What is Withholding Tax? Scope, Rates and Payment Process

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What is Withholding Tax?

Withholding tax is a deduction method implemented by the government to expedite tax collection, ensure security, and minimize tax losses. As one of the fundamental elements of the tax system, withholding tax is applied to certain types of income, collecting the tax at the source before the payment reaches the taxpayer. This allows the government to collect taxes in a timely and orderly manner. The withholding tax system is primarily carried out by payers such as employers, tenants, and businesses. When employers pay salaries to employees, tenants pay rent to landlords, or businesses make payments to self-employed professionals, they deduct the predetermined withholding tax rate and remit the amount directly to the state treasury. This method reduces the burden on taxpayers by eliminating the need for direct tax payments while ensuring that the government receives tax revenues on time, thereby maintaining financial discipline.

What is Withholding Tax?

Withholding tax refers to the tax deducted from income before it is received by the owner and directly deposited into the tax office. This practice is widely used because it simplifies and secures tax collection. For example, when salaries are paid to employees, the employer deducts the withholding tax from the gross salary and submits it to the tax office. The employee then receives the net salary. Similarly, when payments are made to self-employed professionals, the payer deducts the applicable withholding tax rate and transfers the tax to the government.

Withholding tax is not limited to salary payments. It also applies to various types of income, including rental income, interest earnings, dividend payments, and more. The rate of withholding tax varies depending on the type and amount of payment. The applicable rates are determined by the relevant tax legislation.

Who Pays Withholding Tax?

Withholding tax is paid by the responsible party, usually the employer, tenant, business, or other paying entity. For instance, when an employer pays an employee’s salary, they deduct the applicable withholding tax rate from the gross salary and remit it to the tax office. Similarly, businesses that make payments to self-employed professionals or companies that pay rent are also required to apply withholding tax. Additionally, financial earnings such as deposit interest, repo income, and dividend payments may also be subject to withholding tax.

This system ensures that the government collects taxes on time while allowing taxpayers to manage their tax obligations in a more structured and controlled manner. Withholding tax is paid by the entity making the payment rather than the recipient of the income.

Purpose and Advantages of Withholding Tax

The primary purpose of withholding tax is to accelerate tax collection, regulate tax payments, and prevent tax evasion. It also contributes to a more effective and sustainable tax system. The key advantages of withholding tax include:

Preventing tax evasion: Since tax payments are deducted at the source, the likelihood of tax evasion is reduced, minimizing government tax losses.

Securing government revenues: Withholding tax ensures that taxes are collected in a predictable and systematic manner, supporting the sustainability of public expenditures.

Simplifying tax collection: By streamlining the income declaration process, withholding tax helps individuals and businesses fulfill their tax obligations more efficiently and accurately.

Strengthening financial management: Collecting taxes at the source enhances financial discipline and improves budget management.

Providing benefits to businesses: For employers and businesses, withholding tax simplifies accounting processes by automatically deducting and submitting employees' and suppliers’ taxes.

Easing tax obligations for individuals: Withholding tax allows individuals to participate in the taxation process without making direct tax payments, reducing both the administrative burden and complexity. Thanks to these advantages, withholding tax serves as an effective and fair taxation method for both the government and taxpayers.

Scope of Withholding Tax

Withholding tax is a deduction method applied to payments made on specific types of income. To ensure secure tax collection, various income types fall within the scope of withholding tax.

The main income categories subject to withholding tax include:

Wage Income: Salaries, bonuses, and other wage payments to employees are subject to withholding tax.

Rental Income: Payments received by property owners as rental income are subject to withholding tax at specific rates.

Self-Employment Income: Payments made to self-employed professionals such as lawyers, doctors, engineers, and financial advisors are subject to withholding tax.

Deposit Interest and Repo Income: Interest earned from bank deposits and repo transactions falls under withholding tax.

Dividends (Profit Shares): Withholding tax applies to dividends distributed by companies to their shareholders.

Payments to Farmers: Payments made to farmers for agricultural products and services are subject to withholding tax.

Online Advertising Services: Payments made for advertising services on digital platforms are subject to withholding tax.

Payments to Foreign Entities: Certain payments made by Turkish-based businesses to foreign companies may be subject to withholding tax. The withholding tax rates for each income type vary according to legal regulations and tax laws.

Withholding Tax Rates

Withholding tax rates are determined by the Ministry of Finance and are updated periodically.

Salary payments: 15%, 20%, 27%, and 35%

Rent payments: 20%

Freelance payments: 20%

Agricultural services and products obtained from farmers:

Registered with the exchange: 2%

Not registered with the exchange: 4%

How Is Withholding Tax Calculated?

The withholding tax calculation is based on determining a certain percentage of the total payment. This percentage varies depending on the type of payment and the relevant legal regulations.

The steps to calculate withholding tax are as follows:

Determine the total payment: Identify the gross salary or payment amount subject to withholding.

Identify the applicable withholding rate: Choose the withholding tax rate set by the government based on the type of payment.

Calculate the tax amount: Determine the withholding tax deduction by applying the relevant rate to the gross payment.

Declare and pay the tax: The collected withholding tax is submitted to the tax office within the specified period.

How to Pay Withholding Tax?

The payment schedule and rules for withholding tax are regulated by the Revenue Administration based on a designated calendar. Taxpayers must fulfill their obligations accordingly.

Withholding tax payments are made as follows:

Monthly withholding payments: Payments subject to withholding tax must be declared via a withholding tax return and paid by the 26th day of the following month.

Quarterly withholding payments: In some cases, withholding tax can be paid on a quarterly basis. In this case, the withholding tax return must be submitted, and payment must be made by the 26th day of the third month following the payment month.

Annual withholding payments: In special cases, annual withholding tax deductions may be applied. These payments are made in two equal installments in March and July. Withholding tax is a responsibility for employers and payers. Failure to declare and pay withholding tax on time may result in penalties. Therefore, accurate calculation and timely payment of withholding tax should be carefully monitored.

Withholding Tax Exemptions and Exceptions

Salary Withholding Tax Exemptions

Minimum wage earners: Since 2022, minimum wage income has been exempt from income tax, and therefore, withholding tax is not applied.

Turkish workers employed abroad: Salaries earned outside Turkey and taxed abroad are not subject to withholding tax.

Diplomats and consulate employees: Individuals with diplomatic status working in foreign embassies and consulates may be exempt from withholding tax.

Withholding Tax Exemptions on Rental Income

Taxpayers under the simple taxation method: If they have rented a workplace, they are not required to withhold tax on rent.

Tax-exempt foundations and associations: No withholding tax is applied to workplaces rented by foundations and associations that operate for public benefit.

Withholding Tax Exemptions for Freelance Payments

Tax-exempt tradesmen: No withholding tax is deducted from the earnings of tax-exempt tradesmen.

Partnerships of doctors, lawyers, and engineers: Under certain conditions, withholding tax may not be applied to professionals working in partnerships.

Dividend (Profit Share) Withholding Tax Exemptions

Fully liable corporations: No withholding tax is applied to dividends distributed between corporations that are fully liable in Turkey.

Tax-exempt organizations: Some foundations, associations, or public institutions may be exempt from withholding tax on dividends.

Withholding Tax Exemptions for Government Incentives and Support

R&D and design center employees: Under Law No. 5746, R&D personnel are granted a withholding tax exemption at specific rates.

Technology development zone employees: Employees working in technology parks (technoparks) may be exempt from withholding tax.

Conclusion

Withholding tax is a system that facilitates tax collection and secures government revenue. This deduction method, which is the responsibility of employers, tenants, and businesses, prevents tax evasion while ensuring financial discipline. While withholding tax rates vary depending on income type, certain exemptions and exceptions also apply. It is crucial for taxpayers to fulfill their withholding tax obligations on time to avoid penalties. Withholding tax stands out as a regular and reliable tax collection method for both the government and taxpayers.