This is the English version of an article originally published in Turkish: Yabancı Ortağa Kâr Payı Stopajı ve Çifte Vergilendirme Anlaşmalarının Yorumu.
When a Turkish company with foreign shareholders distributes profits, two sets of rules apply at once: Turkish domestic tax law and the double tax treaty between Turkey and the shareholder’s country of residence. Where the two give different rates, the answer often turns on a single document. If that document is not in hand at the time of payment, the cost falls directly on the company’s cash flow.
This article sets out the legal basis of dividend withholding tax (kâr payı stopajı), the rate increase at the end of 2024, and how treaty provisions limit the domestic rate, with a worked example.
Legal basis of the withholding
The applicable provision depends on who receives the dividend. A distribution to a non-resident company (dar mükellef kurum) falls under Article 30(3) of the Corporate Tax Law (No. 5520, “KVK”). A distribution to a non-resident individual falls under Article 94(6)(b) of the Income Tax Law (No. 193, “GVK”). Foreign companies operating in Turkey through a branch are covered by a separate rule that applies to amounts transferred to the head office.
- Non-resident company: KVK Article 30(3), 15%
- Non-resident individual: GVK Article 94(6)(b), 15%
- Tax-exempt entity: KVK Article 15(2), 15%
- Branch profits transferred to head office: KVK Article 30(6), 15%
The last item deserves attention when structuring an investment. With a subsidiary, withholding arises when profits are distributed. With a branch, the transfer to the head office itself triggers withholding. The tax consequences of the two structures should be compared before the investment is made.
Distributions between Turkish resident companies are outside this framework: no withholding arises when one resident company pays a dividend to another. Withholding applies at the point where profit leaves the corporate chain and reaches an individual or goes abroad.
The taxable event is payment of the dividend, either in cash or by book entry. A general assembly resolution to distribute is not enough on its own. Payment by book entry matters in practice: crediting the amount to the shareholder’s current account also triggers the obligation. The tax withheld is declared on the withholding and social security return (muhtasar ve prim hizmet beyannamesi) by the 26th of the month following payment.
Adding profits to share capital is not treated as a distribution and does not trigger withholding. Nothing passes to the shareholder’s disposal, so the taxable event does not occur.
The rate rose to 15% at the end of 2024
The dividend withholding rate stood at 10% for a long period. Presidential Decree No. 9286, published in Official Gazette No. 32760 of 22 December 2024, raised it to 15%. Dividends distributed from the date of publication are subject to the new rate.
The decree raised the rates under GVK Article 94, KVK Article 15 and KVK Article 30 together, so resident individual shareholders were affected as well. For foreign-owned companies, the main consequence is a wider gap between the domestic rate and treaty rates. A five-point difference can reach seven-figure amounts in Turkish lira even on a mid-sized distribution, which makes documentation a financial matter rather than a technicality.
How a tax treaty limits domestic law
Double tax treaties apply directly in Turkish law. The basis is the final paragraph of Article 90 of the Constitution: “International agreements duly put into effect have the force of law. No appeal to the Constitutional Court shall be made with regard to these agreements, on the grounds that they are unconstitutional.”
The starting point for interpretation follows from this. A treaty does not impose tax; it limits a tax imposed by domestic law. The power to tax comes from the statute, and the treaty sets the maximum extent to which that power may be used.
Interpretation problems usually concern the scope of terms. A term not defined in the treaty is interpreted under the domestic law of the state applying the treaty, unless the context requires otherwise. This is why the treaty concept of “dividends” and the domestic concept of profit share do not always match exactly. Because Turkey’s treaties largely follow the OECD Model, the OECD Commentary is often cited. It is not binding, but it carries weight as evidence of how the parties understood the text.
What if the treaty rate is higher than the domestic rate?
If a treaty sets a 20% ceiling for dividends and the domestic rate is 15%, the rate applied is 15%. The treaty rate is a ceiling, not a floor. The taxpayer cannot pick whichever text suits it better: the rate is the one set by statute, and the treaty can only bring it down. No treaty provision creates a tax that does not exist in domestic law.
The two-tier treaty rate and a worked example
Turkey’s treaties generally set two rates for dividends: a reduced rate (often 5%) where the beneficial owner is a company holding directly a minimum percentage of the paying company’s capital, and a higher rate (often 15%) in all other cases. Both conditions must be met: the beneficial owner must be a company, and the holding must be direct. If another company sits in between, the direct holding test fails and the reduced rate is not available.
Each treaty sets its own threshold, and some have a single rate. Rather than relying on a general figure, check the specific treaty, including its protocol and any amending instruments.
Take a Turkish joint stock company with distributable profit of TRY 10,000,000. A foreign parent company, resident in a treaty country, directly holds 60% of the capital and meets the treaty’s threshold for the 5% rate. Its gross dividend is TRY 6,000,000.
- No residence certificate, domestic rate of 15%: withholding TRY 900,000, net to the shareholder TRY 5,100,000.
- Residence certificate provided, treaty rate of 5%: withholding TRY 300,000, net to the shareholder TRY 5,700,000.
The difference is TRY 600,000, and it depends on whether one document is obtained in time.
Why the certificate of residence decides the outcome
The reduced treaty rate does not apply automatically. The recipient must prove residence in the other state through a certificate of residence (mukimlik belgesi) issued by that state’s competent authority. The certificate is submitted to the company making the withholding or to the relevant tax office, with a notarised Turkish translation.
Timing is the key point. If the certificate is not available at the time of payment, the company must withhold at the domestic rate, because it cannot apply the reduced rate at its own discretion. Liability rests with the withholding company, so the risk of under-withholding falls on it.
Obtaining the certificate later does not close the door entirely. A correction can be sought for the excess tax withheld, but this takes time and the administrative burden stays with the taxpayer. In practice the certificate must relate to the relevant calendar year, and one issued for the previous year may not be accepted for a current-year distribution. Companies that distribute regularly benefit from a fixed renewal schedule.
Residence alone may not be enough. Treaties tie the reduced rate to “beneficial owner” status, so a recipient receiving income on behalf of someone else cannot rely on it. Beneficial ownership is assessed by who actually controls the income, not by formal records.
When disguised profit distribution becomes a dividend
In foreign-owned companies the withholding question does not always start with a formal distribution. Where intra-group purchases of goods or services are priced other than at arm’s length, the amount shifted can be treated as a dividend for tax purposes. The Corporate Tax Law provides that profit distributed in a disguised manner, wholly or partly, through transfer pricing is treated, for income and corporate tax purposes, as a dividend distributed, or for non-residents as an amount transferred to the head office, as of the last day of the accounting period in which the conditions arose.
The consequence has two layers: corporate income is adjusted, and dividend withholding then follows. Royalties, management fees and intra-group financing with a foreign shareholder therefore need particular care. Because the deemed dividend arises as of the last day of the relevant period, the withholding obligation arises retrospectively, and when an audit takes place years later the financial consequences are calculated from that date.
The treaty dimension appears here too. Whether a deemed distribution falls within the dividend article of the treaty is often the real point of dispute, and the argument centres on how far the treaty definition of dividends covers the domestic concept.
Three common mistakes
- Requesting the certificate after payment. The resolution is passed, payment is made, and only then is the certificate sought. Withholding has already been made at the higher rate, and even if a correction is possible, an unnecessary procedure follows.
- Treating an indirect holding as direct. Where the treaty says “directly”, holding the Turkish company through an intermediate company defeats the reduced rate. Every layer of the group chart should be checked.
- Choosing a treaty by building a structure. Setting up a company in a third country only to access a lower treaty rate invites a beneficial ownership challenge. Structures without economic substance or staff tend to fare poorly in that review.
The approach of the courts
Settled case law treats the precedence of treaty provisions over domestic law as beyond dispute. The real disputes are about whether the conditions for the reduced rate were met.
- Where residence is not proven by a proper certificate, the treaty rate is not applied. The certificate is a condition for applying the treaty, not a mere formality.
- In beneficial ownership reviews, courts look past the formal shareholding structure to who actually controls the income, relying on the principle of economic substance.
- Adding profits to capital is not treated as a distribution, so no withholding obligation arises.
- In refund claims for excess withholding, the burden of proof is on the taxpayer, so the date and content of the certificate on file are decisive. A late or incomplete certificate does not by itself rescue a claim that is otherwise sound.
Practical points
The domestic rate has been 15% since 22 December 2024, and a treaty may reduce it. For the reduction to apply, residence and beneficial ownership must be established at the time of distribution. Documentation should therefore be planned before the distribution resolution, together with the group structure and the payment timetable. Current statutory texts, including the Corporate Tax Law, are available on mevzuat.gov.tr.
More information for foreign clients: English-speaking lawyer in Ankara.
This article provides general information on Turkish law and is not legal advice. Outcomes depend on the facts of each case.
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