1

GRANT THORNTON

PROFILE OF TURKEY FOR BUSINESSMEN

DOING BUSINESS IN TURKEY

December 2012

2

This document reflects current information as of December 2012. The latest available version may be followed at our web site:

www. gtturkey.com

If you would like more detailed on the subjects covered in this business profile, please do not hesitate to contact Grant Thornton offices are follows:

Grant Thornton Turkey Address : Abide-i Hürriyet Cad, Bolkan Center, C Blok, No. 211, Kat 3, Sisli, Istanbul Phone : (0212) 373 00 00 aykut.halit@gtturkey.com

This booklet has been prepared by Grant Thornton to provide foreign businessmen with introductory information about Turkey. The information and views appearing in this booklet may change in parallel to changes in the regulations. For a final opinion resort must be made to related professional advisers.

3

1 Introduction 5 1.1 Geography 5 1.2 Population 5 1.3 Currency 7 1.4 Political Environment 7 1.5 International Economic Relations 8 1.6 Turkish Economy 8

2 Legal Background

9 2.1 The Legal System 9 2.2 Court System 9 2.3 Foreign Investment 9 2.4 Turkish Commercial Code 10 2.5 Turkish Accounting Standards &Uniform Chart of Accounts 10 2.6 Capital Market Board (CMB) Regulations 11 2.7 Banks and financial institutions like leasing and factoring companies 11 2.8 Insurance Companies 11 2.9 Social Security 11 2.10 Labour Law 12

3

Business Entities

13

4

Grants and Incentives

15 4.1 Research and Development (R&D) Incentives 17 4.2 Technology Development Zones (TDZs)- Technoparks 18 4.3 Organised Industrial Zones 18 4.4 Free Trade Zones 18 4.5 State Aid to SMEs 18 4.6 KOSGEB Support for SMEs 19

5

Taxation

19 5.1 Corporation Tax 20 5.2 Significant Corporate Taxation Issues 24 5.2.1 Controlled Foreign Corporation (CFC) 24 5.2.2 Thin capitalization 24 5.2.3 Transfer pricing 24 5.2.4 Participation Exemption 26 5.2.5 Payments to Tax Havens 26 5.2.6 Taxation of Foreign Transportation Companies 27 5.3 Individual Income Tax 27 5.3.1 Income Tax on Salaries 27 5.3.2 Self employed individuals 28 5.3.3 Wages remitted from abroad 28 5.4 Withholding tax 28 5.4.1 Withholding tax rates apply to corporations 28 5.4.2 Withholding tax rates apply to individuals 29

4

5.4.3 Corporate Withholding Tax on Dividends 29 5.4.4 Withholding tax on long term construction works 29

5.5 Value Added Tax (VAT) 30 5.5.1 General 30 5.5.2 Tax Rates 30 5.5.3 VAT Refund 31 5.6 Stamp Duties 31 5.7 Banking and Insurance Transaction Tax (BITT) 31 5.8 Special consumption tax 31 5.9 Property Tax 32 5.10 Resource Utilization Support Fund (RUSF) 32

6

Company Restructuring

32 6.1 Merger 32 6.2 Share swap 33 6.3 Reduction of capital 33

7

Real Estate Law

34 7.1 Real estate acquisition by foreign individuals 34 7.2 Real estate acquisition by foreign legal entities 35 7.3 Real estate acquisition by Turkish subsidiaries of foreign legal entities 35 7.4 Taxes on acquisition of real estate 35

8

Competition Law

35

Appendix 1 : Double Tax Treaties 36 Appendix 2 : Bilateral Social Security Agreement 40 Appendix 3 : Technology Development Zones (TDZ) - Technoparks 41

5

1 Introduction

1.1 Geography

Turkey has land area of 779,452 sq.km, surrounded by a long coastline, the Black Sea in the north, the Marmara Sea and the Aegean Sea in the West and the Mediterranean in the South. To the East Turkey has borders with Georgia, Armenia, Iran, Iraq and to the South East with Syria. Bulgaria and Greece borders the Thrace region in the North West.

1.2 Population

According to the latest census (2012), the population of Turkey as of December 2012 has reached 75.6 million, increasing at an annual rate of 1.2 percent.

Around 77.3% (58.4 million) was urban population and the rest 22.7% (17.2 million) lived in rural areas. Male and female population numbered respectively 37.9 million and 37.7 million. The average age was 30.1 years and one half of the population was under 30 years.

Major cities 2012 Population % of total population in 000’s

Istanbul 13.710 18.1 Ankara 4.842 6.4 Izmir 3.662 4.8 Bursa 2.402 3.2 Adana 1.887 2.5 Gaziantep 1.605 2.1

6

Konya 1.564 2.1 Kocaeli 1.527 2.0 Antalya 1.493 1.9 Mersin 1.328 1.7 Diyarbakir 1.155 1.6 Kayseri 1.116 1.6 S.Urfa 975 1.3 Manisa 904 1.2 Samsun 840 1.1 Hatay 742 0.9 Balikesir 712 0.9 K.Maras 676 0.9 Aydin 612 0.8 Van 549 0.7

--------- ---------- Sub-total 42.301 55.9

--------- ----------

Cities between 2012 Population % of total population 500-1000 in 000’s

Eskisehir 711 0.9 Sakarya 681 0.9 Denizli 671 0.9 Tekirdag 589 0.8 Erzurum 509 0.7 Malatya 505 0.7 Mardin 458 0.6 Sivas 428 0.6 Trabzon 427 0.6 Ordu 423 0.6 Elazig 419 0.5 Batman 399 0.5 A.Karahisar 378 0.5 Kutahya 375 0.5 Mugla 374 0.5 Adiyaman 365 0.5 Corum 365 0.5 Tokat 358 0.5 Agri 292 0.4 Zonguldak 287 0.4

---------- --------- Sub-total 9.014 12.1

---------- --------- Cities below 2012 Population % of total population 500 in 000’s Total 7.133 9.3

----------- --------- ----------- ---------

Grand Total 58.448 77.3

7

Division of the population by sectors is summarized below as of October 2012:

% Industry 19 Agriculture 25 Services 49 Construction 7

Total 100.0

On basis of the above statistics published by the State Institute of Statistics for year 2012, around 85 % of the Turkish population lived in cities with population of over 500.000.

1.3 Currency

The currency unit of the Republic of Turkey is Turkish Lira (TRY) in symbol “ ”.

The value of TRY against major foreign currencies has been allowed to fluctuate on basis of international currency movements. Developments in the value of the Turkish Lira over the last 5 years were as follows:

As of 31 December

1.4 Political Environment

Turkey is a republic in which, power is divided between the legislature, the executive and the judiciary. Under the 1982 constitution the Turkish parliament (TBMM) is the sole legislative body, exercising supreme power. Executive power is exercised by the President and the Council of Ministers, in accordance with the constitution and the law. The Judiciary operates independently on behalf of the state.

The parliament (TBMM) consists of 550 deputies who are directly elected by universal adult suffrage. Elections take place every four years or less at the discretion of the government. The Council of Ministers (the cabinet) is headed by the Prime Minister and is responsible to the Parliament. After an election the President invites the leader of the largest party to form a government. If successful, he or she is then appointed Prime Minister and nominates ministers who are in turn approved by the President. The President is elected by the members of the parliament for a period of seven years.

2008 2009 2010 2011 2012

Euro

2.15

2.18

2.05

2.44

2.35

US $ 1.51 1.52 1.55 1.89 1.78 GP Pounds 2.20 2.44 2.39 2.92 2.87

8

1.5 International Economic Relations

Turkey has been a member of The UN since 1946,

The WHO since 1995 The NATO since 1951, The OECD since 1961, Joined the Customs Union with EU as from January 1996, EU Council decided to open talks for accession to full EU membership in October 2005

In addition Turkey has bilateral agreements on preferential free trade, on the promotion and protection of investments, on the prevention double taxation between the countries (see Appendix 1), and on social security (see Appendix 2). 1.6 Turkish Economy

Turkey is the seventeenth largest economy in the world and the seventh largest when compared to the EU's twenty-seven member state countries, where it is the largest national economy in Central and Middle East. Turkey is a growing political and economic power in its region, which includes the Middle East, Africa, Eastern Europe and the Commonwealth of Independent States, comprising former Soviet Republics (the "CIS"). Turkey has demonstrated strong political and macro-economic stability in the past years, during which time the country has been ruled by a single-party government. One of the most important outcomes of macro-economic stability and the disciplined monetary policy that the Turkish government applied over the past years has been the drop in Turkey’s inflation rate from 29.5% in 2002 to 6.2% in 2012. Standard & Poor’s recently affirmed Turkey’s foreign currency credit rating as ‘BB/B’. Turkey’s GDP figures and growth rates between 1998 and 2011 are as follows:

9

The key drivers for Turkey expected future growth include: - young and growing population; - skilled but comparatively inexpensive workforce; - accumulated know-how in various industrial and services sectors; - well-established industries (including retail, automotive, textiles and construction materials); - macro-economic and political stability; and - strategic geographical location. 2 Legal background

2.1 The Legal System

Turkish jurisprudence is split into three main sections:

Criminal law, civil law and administrative law. Administrative Law deals with disputes between individuals and legal entities and the departments of the state namely, the local councils and tax and customs authorities.

2.2 Court System

The Constitutional Court deals with cases related to the functioning of the rules laid down in the Turkish Constitution.

The Court of Appeal (Yargitay) re examines the decisions and judgments taken by Courts of Justice and by Commercial Courts.

The Council of State Court (Daniştay) is the last place of review for decisions and judgments given by the Administrative Courts and Tax Courts. It oversees the interpretation of the law by the Other Administrative Courts.

2.3 Foreign Investment

Turkey ranks as the world’s 13th most attractive destination for Foreign Direct Investment (FDI) in 2012 according to A.T. Kearney FDI Confidence Index. According to the statistics of the Central Bank of Turkey, the overview of FDI inflow to Turkey by sectors is as follows: (in USD million) Sector 2005 2006 2007 2008 2009 2010 2011 Agriculture 7 6 9 41 49 82 31 Industry 829 2.100 5.116 5.174 3.780 2.861 7.771 Services 7.699 15.533 14.012 9.532 2.423 3.295 8.085 Total 8.535 17.639 19.137 14.747 6.252 6.238 15.887

10

The “Direct Foreign in Investment Law published on June 17, 2003 guarantees the treatment of foreign investors in Turkey in equal manner as local investors. Currently a foreign investor does not need to obtain advance permission from the authorities in order to invest in Turkey, but has to submit statistical information to the Turkish Treasury after the investment has taken place. Companies with foreign capital are subject to the same Commercial Law and all other laws and are committed to bear the same taxes as their Turkish counterparts. Anti-trust regulations also provide a fair competition environment to foreign investors. Further information on Turkish foreign investment regulations and procedures can be found on the Turkish Treasury and Invest in Turkey sites: www.hazine.gov.tr ; www.invest.gov.tr 2.4 Turkish Commercial Code (TCC)

TCC regulates the business environment in Turkey that covers all aspects of business. A new Commercial Code came into force as of 01.07.2012. It has brought significant changes into Turkish business life. The New Code is mostly compatible with EU regulations and enacts rules on corporate governance, internal and external audit requirements, protection of stakeholders’ rights, bookkeeping and financial reporting, company formation, representation and structuring, public information sharing, competition and some other related aspects for corporations in detail. 2.5 Turkish Accounting Standards & Uniform Chart of Accounts

Under the New Commercial Code, listed companies, financial companies, media and insurance companies and companies that meet some specific revenue, asset value and staff size requirements according to their structures and area of operation, have to keep their books in accordance with the Turkish Accounting Standards and to prepare their financial statements in line with the Turkish Financial Reporting Standards beginning from 01.01.2013, which are in conformity with IFRS. These companies also have to assign external independent auditors. The rest will continue keeping their books in line with the Uniform Chart of Accounts as in the past, which is promulgated by the Ministry of Finance. Valuation standards, depreciation methods and provisions for expenses are determined by the Tax Procedural Law (TPL). According to the Law: - Tangible and intangible fixed assets are valued at cost. Up to end of 2005 revaluation was allowed on basis of the rules laid down by the Ministry of Finance. - Stocks may be valued at average cost or on FIFO basis. LIFO is not allowed. - Provision for obsolete, damaged etc. stocks or fixed assets is allowed only if approval of an official committee appointed for this purpose is obtained. - provision for bad debts is not allowed unless it is supported by action in Court. - provision for accrued severance pay to personnel is not allowed. However actual payments made are allowed to be written off.

11

Under the New Code, it is possible for Turkish companies to keep their books in electronic form.

2.6 Capital Market Board (CMB) Regulations

The following entities are subject to the regulations of CMB:

- companies listed at the Istanbul Stock Exchange - intermediary companies (dealing in purchase and sale of shares), - Real Estate Investment Funds, - Investment Funds and Investment Trusts - Investment companies - Companies more than 250 shareholders

CMB companies are subject to International Financial Reporting Standards (IFRS). All entities subject to CMB regulations are subject to independent audit by firms of qualified accountants approved by CMB.

2.7 Banks and financial institutions like leasing and factoring companies.

These are regulated by the Banking Regulatory and Supervision Board (BRSB) and are obliged to comply with the accounting and other standards set by BRSB. They are also subject to independent audit by firms of qualified accountants approved by BRSB. 2.8 Insurance Companies

These are regulated by the Treasury of the Turkish Government and are subject to independent audit by firms of qualified accountants approved by the Treasury.

2.9 Social Security

All employees in the private sector companies must be covered by the Social Insurance Institution of Turkey. The coverage of this system comprises; illness, maternity, disability, old age pension, death and job accidents. Social security premium contribution rates are as follows:

Premium Type Employee Employer Total Short-term including occ. accidents, deseases (acc. to risk level)

-

1-6,5

1-6,5

Disability, old age, death 9 11 20 General health 5 7,5 12,5 Total minimum 14 19,5 33,5 Total maximum 14 25 39 Unemployment 1 2 3 Total 15 21,5-27,0 36.5-42,0

12

The above rates apply on gross salaries, wages and bonuses and paid on a monthly basis and subject to an upper monthly limit of TRY 6.113, 40 (approximately USD 3.400 or EURO 2.650) as of July-December 2012 (subject to valuation twice a year). Employee part of the premium contributions (e.g.15%) are deducted from employee’s withholding tax base. Citizens of countries with reciprocal social security agreements with Turkey are exempt from the Turkish Social security system. Countries with bilateral social security agreements are listed on Appendix 2. 2.10 Labour Law

The relations between employers and employees are regulated by the Turkish Labour Law (nr. 4857). The official working hours in Turkey is 45 hours per week. Overtime may not exceed 270 hours per year. There is a Committee which sets the minimum gross wages. Currently the minimum monthly wage is TRY 940,50 as of 2012. This limit is subject to revision every six months.

Annual Paid Vacation

After completion of one year of employment, employees are entitled to a paid annual vacation as follows: Length of Employment Paid Annual Vacation 1-5 years 14 days 5-15 years 20 days 15 and over 26 days

Retirement Pay (Indemnity)

Where the employer terminates the employment contract through no fault of the employee departure for military service and in case of female employees, marriage the employer has to pay a lump sum of money based on the latest salary and other benefits and accumulated years of employment. This indemnity is equivalent to 30 days pay for each full year of service starting from the date of employment and is limited by a ceiling fixed by the Government. If the gross salary exceeds this ceiling, the service award is calculated up to the ceiling. Currently the ceiling amount up to 31.12.2012 is TRY 3.033,98 (approximately USD 1.700 or EURO 1.300) which is adjusted every six months. Employment of Foreign Personnel

Expatriates need a work permit from the Ministry of Labour and Social Security and a residence permit from the Ministry of Interior in order to be employed in Turkey. Further information on the web is provided by the Ministry of Labor and Social security. http://www.csgb.gov.tr/csgbPortal/yabancilar/eng/index.html

13

3 Business Entities

Business may be carried out in a variety of entities as defined in the Turkish Commercial Law:

These include :

The Joint Stock Company (A.S.) Limited Liability Company (Ltd. Sirket) Collective companies Ordinary partnership Joint Venture Branch Liaison office

Joint ventures are possible only for specific contracts.

Joint Stock Company (A.Ş.) & Limited Liability Company (Ltd. Şirket)

The New Commercial Code has introduced a very simple, straightforward and easily applicable system for the formation of both joint stock companies (JSCs) and limited liability companies (LLC). Under the new law, a single shareholding individual or entity is sufficient for company establishment, which also applies for the BoD. The capital requirement for a JSC is TRY 50.000, where it has been set as TRY 10.000 for LLCs. For LLCs, it is possible to pay ¼ of the whole capital during establishment and the rest within the next 24 months following establishment. For listed companies and the ones that meet staff number, revenue and asset value requirements announced by the Council of Ministers, it is compulsory to assign an external auditor. Listed companies and companies that meet at least two of three requirements shown below for two consecutive years; staff size, revenue and asset values must (keep their books and to) prepare their financial statements in accordance with the Turkish Accounting Standars and Turkish Financial Reporting Standards, which are in conformity with IFRS. The rest will continue to keep their books in accordance with the Turkish Uniform Chart of Accounts. The general requirements for assigning an external auditor, which also brings the requirement for bookkeeping and financial reporting in line with IFRS are as follows: - Net active asset value is TRY 250 million or above, - Annual revenue is TRY 200 million or above, - Staff number is 500 or above.

14

Please note, the Council of Ministers have determined some different limits for some specific sectors. Companies that are required to assign external auditors cannot assign the same external auditor more than seven years within an uninterrupted ten years time period. The new law also regulates structural changes like capital increase, mergers, divisions, internal audit, responsibilities of the BoD, GA and liquidation. Both JSCs and LLCs resident in Turkey are deemed as taxpayers under Turkish tax laws and subject to corporation tax and other taxes in accordance with their areas of operation. Registration formalities

All JSCs and LLCs must be registered with the Commercial Registry and publicized in the Commercial Gazette. There are documents to be prepared (articles of association etc.) which must accompany the application to the Commercial Registry. All companies must also register with: - the Tax office and have the legal books of accounts duly notarized, - the Chamber of Commerce of the city where they are located.

Branch Branches of foreign companies are legal entities under Turkish laws registered with the Trade Registry, which are represented by a branch manager. Branches are established with a separate capital and deemed as a separate tax personality, but do not have separate articles of association. A branch office has to operate within the same field of activity of the head office, but can act independently and trade in its own account in external relations. A Turkish individual or an expatriate can be assigned as the branch manager Liaison Office

Liaison offices of foreign companies can only operate to provide preparatory services to their headquarters and cannot engage in commercial activities. Personnel employed in liaison offices are not subject to income tax and therefore less costly to the liaison office. A liaison office must keep records of its expenditure and income and submit the same to and make them available for inspection by the Ministry of Finance. Liaison offices shall regularly report their activities to the Foreign Investment Directorate of the Treasury; they are allowed to be set up for an initial period of three years which may be extended upon application.

15

4. Grants and Incentives

Turkish Investment Incentive Regime supports foreign investors with many tax advantages. The new investment incentives system has come into effect as of 01.01.2012 and comprised of four investment schemes that provide different support instruments: - General investment incentives scheme, - Regional investment incentives scheme, - Large-scale investment incentives scheme, - Strategic investment incentives scheme. General tax support tools provided to different incentive schemes are shown on the table below: Please note, some additional tax support tools are also provided to some specific investments into some specific regions under condition the specified conditions are met.

Tax Support Instrument

Type of investment scheme

General

Investment

Incentives

Scheme

Regional

Investment

Incentives

Scheme

Large-scale

Investment

Incentives

Scheme

Strategic

Investment

Incentives

Scheme

VAT Exemption √ √ √ √

Customs Duty Exemption √ √ √ √

Tax Reduction √ √ √

Social Security Premium Support (Employer)

√ √ √

Income Tax Withholding Allowance (a)

√ √ √

Interest Payment Support (b) √ √

Land Allocation √ √ √

VAT Refund (c) √

(a) Apply to investments made in Region 6.

(b) Apply to investments made in Regions 3,4,5 or 6 within the framework of the Regional Investment

Incentives Scheme.

(c) Apply to investments made within the framework of the Strategic Investment Incentives Scheme with a

minimum fixed investment of TRY 500 million.

The incentive system has allocated cities into six different regions.

Region 1 Region 2 Region 3 Region 4 Region 5 Region 6

Ankara Adana Balikesir A.Karahisar Adiyaman Agri

Antalya Aydin Bilecik Amasya Aksaray Ardahan

Bursa Bolu Burdur Artvin Bayburt Batman

Eskisehir Canakkale Gaziantep Bartin Cankiri Bingol

Istanbul Denizli Karabuk Corum Erzurum Bitlis

Izmir Edirne Karaman Duzce Giresun Diyarbakir

Kocaeli Isparta Manisa Elazig Gumushane Hakkari

16

Mugla Kayseri Mersin Erzincan K. Maras Igdir

Kirklareli Samsun Hatay Kilis Kars

Konya Trabzon Kastamonu Nigde Mardin

Sakarya Usak Kirikkale Ordu Mus

Tekirdag Zonguldak Kirsehir Osmaniye Siirt

Yalova Kutahya Sinop Sanliurfa

Malatya Tokat Sirnak

Nevsehir Tunceli Van

Rize Yozgat B.Ada&G.Ada

Sivas

General Investment Incentives Scheme Minimum investment amount is TRY 1 million in Region 1 and 2, and TRY 500.000 in regions 3, 4, 5 and 6 respectively. Regardless of the region that investment takes place, all projects meeting both the specific capacity conditions and the minimum fixed investment amount are supported within the framework of the General Investment Incentives Scheme. Some types of investments are excluded from the investment incentives program and would not benefit from this scheme. Regional Investment Incentives Scheme Minimum investment requirement determined for each sector and region as TRY 1 million in Regions 1 and 2, and TRY 500.000 for the rest of the regions. Tax supports vary for each region. Sectors supported in each region are determined in accordance with regional potential and the scale of the local economy, while the intensity of supports varies depending on the level of development of that region.

17

Some investment areas with specific priority are supported by means of Region 5 instruments regardless of the region investment is made. Some of these investments are; mining, transport, wind tunnels, school investments, specific R&D projects. Large-scale Investment Incentives Scheme The Large-scale Investment Incentives Scheme supports twelve types of investments with different minimum fixed investment amounts and different tax support tools, which are; automotive, production of chemical products, production of refined petroleum products, harbors and harbor services, production of railway and tram locomotives, transit pipeline transportation services, electronics industry, production of medical, high-precision and optical equipment, production of pharmaceuticals, production of aircraft and spacecraft and/or related parts, production of machinery, mining. These types of investments are also subject to additional tax advantages under condition they are made into Organised Industrial Zones (OIZs). Strategic Investment Incentives Scheme Strategic Investment Incentives Scheme supports investments that meet the following conditions with different tax support tools based on the regions they are to be made: Investments; - with a minimum investment amount of TRY 50 million, - made for the production of intermediate and finished goods with high import

dependency, - create minimum 40% added-value - possess an import amount of at least USD 50 million in the past year – for goods to be

produced - 4.1. Research and Development (R&D) Incentives

Corporate and individual income taxpayers are allowed 100% of the R & D expenditure as a deduction from their taxable income under condition they hire minimum of 50 personnel who are employed in an R&R centre. The amount that cannot be deducted in the relevant period can be carried forward to the following fiscal periods. Incentives apply to R&D investments are as follows: - 100% deduction of R&D expenditure from the tax base if the number of researchers

exceeds 500, then in addition to the 100% deduction, half of the R&D expenditure increase incurred in the operational year compared to the previous year will also be deducted,

- Income withholding tax exemptin for employees, - 50% of social security premium exemption for employers for a period of 5 years, - Stamp duty exemption, - Techno-initiative capital for new scientists up to TRY 100.000, - Deduction of certain funds granted by public bodies and international organizations

from tax base.

18

4.2. Technology Development Zones (TDZs) – Technoparks

Technology Development Zones are areas that support R&D activities. Currently, there are 39 areas defined as TDZ, 27 of which are operational. For the list of TDZs, please see Appendix 3. Supports provided to TDZ are as follows: - Revenues generated from R&D and software development activities are exempt

from income and corporation taxes until year 2023, - Sales of application software produced in TDZs are exempt from VAT until year

2023, - Salaries of R&D and support staff employed in TDZs are exempt from all taxes

until year 2023.

4.3. Organised Industrial Zones

There are 263 OIZs in 80 provinces, 148 of which are currently operational, while the rest are under construction. OIZs provide ready-to-use infrastructure and social facilities. Tax advantages provided to OIZs include; VAT exemption for land acquisitions, real estate duty exemption for five years starting construction of the plant, tax exemption for unification/separation of plots, lower water, gas and telecommunication costs, exemption from municipality tax for construction and usage of the plant and on solid waste is OIZ does not benefit from municipality services. For the list of OIZs, please see http://www.invest.gov.tr/en-US/investmentguide/investorsguide/Pages/SpecialInvestmentZones.aspx

4.4. Free Trade Zones

Investments in free zones are provided with 100% exemption customs and assorted duties, corporation tax (for manufacturing companies), VAT and special consumption and income tax on employee salaries. Regulations also allow profit transfers from FZs to abroad and to Turkey without any restrictions. Currently, there are 19 operational FZs in Turkey that are based in cities close to harbors, borders and main transport lines to Middle East and Europe like; Adana, Bursa, Antalya, Denizli, Gaziantep, Izmir, Kayseri, Kocaeli, Mardin, Rize, Samsun, Tekirdag and Trabzon.

4.5. State Aid to SMEs

SMEs are companies, which employ less than 250 employees and generate an annual income below TRY 25 million. Investments by SMEs benefit from several tax advantages like; custom duties exemption, VAT exemption for imported and domestically purchased machinery and equipment, credit allocation from government budget, credit guarantee support.

19

4.6. KOSGEB Support for SMEs

KOSGEB (Development organization for small and medium sized entities) also supports SMEs in financing R&D, common facilities, market research, investment site, marketing, export and training under specific conditions. 5 Taxation

General The taxes of major importance in Turkey are as follows: Corporation Tax (Kurumlar Vergisi) Income Tax for Individuals (Gelir Vergisi) Value-added tax (Katma Değer Vergisi) Bank and insurance transactions tax (Banka ve Sigorta Muameleleri Vergisi) Stamp duty (Damga Vergisi) Special consumption tax (Özel Tüketim Vergisi) Property Tax Resource Utilisation support Fund (RUSF)

There are various other taxes, such as municipal, taxes, motor vehicles taxes etc. Both corporations and individuals can be either full or limited taxpayers. Full taxpayers are liable for tax on their world-wide income. Limited taxpayers are subject to tax only on their income derived in Turkey Companies are regarded as full tax payers if either their head office or business center is located in Turkey. For individuals, the tax status is determined according to “residency”. Turkish citizens are accepted as resident unless they have proof of residence abroad. Foreigners are regarded as resident if they stay in Turkey for a continuous period of more than six months in a calendar year other than for reasons of imprisonment, illness or assignment for temporary projects, education etc. In the case of partnerships (joint ventures and consortia) partners’ residence status is taken into account for tax treatment. Full taxpayers are liable to tax on all of their “world” income. Limited taxpayers are liable only on their income or profits earned in Turkey.

20

5.1 Corporation Tax

Corporation Tax rate is 20%.

Tax is assessed on the profits of a company after addition of tax disallowable expenses and deduction of tax exempt income. The accounting year is 31 December, however, permission may be obtained for a different accounting year. This permission is granted by the Ministry of Finance upon application by the taxpayer who should offer an acceptable reason for the different year i.e. seasonality of business or adoption of different accounting period by foreign parent of Turkish subsidiary, etc.

Advance Corporation Tax Companies must prepare a statement of income for each quarter and pay tax on the quarterly profits at the rate of 20%. Quarterly declarations have to made by 14th and payment made by 17th of the second month following the end of the quarter. Annual corporation tax

An annual corporation tax must also be submitted by 25th and payment made by the end of the fourth month following the accounting year end. The quarterly corporation tax (advance corporation tax) payments are deductible from the final annual corporation tax assessment. Branches of foreign companies

Branches of foreign companies (i.e. companies not resident in Turkey) established in Turkey are subject to corporation tax as above only on their income or profits earned in Turkey.

Joint ventures

Joint ventures of a foreign company with a Turkish entity are subject to corporation tax on its share of profits earned in Turkey.

Turkish subsidiaries of foreign companies

These are not subject to any favorable tax treatment compared to locally owned companies. Exemptions from Corporation Tax

These are shown below:

- Dividends received from other Turkish resident companies, - Dividends received from foreign resident subsidiaries or branches subject to

complying with certain conditions

21

- Capital gains of holding companies from foreign subsidiaries with certain conditions - Earnings of the following funds and companies established in Turkey:

- Earnings from portfolio management of investment funds/companies - Real estate investment funds/companies - Venture capital funds/companies - Pension funds - Housing financing funds and assets financing funds,

75% of the capital gains arising from disposal of shares in investee companies and immovable properties provided that companies these have been owned for more than two years; profits resulting from the disposal must not be distributed but must be added to share capital or are transferred to special reserve for minimum of five years. Tax allowable deductions

For corporate and income tax purposes an expense is deductible if it relates to the generation of income or the operation of a business. The following items which may be of special interest are allowed as deductions for Turkish tax purposes:

- Travel and accommodation expenses commensurate to the size of business - Meals provided to employees on site, - Employer’s share of social security contributions (if actually paid in cash) Compensation

and losses incurred according to a contract or a court decision, - Expenses of leased or owned vehicles that are used for business purposes, - Depreciation expenses calculated on basis of the rates and methods of the Tax Procedural Law, - Employer’s contributions to labor unions and to the private pension plan of the

employees (subject to ceiling) - Donations to certain institutions and associations for charitable works (up to a limit), - Bad debt provisions only if legal action towards enforcing the payment has been taken, - Interest paid for business purposes - Business losses inherited from a merger/reduction of capital transaction (subject to a

limit), - Losses incurred in foreign jurisdictions (subject to certain conditions)

Disallowable Expenses

Disallowable expense items include:

- Legal reserves and other reserves set aside from profits - Tax penalties - Late payment interest related to corporate tax and income tax, calculated in

accordance with the regulations - Interest and foreign exchange losses on disguised capital Disguised profit distribution

through transfer pricing Interest paid or calculated on basis of capital

22

Depreciation Rates and Methods of fixed assets

As from 01.01.2004 depreciation rates are derived from the depreciation lists prepared by the Ministry of Finance. In general these rates have been based on expected useful lives of related fixed assets. Taxpayers may choose either the “Straight-Line” or “Declining Balance” method. Taxpayers who start with the declining balance method are allowed to switch to the straight-line (a reverse switch is not possible). With the declining method, the depreciation rate is twice the rate of straight-line method applied to the net after depreciation balance brought forward at beginning of each year. The ceiling rate is 50%. Below is a summary of the depreciation rates promulgated by the Ministry of Finance which are usually encountered in practice:

Type of Assets Useful Life Rate

Films, tapes, CD, DVD 2 years 50% Mobile phones, IT software 3 years 33.33% IT hardware, light trucks 4 years 25% Cars, heavy trucks, buses, TV, copiers, camera, start-up costs 5 years 20% Railways, chemical facilities, poultry facilities 10 years 10% Intangible fixed assets 15 years 6.66% Cement facilities, wooden buildings 20 years 5% Energy transmission lines, half-timbered buildings 30 years 3.33% Stone buildings, steel constructions 50 years 2%

Fixed assets acquired before January 1, 2004 shall continue to be depreciated on basis of previously applicable rates where taxpayer is free to choose a depreciation rate of up to 20% per year. Carry-forward Losses

Tax losses may be carried forward and set off against profits of subsequent two years. There are no loss carry-backs. Returns

No further return must be filed by those taxpayers whose income is taxed at source; however, taxpayers may file an optional tax return if they are willing to set off their losses arising from a trading with another line of business.

23

Sample Corporate Tax Calculation

Data - Corporate Profit 1,000 - Disallowable Expenses 20 - Corporate Tax base 1,020

- Corporate Tax (20%) 204

Distributable profit and withholding tax assuming 100% dividend distribution Corporate profit 1,000 Corporation Tax (204) 1st compulsory reserve

5% of profit until 20% of share capital is reached (50) ----

746

2nd Legal Reserve 10% of distributable profit which exceed 5% of share capital (say) (76)

-------

Netdistributable 700 Withholding tax (15%) (105)

------- Distributable net after tax 595

-------

Total tax burden - Corporate Tax 204 - Withholding 105

------- 309

------

It has been assumed the whole of profit is distributed to the shareholders. The allocation of reserves are compulsory according to Turkish Commercial Law and these remain in the structure of the company. Please refer to Appendix 1 for preferential withholding tax rates in line with the tax treaties.

24

5.2. Significant Corporate Taxation Issues

5.2.1 Controlled Foreign Corporation (CFC)

Revenues generated by the CFC of a Turkish company are subject to corporation tax in Turkey, where the Turkish resident company directly or indirectly controls at least 50% of it’s share capital, voting rights or dividends and the following conditions are met: - 25% or more of the CFC’s gross income comprised of passive income, - Effective tax rate applies in the country of residence of the CFC is below 10%, - The annual gross revenue of the CFC exceeds TRY 100.000.

5.2.2 Thin capitalization

Where borrowings from related parties exceed three times the equity of a company at beginning of accounting period the interest, foreign exchange losses and other expenses related to the portion which exceeds three times the equity will be disallowed for tax purposes. In case of borrowings from related banks and/or similar financial institutions the ratio is six times the equity. The term “related parties” refers to shareholders and real or legal persons that own 10% or more of the shares, voting rights or right to receive dividends of a company. Besides, payments or accruals related to the portion of borrowings over three times the equity shall be subject to withholding tax as they are regarded as distributed dividend. Non-cash guarantees provided by related parties, and loans which are obtained from banks/financial institutions by related parties and given over to a company with the same credit terms are out of the scope of thin capital definition. The equity at the beginning of the taxpayer’s fiscal year applies for thin-capitalization purposes. Interest paid or accounted for and foreign-exchange differences related to disguised capital are regarded as non-deductible expenses in determining the corporate tax base. Interest related to disguised capital is treated as a dividend distribution and is subject to dividend withholding tax.

5.2.3 Transfer pricing

Earnings from goods or services traded with related parties on basis of prices or values contrary to the arm’s length principle will be deemed as totally or partially disguised through transfer pricing. Trading in goods or services include buying, selling, production and construction, renting of assets, borrowing and lending money, and other transactions including payments such as bonuses and salaries. The related parties refer to individual or legal entity shareholders of a company and its members of management to which the corporations or the partners are related, the real persons or institutions to which she is related or that he/she influences directly or indirectly

25

its capital or control. The spouses of the partners, ascending and descending lines of partners and their spouses and the cognates including the third generation and their matrimonial allies are also considered as the related persons. All businesses carried out with persons located in countries or regions announced by the Council of Ministers are deemed to have been carried out with the related persons on condition that the tax system in the country where the income is obtained provides a taxation opportunity that is at the same level with the taxation capacity created by the Turkish tax system. Applicable methods

As described in OECD transfer pricing guidelines prices and values in transactions to be carried out with related parties shall be ascertained by using one of the following methods depending on which method is most appropriate to the nature of business:

- Comparable price method, - Cost-plus method, - Resale price method, - Profit split, - TNMM

In case it is not possible to reach an appropriate transfer price through any of the foregoing methods the taxpayer use may any other methods considered appropriate to the nature of the business. APAs, CCAs, CSAs

Upon request of taxpayer, it is possible to make an APA (advance pricing agreement) with the Ministry of Finance regarding the method for determination of the price or value to be applied to goods and services traded with related parties. The method agreed upon in this way becomes applicable for a maximum period of three years. Cost Contribution (CCA) and Cost Sharing Agreements (CSA) are acceptable in principle Any profit deemed in whole or in part as disguised profit under these regulations is treated as dividend distributed on the last day of accounting period. It is considered as a disallowable expense for corporation tax purposes and also become subject to dividend withholding tax. To ensure tax deductibility; services underlying CCAs or CSAs must be performed in real, payments must contribute to the generation and securing of revenues in Turkey, group company receiving the service must need the pertinent service, the portion of the costs to be allocated must meet the arm’s length principle and relevant documentation must be kept.

26

Documentation and reporting It is compulsory to keep as proof the records, lists and documents pertaining to the calculations concerning the prices and values determined in compliance with arm’s length principle. Turkish taxpayers registered with the Large Taxpayers Tax Office (LTTO) are required to prepare and submit an annual transfer pricing report regarding both cross-border and domestic transactions with related parties. The transfer pricing report is prepared in line with the guidelines of the Transfer Pricing Communiqué. Taxpayers who are not registered with the LTTO, but other tax offices are required to submit their annual transfer pricing reports only for cross-border transactions with related parties (also covering transactions with Free Trade Zones). All corporate taxpayers are required to complete a form related to Transfer Pricing, Controlled Foreign Entities and Thin Capitalisation and submit to their tax office with their annual corporate tax returns. 5.2.4 Participation exemption

Dividends paid by a resident company to another company are exempt from corporation tax in the hands of the recipient. This exemption also applies to non-resident companies to the extent that dividends are attributable to a permanent establishment or a branch. Dividends received from a non-resident company are also exempt from corporation tax, under the following conditions:

- The Turkish recipient holds at least 10% of the paid-in capital of the payer company for an uninterrupted period of one year as of the date of distribution,

- Non-resident payer is a JSC or LLC, - Profit out of which the dividend is paid were subject to a foreign income tax at

a minimum rate of 15%, - Dividend is transferred to Turkey before the date of corporation tax return

submission deadline of 25 April.

The exemption also applies to income derived from permanent establishments and permanent representatives resident abroad under some specific conditions. Special exemption rules apply to companies resident abroad, which render construction, repair, assembling and technical services.

5.2.5 Payments to Tax Havens

All payments made to individuals and legal entities in countries or regions announced by the Council of Ministers (called tax havens) are subject to a withholding tax of 30%. This is not applicable to insurance/reinsurance payments, and principal/interest payments of loans obtained from financial institutions.

27

5.2.6 Taxation of Foreign Transportation Companies

Profits of foreign transportation companies, which are subject to corporation tax in Turkey are calculated by multiplying their sales revenue by the ratios as follows:

Road and railway transportation - 12% Marine transportation - 15% Air transportation - 5%

For marine and air transportation, sales revenue of non-resident carriers consists of all the amounts (including passenger ticket fares, freight, cargo carrying and expense allowances) collected by the carrier for the route from departure ports in Turkey to arrival ports in foreign countries (i.e. only transportation which originate from Turkish ports are recognized in revenue calculation regarding marine and air cargo).

5.3. Individual Income Tax

Turkish residents are liable to tax on their world-wide income. However, a resident may deduct from its tax liabilities in Turkey the taxes paid on income arising in foreign countries provided the rate of tax in the foreign country does not exceed the taxation rate in Turkey. Non-resident individuals are liable to income tax only on their income generated in Turkey. Such income may include, inter alia, income from immovable items like rents and also royalties, technical know-how fees, dividends and interest received.

5.3.1. Income tax on salaries

An individual whose income consists of only salary, bonus etc from only one employer does not have to submit a tax declaration. The employer is responsible to withhold tax from salaries etc. and pay the same over to the tax office. However, an individual earning a salary from a second employer has to submit an income tax declaration if the income from second employer exceeds total of TRY 23,000 for 2012. Income Tax rates are progressive and subject to revision every calendar year. The rates for 2012 are as follows:

Annual income bracket TRY

Approximate Euro equivalent

Rate of Tax %

Up to

10,000

4,350

15 Next 15,000 6,550 20 Next 33,000 14,350 27 ----------

58,000 ---------- 25,250

Above

58,000

35

28

5.3.2. Self -employed individuals

These include individuals carrying on trade or other business or performing professional services on their own account. They are responsible for keeping books of account and documents and filing tax declarations as required by Income Tax Law. Wage/salary and other costs incurred for the generation of income are deductible from earnings. They must also submit quarterly profit declarations and pay tax thereon (advance tax) at the rate of 20%. Annual income tax declarations have to be submitted as of March following the calendar year end. Advance tax payments are deductible from the final assessment at end of the year based on the income bracket and tax rates for income tax as given above. A withholding tax at the rate of 20% has to be applied upon payment of invoices issued by self employed professionals.

5.3.3. Wages Remitted from Abroad

Salary of an employee who works for an employer with limited tax liability in Turkey is exempted if salary payments are made as follows: - It is paid by a limited taxpayer employer whose statutory head office and actual business center is outside Turkey, - It is paid out of the employer’s earnings from outside Turkey and in foreign currency, - It is not accounted for as cost or expense item in Turkey. The salaries within the scope of this exemption are not subject to tax Declaration.In this context salaries of personnel employed in liaison offices are exempt from income tax. However, social insurance premiums must be paid.

5.4. Withholding tax

Turkish tax system, withholding tax applies to various types of earnings of both individuals and corporations at different rates. Reduced tax rates or exemptions may apply in line with bilateral tax treaties (please see Appendix 1 for the list of existing tax treaties signed by Turkey.

5.4.1. Withholding tax rates apply to corporations

Tax has to be withheld in respect of earnings of corporations at the following rates: Resident Non-resident Description / (in %) Corporations Corporations Professional services - 20 Construction work exc. 1 year 3 3 Salaries - - Rentals/royalties - 20 Financial lease - 1 Dividends - 15 Branch profits - 15 Sale of patents, copyrights/other intangables - 20/20 Loan interests - 0/1/5/10 Capital gains 0/15 0/15

29

5.4.2. Withholding tax rates apply to individuals

Withholding tax rates apply to individual earnings are as follows: Resident Non-resident Description / (in %) Individuals Individuals Professional services 20 20 Construction work exc. 1 year 3 3 Salaries 15-35 15-35 Rentals/royalties 20 20 Financial lease - - Dividends 15 15 Branch profits 20 - Sale of patents, copyrights/other intangibles 17/- 20/- Loan interests - - Capital gains 15-35 0/15

5.4.3. Corporate Withholding tax on dividends Upon actual distribution in cash dividends are subject to a corporate withholding tax of 15%. Dividends to local company shareholders are exempt from withholding tax but dividends to foreign (non-resident) shareholder companies or foreign individuals are subject to withholding tax. However if the withholding tax rate in the country of the foreign parent is below 15%, say it is 10%, then Turkish withholding tax is also reduced to 10% after compliance with procedure laid down in the tax regulations. Dividends distributed by way of bonus shares are not subject to withholding tax. 5.4.4. Withholding tax on long-term construction works

Long term means that period of construction project will extend to more than 12 months. Repair, assembly and similar works lasting longer than 12 months also come under the same regime. Works which are not completed within the same accounting year and extend into the following accounting years are also treated as long term. A withholding tax of 3% is applicable on all progress payments made under long term construction works. Progress payments and expenses incurred on each project have to be accumulated until the date when the project is accepted as completed by an appropriate take-over completion protocol or certificate. The accounting year in which the take over is accepted is considered as the final year of the project and the difference between all project income and accumulated expenses is transferred to the accounts either as profit or loss for inclusion in the corporation tax declaration of the same year. The accumulated 3% withholding taxes on progress payments are deductible from the tax liability due in the year of completion of the project.

30

5.5. Value Added Tax (VAT)

5.5.1 General

Value added tax is levied on all goods and services supplied in Turkey within the scope of commercial, industrial, agricultural and professional activities and on the import of goods and services. VAT paid by a taxpayer entity on purchase and/or import of goods and services is deductible from the VAT calculated on its sales of goods and services and the difference is accounted for the tax office. Hence the ultimate tax burden of VAT falls on the end user of goods and services. VAT is declared and paid monthly. In the event that the input VAT exceeds the output VAT, the balance is carried forward to be offset in the following months. There is no refund in cash of the VAT so carried forward. 5.5.2 Tax Rates

The standard VAT rate is 18%. Presently, reduced rates (VAT Law: List I -1% and List II- 8%) are applicable to two different groups of goods and services. List I contains goods such as: agricultural products (dried food, cotton, wheat, olives), newspapers, magazines, used cars, houses under a size of 150 square meters. List II contains goods and services such as: basic food items (milk, macaroni, oils, poultry and fishery products), medicines, medical equipment, books, textile and leather products, shoes bags, carpets, natural gas. Exemptions There are two types of VAT exemptions; “full VAT exemption” and “partial VAT exemption”. Full exemption refers to supply of goods and services that are not subject to VAT, which can be recovered or refunded of the input VAT, where refund mechanism does not apply for the supply of partially exempt goods and services. Some goods and services which are subject to full and partial VAT exemption are: Full VAT exemption; - Export of goods and services, - International transport, - Services provided at marine and air ports, - Supplies to; petroleum exploration companies, entities holding investment incentive

certificates, Defense Industry, diplomatic entities and individuals..

Partial VAT exemption; - Financial transactions, - Deliveries to and activities in free trade zones,

31

- Supply of unprocessed gold, scrap, metal, plastics, fx money, stocks and bonds, - Leasing of immovables by individuals, - Supplies to some cultural and governmental bodies, - Storage services at bonded warehouses or temporary storage..

5.5.3 VAT Refund

In cases where a residual amount of VAT arises as a result of above exemptions this residual amount may be refunded to taxpayer after an examination by the tax office. Sworn Financial advisers are permitted to certificate VAT refunds subject to certain limits and principles.

5.6. Stamp Duties

Stamp duty is charged on a wide range of legal documents such contracts, promissory notes, letters of guarantee etc. Stamp duty may be either fixed or proportional. Proportional rates range between 0.15% to 0.825%, examples are Contracts and guarantee documents etc. 0,825%, Rent contracts 0,165%, Gross salaries 0,66%

5.7. Banking and Insurance Transaction Tax (BITT)

Banks, insurance and reinsurance companies are exempted from VAT. However, all transactions of banks and insurance companies are the subject to BITT. BITT arises on all income of banks and insurance/reinsurance companies (interest, commission, service charge etc). Standard rate of the tax is 5%. Banks, bankers, insurance and reinsurance companies, finance companies, factoring companies are the taxpayers. They have to declare their monthly taxable transactions until 15th day of the following month. 5.8. Special Consumption Tax

This tax is levied on four group’s (lists) shown below. Each good on the lists is subject to tax at different rates: List I covers petroleum products, natural gas, lubricating oil, solvents and derivatives of solvents List II covers automobiles and other vehicles, motorcycles, planes, helicopters, yachts. List III covers tobacco and tobacco products, carbonated and alcoholic beverages and soda ash. List IV is related to durable consumer articles and luxury goods.

The tax is charged only once at importation and/or production stages of the products. Tax is charged only once at importation and/or production stages of the products. Examples of tax rates are:

32

- Between 6,7-20 % for white and brown durable goods, - Between TRY 25-77 for alcoholic beverages, - Between 40-65 % for tobacco products, - Around TRY 2,17 per liter of gasoline, - TRY 1,5945 per liter of diesel oil

5.9. Property Tax

Real property owners have to pay Property Tax on annual basis in two installments. The value for tax base is set by local municipal authorities. The rates are as follows (these ratios are applied as double in the metropolitan areas such as Ankara, İstanbul, İzmir, Antalya, Bursa).

- for the residences used as domiciles 0.1% - for the other buildings 0.2% - land allocated for construction 0.3% - land 0.1%

5.10. Resource Utilization Support Fund (RUSF)

This levy amounts to a transaction tax, especially on foreign loans obtained by Turkish residents from entities other than banks or financial institutions abroad. The current rates of RUSF are as follows: - Credits financed by banks and other financial institutions

-Over consumer credits 15% -Over other credits 0% - Loans secured from abroad by banks and financing companies 0% - Loans secured from abroad by Turkish residents, other than banks and financing companies -If the maturity is less than 1 year + 1 week 3% -If the maturity is more than 2 years+ 1 week 1%

-If the maturity is more than 3 years + 1 week 0,5% - Imports made on basis of payment terms such as acceptance credit,forward letter of credit and against goods 3% . 6. Company restructuring (merger, divisions, share swap, capital reduction)

6.1 Merger

Turkish Commercial Code allows one company to merge with another on basis of market/fair values. In this case, if the asset values taken over exceed the book value, meaning that hidden reserves are realized, corporate tax becomes payable. However, Turkish Corporate Tax Law (CTL) defines a special tax-free merger method explained below.

33

When two companies of the same legal formation (i.e A.Ş.) of which the registered address or place of business are located in Turkey, merge at their book values, a take-over occurs. In the event of a take-over, both companies must sign the tax return of the taken over company for the period up to the take over date and the company which takes over must undertake all liabilities of the taken over company. Brought forward losses of the taken over company may be offset against profits of the merged company subject certain conditions. Mergers and acquisitions between resident companies may be tax-free, under condition that the assets are transferred at their book values. The New Commercial Code, which came into force as of 01.07.2012, has integrated the Turkish legal system with the EU regulations. The New Code includes detailed articles aiming to protect the rights of shareholders, creditors, stakeholders and employees. The New Code defines types of mergers as acquisition and merger by formation of a new company. 6.2 Share swap

When a company acquires the shares of another company in such a way that it obtains the shares of representing majority of voting rights in exchange for shares of its own, the transaction shall not be subject to corporate tax. The number of shares to shareholders of transfer or company shall be based on the current value of both the transferee and transferor companies. Shareholders of transfer or company may receive extra cash up to 10% of the nominal value of the shares received. 6.3 Reduction of Capital

A reduction of capital enables a full taxpayer company to transfer its assets, receivables, liabilities and its equity, partly or entirely, to one or more companies at their book values

as laid down in the Corporation Tax Law.

Consequences are:

- Profits arising from the reduction transactions shall not be not taxable, - Since no profit shall be recognized, there will be no withholding income tax, - Capital reduction transactions are exempt from VAT, stamp duties, banking and insurance transaction taxes, and other fiscal charges.

Corporation Tax Law describes two types of reduction, one as “total reduction of capital”, and the other as “partial reduction of capital”.

Under a total reduction of capital a full taxpayer company (i.e. “A.Ş.”/”LTD”) transfers all of its assets, receivables, and liabilities to two or more (new or existing) companies at their book value.

In return for the assets less liabilities, the shareholders of the acquired company (company with reduction of capital) receive the shares of the acquirer company. After a total reduction of capital, the company (company with reduction of capital) dissolves

34

without liquidation. In the event of a total reduction of capital the income of the dissolving company up the date of dissolution will be subject to Corporation Tax. The acquiring company provides an undertaking to tax office so as to be jointly and severally responsible for tax obligations of the dissolved company.

A partial reduction of capital is a special type of capital-in-kind contribution to an acquiring company. It is defined as the transfer of

Assets and shares indicated in the balance sheet of a company Assets may include production plants and service facilities Intangible rights, raw materials, processed and semi-processed materials related to those plants and facilities.

Assets shall be transferred at their book value. In return for the transfer of assets, the transferor company owns the shares the transferee company. Instead of the transferor company the shareholders of the transferor company may receive the shares in the transferee company. In this case the liabilities which are related to the assets transferred, if any, will also be transferred to the acquiring company. The transferor and transferee companies are jointly and severally liable for the tax obligations of the transferor company as of the date of reduction of capital.

7. Real Estate Law

Real estate acquisition of foreigners is regulated by Land Registry Law (Law No. 2644 amended with the Law No. 5444). 7.1 Real Estate Acquisition by foreign individuals

Foreign individuals may acquire real estates in Turkey under the following conditions: (a) Reciprocity principle

Only the citizens of countries where Turkish citizens have the right to acquire property, have the right to acquire property in Turkey. Reciprocity must exist both in law (de jure) and in practice (de facto),

(b) Property acquired must be used for purpose of residence or for business,

(c) Property must be located within municipal boundaries (The Council of Ministers is authorized to determine the places that individuals may not acquire real estates) (d) The maximum area of the property to be acquired must not exceed 25,000 m2 (The Council of Ministers may increase this limit to 30,000 m2),

(e) There must be compliance with the restrictive provisions of the Law i.e. geographic restrictions to property falling under military or security zones.

35

7.2 Real Estate acquisition by foreign legal entities

(a) Legal entities established in foreign countries only for trading purposes may acquire immovable property and limited rights on immovable property only under framework of specifically enacted laws which are:

- Petroleum Law nr. 326 - Tourism Encouragement Law nr. 2634 - Industrial Zones Law nr. 4737

(b) Foreign funds, associations and cooperatives are not allowed to acquire property or rights on property,

(c) Reciprocity principle is also applicable in respect of foreign legal entities, as well as the restrictive provisions mentioned above for foreign individuals.

Please note that further information is available on the web: http://www.tkgm.gov.tr 7.3 Real Estate acquisition by Turkish subsidiaries of foreign legal entities

Turkish subsidiaries of foreign legal entities are considered as Turkish entities, consequently, they may acquire immovable property or rights thereon like other Turkish legal entities.

7.4 Taxes on acquisition of real estate

- Purchase/sale tax of 1.5% on sales value payable by each of the buyer and seller i.e. total of 3%. - Sales agreements between buyer and seller -are also subject to stamp tax. 8. Competition Law

The Law No. 4054 titled as Protection of Competition which has been effective since 1994 focuses on three main areas as follows:

- Prevention of agreements restricting competition and misuse of dominant position, - Prevention of mergers and acquisitions which would create a dominant position in the market

and adversely affect competition. - Monitoring of state aids and prohibition of the same which may be against

productivity and competition

36

Appendix 1 : Double Tax Treaties

With respect to Double Tax Treaties , Turkey seeks to follow the OECD model as far as possible. % % %

Contracting State Dividends Interests Royalties

Albania 5/15 (a) 10 10 Algeria 12 10 10 Austria 5/15 (a) 5/10/15 10 Azerbaijan 12 10 10 Bahrain 10/15 (c) 10 10 Bangladesh 10 10 10 Belarus 10/15 (c) 10 10 Belgium 5/10 (d) 15 10 Bosnia- Herzegovina 5/15 (a) 10 10 Brasil 10/15 (c) 15 10/15 (u) Bulgaria 10/15 (c) 10 10 Canada 15/20 (g) 15 10 China 10 10 10 Croatia 10 10 10 Czech Republic 10 10 10 Denmark 15/20 (e) 15 10 Egypt 5/15 (a) 10 10 Estonia 10 10 5/10 (f) Ethiopia 10 10 10 Finland 15/20 (e) 15 10 France 15/20 (g) 15 10 Georgia 10 10 10 Greece 15 12 10 Hungary 10/15 (c) 10 10 India 15 10/15 (h) 15 Indonesia 10/15 (c) 10 10 Iran 15/20 (e) 10 10 Ireland 5/10/15 (aa) 10/15 (bb) 10 Israel 10 10 10 Italy 15 15 10 Japan 10/15 (c) 10/15 (i) 10 Jordan 10/15 (c) 10 12 Kazakhstan 10 10 10 Korea (South) 15/20 (e) 10/15 (j) 10 Kuwait 10 10 10 Kyrgyzstan 10 10 10 Latvia 10 10 5/10 (f) Lebanon 10/15 (o) 10 10 Lithuania 10 10 5/10 (f) Luxembourg 10/20 (l) 10/15 (m) 10 Macedonia 5/10 (n) 10 10 Malaysia 10/15 (c) 15 10 Moldova 10/15 (c) 10 10 Mongolia 10 10 10 Morocco 7/10 (k) 10 10 Netherlands 5/10 (p) 10/15 (m) 10 New Zealand 5/15 (a) 10/15 (h) 10 Northern Cyprus 15/20 (e) 10 10 Norway (dd) 25/30 (q) 15 10 Oman 10/15 (o) 10 (cc) 0 Pakistan 10/15 (c) 10 10 Poland 10/15 (c) 10 10

37

% % %

Contracting State Dividends Interests Royalties

Portugal 5/15 (z) 10/15 (m) 10 Qatar 10/15 (c) 10 10 Romania 15 10 10 Russian Federation 10 10 10 Saudi Arabia 5/10 (b) 10 10 Serbia and Montenegro 5/15 (a) 10 10 Singapore 10/15 (c) 7.5/10 (r) 10 Slovak Republic 5/10 (n) 10 10 Slovenia 10 10 10 South Africa 10/15 (c) 10 10 Spain 5/15 (s) 10/15 (t) 10 Sudan 10 10 10 Sweden 15/20 (e) 15 10 Switzerland 5/15 5/10 10 Syria 10 10 10/15 (u) Tajikistan 10 10 10 Thailand 10/15 (c) 10/15 (v) 15 Tunisia 12/15 (w) 10 10 Turkmenistan 10 10 10 Ukraine 10/15 (c) 10 10 United Arab Emirates 5/10/12 (x) 10 10 United Kingdom 15/20 (e) 15 10 United States 15/20 (g) 10/15 (y) 5/10 (f) Uzbekistan 10 10 10 Yemen 10 10 (cc) 10 Nontreaty countries 15 0/1/5/10/15 20

(a) The 5% rate applies if the recipient owns more than 25% of the payer of the dividends. The 15% rate applies to other dividends. (b) The 5% rate applies if the recipient owns more than 20% of the payer of the dividends or if the recipient is the central bank or an entity that is wholly owned by the government. The 10% rate applies to other dividends. (c) The 10% rate applies if the recipient owns more than 25% of the payer of the dividends. The 15% rate applies to other dividends. (d) The 5% rate applies to dividends distributed by Belgian companies. The 10% rate applies to dividends distributed by Turkish companies. (e) The 15% rate applies if the recipient owns more than 25% of the payer of the dividends. The 20% rate applies to other dividends. (f) The 5% rate applies to royalties paid for the use of industrial, commercial or scientific equipment. The 10% rate applies to other royalties. (g) The 15% rate applies if the recipient owns more than 10% of the payer of the dividends. The 20% rate applies to other dividends. (h) The 10% rate applies to interest on loans granted by banks and financial institutions. The 15% rate applies to other interest payments.

38

(i) The 10% rate applies to interest on loans granted by financial institutions. The 15% rate applies to other interest payments. (j) The 10% rate applies to interest paid with respect to a loan or other debt claim with a term exceeding two years. The 15% rate applies to other interest payments. (k) The 7% rate applies if the recipient owns more than 25% of the payer of the dividends. The 10% rate applies to other dividends. (l) For Luxembourg recipients, the 10% rate applies if the recipient owns more than 25% of the payer of the dividends and the 20% rate applies to other dividends. For Turkish recipients, these rates are applied as 5% and 20%, respectively. (m) The 10% rate applies to interest on loans with a term exceeding two years. The 15% rate applies to other interest payments. (n) The 5% rate applies if the recipient owns more than 25% of the payer of the dividends. The 10% rate applies to other dividends. (o) The 10% rate applies if the recipient owns more than 15% of the payer of the dividends. The 15% rate applies to other dividends. (p) The 5% rate applies to dividends distributed by Dutch companies. The 10% rate applies to dividends distributed by Turkish companies. (q) For Norwegian recipients, the 25% rate applies if the recipient owns more than 25% of the payer of the dividends and the 30% rate applies to other dividends. For Turkish recipients, these rates are applied as 20% and 25%, respectively. (r) The 7.5% rate applies to interest on loans paid by financial institutions. The 10% rate applies to other interest payments. (s) The 5% rate applies to dividends to the extent they are paid out of profits that have been subject to tax as specified in the tax treaty and if the recipient owns more than 25% of the payer of the dividends. The 15% rate applies to other dividends. (t) The 10% rate applies to interest on loans granted by banks. The 15% rate applies to other interest payments. (u) The 10% rate applies to royalties paid for the use of, or the right to use, copyrights of literary, artistic or scientific works, including cinematographic films and recordings for radio and television. The 15% rate applies to royalties paid for patents, trademarks, designs or models, plans, secret formulas or processes, or for information concerning industrial, commercial or scientific experience. (v) The 10% rate applies to interest on loans granted by banks, financial institutions and insurance companies. The 15% rate applies to other interest payments. (w) The 12% rate applies if the recipient owns more than 25% of the payer of the dividends. The 15% rate applies to other dividends. (x) The 5% rate applies if the recipient of the dividends is the government, a public institution wholly owned by the government or a political subdivision or local authority of the other contracting state. The

39

10% rate applies if the recipient owns more than 25% of the payer of the dividends. The 12% rate applies to other dividends. (y) The 10% rate applies to interest derived from loans granted by financial institutions, such as banks, savings institutions or insurance companies. The 15% rate applies to other interest payments. (z) The 5% rate applies if the recipient owns more than 25% of the payer of the dividends for an uninterrupted period of at least two years. The 15% rate applies to other dividends. (aa) For Irish recipients, the 5% rate applies if the dividends are paid out of the profits that have been subject to tax in Turkey and if the recipient owns more than 25% of the voting rights of the payer of the dividends. The 10% rate applies if the recipient owns more than 25% of the voting rights of the payer of the dividends, and the 15% rate applies to other dividends. For Turkish recipients, these rates are applied as 5%, 5% and 15%, respectively. (bb) The 10% rate applies to interest received by financial institutions or paid with respect to loans or other debt claims with a term exceeding two years. The 15% rate applies to other interest payments. (cc) Interest paid to the government and central bank is exempt. (dd) A new treaty between Turkey and Norway was signed on 15 January 2010. This new treaty is effective from 1 January 2012. Under the new treaty, the dividend withholding tax rate may be reduced to 5%. The withholding tax rate for interest ranges from 5% to 10%. The withholding tax on royalties is 10% if certain conditions are satisfied. (ee) The treaty between Turkey and Germany was terminated on 21 July 2009. A new treaty was signed by the countries in 2011, with the treaty to take effect retroactively from 1 January 2011. However, the treaty is not yet in effect because it has not been accepted by the parliaments of the countries. Treaties with Australia and Malta have been signed. However, these treaties are not yet in effect.

40

Appendix 2 : Bilateral Social Security Agreements

Albania 1 February 2005 Austria 1 October 1969 Azerbaijan 9 August 2001 Belgium 1 May 1968 Bosnia-Herzegovina 1 September 2004 Canada 1 January 2005 Czech Republic 1 January 2005 Denmark 1 December 2003 France 1 August 1973 Georgia 20 November 2003 Germany 1 November 1965 Libia 1 September 1985 Luxembourg 2006 Macedonia 1 July 2000 Netherlands 1 February 1968 Northern Cyprus 1 December 1988 Norway 1 June 1981 Quebec 1 January 2005 Romania 1 March 2003 Sweden 1 May 1981 Switzerland 1 January 1972 United Kingdom 1 June 1961

41

Appendix 3 : Lists of Technology Development Zones (TDZ) – Technoparks

City Name of the TDZ

1 Ankara Metutech 2 Kocaeli TUBITAK Marmara Research Center 3 Izmir Izmir Technology Development Zone 4 Ankara Bilkent Cyberpark 5 Kocaeli GOSB Technopark 6 Istanbul ITU Ari Technopark 7 Ankara Hacettepe Technopolis 8 Kocaeli Kocaeli University Technopark 9 Eskisehir Eskisehir Technology Development Zone 10 Istanbul Yildiz Technical University Technopark 11 Istanbul Istanbul University Technology Development Zone 12 Konya Konya Technopolis Selcuk University Tech. Dev. Zone 13 Antalya Antalya Technopolis 14 Kayseri Erciyes Technopark 15 Trabzon Trabzon Technology Development Zone 16 Adana Cukurova Technopolis 17 Erzurum Ata Technocity 18 Mersin Mersin Technology Development Zone 19 Isparta Lakes District Technocity 20 Bursa Ulutek Technology Development Zone 21 Gaziantep Gaziantep Technopark 22 Ankara Ankara University Technology Development Zone 23 Denizli Pamukkale University Technology Development Zone 24 Elazig Firat Technology Development Zone 25 Sivas Cumhuriyet Technocity 26 Edirne Trakya University Technology Development Zone 27 Ankara Gazi Technopark 28 Diyarbakir Dicle University Technology Development Zone 29 Ankara ASO Technopark 30 Tokat Tokat Technology Development Zone 31 Sakarya Sakarya University Technology Development Zone 32 Bolu Bolu Technology Development Zone 33 Kutahya Dumlupinar Technology Development Zone 34 Istanbul Bogazici University Technology Development Zone 35 Samsun Samsun Technology Development Zone 36 Malatya Malatya Technology Development Zone 37 Istanbul Istanbul Technology Development Zone 38 Sanliurfa Harran University Technology Development Zone 39 Duzce Duzce Technopark Technology Development Zone

Please note TDZs 25, 28-39 are not operational as of end of 2012.