The legal framework governing the taxation of personal income (as well as the income of a few types of unincorporated partnership) is provided by the Income Tax Code (Statute 193). This basic law, which was originally passed in 1961, has been amended many times over the years with sweeping changes being made in 1980. The following discussion incorporates changes made in the law as recently as 6 July 1994.

Personal income is defined in the law in terms of seven categories: commercial earnings, agricultural earnings, wage and salary income, independent professional service income, income from real estate properties, dividend and interest income, and miscellaneous profits and earnings. Specific provisions concerning the taxation of each category of earnings are spelled out in relevant sections of the law.

An additional concept in the taxation of personal income in Turkey is related to what is known as a "full tax liability" versus a "limited tax liability". "Full" taxpayers are residents of Turkey who are legally required to report all their income from whatever sources anywhere in the world and are liable for taxation on that basis. "Limited" taxpayers on the other hand are generally non-residents who have secured income in Turkey and are liable for taxes only on the income they may have secured in the country. As a rule, income tax is collected on the basis of a filed declaration though certain types of transactions may be subject to what is called "lump-sum" taxation or to tax withholding. These methods are discussed individually below.

Declaration is the method most commonly employed in the taxation of commercial earnings. Taxpayers are required to file an annual return reporting their earnings during the previous calendar year. The law stipulates what types of expenses are or are not deductible when determining what constitutes taxable income. For example, salaries paid to the owner of a business enterprise, his spouse, or his children, taxes and penalties, and the interest paid on capital are not deductible expenses. Only half the expenses of vehicles reportedly used for business purposes can be booked as expenses. While charitable donations can be deducted, severe limits are imposed on the amounts. The income from construction work that extends over a period of more one calendar year becomes taxable as of its completion date.

Withholding is generally the method used to tax wage and salary income. A person with wage or salary income is not required to file a personal return unless he earns over a certain amount (currently TL 450 million a year) or has more than one employer.

"Wage and salary income" is defined very broadly to include the cash value of virtually anything (including all benefits) that an employer provides to his employees on account of their employment. When benefits are provided on a net basis, the payment must be "grossed-up" (so as to include tax) and reported accordingly. Employees take a personal exemption of TL 30,000 a day and up to a third of their food, clothing, education, health, and rent expenses can also be deducted (subject to a cap of 35% of the tax base-23% in 1994). Premiums paid for personal insurance (life, health, retirement) purchased from companies in Turkey are deductible though the amount deducted cannot exceed the amount that employee pays as his share of social security. Employer-provided severance pay and marriage allowances are also tax free, subject to certain conditions.

Another category of earnings taxed through withholding is dividend and interest income. This includes interest on bank deposits, private corporate securities, and repo transactions based on marketable securities. In this case, the tax withheld at source is usually the final tax burden and the income may not have to be reported (at least not until 1997 under the present rules). The tax rate, incidentally, is remarkably low: 5.50% on Turkish-lira deposits, 11% on foreign-currency deposits and bond interest. The withholding rate on income from government bonds and Treasury bills and from repo transactions is currently zero.

If the total value of corporate dividend income plus the tax credit (computed as one-third of the income) come to less than TL 450 million a year, the tax withheld by the company paying the dividend represents the final tax burden on such earnings and the earnings need not be separately declared. It only becomes necessary to file a return if the aggregate value of dividend income from all sources amounts to more than TL 450 million a year.

Please do not hesitate to contact us if you need any additional information regarding the matters discussed here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

For further information contact Mustafa Camlica, Tax Manager on tel: +90 212 232 1210, fax: +90 212 230 8231, or e-mail mustafa.camlica@arthurandersen.com or enter a text search 'Arthur Andersen' and 'Business Monitor'.