THE LEGAL ASPECT OF RECEIVING INCOME FROM ABROAD WHILE RESIDING IN TURKEY

PRACTICES OF TAX ON FOREIGN INCOME IN TURKEY

Tax on foreign income in Turkey is significantly influenced by Article 23/14 of the Income Tax Law. According to this article, individuals residing in Turkey and receiving a salary from a foreign company can obtain an income tax exemption under certain conditions. Although these salaries are generally not taxed in the country where the employer is located, and Turkey holds the right to tax them, they are not subject to income tax in Turkey if the specified conditions are met. For this exemption to apply, the employee must reside in Turkey, and the employer must not have a workplace or representative in Turkey.

• Income Earned in Turkey Under the Income Tax Law

According to Article 7/3-a of the Income Tax Law, if a person resides in Turkey and earns a salary, this salary is considered to be earned in Turkey and is therefore subject to income tax, even if the employer is abroad.

• Double Taxation Avoidance Agreements

Double taxation avoidance agreements take precedence over domestic regulations. According to these agreements, the right to tax the income earned by personnel residing in Turkey and providing services to a foreign company belongs to Turkey. This situation is specified in the “Dependent Services” article (usually Article 15) of the double taxation avoidance agreements.

• Exemptions Under Article 23, Paragraph 14/a of the Income Tax Law

Paragraph 14/a of Article 23 of the Income Tax Law is as follows:

“14. a) Salaries paid in foreign currency to employees working for employers subject to limited tax liability whose legal and business centers are not in Turkey, based on the earnings obtained by the employer outside of Turkey;”

Accordingly, receiving salary from abroad in Turkey is exempt from income tax if a foreign company pays its personnel in Turkey in foreign currency, and the salaries are paid based on the income obtained by the employer outside of Turkey.

• Conditions for Exemption According to Income Tax Communiqué No. 147

Section c of Income Tax Communiqué No. 147 explains the conditions for this exemption as follows:

• Institutions making salary payments to personnel as employers must not have any legal or business center in Turkey. It is irrelevant whether the institutions that do not have a legal or business center in Turkey have any legal status, legal personality, or any economic enterprise in the state where they are fully taxable.
• The institution with limited tax liability, to which the individual providing services in Turkey is affiliated as an employer, must pay the salaries in foreign currency directly from the income obtained abroad, and these salaries should never be associated with income obtained in Turkey. In this context, it is irrelevant whether the recipient of the salary is fully taxable or subject to limited tax liability in Turkey. Since the payment is made based on income earned abroad, these salaries cannot be considered expenses according to Article 40 of the Income Tax Law due to activities in Turkey.

ADVANCE RULINGS ON THE TAX OBLIGATIONS OF RECEIVING A SALARY FROM ABROAD IN TURKEY

The following examples provide clear rules on the tax obligations and exemptions related to receiving income abroad in Turkey.

• Advance Ruling 1: Conditions for Exempting Salaries Received from Abroad from Income Tax in Turkey

A private ruling outlines the conditions under which a salary received from abroad can be considered exempt from income tax:

1. Condition of Being a Limited Taxpayer Institution: The employer of the individual providing services in Turkey must be a limited taxpayer institution, and this institution must not engage in any activities in Turkey that generate income.
2. Nature of the Employee and Salary: The individual working for the limited taxpayer institution must be an employee, and the payment made must be in the form of a salary/wage.
3. Payment from Foreign Earnings: The payment to the employee in Turkey must be made from the foreign earnings of the limited taxpayer institution.
4. Payment in Foreign Currency: The salary must be paid in foreign currency.
5. Non-deductibility of Expenses: The salary paid must not be recorded as an expense in the Turkish accounts of the limited taxpayer institution.

Based on these provisions and explanations, the salaries paid directly from the foreign headquarters to personnel working at the Turkish representative offices opened by a foreign institution in Ankara and Hatay, and paid in foreign currency, will be exempt from income tax under Article 23, paragraph 14 of the Income Tax Law, provided that the above conditions are met.

• Advance Ruling 2: Exemption Not Applied in Consultancy Services

Another private ruling is as follows:

“According to these provisions and explanations, the fee paid directly to you from abroad in foreign currency for the project consultancy services provided via the internet to a company domiciled abroad is not exempt from income tax under Article 23/14 of the Income Tax Law. This is because the conditions specified in the 147th Income Tax General Communiqué are violated, as the income was earned by providing consultancy services that contribute to the employer firm’s profit. Therefore, it is necessary to declare this income through an annual tax return according to Article 95 of the Income Tax Law.”

As seen, if the person providing services from Turkey is a consultant (not in a personnel position), in other words, acting as a freelancer, the exemption under Article 23/14-a of the Income Tax Law does not apply. Consultancy income earned from abroad must be taxed.

For the exemption to apply to foreign income, there must be an employer-employee relationship between the parties. The most important document proving this relationship is the employment contract made between the parties, defining them as employer and employee.

If such an employment contract exists and the other exemption conditions are met, the tax exemption for receiving income abroad in Turkey can be applied even if the employer-employee relationship is limited to or lasts for a specific project.

RECEIVING INCOME ABROAD IN TURKEY IN TERMS OF SOCIAL SECURITY

The “Social Insurances and General Health Insurance Law” No. 5510 stipulates that social security premiums are required for salary payments made within the framework of an employer-employee relationship. However, the employers specified in the Law are residents of Turkey. Therefore, if the employer resides abroad, it is not possible to apply the provisions of this Law to the situation where personnel receiving salary from abroad in Turkey.

For this reason, the salaries earned by individuals residing in Turkey from foreign employers as employees are not subject to Social Security Institution (SGK) premiums. Receiving a salary from abroad does not mean that SGK premiums need to be paid.

RECEIVING SALARY FROM ABROAD IN TURKEY IN TERMS OF LABOR LAW

The Labor Law No. 4857 regulates the rights and obligations of parties who have entered into an employment contract. However, the provisions of this Law consider the employer to be resident in Turkey. Since the legal regulations of each country are different, the law of the location of the employer will be applied in the context of labor law. Therefore, the provisions of the Labor Law cannot be applied when the employer is located abroad.

In summary, when the employer is located abroad, neither the SGK nor the provisions of the Labor Law are applicable. This should be taken into account in such cases.

UNDERSTANDING INCOME TAXES ABROAD IN TURKEY

The tax on foreign income of receiving salary from abroad in Turkey are significant. For individuals residing in Turkey, the salary income earned from foreign employers can be exempt from income tax, provided they meet the conditions specified in Article 23/14-a of the Income Tax Law and the 147th Income Tax Communiqué.

According to the aforementioned provisions and explanations, the salaries paid directly in foreign currency from the headquarters abroad to personnel working at the Turkish representative offices of organizations with headquarters abroad are exempt from income tax under Article 23, paragraph 14 of the Income Tax Law, if specific conditions are met.

However, consultancy services and other freelance activities do not qualify for this exemption. Therefore, tax on foreign income made by foreign employers to their personnel in Turkey must be carefully evaluated based on the relevant conditions.

When the employer is located abroad, social security premiums (SGK) cannot be applied, and the provisions of the Labor Law cannot be applied.