1. EXPENSES OF LIAISON OFFICES:
Liaison offices deemed not to engage in income-generating activities and have any commercial operations in Turkey. As they are deemed, not to have any commercial operations, all the expenses of the liaison offices have to be covered by the foreign exchange sent by parent foreign entity. The Undersecretariat of Treasury’s General Directorate of Foreign Investment of Republic of Turkey grants a license for establishment of liaison offices. It needs to indicated in the license that the liaison offices expenses will be covered by parent company. The expenditures of a liaison office such as the payment of salaries, rental payments and other expenses must be brought from abroad in foreign currency, thus the parent company shall send a foreign currency to the liaison office’s bank account. Therefore, in accordance with the relevant legislation and the license granted by Undersecretariat of Treasury’s General Directorate of Foreign Investment of Republic of Turkey, the inflow of foreign currency to Turkey is required for operation of liaison offices in Turkey. According to the Regulation for Implementation of Foreign Direct Investment Law, the Ministry on its own or on the written request of relevant institutions or organizations may carry out inspections on the liaison offices whether their activates are in conformity with relevant legislation and the field of activity determined in their operation permits.
In light of the above mentioned statements, since a liaison office is not allowed to engage directly in any profit-generating business, a liaison office may not directly issue invoices for the goods sold or services rendered to a local persons; however, the parent company may issue such invoices.
2. STATUS OF LIAISON OFFICE IN RELATION TO TURKISH TAX LAW:
In Turkey corporations are required to pay corporate income tax based on their quarterly profits at the rate of 20%. Advance corporate income tax paid during the fiscal year are offset against the ultimate corporate income tax liability of the company which is determined in the related year’s corporate income tax return.
On the other hand liaison offices are defined as business units of foreign investors that do not engage in income-generating activities and commercial operations in Turkey. As they are deemed not to have any commercial operations, all the expenses of the liaison offices have to be covered by the foreign exchange sent by parent foreign entity and they are also exempted from the major taxes in Turkey. According to Turkish Law, any and all office expenses shall be covered by the foreign exchange transferred from abroad. Liaison Offices by itself is not subject to taxes and exempted from the Turkish taxes listed below:
-corporate income tax
-income tax on salaries of the liaison office employees
I.REGARDING INCOME TAX ON SALARIES OF THE LIAISON OFFICE EMPLOYEES:
Under the Turkish tax system, in order to secure the collection of taxes, certain taxes are collected through withholding.
These include income tax on salaries of employees, lease payments to individual landlords, independent professional service fee payments etc. Companies in Turkey are responsible for withholding taxes on payments made to employees, and declaring them. The Income Tax Law No. 193(3) stipulates that the payments made to a liaison office’s employees are exempted from income tax which the employer is obliged to withhold pursuant to the Art. 94 of Income Tax Law in case the conditions listed under are fulfilled:
-The payment shall be made from earnings that earned outside Turkey by the limited-liability-tax-payer.
-The payments shall be made as foreign currency.
-The documents proving these conditions (bank statements, foreign currency purchase documents, overseas transfer receipt, etc.)shall be kept in order to check these conditions.
Excluding the above-mentioned payments, the liaison offices are obliged to make stoppage, in case they make payments listed in the Art.94 of Income Tax Law. For instance, the liaison office shall made stoppage on the rental payments that made by the officials of the liaison office and the honorarium paid to accountants or translation offices.
II.REGARDING THE STAMP TAX:
Documents within the scope of stamp tax are papers which are legally valid and enforceable, bearing a signature and prepared for the purpose of proving of a legal subject. Therefore, stamp tax applies to a wide range of documents. Since there wasn’t any provision in the Stamp Tax Law which was exempting the payments made to a liaison office’s employees from tax, the stamp tax withholding was made on payments of liaison office’s employees before the Law No. 5535 legislated on 08.07.2006. However, after this date, pursuant to the Art.8 of the Law No.5535 and Art.23 of Income Tax Law the payments which are exempted from the income tax are also exempted from the stamp tax. After the relevant date, the stamp tax withholding will not be made on payments of liaison office’s employees.
III.CONSIDERATION IN TERMS OF THE SOCIAL INSURANCE LEGISLATION:
If the employee works in a liaison office is a Turkish citizen, the income tax stoppage shall not be made on the employment wage ,but the Social Insurance Institution; employee and employer premium shall be cut and deposited to the Insurance Department. The Art.3 of the Social Insurance Law No. 506 which regulates persons who does not count as insurance holder contains a provision stating “foreign nationals who are sent to Turkey for work to be done on behalf, and for the account, of an undertaking having its principal place of business abroad and who claim that they are insured abroad”. The foreign employees of liaison office are foreign nationals who are sent to Turkey for work to be done on behalf of a work where its principal place of work is off abroad. In order not to consider these employees as insurance holder in Turkey, it is required that:
-There must be Social Insurance Agreement between Turkey and the employer’s resident country.
-There must be documents taken from employee’s resident country’s institution which proves that the employee is insured in resident country.
-The above mentioned document must be approved by Social Security directorate.
In case of employee proves that he/she is insured in resident country with the above mentioned documents, he/she shall not pay the Social Security premium in Turkey.
On the other hand, since the employees of the liaison offices who are Turkish citizens will be considered as insurance holders within the Scope of Social Insurance Legislation, they must be informed to the Social Insurance Institution by limited taxpayer employer. Liaison office is obliged to submit the workplace opening notification at the latest the date the office starts to employ the insurance holders to the Social Security Directorate. In addition, liaison office is also obliged to submit employee entrance notification form of these employees to Social Security Directorate.
IV.REGARDING THE CORPORATE INCOME TAX:
According to Foreign Direct Investments Law No.4875 Undersecretariat of Treasury’ General Directorate of Foreign Investment of Republic of Turkey grants permission for establishment of liaison offices on the condition of not engaging in income-generating activities and commercial operations. Since the liaison office does not engage in commercial activities, it cannot obtain any income. Therefore, it is exempted from corporate income tax. There are a plenty of Council of State decisions and advance rulings regarding this issue. Liaison offices are obliged to pay tax only on the payments which are outside the scope of Art.94 of Income Tax Law. In accordance with this rule, liaison offices are not obliged to keep books which are mandatory under the Tax Procedural Law.
Although, liaison offices do not pay income or corporate taxes; they must keep records of all of its expenditures and revenues which are transferred from the parent company.
V.REGARDING THE VALUE ADDED TAX:
The Turkish tax system levies value added tax on the supply and the importation of goods and services. But, in order to mention value added tax liability under the Art.1 of the Value Added Tax Law No.3065, commercial, industrial, agricultural or self-employment activity is required to be done. Since, the liaison offices are established offices on the condition of not engaging in income-generating activities and commercial operations, they are not become VAT taxpayer. There are plenty of advance rulings regarding this issue.