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What is Income Tax?
Income tax is the taxation of earned income in line with the rates determined according to the Tax Laws in our country. Income tax is a tax that individuals, as well as companies, pay. The taxation process is determined by the level of income earned, the source of income, the type of professional activity, and other factors.
As defined in Article 1 of the Income Tax Law No. 193 (“Law”), income is the net amount of earnings and revenues earned by a person in a calendar year. On the other hand, income tax is a type of tax levied on the income of real persons. In this Article, the taxpayer of income tax, types of liabilities, earnings, and revenues evaluated within the concept of income, calculation of income tax, its assessment, and rates to be applied will be explained.
Who is The Taxpayer of Income Tax?
According to the definition in the Law, the taxpayer of income tax is a “real person” who has earned income during a calendar year as specified in the Law. At this point, the fact that the taxpayer of income tax is a real person is one of the most important differences between income tax and corporate tax. Indeed, both types of taxes primarily aim to tax income. However, while the taxpayer of corporate tax generally consists of legal entities, the taxpayer of income tax is only a real person.
What Are The Types of Liability in Income Tax?
When the system of the Law is examined, it is seen that two types of liabilities are adopted in income tax. Such a distinction is made to determine the scope of taxable income in terms of taxpayers and the place where it is obtained.
Accordingly, it may be possible to tax the income of Turkish citizens in Turkey or another country and tax income earned by foreign nationals or non-residents in Turkey.
According to Article 3 of the Law, Turkish citizens and residents are subject to taxation in Turkey on the total income they have earned in Turkey and abroad.
Article 4 of the Law defines the concept of “Residence in Turkey“. It establishes that individuals who reside in Turkey or who have resided continuously in Turkey for more than six months within a calendar year will be considered residents of Turkey.
Therefore, individuals who do not have a residence in Turkey but who have resided in Turkey for more than six months within a calendar year will only be taxed on the income they have earned during the period they have resided in Turkey.
Article 5 of the Law provides some flexibility on this residency requirement. Specifically, individuals who come to Turkey for a specific and temporary assignment or work, scientists, experts, officials, press correspondents, and those who come for educational, medical, rest, or travel purposes, as well as individuals who are detained, imprisoned, or held in Turkey due to circumstances beyond their control, will not be considered resident in Turkey even if they stay in the country for more than six months.
Under full liability, taxpayers are taxed not only on their income earned within Turkey but also on their income earned abroad.
Limited liability is a tax obligation for individuals who are not considered residents in Turkey but have earned income in Turkey. Unlike full liability, the income earned by limited taxpayers abroad is not subject to taxation. Since ownership is considered in this type of liability, taxation depends on the income earned in Turkey.
In summary, individuals who reside in Turkey or have resided continuously in Turkey for more than six months within a calendar year are subject to full liability, while those who do not have a residence in Turkey but have earned income in Turkey are subject to limited liability.
What Falls Under The Concept of Income?
As explained above, income tax is a tax levied on the income earned by an individual during a calendar year. Therefore, the Law specifies which earnings or revenues fall under the scope of income tax and which situations are exempt from taxation and not included in the taxable income.
According to the Law, the taxable gains and revenues subject to income tax include commercial gains, agricultural gains, salaries, freelance professional gains, real estate capital gains, securities capital gains, and other gains and revenues.
Under Article 37, paragraph 1 of the Law, commercial gains are generally defined as “all gains arising from commercial and industrial activities are commercial gains” generally.
The Article states that certain commercial gains will be considered commercial gains. Accordingly, gains from operating mines, quarries, lime pits, sand and gravel production sites, and brick and tile factories, cobbling (engaging in buying and counting activities on the stock exchange and in one’s name), running private schools and hospitals, engaging in the purchase, sale, and construction of the real estate, and engaging in securities trading activities in their name and for their account will be considered as commercial gains. In addition, gains from the sale of land acquired through purchase or exchange, which is parceled out within five years of the acquisition date and sold partly or wholly during this period or later years, and gains from denture prosthetics are also considered commercial gains.
To determine commercial gains within the scope of income tax, the commercial or industrial activity that generates income must be carried out independently by an entrepreneur and be continuous. If this activity is not continuous, it will no longer be considered commercial gain and will fall within the scope of other gains and revenues under Article 80 of the Law.
According to Article 52 of the Law, income obtained from agricultural activities is considered agricultural income. Agricultural activity is defined as the production, breeding, cultivation, maintenance, improvement, and direct utilization of plants, forests, animals, fish, and their products by utilizing nature on land, sea, lake, and rivers, or their preservation, transportation, sale, or other utilization. For agricultural activities to be subject to income tax, an independent activity must be carried out to earn income.
According to Article 61 of the Law, wages are defined as money and benefits provided in exchange for services rendered to employees working for a specific workplace under the employer’s authority, and benefits that can be represented by money.
It is stipulated that the fact that wages have been paid under the name of allowances, compensation, cashier compensation, allocation, increment, advance payment, dues, peace allowance, bonus, premium, expense compensation, or under other names or that they have been determined as a certain percentage of earnings, without being like a partnership relationship, will not create any change in its status as wages.
The continuation of the provision regulates that certain payments will be included in the concept of wages. Accordingly, retirement, disability, widows’ and orphans’ pensions, other benefits provided in the form of money and benefits provided for services previously or to be provided in the future, to members of the Grand National Assembly of Turkey, provincial general assemblies and municipal councils, and to members of all permanent or temporary commissions established by special laws or administrative decisions similar to the aforementioned, as well as money, benefits, and allowances paid or provided for these statuses, to the presidents and members of management and audit boards and liquidators, to expert witnesses, official mediators, experts, sports referees, and to members of all kinds of competition juries, transfer fees and other payments and benefits provided to athletes, and payments and assistance made under various names such as compensation paid under termination or compromise agreements, job loss compensation, end-of-employment compensation, job security compensation will be considered as wages.
According to Article 65 of the Law, freelance activity is defined as work based on personal effort, scientific or professional knowledge, or expertise, which is not subject to an employer and is carried out under personal responsibility in one’s name and account. It is stated that all kinds of income obtained from freelance activities are freelance income.
In addition to this definition, according to the Law, some income obtained from certain activities is freelance income. Accordingly, the fees received by arbitrators for arbitration work and the income generated from freelance activities carried out by collective, ordinary limited partnerships and ordinary companies are freelance income.
According to Article 66 of the Law, some professions are considered freelance professionals, and it is stated that their income is also freelance income. These are; customs brokers, all kinds of exchange agents and agencies, notaries, those who are obliged to perform notary duties, and those who are not included in the definition of freelance professionals but receive a share of freelance income by establishing organizations for freelance professionals or providing them with capital in any other way, partners in collective and ordinary companies engaged in freelance activities, commanditaires in ordinary limited partnerships, attorneys, consultants, institutions and traders following the commercial and professional affairs of freelance professionals, and musicians who give concerts. Those engaged in professional activities such as midwives, circumcision specialists, health officers, petition writers, and guides who meet at least two of the conditions specified in Article 155 of the Tax Procedure Law (TPL) (the income of those who do not meet at least two of the conditions and those who operate in villages or in places where the population does not exceed 5.000 according to the latest census is exempt from income tax), and persons who are considered as freelance professionals under Article 10 of the Law No. 5510 and who are insured under the first paragraph (b) of Article 4 of the same Law and who are specialized per the legislation on medical specialization are considered as freelance professionals.
It is regulated that income tax will be calculated on the income obtained as a result of freelance activities based on the actual method. Accordingly, in the Law, freelance income is defined as the difference obtained after deducting the expenses incurred for this activity from the money collected and other benefits that can be represented by money obtained for freelance activity during an accounting period. The expenses to be deducted, mentioned in the definition, are regulated in Article 68 of the Law.
Real Estate Capital Revenues
The income obtained from leasing certain property and right holders, their owners, possessions, easements, and usufruct right holders listed in Article 70 of the Law is defined as real estate capital income.
Although it is understood as rental income from real estate, if the goods listed in the Law are considered, it will be understood that the concept of “real estate” in terms of income tax is more comprehensive than the meaning of Private Law. Accordingly, capital revenues consist of revenues obtained from leasing real estate, rights like real estate, some movable goods, and intellectual and industrial rights.
The base required to be determined to calculate the income tax in real estate capital income is calculated by deducting the expenses incurred to generate or maintain the income from the gross income.
Capital income is the profit, interest, rent, and similar income obtained from cash capital or values represented by cash outside the owner’s commercial, agricultural, or professional activities.
The Law considers certain income as capital income regardless of its source. These include: dividends from stocks, gains from participation shares, dividends paid to the chairman and members of the board of directors of corporations, the portion of annual or special declaration made by non-resident corporations after deducting discounts and exemptions from the pre-tax corporate earnings, all kinds of bond interest and treasury bill interest, income obtained from securities issued by TOKI, Public Partnership Administration, and Privatization Administration, all kinds of receivable interests, deposit interests, sales prices of stocks and bonds whose maturity date has not been reached, amounts received for the transfer of unaccrued profit shares of participation shares, discount amounts, profit shares paid to interest-free credit providers, profit and loss partnership certificate holders, and account holders of special finance institutions, repo revenues, legal retirement funds, assistance funds, and payments made by retirement and insurance companies are considered as capital income.
Other Earnings, Gains, and Revenues
Other gains and revenues are defined as other gain increases and occasional (non-continuous) gains in Article 80 of the Law. Other gain increases are listed in the repeated Article 80 of the Law and generally represent the increase in the value of a capital asset. Occasional gains, on the other hand, can be defined as non-continuous commercial or industrial gains. The taxable base on which income tax will be calculated is deducting the incomes stated in the Law from gross earnings.
How is Income Tax Calculated?
Generally, income tax is levied on the taxable income declared by the taxpayer or the responsible party. It should be noted that when declaring taxable income and revenues, the taxpayer should also deduct the expenses that can be deducted under the Law. Income tax can be calculated based on the determined tax on which the applicable rates will be applied.
When examining the Income Tax Law, an increasing rate tariff is applied based on income types. As the taxable income amount increases, the applicable rate also increases. It is stated in the Law that a fixed rate will be applied for income tax withheld at source as an exception in a limited manner.
The applicable rates and amounts for 2023 are announced in the 323 Serial Number Income Tax General Communique published in the Official Gazette dated December 30, 2022. Under Article 117 of the Law, the income tax accrued on the income reported with the annual declaration is paid in two equal installments, in March and July.
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