This is the English version of an article originally published in Turkish: İstanbul Finans Merkezi Teşvikleri Kapsamı.
The Istanbul Finance Centre (İstanbul Finans Merkezi, “IFC”) is Turkey’s designated hub for financial services. To attract domestic and international financial institutions, Turkish law grants a set of tax incentives to institutions that operate in the IFC. These incentives can reduce the tax burden significantly, but they come with conditions, and a company that relies on them must be able to show that it meets those conditions at all times. This article summarises the main incentives and the compliance points that matter in practice.
Who can benefit: the participant certificate
The incentives apply to domestic and foreign institutions that carry out financial activities within the IFC and hold a participant certificate (katılımcı belgesi). Only institutions holding the certificate can claim the tax advantages. The application should therefore be prepared carefully and completely, since an incomplete file delays or prevents access to the incentives. Official application dates must also be observed: late applications may result in the loss of the right.
Corporate tax: the 75% deduction
The central incentive was introduced by Law No. 7412. Under the rule, institutions that operate in the IFC with a participant certificate may deduct 75% of the earnings derived exclusively from those activities from their corporate income when calculating the corporate tax base. In practice this benefits, in particular, institutions that export financial services.
Because the deduction applies only to earnings derived exclusively from the qualifying activities, the institution should record income within the scope of the incentive in separate accounts. Mixing qualifying and non-qualifying income is one of the most common sources of dispute in a later tax inspection.
Income tax and employment
The regime also contains income tax advantages aimed at making it easier to employ qualified staff, including specialists coming from abroad. Qualified foreign personnel who meet the statutory conditions may benefit from income tax exemptions and wage-related incentives. Employers can only rely on these incentives if their notifications to the authorities are accurate. Personnel starts and departures should be recorded promptly, and full compliance with social security (SGK) rules is a precondition in practice.
Stamp duty and fee exemptions
Certain contracts and transactions of IFC participants benefit from stamp duty exemptions, which can be significant for large financing agreements. Contracts with foreign companies can also fall within the exemption. The exemptions apply only to activities within the limits set by law, and the tax authorities review such contracts. An incorrect application of the exemption can lead to tax assessments and penalties, so contracts should be drafted with the scope of the exemption in mind. The regime also provides exemptions from certain fees (harç).
Later amendments
The original Turkish article notes that amendments made by Law No. 7582 extend the duration of certain incentives and strengthen reporting and transparency obligations, including the timely submission of independent audit reports. Anyone planning on the basis of these incentives should check the current wording and deadlines of the relevant provisions at the time of planning.
Legal risks
The tax administration subjects institutions that use incentives to risk analysis and inspection. If it finds that an incentive was used without meeting the conditions, the tax that was not paid is reclaimed with late payment interest, and a tax loss penalty (vergi zıyaı cezası) may be imposed. Directors may also face personal liability in some cases. Errors in contracts can lead to claims for damages as well.
Compliance in practice
- Keep accounting records complete and track income covered by the incentive in separate accounts.
- Issue invoices in line with the specific rules that apply to the incentive.
- Keep all supporting documents ready for inspection at any time.
- Carry out regular internal audits to identify errors early.
- Where the treatment of a transaction is uncertain, consider requesting an advance tax ruling (özelge) from the administration before acting.
- Monitor changes in the legislation and train staff on the relevant rules.
Lawyers and sworn financial advisers can assist with the application, the drafting of contracts within the scope of the exemptions and, where a dispute arises with the administration, representation before the tax courts.
Frequently asked questions
Who is covered by the IFC incentives? Domestic and foreign institutions that hold a participant certificate and carry out financial activities within the IFC.
What is the rate of the corporate tax deduction? 75% of the earnings derived exclusively from the qualifying activities is deducted when determining the corporate tax base.
Can foreign employees benefit? Qualified foreign personnel who meet the statutory conditions can benefit from income tax exemptions and wage-related incentives.
What happens if the rules are breached? Incentives used without entitlement are reclaimed with interest and a tax loss penalty may be imposed.
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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