Türkiye’s Tax Reduction Initiative: Compliance Requirements and Investment Incentives

Türkiye’s five percent tax reduction for compliance incentivizes timely tax filings, with clear eligibility criteria and exemptions. Coupled with competitive tax rates and diverse investment incentives, these measures enhance Turkey’s appeal for businesses and investors.

By Giorgia Sgueglia

On February 7, 2025, Türkiye has recently issued detailed guidance on the conditions taxpayers must meet to qualify for a five percent tax reduction for compliance. This  initiative  encourages taxpayers to meet their obligations by rewarding timely and accurate tax filings. The guidance outlines the specific exclusions, eligibility requirements, and recovery mechanisms for non-compliance after benefiting from the tax reduction.

Türkiye’s tax reduction framework

The initiative is grounded in Article 121 of Turkey’s Income Tax Law (ITL),introduced through Article 4 of Law No. 6824, dated February 23, 2017. The tax reduction applies to income taxpayers engaged in commercial, agricultural, or professional activities, as well as corporate taxpayers. However, businesses in  finance and banking sectors, insurance industry, retirement companies, and retirement investment funds are excluded.

To qualify for the reduction, taxpayers must have filed all required tax returns for the current and previous two years and settled any taxes due. As of January 1, 2025, the maximum allowable tax reduction is capped at TRY 9.9 million (US$ 275,800). This deduction is applicable to taxes due based on annual corporate and income tax returns, filed from January 1, 2018, onwards.

Scope of Türkiye’s tax reduction

Notably, the five percent tax reduction applies only to taxes calculated on tax returns, and tis subject to a cap. The reduction is limited to TRY 1.4 million (US$38,389). for the year 2020. If the five percent reduction exceeds the tax due, the excess can be offset against other tax liabilities within one year of the filing date. Any unused amount will expire after one year and cannot be refunded or carried forward.

Eligibility requires taxpayers to have submitted all required tax returns on time for the past three years, including various types of tax filings. While correcting errors or voluntarily disclosing information does not disqualify them, any unpaid tax debts (including penalties) exceeding TRY 1,000 (US$27.4) disqualify them.

In the original framework, taxpayers could still qualify for the reduction if their late payments were under TRY 10 (US$0.27), later raised to TRY 250 (US$6.68). However, this provision led to multiple legal disputes, as taxpayers were disqualified from the reduction for minor delays in paying stamp taxes related to their filings. Courts determined this was inconsistent with the regulation’s purpose, leading to significant amendments in Law No. 7194. The most notable change is the complete removal of the monetary limit on late payments, meaning that small delays will no longer disqualify taxpayers from receiving the tax reduction.

Taxpayers must also not be subject to additional tax assessments by Turkish tax authorities within the year of the reduction and the two preceding years. If extra taxes, penalties, or corrections were imposed during this period, the taxpayer loses eligibility. Furthermore, taxpayers who have committed tax evasion in the year of applying or the four preceding years are also ineligible.

Law No. 7914 clarifies that taxpayers offsetting their tax payments remain eligible, if unpaid amount is no more than 10 percent of the total amount required. Previously, timely Value Added Tax (VAT) filings affected by deduction issues or administrative delays could lead to disqualification. The amendment prevents minor errors or delays from affecting eligibility.

If the taxpayer’s unpaid debts exceed TRY 1,000 (US$27.42), the taxpayers are ineligible for the tax reduction.

If  a taxpayer benefits from the tax reduction but later fails to meet the conditions , the tax reduction will be recalculated. While no tax penalties apply, default interest will be charged on any unpaid taxes. The statute of limitations starts from the year following the finalization of the tax assessment. The finalization of the assessment means that the taxes or penalties are no longer subject to legal challenges.

Benefit for investors

Türkiye’s tax system is  one of the most competitive among OECD member countries, offering transparent provisions that adhere to international standards. With a corporate tax rate of 25 percent for most businesses and 30 percent for financial institutions, Türkiye presents an attractive environment for both local and foreign enterprises. This favorable tax framework plays a crucial role in encouraging tax-compliant behavior, particularly through a range of tax reduction initiatives. For individuals, Türkiye’s progressive personal income tax rates range from 15 percent to 40 percent, depending on income . Taxpayers who consistently fulfill their tax obligations may qualify for tax reductions,  easing their financial burden. The five percent tax reduction program, designed to benefit individuals with a clean tax record and timely filings, aims to incentivize full compliance and promote economic growth, especially in sectors like international trade.

Investment incentives in Türkiye

Türkiye offers a comprehensive range of investment incentives designed to attract domestic and international investors, stimulate economic growth, innovation, and regional development. These incentives are tailored to specific sectors, regions, and types of investment, helping businesses reduce costs and enhance their competitiveness in the market.

General investment incentive scheme

This scheme offers businesses exemptions from customs duties and VAT on machinery and equipment, reducing capital expenditure. The scheme provides a reduction in corporate income tax (CIT), which offers long-term savings as businesses generate profits. The scheme is benefits investments across Türkiye that may not fall into special categories but  contribute to the broader economic development.

Regional investment incentive scheme

This focuses on encouraging businesses to invest in Türkiye’s less-developed regions. These regions are classified into six categories based on their economic development levels. The most underdeveloped areas receive the most support, including  exemptions from customs duties and VAT on machinery and equipment, reduced CIT , social security premium support, land allocations, and interest rate support for loans.

Strategic investment incentive scheme

This scheme targets industries critical for reducing Türkiye’s dependency on foreign imports and increasing domestic production capacity. To qualify, investments must meet specific criteria, such as a minimum fixed investment amount of TRY 50 million (US$1.37 million). Benefits include enhanced tax reductions and financial assistance.

Project-Based investment incentive package

This package is designed for high-tech, innovative projects that reduce foreign dependency and create significant economic value. It offers a comprehensive set of incentives, including exemptions from VAT and customs duties, CIT reductions , land allocation, interest rate support, and purchasing guarantees for  produced goods . The scheme is particularly attractive to companies in the tech and research sectors.

R&D incentives

Türkiye recognizes the importance of research, development, and innovation in driving technological progress and enhancing global competitiveness. The Turkish government offers a range of incentives through legislative frameworks such as Law No. 5746 on Support for Research, Development, and Design Activities and Law No. 4691 on Technology Development Zones. These include:

• R&D deduction: Companies can reduce their tax liability by availing 100 percent R&D deduction from their CIT base.
• Income tax exemption: Salaries paid to R&D personnel are exempt from income tax, ranging from 80 percent to 95 percent based on qualifications, such as holding PhDs or Masters degrees.
• Social security premium support: Companies receive a 50 percent social security premium support for both the employer’s and employee’s contributions.
• VAT and customs duty exemptions: These exemptions are available for machinery, equipment, and materials used for R&D activities.

Türkiye’s Technology Development Zones (TDZs) enhance this environment by offering tax incentives such as CIT  exemptions on profits from R&D and intellectual property. Salaries for R&D and design personnel in these zones are fully exempt from income tax, providing strong financial incentives to establish R&D facilities in these specialized areas.

Conclusion

Türkiye’s tax reduction initiatives, including the five percent reduction for compliance, provide strong incentives for businesses and individuals to meet their tax obligations, contributing to economic growth. The clear eligibility criteria and removal of minor late payment penalties reflect Türkiye’s commitment to fostering tax compliance.

Combined with competitive corporate tax rates and investment incentives, these measures make Türkiye an attractive destination for investors, particularly in high-priority sectors like R&D, supporting innovation and long-term economic prosperity.

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