| Mine BEYAZHANÇER, Lawyer |
ABSTRACT This article examines the legal framework pertaining to liaison offices that foreign companies may establish in Turkey for purposes such as representation, promotion, and coordination, without engaging in commercial activities. In accordance with Law No. 4875 on Direct Foreign Investments and relevant regulations, the establishment procedures of liaison offices, permit durations, activity restrictions, and tax obligations are addressed. Furthermore, special provisions such as income tax exemptions concerning employee salaries and the legal status of regional management centers are discussed. It is emphasized that liaison offices must remain limited to non-commercial activities; otherwise, they may become subject to tax liability.
Keywords: Liaison Offices, Foreign Capital, Taxation.
INTRODUCTION
As investment transcends national boundaries, the need to establish a framework for foreign investment and determine various models has come to the fore. In addition to domestic legal regulations concerning foreign investment, there exist international agreements to which Turkey is a party. The rationale of Law No. 4875 on Direct Foreign Investments¹ emphasizes that the investment climate is not merely economic but also legal in nature. Within this scope, Article 3 of Law No. 4875 stipulates that companies established under foreign country laws may establish liaison offices provided that they do not engage in commercial activities, and the matter of opening a liaison office has been made subject to Ministry permission. Within the scope of this article, the purposes and establishment of liaison offices will be examined first, followed by evaluations from the perspective of tax legislation.
I. THE ESTABLISHMENT PROCESS AND CHARACTERISTICS OF LIAISON OFFICES OF FOREIGN ENTITIES IN TURKEY
Article 3 of Law No. 4875 contains provisions protecting investments to be made in Turkey by foreign investors. Paragraph (h) of this Article stipulates that permission to open a liaison office in Turkey shall be granted to companies established under foreign country laws, provided that they do not engage in commercial activities. This provision, which constitutes the legal basis of liaison offices, regulates that the establishment of a liaison office may only be carried out by “companies”; that these companies must be established under foreign country laws; and that they bear the obligation not to engage in commercial activities in Turkey. Accordingly, the scope of persons who may establish a liaison office has been determined; the expression of not engaging in commercial activities will be evaluated under the heading of taxation in this article. Details regarding the provisions of Law No. 4875 are regulated in the Regulation on the Implementation of the Direct Foreign Investments Law dated 20.08.2003 and numbered 25205. Applications for liaison office establishment are made either electronically or in person through the Ministry of Industry and Technology, Directorate General of Incentive Implementation and Foreign Capital. Article 6 of the Regulation on the Implementation of the Direct Foreign Investments Law stipulates that applications concerning establishment and duration extension, provided that the requested information/documents are complete and without deficiency, shall be concluded within 5 business days from the date of application. Pursuant to Article 8/c of the Regulation, the initial establishment permit is granted for a maximum period of 3 years, however, this period may be extended upon application for periods of up to three years each. The application for extension must be made before the expiration of the activity period.
The documents required for foreign legal entities to establish a liaison office in Turkey are enumerated in Article 7 of the relevant Regulation as follows:
a. Original Activity Certificate authenticated in accordance with the provisions of the Convention Abolishing the Requirement of Legalisation for Foreign Public Documents prepared within the framework of the relevant Turkish Consulate or the Hague Conference on Private International Law,
b. Activity report or balance sheet and income statement prepared regarding the parent company,
c. Original letter of authorization to be given to the person assigned to carry out the activities of the liaison office,
d. Original power of attorney in cases where the establishment procedures of the liaison office are carried out through another person.
Foreign companies cannot make direct money transfers in Turkish Lira (TL) to their liaison offices in Turkey. However, mandatory local expenses such as rent, electricity, water, meals, and employee SGK premiums must be paid in Turkish Lira. For this reason, in practice, liaison offices are expected to open two separate bank accounts in Turkey: a foreign currency account for accepting foreign currency coming from abroad, and a Turkish Lira account where foreign currency will be converted to TL and local expenses will be made.
Under Turkish law, liaison offices may only be established with activities limited to non-commercial ones. As a special type of liaison office enabling multinational companies to have a more centralized structure at the regional level, the Regional Management Center category has been recognized. A Regional Management Center is a special type of liaison office established to coordinate and manage the regional activities of the parent company or group companies. They do not engage in commercial transactions, but since they undertake the management of multiple affiliated companies, they have a broader scope of activity compared to standard liaison offices. Regional Management Centers are also established within the framework of the Regulation on the Implementation of the Direct Foreign Investments Law and are subject to the preliminary approval of the Ministry of Industry and Technology. However, in the establishment application of these offices, it must be explicitly stated that they will operate as a regional coordination center.
II. LIAISON OFFICES IN TERMS OF TAXATION
Paragraph (h) of Article 3 of Law No. 4875 stipulates that foreign companies that have obtained the necessary permits to open a liaison office in Turkey cannot engage in commercial activities in these offices. However, it is considered that the expression “commercial activity” used should be interpreted broadly to encompass any revenue-generating activity.² Since liaison offices cannot engage in revenue-generating activities, they cannot be qualified as a workplace.³
Various special rulings issued concerning liaison offices also include explanations that liaison offices cannot engage in revenue-generating activities. In the special ruling of the Istanbul Tax Office Presidency, Income Laws Income and Corporate Taxes Group Directorate, dated 21.05.2024 and numbered 62030549-125[3/2023]-664932, it is explained that liaison offices cannot engage in commercial and other revenue-generating activities in Turkey or activities outside the scope of the permit, cannot obtain and transfer profit, and must cover all their expenses with foreign currency coming from abroad; therefore, if they do not engage in commercial and other revenue-generating activities or activities outside the scope of the permit, there is no need to establish corporate tax liability.
Regarding the subject of the special ruling request, which concerns the closure of the liaison office due to expiration of its term and the transfer of fixed assets registered in the office’s assets to a newly established limited company at arm’s length value:
“However, since the profit obtained by the headquarters abroad from the sale of the aforementioned equipment and vehicles is in the nature of other income and revenues obtained from incidental commercial activities in Turkey, the aforementioned income specified in Article 26 of the Corporate Tax Law must be declared via tax return to the tax office specified in Article 27 of the same Law by the foreign institution or the person acting on its behalf in Turkey within 15 days from the date of acquisition.”
The tax obligations valid for liaison offices, if office space has been rented, are withholding tax on rent payments and income tax withholding on employee salaries.
However, pursuant to paragraph 14/a of Article 23 of the Income Tax Law, there exists an income tax exemption for salaries paid to personnel working in liaison offices of foreign companies with foreign currency transferred from abroad.
a. “Wages paid in foreign currency by employers subject to limited tax liability whose legal and business center is not located in Turkey, to their employees, from earnings obtained by the employer outside Turkey”
This exemption does not apply in cases where salaries are paid from local revenues in Turkey (this situation also constitutes a violation of the commercial activity prohibition). Furthermore, this exemption cannot be utilized if the liaison office conducts unauthorized commercial activities. Salaries paid to personnel working in special-status liaison offices that are in the nature of regional management centers are also exempt from income tax pursuant to Article 23/14-b of the Income Tax Law.
Finally, engaging in any activity outside this scope may lead Turkish tax authorities to reclassify the liaison office as a “workplace.”
CONCLUSION
With the increase in the presence of foreign capital in Turkey and the dynamism of international trade, the importance of liaison offices serving as a bridge between domestic and foreign companies has increased. Law No. 4875 on Direct Foreign Investments and relevant secondary regulations contain explicit provisions regarding the establishment, fields of activity, and boundaries of these structures. In particular, the rule of not engaging in commercial activities ensures that liaison offices remain limited to functions such as promotion, coordination, and information transfer.
It is of great importance that foreign companies wishing to establish a liaison office carefully fulfill their legal obligations, obtain the necessary permits, and correctly understand the scope of exemptions in tax legislation. Furthermore, the activities of these offices are regularly inspected, and in cases of non-compliance with legislation, they may face administrative sanctions.
In conclusion, while liaison offices provide a safe transition point to the investment environment in Turkey, they simultaneously offer limited but strategic opportunities to foreign investors. However, like any investment model, the liaison office structure must be properly planned and operated in compliance with current legislation.
¹ Law No. 4875 on Direct Foreign Investments dated 05.06.2003 (Official Gazette dated 17.06.2003/25141)
² Başak, L. (2013). Legal Procedure Regarding the Opening and Activities of Liaison Offices According to Foreign Capital Legislation and Matters That Foreign Companies Must Take Into Consideration, Journal of Tax Problems, Issue 293.
³ Kurun, E. (2023). Taxation of Direct Foreign Investments: The Case of Turkey. p.166.