Formation of Liaison Offices in Turkey

Formation of Liaison Offices in Turkey. In an increasingly globalized economy, businesses are continually exploring new markets to expand their reach and diversify their operations. Turkey, straddling Europe and Asia, offers a compelling proposition for foreign companies seeking a strategic foothold. One popular entry mechanism is the formation of a liaison office. This article delves into the advantages and legal framework governing liaison offices in Turkey, addresses key tax instruments, clarifies who qualifies as a taxpayer under the Corporate Tax Law, contrasts liaison offices with branch offices, outlines formation rules, and describes permissible activities. Through this comprehensive analysis, readers will gain a clear understanding of why Turkey is an attractive destination for liaison offices and how to navigate the regulatory landscape.

Is Turkey good for business through the formation of liaison offices in Turkey?

Establishing a liaison office in Turkey can be an excellent strategic move for foreign companies. A liaison office serves as a bridge between the parent company and local Turkish partners, customers, and authorities. Unlike a full-fledged subsidiary, a liaison office cannot engage in direct commercial transactions; instead, it functions as a representative office, facilitating market research, gathering information, and promoting the parent company’s products and services.

Economic Environment in Turkey

Turkey’s dynamic and diversified economy is one of the primary factors that make liaison offices appealing. As the 19th largest economy globally and the 11th largest in Europe by nominal GDP, Turkey boasts robust sectors such as automotive, textiles, electronics, and tourism. Its young and growing population—over 85 million—provides a stable consumer base and a skilled workforce. Government incentives, such as tax reductions and investment allowances in designated free zones, further enhance the business climate.

Strategic Geographic Location

Positioned at the crossroads of Europe, Asia, and the Middle East, Turkey offers unparalleled access to over 1.5 billion consumers across three continents within a four-hour flight radius. Major ports on the Mediterranean and the Black Sea, as well as modern highways and rail networks, make logistics and distribution efficient. Liaison offices can leverage this geographic advantage to establish supply chain links and coordinate regional activities.

Political and Legal Stability

Turkey’s legal framework has evolved considerably, aligning with international norms and EU standards. The Turkish Commercial Code and related regulations provide a transparent and predictable environment. Although businesses should monitor geopolitical developments, overall legal stability supports long-term planning. Liaison offices benefit from clear rules on company representation, licensing, and taxation, reducing compliance risks.

What are the main legal instruments applicable to commercial activities in Turkey in terms of Tax?

Understanding Turkey’s tax framework is essential for any foreign entity operating through a liaison office or other structures. The primary legal instruments include the Corporate Tax Law, Value Added Tax (VAT) Law, Income Tax Law, and various withholding tax regulations. These laws define tax liabilities, rates, procedures, and exemptions.

Corporate Tax Law (Law No. 5520)

The Corporate Tax Law governs the taxation of Turkish-resident companies and permanent establishments of foreign enterprises. It sets a flat corporate tax rate, currently at 25%, applicable to net profits. Notable features include:

• Taxable Base: Net commercial income after allowed deductions.

• Loss Carried Forward: Losses can be carried forward for up to five years.

• Group Relief: Affiliated groups meeting shareholding thresholds can benefit from tax consolidation.

Value Added Tax (VAT) Law (Law No. 3065)

VAT is a consumption tax imposed on the supply of goods and services in Turkey. Standard VAT rate is 18%, with reduced rates of 1% and 8% on certain items. Key points:

• Registration: Entities making taxable supplies must register for VAT.

• Input Tax Credit: VAT paid on purchases can be deducted from output VAT liabilities.

• Exemptions: Financial services, exports, and certain agricultural transactions are exempt.

Income Tax Law (Law No. 193)

While liaison offices themselves do not earn income, understanding the Income Tax Law is crucial for employees and local staff. Progressive tax rates apply to personal income, with rates ranging from 15% to 40%. Employers must withhold payroll taxes and social security contributions.

Withholding Tax Regulations

Certain payments to non-residents—such as dividends, interest, royalties, and service fees—are subject to withholding tax. Rates vary:

• Dividends: 15%.

• Interest: 0–10%, depending on the instrument.

• Royalties: 20%.

Double taxation treaties may reduce these rates. Liaison offices must ensure proper withholding to avoid penalties.

Who may be a taxpayer under Corporate Tax Law?

Determining taxpayer status under the Corporate Tax Law is vital for compliance. Article 1 of Law No. 5520 specifies who is liable.

Domestic Companies

All companies incorporated in Turkey are deemed residents and taxed on their worldwide income. This includes joint-stock companies (A.Ş.), limited liability companies (Ltd. Şti.), and partnerships.

Permanent Establishments of Foreign Companies

Foreign entities with a permanent establishment (PE) in Turkey are taxed on income attributable to that PE. A liaison office, however, does not qualify as a PE because it does not engage in commercial transactions. Therefore, a liaison office itself is not a corporate taxpayer, but any income-generating activities beyond representation could trigger PE status.

Non-Resident Entities Without PE

Foreign companies without a PE are taxed only on Turkish-source income. Payments to these entities are subject to withholding tax. Liaison offices must be careful not to undertake prohibited commercial activities that could inadvertently create a PE.

What is the difference between liaison office and branch office for a foreign company?

While both liaison offices and branch offices provide a presence in Turkey, they differ significantly in scope, liability, and taxation.

Legal Definition

• Liaison Office: Established under Article 20 of the Turkish Commercial Code as a representative office. Cannot earn revenue; limited to coordination and promotional tasks.

• Branch Office: Defined under Article 18 as an extension of the parent company. It may carry out commercial activities, sign contracts, and generate revenue.

Scope of Activities

• Liaison Office: Market research, maintaining customer relations, facilitating communication, and reporting back to headquarters.

• Branch Office: Full commercial operations, including sales, contracting, manufacturing, and employment of staff.

Liability and Taxation

• Liaison Office: Exempt from corporate income tax. Expenses may be deductible for the foreign parent in its home jurisdiction, but no local tax filings for profit since no profit is generated. However, mandatory annual financial statements must be submitted to the Ministry of Industry and Technology.

• Branch Office: Subject to corporate income tax at 25% on net profits. Must register with tax authorities, obtain a tax identification number, and file regular tax returns.

What are the rules applicable to the formation of liaison offices in Turkey?

Forming a liaison office involves several procedural and documentary requirements under Turkish law. Compliance ensures legal recognition and prevents operational delays.

Application Process

1. Ministry of Trade Approval: Foreign companies must apply to the Turkish Ministry of Industry and Technology with details of the parent company and the intended scope of representation.

2. Power of Attorney: A notarized and apostilled power of attorney authorizing a local representative to act in Turkey.

3. Articles of Association: Certified copy of the parent company’s constitutional documents, translated into Turkish and notarized.

Documentation

• Board Resolution: Decision by the parent company’s board to establish a liaison office in Turkey.

• Tax Registration: Obtain a Turkish tax identification number for the liaison office. While not taxable on profits, the office must still register and file an annual informational return.

Compliance and Reporting

• Annual Financial Statements: Even without revenue, the liaison office must submit audited statements showing zero commercial income and detailing operational expenses.

• Duration and Extension: Liaison offices are initially granted a two-year license, renewable indefinitely in two-year increments upon reapplication.

What type of activities can be performed by liaison offices in Turkey?

A liaison office’s permitted activities are strictly defined to avoid competition with local businesses and safeguard tax and commercial regulations.

Market Research and Analysis

Liaison offices can conduct market studies, gather industry intelligence, and analyze competitor activities. Such research helps the parent company make informed decisions about future investments, partnerships, or the establishment of a full-fledged subsidiary.

Promotion and Advertising

While liaison offices cannot conclude sales contracts, they can organize promotional events, attend trade fairs as the parent company’s representative, and distribute brochures and marketing materials. These activities raise brand awareness without directly generating revenue.

Liaison and Reporting Tasks

The core function is to maintain communication channels between the parent company and Turkish stakeholders—suppliers, clients, governmental bodies, and industry associations. Liaison offices prepare regular reports on legislative changes, market trends, and potential partnership opportunities.

Coordination of Technical and Training Support

If the parent company supplies technical equipment or services, the liaison office can coordinate installation schedules, training sessions, and after-sales support. However, any billing for such services must be handled centrally by the parent company outside Turkey.

Facilitation of Negotiations

Representatives in a liaison office may facilitate negotiations on behalf of the parent company, acting as intermediaries to schedule meetings, prepare negotiation materials, and advise on local business culture. Actual negotiation outcomes and contract signings, however, must occur through the parent company or an authorized branch.

Conclusion

Turkey’s strategic location, robust economy, and evolving legal framework make it an attractive market for foreign companies. Establishing a liaison office offers a low-risk entry strategy to tap into market intelligence, promote brand presence, and build relationships without the complexities of full commercial operations. Understanding the key tax instruments, taxpayer definitions, and the distinction between liaison and branch offices is crucial for compliance. By adhering to the formation rules and focusing on permitted activities—market research, promotion, liaison, and coordination—foreign businesses can effectively position themselves for long-term success in Turkey. Whether as a stepping stone to a future branch or subsidiary, a liaison office provides valuable insights and local connectivity, making Turkey a competitive choice for international expansion.