Taxation & Investment in Turkey Nexia International Tax Conference

1. Taxation & Investment in Turkey Nexia International Tax Conference Istanbul 1– June 02, 2011

2. The information included herein is not intended or written to be used, and itcannot be used by any taxpayer. The information included herein is of a general nature and should not be relied on as tax advice. Consultation with a tax advisor in respect of specific transactions should be undertaken.

3. Outline • Main Taxes • Income Taxes • Taxes on Transactions of G&S • Other Taxes • Inbound Investment to Turkey • Liability to Tax • Financing & Thin Capitalization • Transfer Pricing • CFS Exemption • Payments to the Non Residents • Main Incentives • New Trade Law

4. MainTaxes • Income Tax • Corporate Income Tax • Personal Income Tax • Tax on transfer of G&S • VAT • Real Estate Transfer Tax • Special Consumption Tax (petrolium products, motor vehicles, tobacco products, luxery goods) • Special Communication Tax • Inheritance and Gift Tax • Other Taxes • Bank and Insurance Transactions Tax • Stamp Duty • Property Tax • Motor Vehicle Tax

5. Corporate Income Tax – Taxable Entity • Unlimited Taxpayer Status →Taxed on WWI • Resident Entities • JSC – LLC – other corporations and legal entities • Foreign Subsidiaries (with legal base in Turkey) • Non-Resident Entities • Main Business Center is in Turkey • Same rules apply both domestic and foreign Unlimited Taxpayers • Limited Taxpayer Status → Taxed on income and gain derived in Turkey • Taxation depends on the type of the income and DTT • Business income derived from a premises-offices or by an representative → The same rules apply with Unlimited Taxpayer (except WWI) • Liaison Offices→ No tax requirement, if doing no business activity • No Consolidation

6. CIT (Unlimited Taxpayer) • Financial Year • Calendaryear, or • Other 12 months period (upon taxpayers request and approval of Tax Administiration) • Returns & Payment • Quarterly Advance CIT Return (second month) • CIT Return (4thmonth) (*) Apply to Limited Taxpayers with business or agricultural activities

7. CIT Base: Adjusted corporate income • Business Income Adjusted for Tax Purposes; • Deductables • Dividend income from unlimited taxpayers to unlimited taxpayer • Dividend income and capital gain from CFS • Incomefromsale of realpropertyandsubscriptionstocks, heldmorethan 2 years (75%) • Unrealized gains from financial assets • Incentivesandotherdeductions • Lossescarriedforward 5 year – No losscarryback • Undeductebles • Unrealized losses of securities • Penalties • Personalexpenses • Donations over certain limits

8. PERSONAL INCOME TAX

9. Personal Income Tax-1 • Taxable Person - Individuals incurring taxable income • Residents → worldwide income • Non-residents → Income derived from Turkey • Residence test (183 days rule) • Be determined in line with applicable DTT • Tax Base: Income from, • Trade and business activities • Agriculture • Independent professional service • Immovable assets and rights • Income from capital investment (dividends, interests, etc.) • Wages and salaries • Other incomes (*) Exemptions, deductions and personel allowances apply

10. Personal Income Tax-2 • Period: Calendar year • Returns & Payment • Quarterly Advance Tax Return (income from business activities and professional service) • No filing requirement in certain cases (mostly WHT case, salary only from one employer, etc.) • Tax Rates • Progressive tax rates

11. Personal Income Tax Rate (2011) Income (TRY) Tax Rate (%) 0 - 9.400 9.401 - 23.000 23.001 - 53.000 53.000 - ∞ 15 20 27 35 (*) Lower for wages (*) If allowade not to fill tax return, lower rates or WHT apply (Euro/TRY = 2,2)

12. Provisions for Income Taxes • Taxable income is calculated in accordance with the Turkish Accounting Standards issued by Ministry of Finance • Accural basis (except income from professional service and rents) • Depreciation: Straight-line or Accelerated method. Usefull life is anounced bu Tax Administration (from 2 to 50 years, generally 5 year) • Inflation accounting for high inflation periods (once) • Dividends treated as flow through entities until to individuals or foreigners. • Interest paid to related or unrelated parties is deductible. • TP and Thin Capitalization rules apply

13. VALUE ADDED TAX

14. Value Added Tax • Credit mechanism • Paid VAT = Collected – Input • Refund in some cases for residual (exemption, etc.) • Monthly VAT Return • VAT Rates • Generaly 18 % • Basic foods, medicines, book, textile, meals, etc. 8 % • Dried food, cotton, newspaper, etc. 1 %

15. VAT - Taxable Transactions • G&S transactions (except personel assets) • Import of G&S • Main exemptions • Export (and free zones) • Transit transportation • Temporary import of goods (transit), free-zones • Diplomatic exemption • Services of banks, insurance companies • Suplies to taxpayers with Investment Incentive Certificate • Certain suplies and services for cultural, educational, social, miltary purposes • Other sectoral exemption (sea, air, railway transportation, petrolium extract, defence, precious metals and stones,

16. Main Taxe Rates • Income Tax • Corporate IncomeTax(20%) • Personal IncomeTax(%15 – 35%) • Tax on transfer of G&S • VAT (18% - 8% - 1% - exemptions) • Real Estate TransferTax(0,15% + 0,15%) • Special Consumption Tax (0% - 84%) (petrolium products, motor vehicles, tobacco products, luxery goods, etc. • Special Communication Tax (5% - 25 %) • Tax on Inheritance (1% - 10%) and Gift (10% - 30%) • Other Taxes • Bank and Insurance Transactions Tax (5%) • Stamp Duty (from fixed amount to 0,825 %) ceiling TRY1.251.383,40 • Property Tax (0,1% - 0,3%) • Motor Vehicle Tax • Etc.

17. INBOUND INVESTMENT TO TURKEY- tax aspect -

18. Tax Liability • Subsidiary : Unlimited Taxpayer (WWI) • Branch (main business center) : Unlimited Taxpayer (WWI) • Branch or Representative : Limited Taxpayer • Not a main business center • Taxed on income derived in Turkey • Liaison Offices (non-trading) : No tax requirements • Tax treaties comes first • DTT with 74 countries • No consolidation • Controlled Foreign Subsidiary (CFS) rule apply • Resident and NR Companies with permanent establishment taxed same

19. Financing & Thin Capitalization • Tax on Borrowings • WHT on interest paid • Stamp tax on borrowings • Thin Capitalization • Disguised capital ratio: 3 to 1 • Related party: At least 10% voting or dividend right • Transit loans (from bank to company) are not deemed as DC • Disallowable deductions; • Interest, exchange rate differences, other charges • Considered as distrubuted dividends and taxed accordingly

20. Arm’s length rule Methods Comparative Uncontrolled Price (CUP) Method Resale Price Method Cost-Plus Method Other Methods if above 3 can not be used APA TP Forms (for all taxpayers) TP Report (for taxpayers have transactions with foreigners) Detailed documentation requirements Profit distrubuted through TP is considered as dividends and taxed accordingly Transfer Pricing

21. Controlled Foreign Subsidiary Exemption • Dividends and capital gains (distrubuted or not) is part of the taxable income • Not exempt on the conditions that: • Direct or indirect participation of at least 50% anytime in the tax year • At least 25% of income of the CFS results from passive activities • At least 100.000 TRY gross income • Taxed less than 10% in resident country

22. Payments to abroad-1 • Subject to WHT (DTT is the key) • Dividend (and branch net gain after tax) • Interest (bank loans exempt) • Royalty • Charged expenses by foreign parent • Management and service fees paid to a foreign parent is deductible. In some cases subject to WHT. Documentationrequirement for reasonableness. • No differences between domesitc corporations or foreign subsidiary-branches in terms of WHT on payments to the foreigners or parent company • 183 days rule apply • Precautionary WHT on payments to tax heavens

23. Payments to abroad-2 Tax RateDTTPayment • Dividend 15% 10% WHT • Interest - 10% WHT • Payment for professional services - Service is not rendered in Turkey 20% - WHT - Service is rendered in Turkey - Over 183 days 20% 20% WHT - Less than 183 days 20% - WHT • Royalty, licence, software, etc. payment 20% 10% WHT • VAT on payments 18% %18 WHT (if transaction take place in Turkey or imported to Turkey) • All payments to the entities in tax-heavens 30%

24. Overview for a Foreign Investment • Most common case; • Permanent establishment → Subsidiary, Unlimited Taxpayer Mostly: JSC or LLP • Corporate Income Tax Rate : 20% • Debt financing allowed → Thin Capitalization rule apply • Transfer Pricing apply • Interests paid to the abroad : 10 % (WHT) • Dividends paid to the abroad : 10 % (WHT) (Example: CIT= 100*20% = 80 WHT= 80*10% = 8 TOTAL=20+8 = 28) • No tax filings by foreign parent company • No consolidation • Tax authorities will question allocations of income and deductions with parent company

25. INCENTIVES

26. Main Incentives-1 • Incentives for Large Scale Investments • Corporate Income Tax • VAT exemption • Social security premium support • Custom duty exemption • Land allocation • Incentives for investments increasing employment in recognized undeveloped areas (4 different region) • Tax relief • Social security premium support • Land allocation • Interest support

27. Main Incentives-2 • Free-Trade Zones • Income from production of goods are exempt from CIT • VAT exemption • Techno Parks • Income derived from Techno Parks are exempt from CIT • Software transactions are exempt from VAT • Qualifying R&D expenditures deductible from CI • SME Support

28. New Business Law • JSC and LLC with one shareholder (current: 5 - 2) • One-man Board of Directors • Electronic Shareholders and Board of Directors meetings and voting • Accounting in line with IFRS • Independent Audit • Effective by July 2012 (some provisions, January 2013)

29. Thank You