Renewable Energy Investments in Turkey-Local Manufacture Issues
Şubat 11th, 2017 Burcu DUMAN

Frequently Asked Questions about Investing in Turkey-Renewable Energy- Production Phase

1)    55% - What is the content of the 55% local production that the law requires? How is it determined?

 Licensed legal entities who intend to benefit from Support Mechanism, shall submit the Certificate of Conditions for Domestic Manufacturing which is drafted by certified public accountant, Type Certificate and Certificate of Unit Verification, certificate of information of domestic manufacturer to the Ministry. Domestic Manufacturing Determination Committee shall inspect the place of manufacture and/or usage of components during the setup, in case the Ministry approves the submitted documents.

2)   Production - Where is it best to produce? To install? Both tax and logistics considerations exists.

Turkey is the best place to produce equipment considering the new regional investment incentives grand scheme, tax incentives, logistics (resources of geothermal energy and the licensed firms are located in Aegean Region.)

3)   For local manpower vs. your own experts? What are the possibilities, advantages and disadvantages in either hiring local manpower or subcontracting a local company to do the work for us? Is it possible to do subcontracting and remain as supervisors on the process?

Work and residence permits should be taken from Ministry of Labor and Social Security or Turkish Embassy/Consulates for foreign employees. Taxation of temporary foreign employee could be more advantageous. According to the Article 15 paragraph 2 of Double Taxation Agreement between USA and Republic of Turkey, remuneration derived by a resident of a Contracting State in respect of an employment exercised in the other Contracting State shall be taxable only in the first-mentioned State if: a) the recipient is present in the other State for a period or periods not exceeding in the aggregate 183 days in any continuous period of 12 months; b) the remuneration is paid by, or on behalf of, an employer who is not a resident of the other State; and c) the remuneration is not borne by a permanent establishment or a fixed base which the employer has in the other State. These are cumulative conditions. Thus, providing the conditions stated in article 15, hiring local manpower and appointment of temporary foreign employee for supervision could be an advantage (key personnel is excluded) The fact that a company which is a resident of a Contracting State controls or is controlled by a company which is a resident of the other Contracting State, or which carries on business in that other State (whether through a permanent establishment or otherwise), shall not of itself constitute either company a permanent establishment of the other. Hence, supervision of subcontractors might not be deemed as permanent establishment and might not benefit from the relevant provisions of Double Taxation Agreement.

4)   Free zone area- advantages and possibilities. How to get local procurement in? How to get the final product out? Importing parts that not locally produced – How is it considered?

As speaking of local manufacture issue, sales of goods from any Free Zone Area to Turkey shall be subject to import legislation and should not be considered as “local manufacture” within the scope of relevant regulation. Local office

a)   What type of office, advantages and disadvantages, including liabilities, closing an office, etc…

Individuals, legal entities, corporations, ordinary partnerships, joint ventures, Branch offices of foreign companies can benefit from New Incentive System of Turkey as stated above, provided that they have “incentive certificate”. Establishment of a foreign capitalized Limited Company is an option. However, establishing a branch office is the best option for foreign investors. Branch offices have autonomous capital and accounting to carry out commercial transactions with third parties, although they are closely associated with the parent company in respect of internal management. This means that rights, debts, profits and losses of the branch offices are assumed by the parent company. A branch office can only engage in activities of its parent company. It cannot provide goods and services or engage in any commercial activities that are not specified in the parent company’s articles of association. Although there is no legal capital requirement for branch offices, it is required that the incorporating company maintains a capital sufficient to run the branch office in practice. A branch office shall use the same corporate name as that of the parent company by indicating that it is a branch office and also contain the location of the head office and the branch office. A fully authorized commercial representative (branch office manager) residing in Turkey needs to be appointed in order to run day-to-day business of the branch office. Paragraph 5, Article 10 of Double Taxation Agreement states that the provisions of paragraphs 1 and 2 shall not apply if the recipient of the dividends, being a resident of one of the Contracting States, carries on business in the other Contracting State of which the company paying the dividends is a resident, through a permanent establishment (Branch) situated therein. In such case the provisions of Article 7 ( Business Profits) or Article 14 (Independent Personal Services), as the case may be, shall apply. As a matter of fact, Paragraph 2 of article 7 of DoubleTaxation Agreement , where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment the business profits which it might be expected to make if it were a distinct and independent enterprise engaged in the same or similar activities under the same or similar conditions. Within the light of the information above, establishment of a Branch is the best option. Besides, there are satisfying incentives within the context of New Incentive System.

b)   Financial matters - regarding the different offices- injecting money, spending money locally, local procurements, income from selling services, spare parts, production parts.

There is no capital duty or stamp duty on injecting equity into a Turkish company or branch. The equity contribution is subject to a fund (i.e. contribution to the Competition Board) of 0.04 percent (four per 10,000). According to the paragraph 2 of article 7 of Double Taxation Agreement, where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment the business profits which it might be expected to make if it were a distinct and independent enterprise engaged in the same or similar activities under the same or similar conditions. Specific transfer pricing rules are valid in Turkey as of the beginning of 1 January 2007 under Article 13 of the Corporate Income Tax Law (the CITL) No. 5520 with the title ‘Disguised Profit Distribution through Transfer Pricing’. The regulations under Article 13 follow the arm’s-length principle, established by the Organisation for Economic Co-operation and Development Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD Guidelines), and are applicable to all financial, economic, commercial transactions and employment relations between related parties. Details on the application of Article 13 are provided in a communiqué regarding disguised profit distribution through transfer pricing. Transfer Pricing procedures shall be completed in case the Branch enters into any transaction with related parties such as purchase and sales of goods and services. In case Branch does not submit Annual Transfer Pricing Method or Appendix 2 Form to the Relevant Tax office, Tax authority will apply: Special irregularity fine (Tax Procedural Law,article 355) + forward to Tax Auditing +Assessment + Loss of Tax (100%) + Default interest (2,5% Monthly). If taxpayers mislead tax authorities on purpose over Transfer Pricing Methods,there exists tax-veiling issue for which Company Managers and shareholders may face with tax fraud charges pursuant to the Turkish Criminal Code, Turkish Tax Procedural Law, article 359 and the administrative sanctions shall apply in article 344 which includes huge amounts of tax penalties.

c)    Service contracts – procedures, possibilities

Service contracts and remunerations should be in accordance with arm’s length principle. It’s a significant element of Transfer Pricing Procedure for purchase and/or sale of services from/to related parties. Foreign Employees: Work and residence permits should be taken from Ministry of Labor and Social Security or Turkish Embassy/Consulates for foreign employees.

d)   Local shop- spare parts stock and how to handle against warranty and service issues. Repair shop. Free zone or not?

 Free zone is not an appropriate zone to establish a local shop due to the time limitation of spare parts stock, which is 12 months 

Tags: turkey, transfer, taxation, manufacture, zone, energy, incentive, production, pricing, free, investment, renewable