Lara Candoğan

Attorney

24.01.2023

Establıshment Of Companıes Abroad And Taxatıon Of Foreıgn Investments In Turkey

Today, with the effect of globalization, many people dream of establishing a company abroad. There are areas where establishing a company abroad is more advantageous than establishing a company in Turkey. For this reason, especially entrepreneurs who want to become a global company prefer to establish a company abroad. In this regard, this article will examine and explain what needs to be known and done to establish a company abroad, the issues that need to be considered, as well as how the investments made abroad will be taxed in Turkey.

A.    DETERMINING THE BUSINESS PLAN AND COUNTRY FOR ESTABLISHING A COMPANY ABROAD


            The first thing to do before proceeding with the establishment of a company abroad is to create a business plan. Without a business plan, problems may arise and process management becomes very difficult. In the planning process, it is important to determine the steps according to the field of activity. In this regard, it should first be decided in which field the company to be established abroad will operate. After determining the field in which the company will operate, it is necessary to determine the country or countries where this activity / business will be carried out. 

When determining the country, one should examine in detail in which country the activity in question will be carried out more easily and which country will provide more advantages. The main factors to be considered when determining the country where the company will be established are as follows;

·       Government incentives provided by the country
·       Country's tax conditions 
·       Property rights in the country
·       The country's economic situation and policy 
·       Language of the country
·       Cultural structure of the country 
·       Suitability of the country for the chosen field of activity 
·       Cost of company incorporation in the country
 

All these factors play an important role in determining the country of incorporation. For example, a company should not be established in a country that restricts the property rights of foreigners. For this reason, it is important to learn the laws and regulations in the country where you want to establish a company. In addition, income inequality and high inflation in the country where the company will be established also increase the risk. For this reason, it is much more appropriate to establish a company in countries with a stable economy. 

One of the most important issues for entrepreneurs who will establish a company is undoubtedly the tax rates and the withholding taxes applied to these rates. Entrepreneurs need to pay less tax in order to maximize their earnings. Tax exemptions and low tax rates provide a significant cost advantage when the annual expenses and costs of the company are considered. It is therefore extremely important to establish a company in the country that will provide this. The countries where entrepreneurs invest and open companies the most today are the USA, Russia, China, Singapore, Mexico and the United Arab Emirates, due to their market volumes and very reasonable tax rates.

Another factor that entrepreneurs who want to establish a company abroad should consider is the costs of establishing a company. For this reason, it is extremely important to determine the capital before establishing a company abroad. The cost of setting up a company abroad varies according to the country or state where the company will be established, and each country has its own fee schedule. The United States of America is the country where the cost of company formation abroad is the most affordable. The cost of setting up a company abroad also varies according to the type of company to be established.   

B.    STAGES AND CONDITIONS FOR ESTABLISHING A COMPANY ABROAD

      There are conditions that must be complied with in order to establish a company or open a branch abroad. These requirements vary according to countries. For this reason, it is necessary to obtain up-to-date information about the countries before establishing a company. Information such as how the company can be established in which country, which countries tolerate which commercial activities, which institutions should be contacted, the documents that should be ready and the taxation systems of the countries should be learned. The Undersecretariat of Foreign Trade can provide support for this information. This information can be easily accessed from the website of the Undersecretariat of Foreign Trade. 

The first of the documents required to open a company abroad is a petition to the Ministry of Finance. In order to move an existing company abroad, the owner of the company will submit a petition online through the website of the Ministry of Finance. This petition should include important information such as the name of the company, the date of establishment, the amount of capital, the amount of profit or loss for the last five years, the total amount of foreign currency requested by the country where the company is planned to be established. It may also be requested to explain the professional qualifications of the person who will establish the company and to provide proof of them. The follow-up of the acceptance process of the company to be established abroad can also be checked on the website of the Ministry of Finance. Thanks to the fact that all establishment procedures can be handled over the internet, there is no need to go to the foreign country where the company will be established.

When the establishment process of the company abroad is completed and the required capital amount is sent from the company owner's account or from the company in Turkey, the company owner is required to make a capital declaration, i.e. Foreign Investment Declaration. This is an important issue that founders or partners of companies abroad should not overlook. The provision shared below is also based on this issue:

Pursuant to Article 10 of the Communiqué on Decree No. 32 on the Protection of the Value of the Turkish Currency (Communiqué No: 2008-32/34) regarding the issuance of capital abroad; 
Real persons and legal entities resident in Turkey shall fill out the information form on capital exports abroad and send it to the Ministry of Treasury and Finance and the Ministry of Trade within three months following their first capital export in cash and/or in kind to establish companies abroad, to become partners in existing companies or to open branches.
Those who have their domicile in Turkey and who reside in Turkey continuously for more than six months within a calendar year are deemed to be residents of Turkey. 
If it is determined that the notification is not made, the persons or institutions that do not make the notification are penalized with administrative fines. In this respect, it is important to make the notification.
 
 
C.    ADVANTAGES OF ESTABLISHING A COMPANY ABROAD 
The advantages to be provided by the company to be established abroad vary according to the country where the company will be established. However, in general, we can list the advantages of establishing a company abroad as follows;

·       The business can become a global brand.

·       Certain taxes can be avoided.

·       The products and services sold by the business reach people living abroad.

·       Storage and logistics processes can be managed with more affordable prices.

·       Foreign currency income is obtained.

·       Government grants and incentives can be utilized.

·       Business can be easily developed by establishing a company in economically growing countries.

·       It is much easier for the company owner to obtain a visa to the country where the company is established.

·       The company owner can obtain the right of residence in the country where the company is established in a much shorter time than usual.

 

D.
    TAXATION OF FOREIGN INVESTMENTS IN TURKEY
One of the biggest advantages of setting up a company abroad is having tax rates and advantages that make it easier to do business. Each state imposes taxes in accordance with its own legal regulations. Therefore, tax rates and advantages vary from country to country. In this respect, it is not possible to say anything general about the taxation applied abroad. Countries should be evaluated separately in terms of taxation.   

The person who establishes a company abroad will have responsibilities in the foreign country where the company is established in terms of taxation, as well as in Turkey.

There are basically two systems for the taxation of foreign investment made by companies: the set-off system and the exemption system.  These two systems aim to prevent double taxation. In the set-off method, the country of residence accepts the taxation right of the country of origin. With this method, the taxation authority of the country of residence is restricted in favor of the country of source. In the Exemption Method, the country of residence exempts from domestic taxation the elements of income subject to taxation from the country of origin. Therefore, foreign income earned by the foreign subsidiaries of the company is not taxed by the host country of the parent organization.  
            With the increase in foreign economic activities in recent years, Turkish companies pay more and more taxes in foreign countries. However, by using the offsetting method in Turkey, it is possible to offset these taxes paid in foreign countries against the corporate tax calculated in Turkey. However, in order to use this method, the declaration and documentation obligations regarding the tax payment must be complied with. Failure to comply with these obligations will deprive companies of this tax advantage. 

In addition, if there is a double taxation avoidance agreement signed between Turkey and the country where the investment is made abroad, this agreement should also be taken into consideration. This is because both countries may have the right to levy taxes on some incomes. In this case, the treaties regulate how double taxation will be avoided, i.e. which of the offset or exemption methods will be applied.

For the offsetting process, it is first necessary to obtain a certificate of payment of the tax from the tax authorities in the relevant foreign country. This document must then be certified by the Turkish embassy or consulate in the relevant foreign country. It is also valid to submit a document with an internationally recognized "Apostille" annotation to the tax office in Turkey.
Corporate tax and similar taxes paid on earnings in foreign countries should be deducted from the corporate tax calculated in Turkey. These conditions are
- The tax should be shown in the Corporate Tax Declaration.  Taxes paid on income not included in the declaration cannot be deducted from taxes calculated on other income. 

- The tax paid in the foreign country on these earnings must be corporate tax or a similar tax.

CONCLUSION
Before establishing a company abroad, it is extremely important for the person or persons who will establish the company to prepare a business plan for the survival of the company. We have already mentioned that one of the biggest advantages of establishing a company abroad is the tax rates and advantages. In this respect, it is extremely important for companies that earn taxable income abroad to make tax planning by considering the taxes they will pay. Since offsetting taxes paid abroad in Turkey is one of the most challenging issues for taxpayers, this article examines this issue. We emphasize the importance of taxpayers to fulfill their documentation obligations and use their right of offset.

In today's world, it is quite common for Turkish investors to settle abroad and establish a company there. However, it is very important to make both commercial and tax plans before performing this action. Being familiar with both Turkish law and the foreign law where the company will be established is among the requirements of establishing a company in a foreign country. This article explains the procedures required to establish a company abroad in accordance with the Turkish Commercial and Company Law and the Tax Procedure Law in the light of the laws and regulations.