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TAXATION OF CONSTRUCTION WORKS

July 2014 - Tax & Private Client. Legal Developments by Baspinar & Partners Law Firm.

More articles by this firm.

According to the Turkish Law, they are 5 types of construction related taxes which are;

 

  1. Withholding tax,
  2. Corporate income tax,
  3. Dividend taxation,
  4. VAT, and
  5. Stamp duty.

 

It is important to explain a detailed tax situation concerning the construction processes. 

1. Withholding tax

According to Article 94.3 of the Income Tax Law, both work advances and progress invoice amounts paid to those performing the work, such as contractors or subcontractors, are subject to withholding tax at a rate of 3%;

·      Even if the construction contract states that the duration will not extend over one calendar year, should the work actually extend over a calendar year, then the payments corresponding to the extended period are subject to withholding tax.

·      Withholdings can only be deducted from the tax calculated on the final profit from the related work.

·      Should there still be an amount of tax which could not be deducted from the tax calculated on the profit of the project due to insufficient income, the excess advance tax amount can be refunded or deducted from other taxes payable on condition that all the requirements of tax laws are met.

2. Corporate income tax

According to the current Legislation, the corporate tax rate is 20 % which is calculated on the net profits of the company (after the deduction of all sorts of costs).  In construction and repair projects extending over one calendar year, the final determination of the profit and losses shall be made only in the year in which the project ends. The income calculated in the year in which the temporary acceptance is made is taxed under the legislation of the same year.

Companies must file corporate tax returns until April 15th of the following year and pay the tax promptly until the end of the month in which filing is made.

3. Dividend Taxation

In construction projects extending over one calendar year, final determination of the profit and losses shall be made only in the year in which the project ends; profit from the project is distributed afterwards.

Under the current regulations in Turkey, dividend withholding tax rate is 15%. Dividend distributions to resident corporations are exempt from withholding tax.

4. Value Added Tax (VAT)

VAT on Purchases

Rendering services in Turkey are subject to Value Added Tax (VAT) in the ratio of % 18, according to the Turkish VAT Law. Therefore, contractors are liable for VAT on progress invoices. We shall briefly state that the advance payments are not subject to VAT unless an invoice of the mentioned advance has been issued. The VAT liability occurs on the date of the acceptance of progress payment by the owner.

The contractor may credit the VAT incurred on purchase of goods and services against the output VAT on the supply of goods and services provided by it and pay the difference due. If the amount of credit exceeds the amount charged by the contractor, the excess credit is carried forward.

In order to claim the credit, the invoice or similar documents must include the VAT separately for each item and they must be recorded in the company's legal books. However, it is not necessary that the VAT should actually have been paid, i.e. VAT liability and deductibility is computed on an accrual basis.

 

VAT on Sale of Real Estate

The VAT rate is based on the m2 price of the land determined by the local municipalities. This m2 price is not the real value of the land but a value upon which the real estate tax and VAT rate is calculated. The rates are as follows depending on the m2 prices.

TL 0 - 500 per m2 : 1% VAT

TL 500 - 1000 per m2 : 8% VAT

TL 1000 > : 18% VAT

Taxable base: The taxable base of a transaction is generally the total value of the consideration received not including the VAT itself.

In progress payments, while the bid discount and the accumulated progress payments previously paid are deducted, withholding taxes are included in the VAT base. In addition, advance payments, guarantees, late payment penalties and such other withholdings are not deducted from the tax base.

Payment of VAT: The tax mechanism operates on the basis of tax returns filed by taxable entities within the period indicated in the VAT Law. In practice, it is currently applied as the 26th day of the following month.

5. Stamp duty

According to the Stamp Tax Law, both advance payment receipts and progress invoices are subject to Stamp duty at a rate of 0.948% on the amount indicated in the document. In advance payments, the taxable base is the advance payment amount. On the other hand, there is more than one amount in the progress payment documents and the taxable base is the amount of payment for the work performed within the related period. Stamp duty is withheld from the progress payments and paid to the tax office by the owner.

6. Real Estate Sale and Purchase Government Fee

The real estate sale and purchase fee is 4% which shall be equally borne by the seller and buyer sides unless otherwise agreed between the parties.