Formed a Company Abroad, Do I Pay Tax in Turkey? Controlled Foreign Corporation Rule (CIT Law Art. 7)

A common misconception among entrepreneurs forming a company abroad is: "The company is abroad, not in Turkey, so I do not pay tax in Turkey." The reality is not so simple. Article 7 of the Corporate Income Tax Law No. 5520 taxes in Turkey the profits of foreign subsidiaries controlled by full taxpayer individuals and corporations in Turkey, even if undistributed, when certain conditions are met together. This is the controlled foreign corporation (CFC) rule.

This guide explains the conditions, how control is measured, how the profit is treated in Turkey and what to check before forming a company abroad. For the general picture of offshore structures see our offshore company guide. This article is general information; take advice from a tax adviser and lawyer for your specific case.

1. What Is the Rule? Taxed in Turkey Even If Not Distributed

Under CIT Law Art. 7/1, the corporate profits of foreign subsidiaries that full taxpayer individuals and corporations in Turkey control, directly or indirectly, separately or together, by holding at least 50% of the capital, profit share or voting rights, are subject to corporate income tax in Turkey whether or not they are distributed, if the conditions below are met together.

The aim is to prevent deferral of Turkish tax by accumulating passive income in low-tax countries. The core of the rule is the "undistributed profit": even if profit accumulates in the foreign company's account, if the conditions are met it may be taxed in Turkey.

2. Four Conditions Are Required Together

In addition to control, the following conditions must be met together (Art. 7/1):

• a) Passive income weight: 25% or more of the subsidiary's total gross revenue consists of passive income such as interest, dividends, rent, licence fees and securities sale proceeds, rather than commercial, agricultural or professional activity carried out with proportionate capital, organisation and employees.
• b) Low tax burden: the subsidiary bears total income and corporate-tax-like burden of less than 10% of its commercial balance sheet profit.
• c) Revenue threshold: the subsidiary's total gross revenue for the year exceeds the foreign-currency equivalent of the amount specified in the law (100,000 YTL, i.e. TRY 100,000). This statutory figure is fixed and is not raised by the annual revaluation rate, so the threshold has lagged behind inflation.

For the control ratio, the highest ratio held on any date in the accounting period is taken into account (Art. 7/3). One day above 50% during the year may be enough. The total tax burden is determined under the definition in CIT Law Art. 5/1-(b) (Art. 7/2).

Important: The rule does not cover every foreign company. Where real commercial activity (sales, services, production) is carried out and income mainly arises from active income, the passive income condition is not met. Risk is higher for passive-heavy companies (for example holdings earning only interest, dividends or securities income).

3. How Is the Profit Taxed in Turkey?

If the conditions are met, the subsidiary's profit is included in the corporate tax base of full taxpayer corporations in proportion to their shares, as of the accounting period that includes the month in which the subsidiary's accounting period closes (Art. 7/4). The profit appears in the shareholder's Turkish return regardless of whether the subsidiary decides to distribute.

If profit taxed in Turkey in this way is later distributed by the foreign company, the untaxed part of dividends received is subject to corporate income tax (Art. 7/5). This aims to avoid double taxation, but in practice it must be read together with credit and deduction provisions.

The law speaks of "full taxpayer individuals and corporations". How the rule applies to individual shareholders, and under which provision and return the taxation occurs, should be assessed separately; this can depend on your personal situation and current administrative guidance.

4. Which Foreign Companies Are at Risk?

Looking at the conditions above, these structures stand out:

• Investment or holding companies in low- or no-tax countries: companies whose income is mostly interest, dividends, rent or securities sales.
• Licensing and IP companies: structures earning licence fees without a real organisation and staff.
• Shell companies: companies with no office, employees or actual activity.

By contrast, companies carrying out real commercial activity abroad with staff and organisation, and income arising mainly from that activity, are mostly outside this rule. Being outside the rule, however, does not remove other tax risk areas (for example the risk that the place of management is considered to be in Turkey); that requires a separate assessment.

5. Questions to Ask Before Forming a Company Abroad

• Who will control it? Does the direct or indirect share, voting right or profit share of Turkish residents reach 50%? Because the law says "separately or together", check whether the holdings of several Turkish-resident shareholders are aggregated.
• Where will income come from? Is it active trading, or passive income such as interest, dividends, rent and licences?
• Which country and what tax burden? Will the total tax burden on commercial balance sheet profit be below 10%?
• Is there real substance? Will capital, office and staff proportionate to the activity be provided?
• Tax treaty and reporting: Is there a double taxation treaty with that country, and what must be declared in Turkey?

6. Consequences of Getting It Wrong

A taxpayer who falls within the rule but does not declare the foreign subsidiary's profit in Turkey may face tax, late-payment interest and a tax loss penalty in a tax audit. The risk grows with accumulated profits over the years, because taxation applies for each accounting period separately. Transactions through the foreign company may also be reviewed for banking and reporting obligations.

Therefore a company abroad should be treated not as tax planning but as a compliance plan: calculate the tax result before forming the company and set up an annual filing calendar afterwards.

7. Common Mistakes

• Assuming "no tax because it is abroad": if control and passive income conditions are met, tax may arise in Turkey.
• Believing undistributed profit is untaxed: the rule taxes it even if not distributed.
• Measuring control by direct shares only: indirect shares and joint control are also taken into account.
• Forming the company only for a tax advantage: the risk grows without real organisation and activity.
• Not following the annual calendar: the filing and audit risk renews every year.

Frequently Asked Questions

For company formation abroad and its tax consequences in Turkey, see our Offshore Company Formation page, or request an appointment via our Contact page.