewer legal requirements and quicker approval times compared to a branch.
- Low Operating Costs: Since liaison offices cannot engage in commercial activities, they typically have lower operating costs and minimal financial reporting obligations.
- Flexible Research and Representation: Liaison offices are ideal for foreign companies looking to conduct market research, promote their products, or establish connections without committing to full-scale operations in Turkey.
Disadvantages of Liaison Offices
- No Commercial Activities: The biggest disadvantage of a liaison office is that it cannot engage in revenue-generating activities. This means the office cannot sign contracts, issue invoices, or make sales in Turkey.
- Limited Operations: The scope of activities for a liaison office is restricted to market research, promotion, and administrative functions. Foreign companies looking to establish a more active presence may find this limiting.
- Annual Permit Renewal: Liaison offices must renew their permits annually, and any changes in their activities must be reported to the authorities. Failure to comply with these regulations can result in penalties or the closure of the office.
- No Local Tax Benefits: Since liaison offices do not engage in commercial activities, they are not eligible for any local tax benefits or incentives that may be available to businesses operating in Turkey.
Key Differences Between Branches and Liaison Offices
| Criteria | Branch | Liaison Office |
|---|---|---|
| Legal Status | Not a separate legal entity; part of the parent company | Not a separate legal entity; part of the parent company |
| Commercial Activities | Allowed to engage in commercial activities | Prohibited from commercial activities |
| Tax Obligations | Subject to corporate tax and VAT | Exempt from corporate tax and VAT |
| Registration Requirements | More complex; requires approval from the Ministry of Trade | Simpler; requires approval from the General Directorate |
| Employee Taxes | Subject to withholding tax on salaries | Subject to withholding tax on salaries (only stamp tax) |
| Reporting Obligations | Requires financial reporting and tax filings | Minimal reporting; annual reports to the Ministry of Trade |
| Liability | Full liability for the parent company | Full liability for the parent company |
Which Option is Best for Foreign Investors?
Choosing between a branch and a liaison office in Turkey depends on your business goals, operational needs, and long-term strategy. Here are some key considerations for foreign investors:
- Establish a Branch if:
- You want to engage in commercial activities and generate revenue in Turkey.
- You need a full-scale presence in the Turkish market, including the ability to sign contracts, issue invoices, and interact with local customers.
- You are prepared to comply with Turkish tax and financial reporting requirements.
- You want to establish a long-term presence in Turkey and take advantage of local tax incentives.
- Set Up a Liaison Office if:
- You are not ready to engage in commercial activities but want to explore the Turkish market.
- Your main goal is to conduct market research, promote your products, or establish contacts without the financial burden of commercial operations.
- You want a simple, low-cost solution for representation in Turkey.
- You are looking for a temporary or flexible solution to gauge your long-term potential in Turkey.
How We Can Help
Navigating the legal and financial landscape of Turkey can be challenging, especially for foreign investors unfamiliar with local regulations. As experienced financial advisors with over 15 years of expertise working with multinational companies, we can guide you through every step of setting up a branch or liaison office in Turkey. Our services are tailored to your specific needs, ensuring compliance with Turkish laws and maximizing the benefits of your investment. Whether you need assistance with the registration process, tax planning, or ongoing financial management, we are here to support your business every step of the way.
FAQ
1. What is the difference between a branch and a liaison office in Turkey?
Answer:
A branch in Turkey can engage in commercial activities, generate income, and is subject to Turkish corporate tax. In contrast, a liaison office cannot perform any income-generating activities; its role is limited to non-commercial functions like market research or promotional activities. Liaison offices are exempt from corporate tax, but must still register with Turkish authorities.
2. How do you establish a branch in Turkey?
Answer:
To establish a branch in Turkey, foreign companies must apply to the Ministry of Trade, providing documents such as the parent company’s articles of association, a resolution to open a branch, and financial statements. Once approved, the branch is registered with the Turkish Trade Registry and can commence operations under Turkish law.
3. Can liaison offices in Turkey employ local staff?
Answer:
Yes, liaison offices in Turkey can employ local staff, but their activities must be limited to non-commercial purposes. Any salary payments to employees of a liaison office must comply with Turkish labor laws and tax regulations, even though the office itself is exempt from corporate taxes.
4. What are the tax obligations of branches in Turkey?
Answer:
Branches in Turkey are subject to the same corporate tax rules as local companies. They must pay corporate income tax on their profits at a rate of 25%, as well as withhold taxes on dividends paid to the parent company. Additionally, branches are required to file annual financial statements and tax returns in accordance with Turkish law.
5. Can a liaison office be converted into a branch in Turkey?
Answer:
Yes, a liaison office can be converted into a branch in Turkey. To do this, the parent company must apply to the relevant Turkish authorities, providing the necessary documents and approvals. Once converted, the branch can engage in commercial activities and will be subject to corporate tax and other regulations applicable to businesses operating in Turkey.
Invest CPA Ltd. Turkey 