How Can a Liaison Office be Established? What’s the Establishment Procedure In Turkey?
According to the article 6 of the Application Regulations of the law on Foreign Direct Investments numbered 4875 (“Regulation”), in order to open a liaison office in Turkey, it is necessary to fulfill the below mentioned conditions;
a) Companies must have been dully founded in accordance with the foreign law it’s established in and they must have a company status,
b) Should not carry out commercial activities in Turkey,
In accordance with the conditions mentioned above, liaison offices can be opened for the following purposes; to correspond, to make feasibility research, to execute some studies on social and cultural fields, to make preparations for merger and acquisitions of the companies, advertising and promotion, to follow business opportunities in the country and to give information about these subjects to the main company whose registered address is abroad.
Since participating in the commercial activities is forbidden for liaison offices, they are not liable for corporate tax and VAT in Turkey. If they are to get involved in any commercial activities in future, they will have to convert to a branch of the main company and loose the advantages provided for the liaison offices.
A general outline for the status of the liaison offices in Turkey is set by the information given below on the conditions to establish a liaison office, operating of the liaison office and taxation of liaison offices.
What Has to be Done in Order to Establish a Liaison Office in Turkey:
In accordance with the article 7 of the Regulation in order to establish a liaison office in Turkey, an application has to be made to the Undersecretariat of Treasury with the documents determined below:
a) An original copy of “Certificate of Activity” of the parent company. It should be approved by the Turkish Consulate or approved in accordance with the provisions of the Hague Convention Abolishing the Requirement for Legalization for Foreign Public Documents.
b) The “Activity Report” or “Balance Sheet” and “Income Statement” of the main company.
c) The original copy of “Authorization Document” issued for the representative that is to be assigned as the individual authorized to administrate the office.
d) The original copy of “Power of Attorney” issued in the event the establishment procedures of the liaison is to be carried out by a representative.
Moreover in accordance with the article 6 of the Regulation; applications for establishment and permit extension are finalized within five work days starting from their submission provided that the documents and information required are complete and properly.
Regulations Concerning the Operating of the Liaison Offices:
The following principles are mandatory for the operation of a liaison office:
a) Pursuant to the obtaining of the permit, the liaison office must register in the local tax office within one month starting from the date of establishment; the office must submit a copy of the Tax Office Registration Document to the Directorate General. In case of an address change the liaison office has to inform the new address within one month to the Directorate General.
b) At the end of May of each year the liaison office has to inform the Undersecretariat of Treasury by filling out an information form about the activity of the last year. The documents proving that the expenses regarding the last year activities of the office should be attached to the mentioned form.
c) The permit for the operation of a liaison office is given for at most three years. An exemption can only be given for further three years by taking in consideration of the activity of the last year and plans for the future.
d) In the event of closing the liaison office, a closing certification (control certification) issued by the tax office has to be sent to the Directorate General. Liaison Offices cannot request a transfer other than the total accrued as a result of closing and liquidation.
e) If a breach of the applicable law was detected the Undersecretariat of Treasury is authorized to annul the establishment permit and to notify the relevant authorities.
Taxation of Liaison Offices:
Evaluation from the Corporate Tax Point of View;
Liaison offices apply for permits for the activities other than the activities that generates income (liaison offices cannot carry out any commercial activities) therefore they will not have any commercial income, thus there is no possibility for any tax to accrue. There are some State Council Decisions and rulings which have been given in different dates on this subject. Liaison offices are going to make tax cut and pay it except for the fees they pay which have been stated in the article 94 of Income Tax Law (Fees stated in the article 23/14 of Income tax Law). There are no charge of taxation for liaison offices which have been established and carrying out activities in accordance with the conditions mentioned above except for the ones stated in the article 94 of Income Tax Law. Based on these explanations, within the context of Tax Procedure Law, liaison offices do not have to do bookkeeping by the way of Balance Sheet Procedure.
Evaluation from the Value Added Tax (VAT) Point of View;
In accordance with the article 1/1 of the law on Value Added Tax numbered 3065, delivery and the services which are made in Turkey in the frame of commercial, industrial, agricultural and self-employment activities are subject to VAT. So, in order for VAT liability to be arisen commercial, industrial, agricultural and self-employment activities should be carried out. Therefore there is no need to constitute a charge of VAT by liaison offices since they have not been establishment for showing any commercial activity. There so many letter-ruling about this subject.
Evaluation from the Withholding Tax Point of View;
In the article of 23/14 of the Income Tax Law; it has been stated that “Foreign currency fees which are paid from incomes gained out of Turkey to employees working for foreign-originated taxpayer whose registered address is out of Turkey are exempted from the income tax” based on this explanation that fees which will be paid to employees working for liaison offices are exempt from income tax within specific conditions. Namely, it is exempt from tax cut which is has to be done by the employer as a tax payer within the context of article 94 of Income Tax Law. Conditions set forth are stated below:
1- Fees are going to be paid from foreign-originated taxpayer’s incomes which have been gained abroad. Namely, personnel fees shall be covered and sent to Turkey by the parent company. It would be better for the purposes of evidence that the money transfers must be made to the liaison office’s bank account.
2- Fees are shall not be paid as Turkish Lira, but as foreign exchange or as Turkish Lira indexed to foreign exchange .
3- Moreover for the supervision of these conditions, providing and keeping necessary documents (bank extracts, foreign exchange purchase vouchers, abroad transfer extracts, etc.) is mandatory.
In the event of liaison offices making payments that is declared in the article 94 of the Income Tax Law, they have to make tax cut for the fees other than the payments stated above. For instance; it is a mandatory to make tax cut from rents paid by personnel and professional service payments to accountant or to translation offices.
Evaluation from the Stamp Duty Point of View;
Before the law numbered 5535 and dated 08.07.2006 there was no provision which exempts fee payments (fees within the context of the article 23/14 of the Income Tax Law) from Stamp Duty tax, in accordance with the Stamp Duty Law; stamp duty was being deducted from fees paid to personnel working in liaison offices. After the date above mentioned in accordance with the article 8 of law numbered and article 23 of the Income Tax Law, fees exempt from income tax shall also be exempted from the stamp duty. After the date above mentioned, stump duty is not going to be deducted from the fee payments in liaison offices.
Evaluation from the Social Insurances Legislations Point of View;
If personnel working in liaison office is a Turkish citizen, income tax is not going to be deducted from his/her salary, but social security premiums of both employee and employer are going to be deducted and paid to the Social Insurance Office. Under the article 3/G of Law of Social Insurance “Individuals Deemed as not Insured“ has been defined as “The foreign people sent to Turkey for a work on behalf and account of any company which has been founded abroad and people which are insured in their countries.” The foreign personnel working in liaison offices are people who act on behalf and account of the company whose registered address is at abroad. In order for such personnel not to be deemed as insured in Turkey, firstly there must be a social insurance agreement between his/her country and Turkey, secondly there must be a document taken from relevant country institutions which shows he/she is insured in his/her country and lastly this document must be approved by related management of social insurance office. If the personnel proves that he/she is insured in his/her country as it is explained above, he/she is not going to pay social insurance premium in Turkey or vice versa.
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