Dividend Payments in Turkey: A Comprehensive Guide for Foreign Investors
Introduction
When investing in Turkey, one of the key areas foreign investors should focus on is understanding dividend payments and their tax implications. Dividends are a crucial part of the return on investment (ROI) for shareholders, and knowing how dividend payments in Turkey work will help investors maximize their returns while staying compliant with local regulations.
In this comprehensive guide, we’ll break down the rules governing dividend payments in Turkey, taxation policies, the distribution process, and what foreign investors need to know to optimize their investments.
What Are Dividends?
A dividend is the distribution of a portion of a company’s earnings to its shareholders, typically in the form of cash or additional shares. In Turkey, dividends are distributed after the company’s profits have been taxed, and further taxes may apply at the time of payment to shareholders.
Dividend payments are often seen as an attractive way for investors to receive a steady income from their investments, especially in established companies with consistent profits.
Legal Framework for Dividend Payments in Turkey
The distribution of dividends in Turkey is governed by the Turkish Commercial Code (TCC) and the relevant tax laws. The TCC lays out clear rules about how dividends should be calculated, distributed, and taxed. These rules are designed to protect both shareholders and the company itself, ensuring fair and lawful payments.
The key points of the legal framework for dividend payments in Turkey are as follows:
- Dividend Declaration: Dividends can only be distributed if the company has sufficient net profits as determined by its annual financial statements. The decision to distribute dividends must be approved by the company’s general assembly of shareholders.
- Reserve Fund Requirements: Turkish law mandates that a certain portion of a company’s profits be set aside in a legal reserve fund before any dividends can be distributed. This is to ensure that the company maintains financial stability.
- Equal Treatment: All shareholders must be treated equally in terms of dividends unless otherwise stated in the company’s articles of association.
- Profit-Sharing Ratio: Companies in Turkey can distribute dividends based on the profit-sharing ratio that is determined by their capital structure and the amount of shares held by each investor.
How Are Dividend Payments Made in Turkey?
Once a company decides to pay dividends, the process generally involves the following steps:
1. Profit Determination
At the end of each fiscal year, the company’s net profits are determined based on the financial statements prepared under Turkish accounting standards. Only the portion of profits that remains after all taxes and legal obligations have been fulfilled can be distributed as dividends.
2. General Assembly Approval
The company’s board of directors will propose a dividend payment to the general assembly of shareholders. This assembly must approve the proposal before any payments can be made. In some cases, the company’s articles of association may include specific rules regarding dividend distribution.
3. Payment Schedule
Dividends in Turkey can be paid in one lump sum or in installments, depending on the company’s decision and approval by the general assembly. Companies must adhere to the schedule and process outlined in their dividend policy, ensuring payments are made within the legal deadlines.
4. Form of Payment
Dividends are typically paid in cash, but companies may also opt to distribute additional shares to their shareholders, depending on the preference of the shareholders and the company’s financial situation.
Taxation of Dividend Payments in Turkey
Understanding the taxation of dividend payments in Turkey is crucial for foreign investors, as it impacts the net return they will receive from their investments. Here’s a breakdown of the tax treatment:
1. Corporate Tax on Profits
Before dividends can be distributed, the company’s profits are subject to corporate income tax, which currently stands at 25%. Only after corporate tax has been paid can the remaining profits be considered for dividend distribution.
2. Withholding Tax on Dividend Payments
Once dividends are distributed, they are subject to a withholding tax. The current withholding tax rate for dividends paid to non-resident shareholders is 15%. However, this rate can be reduced based on double taxation treaties (DTTs) between Turkey and the shareholder’s country of residence.
For example, Turkey has signed DTTs with many countries, including the United States, Germany, and the United Kingdom, which can lower the withholding tax rate on dividends. Foreign investors should consult a tax advisor to check the specific treaty benefits applicable to them.
3. Tax Treatment for Resident Shareholders
For Turkish residents, the taxation of dividends follows a different structure. Dividends are first subject to corporate tax at the company level, and then individual shareholders are taxed based on their personal income tax brackets. However, 50% of the dividends received by Turkish resident individuals are tax-exempt, meaning they only pay taxes on half of the dividend income.
4. Reclaiming Withholding Tax
Foreign investors may be able to reclaim part of the withholding tax on dividends paid in Turkey through their home country’s tax authorities if their country of residence has a tax treaty with Turkey. This process involves proving that taxes have already been paid in Turkey to avoid double taxation.
Benefits of Dividend Payments in Turkey
Investing in Turkey and receiving dividend payments can offer several advantages, particularly for foreign investors. Here are some key benefits:
1. Steady Income Stream
Dividend payments provide a regular income stream for investors, making them an attractive option for those looking for cash flow rather than capital appreciation. Turkish companies, particularly in the energy, real estate, and financial sectors, often offer reliable dividend payments.
2. Double Taxation Treaties
Turkey has established numerous double taxation treaties with other countries, which can significantly reduce the withholding tax burden on dividends. This makes Turkey an appealing destination for foreign investors seeking to minimize their tax liabilities.
3. Legal Protections for Shareholders
Turkey’s legal framework under the Turkish Commercial Code offers strong protections for shareholders. Dividend payments must adhere to strict rules regarding profit-sharing and financial stability, ensuring that shareholders receive their rightful dividends in a lawful and fair manner.
Drawbacks of Dividend Payments in Turkey
While there are many advantages to receiving dividends in Turkey, there are also some potential downsides that foreign investors should consider:
1. Withholding Tax
The 15% withholding tax on dividends for non-residents can be a significant cost, although it can be mitigated through double taxation treaties. Foreign investors must carefully consider their tax obligations both in Turkey and in their home country.
2. Corporate Income Tax
Since dividends are distributed from profits that have already been taxed at the corporate level (currently at 25%), there is an element of double taxation. Companies pay corporate tax on their profits, and shareholders pay withholding tax on the dividends they receive.
3. Currency Fluctuations
For foreign investors, currency risk can affect the value of their dividend payments. If the Turkish lira depreciates against the investor’s home currency, the dividends received may be worth less when converted.
Key Considerations for Foreign Investors
When considering investments that yield dividend payments in Turkey, foreign investors should keep the following in mind:
- Double Taxation Treaties: Check whether your home country has a DTT with Turkey and understand the applicable withholding tax rate on dividends. These treaties can help reduce your tax burden.
- Reinvestment Opportunities: Foreign investors should evaluate whether to reinvest their dividends in the Turkish market or repatriate them to their home country. Reinvesting may provide additional growth opportunities, while repatriation could be subject to further taxes.
- Company Financial Health: Before investing in a Turkish company, review its financial statements to ensure it has a strong profit track record and the ability to pay consistent dividends.
How We Can Help Foreign Investors
As being seasoned financial advisors with expertise in Turkish tax and financial regulations, we can help foreign investors understand the intricacies of dividend payments in Turkey and optimize their investment strategies.
Our Services Include:
- Tax Advisory: We provide guidance on minimizing withholding taxes and taking advantage of DTTs to maximize your dividend income.
- Financial Planning: We offer comprehensive financial planning services to help you structure your investments and dividend income for optimal returns.
- Compliance Support: We assist investors in meeting Turkish regulatory requirements to avoid legal issues and penalties.
Feel free to contact us if you need personalized advice on dividend payments in Turkey or any other aspect of financial management in the Turkish market.
Conclusion
For foreign investors, understanding dividend payments in Turkey is a crucial aspect of maximizing returns and ensuring compliance with local tax laws. By familiarizing yourself with Turkey’s tax framework, leveraging double taxation treaties, and working with an experienced financial advisor, you can make informed investment decisions that benefit your portfolio.
Turkey offers many opportunities for investors looking to benefit from regular dividend payments, especially in sectors like real estate, energy, and finance. By strategically managing the tax implications of your dividends, you can optimize your returns and achieve your financial goals.
For more information on dividend payments in Turkey and how to optimize your investments, feel free to reach out to us. We’re here to guide you through the complexities of Turkey’s financial landscape and help you succeed in your investment journey.
FAQ
1. How are dividend payments taxed in Turkey?
Answer:
Dividend payments in Turkey are subject to a 15% withholding tax for non-resident shareholders. For resident companies, dividends received from Turkish companies are exempt from corporate tax, while individual shareholders face a 10% withholding tax. Tax treaties may reduce these rates for foreign investors.
2. What is the process for distributing dividends in Turkey?
Answer:
In Turkey, dividends can only be distributed after the company has generated a profit, and the financial statements are approved by the General Assembly. After setting aside the statutory reserves, the remaining profit can be distributed to shareholders according to their shareholding percentage.
3. Are there any restrictions on dividend payments in Turkey?
Answer:
Yes, dividend payments in Turkey can only be made from distributable profits, and companies must set aside 5% of the annual profit as a legal reserve until it reaches 20% of the paid-in capital. Dividends cannot be paid if the company is in financial distress or if doing so would harm its capital.
4. Can foreign investors freely repatriate dividends from Turkey?
Answer:
Yes, foreign investors can freely repatriate dividends from Turkey after paying applicable withholding taxes. There are no foreign exchange restrictions, allowing foreign shareholders to transfer their dividend income abroad in any currency.
5. How are dividends reported in Turkey?
Answer:
Dividends are reported in the annual corporate tax return of the distributing company and are subject to withholding tax at the time of payment. Shareholders, especially foreign investors, should consult Turkish tax advisors to ensure compliance with local regulations and tax treaties.
Invest CPA Ltd. Turkey 