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Subsidiaries in Turkey

Subsidiaries in Turkey: A Comprehensive Guide for Foreign Investors

Turkey has long been a hub of business activity, strategically positioned between Europe and Asia. Its growing economy, dynamic workforce, and favorable policies make it an attractive destination for foreign investors. One of the key ways foreign businesses establish themselves in Turkey is through subsidiaries. In this comprehensive guide, we will explain everything foreign investors need to know about subsidiaries in Turkey—from legal requirements and formation processes to tax regulations and benefits.

What Are Subsidiaries?

A subsidiary is a company that is either wholly or partially owned by another company, referred to as the parent company. The parent company typically holds a controlling interest in the subsidiary and can exert influence over its operations and management, though the subsidiary operates as an independent legal entity.

For foreign businesses looking to expand into Turkey, setting up a subsidiary offers an effective way to enter the market while retaining control over local operations.

Why Set Up a Subsidiary in Turkey?

There are several reasons why setting up subsidiaries in Turkey is advantageous for foreign investors:

  1. Strategic Location: Turkey’s geographical position between Europe, Asia, and the Middle East makes it a key logistics hub, offering easy access to these markets.
  2. Growing Economy: Turkey boasts one of the world’s fastest-growing economies, with expanding sectors such as manufacturing, technology, and tourism.
  3. Tax Incentives: The Turkish government offers various tax incentives, especially in sectors like R&D, manufacturing, and energy.
  4. Talent Pool: Turkey has a young and educated workforce, particularly in tech, engineering, and finance.
  5. Legal Protection: Subsidiaries are considered independent entities under Turkish law, which limits the legal exposure of the parent company in case of disputes or financial problems.

Legal Framework for Subsidiaries in Turkey

The establishment and operation of subsidiaries in Turkey are governed by the Turkish Commercial Code (TCC) and other relevant regulations, such as Turkish Foreign Direct Investment Law (FDI). These laws provide clear guidelines for the incorporation, management, and operation of subsidiaries by foreign investors.

1. Types of Subsidiaries

In Turkey, foreign investors can choose from different legal structures for setting up subsidiaries. The two most common forms are:

Each structure comes with its own advantages and legal requirements, and the choice largely depends on the scale of business operations and the specific needs of the foreign investor.

2. Shareholders and Directors

Both LLCs and JSCs require at least one shareholder, who can be a foreign national or a foreign company. There is no residency requirement for shareholders or directors, allowing foreign investors to fully own and control their subsidiaries in Turkey. However, JSCs are required to appoint a board of directors, while LLCs are only required to appoint at least one manager.

3. Capital Requirements

Turkey has set minimum capital requirements for subsidiaries:

  • Limited Liability Company (LLC): The minimum capital requirement is 50,000 TRY (approximately $1,400–$1,500 USD depending on the exchange rate).
  • Joint Stock Company (JSC): The minimum capital required is 250,000 TRY (approximately $7,000–$7,500 USD).

These capital requirements are relatively low compared to many other countries, making it cost-effective to set up subsidiaries in Turkey.

Taxation of Subsidiaries in Turkey

Understanding the tax implications is vital for foreign investors establishing subsidiaries in Turkey. Turkish subsidiaries are subject to the same tax regulations as local companies.

1. Corporate Income Tax

Turkey has a standard corporate income tax rate of 25% as of 2024, although this rate may vary slightly depending on annual adjustments. Subsidiaries must pay corporate tax on their profits generated from Turkish operations.

2. Value-Added Tax (VAT)

The VAT rate in Turkey ranges from 1% to 20%, depending on the type of goods and services provided. Most goods and services are subject to the standard VAT rate of 20%.

3. Withholding Tax

Foreign investors may also be subject to withholding tax on dividends, royalties, and interest payments. The standard withholding tax rate on dividends is 15%, though this may be reduced under tax treaties Turkey has with various countries.

4. Transfer Pricing Regulations

Turkey follows OECD transfer pricing guidelines, which means that transactions between the subsidiary and its parent company must adhere to the arm’s length principle. This ensures that intra-group transactions are priced as if they were between unrelated parties.

Compliance and Reporting Requirements

Subsidiaries in Turkey must comply with several ongoing reporting obligations:

  1. Annual Financial Statements: Subsidiaries are required to prepare annual financial statements in accordance with Turkish GAAP (Generally Accepted Accounting Principles) or TFRS (Turkish Financial Reporting Standards) for larger companies.
  2. Tax Filings: Corporate tax returns must be submitted annually, while VAT returns must be filed monthly or quarterly.
  3. Audits: Joint Stock Companies are subject to mandatory independent audits if they meet certain size criteria (e.g., asset size, turnover, number of employees).
  4. Employment Regulations: Subsidiaries must comply with Turkish labor laws, which mandate social security contributions, severance payments, and other employee benefits.

Benefits of Establishing Subsidiaries in Turkey

There are numerous benefits for foreign investors setting up subsidiaries in Turkey:

  1. Tax Incentives: Turkey offers various tax incentives, especially in certain regions and sectors like R&D, manufacturing, and technology.
  2. Access to Emerging Markets: Turkey’s strategic location provides access to emerging markets in Europe, Asia, and the Middle East, making it a valuable base for regional operations.
  3. Free Zones: Subsidiaries located in Turkey’s Free Zones benefit from exemptions on VAT, corporate tax, and customs duties, enhancing profitability.
  4. Lower Operating Costs: Turkey offers a cost-effective environment with lower labor and real estate costs compared to Western Europe, allowing foreign investors to reduce operational expenses.
  5. Double Taxation Treaties: Turkey has signed over 80 double taxation treaties, enabling subsidiaries to avoid being taxed in both Turkey and the parent company’s home country.

Challenges for Foreign Investors

While there are significant advantages, foreign investors should also be aware of potential challenges when establishing subsidiaries in Turkey:

  1. Currency Fluctuations: The Turkish lira has experienced volatility, which can affect the cost of doing business.
  2. Regulatory Complexity: Compliance with Turkish labor, tax, and business regulations can be complex, particularly for first-time investors.
  3. Cultural Differences: Understanding local business culture is essential for successful operations, particularly in negotiations and partnerships.

Conclusion: A Strategic Move for Global Growth

Establishing subsidiaries in Turkey offers numerous opportunities for foreign investors, from accessing a dynamic emerging market to benefiting from tax incentives and competitive operating costs. However, it’s crucial to understand the legal framework, tax regulations, and compliance obligations to ensure smooth operations.

Whether you are expanding a multinational company or entering the Turkish market for the first time, setting up a subsidiary in Turkey can be a strategic move for global growth. By following the guidelines outlined in this article, foreign investors can make informed decisions that maximize the potential for success in this rapidly growing economy.

[OUR SERVICES] Expert Advisory Services for Establishing and Managing Subsidiaries in Turkey

Setting up a subsidiary in Turkey is a strategic move for foreign businesses seeking to expand into the Turkish market. Establishing a subsidiary requires an understanding of Turkish corporate structures, regulatory compliance, and tax obligations. Our services are designed to provide seamless support in setting up and managing your Turkish subsidiary, ensuring both compliance and operational success.

  • Comprehensive guidance on choosing the ideal company structure for your subsidiary, whether it’s a Limited Liability Company (LLC) or a Joint Stock Company (JSC)
  • Support with the preparation and filing of required documents, including the Articles of Association, to meet Turkish legal requirements
  • Assistance with tax registration, obtaining a Turkish Tax Identification Number, and meeting local tax compliance standards
  • Monthly management reports that provide clear insights into the subsidiary’s financial health and operational performance
  • Advisory on implementing internal controls, budgeting, and forecasting to maintain efficiency and financial clarity

Contact us for a tailored, professional approach to establishing a compliant and well-structured subsidiary in Turkey.

FAQ

1. What are the benefits of establishing a subsidiary in Turkey?

Answer:
Establishing a subsidiary in Turkey allows foreign investors to access local markets, benefit from tax incentives, and enjoy legal protections similar to domestic companies. Subsidiaries also offer flexibility in managing operations and tax-efficient structures for repatriating profits.

2. What are the legal requirements for setting up a subsidiary in Turkey?

Answer:
To set up a subsidiary in Turkey, foreign investors must register with the Turkish Trade Registry, obtain a tax identification number, and meet minimum capital requirements. The process includes drafting articles of association, appointing a local director, and opening a local bank account.

3. How are subsidiaries taxed in Turkey?

Answer:
Subsidiaries in Turkey are subject to Corporate Income Tax (CIT) at a rate of 25% (as of 2024) on their global income. They may also benefit from certain tax incentives, such as reduced rates for investments in priority sectors and VAT exemptions, depending on their location and business activities.

4. Can a foreign investor fully own a subsidiary in Turkey?

Answer:
Yes, Turkey allows 100% foreign ownership of subsidiaries across most sectors. This offers foreign investors full control over the subsidiary’s operations and profits without needing a local partner, unlike in some other countries.

5. What is the difference between a branch and a subsidiary in Turkey?

Answer:
A branch in Turkey is an extension of the parent company and is not a separate legal entity, whereas a subsidiary is an independent legal entity. Subsidiaries offer limited liability protection, meaning the parent company’s liability is limited to its investment in the subsidiary, while branches expose the parent company to more direct risk.