What is Corporate Tax? Who Pays and How is It Calculated?

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What is Corporate Tax and How is it Calculated?

Corporate tax is a direct tax levied by the government on the earnings of businesses with legal entity status within a fiscal period. In Turkey, corporate tax is regulated under the Corporate Tax Law No. 5520 and is calculated and collected at rates determined by the Revenue Administration (GİB). Corporations are required to pay a certain percentage of their annual profits to the state on specified dates. Taxpayers who fail to meet their tax obligations may face late payment interest, administrative fines, and various sanctions.

What is Corporate Tax?

Corporate tax is a type of income tax that is only paid by businesses with legal entity status. The taxpayers of this tax are legally recognized corporations. The businesses subject to corporate tax include:

• Joint-stock companies

• Limited liability companies

• Cooperatives

• Economic enterprises of associations and foundations

• Economic public institutions

• Business partnerships

Sole proprietorships, on the other hand, are not subject to corporate tax but are assessed under the Income Tax Law. Corporate tax taxpayers pay tax through a single tax return, rather than filing separately for each operational unit. For instance, even if a joint-stock company has multiple branches, the profits of all its branches are reported and taxed through a single corporate tax return.

Corporate Tax Law and Its Key Provisions

The scope, rates, exemptions, and payment processes of corporate tax are determined by Corporate Tax Law No. 5520. The key provisions of this law include:

• Explanation of the subject and purpose of corporate tax.

• Definition of entities considered corporate taxpayers.

• Regulations on full and limited tax liability.

• Identification of institutions exempt from corporate tax and exemption conditions.

• Explanation of income types that are tax-exempt.

What is Full and Limited Tax Liability?

Corporate tax taxpayers are categorized into two main groups based on the location of their earnings and corporate headquarters:

Full Tax Liability

Institutions whose legal or business headquarters is located in Turkey are considered full taxpayers. These corporations are subject to corporate tax on their total earnings, both within Turkey and abroad.

Limited Tax Liability

Institutions whose legal or business headquarters are outside Turkey but generate income in Turkey are classified as limited taxpayers. Limited taxpayers are only taxed on the income they earn within Turkey.

Corporate Tax Return and Payment Process

Corporate tax taxpayers must submit a corporate tax return, including the previous year's earnings, to the Revenue Administration by the end of April each year. The return is submitted electronically through the e-Declaration system.

Tax payments can be made in three installments within the month in which the return is submitted. Payment methods include the internet tax office, bank branches, and tax offices. Additionally, advance tax payments are made in quarterly periods throughout the year. The advance tax is deducted from the annual corporate tax to determine the final tax amount. Taxpayers may face penalties for calculation errors or underpayment. Therefore, working with a professional financial advisor or accountant is crucial for proper tax planning.

Deductions and Exemptions in Corporate Tax

Certain types of income and specific situations may qualify for tax exemptions in corporate tax. These include:

Investment Deduction: A tax deduction applied as an incentive for investments in certain sectors.

Technology Development Zone Exemption: Tax exemption for businesses engaged in R&D activities.

Export Income Exemption: Discounts applied to earnings from export activities.

Donation and Aid Deduction: Donations made for education, health, and public benefit can be deducted from the corporate tax base.

Corporate Tax Return Filing

Corporate tax taxpayers must complete a Corporate Tax Return to declare their annual earnings. This return can be downloaded from the Revenue Administration's official website and submitted electronically through the e-Declaration system.

Filing Deadline:

The filing period begins after the fiscal year ends. For example, the corporate tax return for the 2024 earnings must be submitted by April 25, 2025, at the latest.

How to Pay Corporate Tax?

Direct Payment to the Tax Office

Taxpayers can visit their respective tax office and make payments in cash or via bank transactions. Businesses opting for this method must present their assessment slip along with the declaration receipt. This method is suitable for those who prefer direct transactions with the tax office.

Payment via Contracted Banks

Corporate tax can be paid through banks designated by the Revenue Administration (GİB). Businesses can make payments directly at these banks' branches or use their online and mobile banking services. The list of contracted banks is updated annually, so taxpayers should check GİB’s official website for the latest information.

Payment via e-Government Portal

The e-Government portal (turkiye.gov.tr) allows taxpayers to make corporate tax payments online by accessing Revenue Administration services. This is a practical method for taxpayers who do not wish to visit a bank or tax office in person.

Payment via Interactive Tax Office

The Interactive Tax Office system, provided by the Revenue Administration, enables quick and secure online tax payments. Taxpayers can log into the system using their Turkish ID number, tax ID number, or e-Government credentials to pay corporate tax using a credit or debit card. The system also allows users to check past tax debts and manage tax structuring transactions.

Taxable Income Sources for Corporate Tax

Corporate tax is calculated based on earnings derived from seven different sources. These include:

• Commercial earnings

• Agricultural earnings

• Wage income

• Self-employment income

• Real estate capital gains (rental income)

• Movable capital gains (interest, stock market profits)

• Other earnings and revenues

If a corporation generates income from any of these sources, it is subject to corporate tax.

Key Considerations During the Payment Process

Corporate tax returns must be filed in April, and the assessed tax amount must be paid by the last business day of the month. Late payments are subject to interest charges and additional penalties. When making payments, it is essential to use the corresponding assessment slip number for the relevant year. Taxpayers are advised to keep payment receipts to ensure transactions are completed smoothly. With the rise of digital payment methods, using e-Government and the Interactive Tax Office offers significant time and cost savings.

Who is Required to Pay Corporate Tax?

Corporate tax is mandatory for legal entities. Sole proprietorships are exempt from this tax.

According to Article 1 of the Corporate Tax Law, the following economic entities are subject to corporate tax:

Capital Companies: Joint-stock companies, limited liability companies, and partnerships limited by shares.

Cooperatives: Legal entities established to protect the economic interests of their members.

Economic Public Institutions: Organizations owned by the state or public legal entities engaging in economic activities.

Economic Enterprises of Associations and Foundations: Businesses engaged in commercial activities under associations, unions, and foundations.

Business Partnerships: Partnerships established to undertake specific projects or commercial activities.

Conclusion

Corporate tax is a significant tax obligation for businesses and must be paid at designated rates. The rates and exemptions of this tax may change over time due to economic conditions and government policies. Therefore, it is crucial for companies to stay updated with the latest regulations and fulfill their tax obligations accurately.

Effective tax planning helps businesses maintain financial discipline while avoiding unnecessary tax burdens. With proper planning, companies can take advantage of legal benefits and strengthen their financial structure. Additionally, timely and complete tax payments prevent businesses from facing penalties and help maintain their corporate reputation. Given the complexities and frequent changes in tax regulations, seeking support from a professional financial advisor is highly recommended. An expert accountant can provide businesses with the most up-to-date information, help develop an effective tax strategy, and mitigate potential risks.