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Doing business in Turkey Guide | 2011

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Keywords you’ll find in our Tag Cloud for this Doing Business in Turkey report are Tax, Turkey, VAT, company, business, invest, employment, legal, incentives, accounting, commercial, labor, limited, …

Keywords you’ll find in our Tag Cloud for this Doing Business in Turkey report are Tax, Turkey, VAT, company, business, invest, employment, legal, incentives, accounting, commercial, labor, limited, registry, audit, stamp tax, accountant, Istanbul, IFRS, payslip, payroll, EU, doing business, Commercial Code, ledger, outsourcing, set up, setup, bookkeeping, invoicing, Germany, UK, Russia, export, import and website.

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  • 1. Doing Business in TurkeyThis Doing Business in Turkey handbook explains the currentarrangements for accounting and auditing in Turkey and gives insightinto the new Turkish Commercial Code. There is reference toaccounting principles, how to setup a business in Istanbul, includingliaison offices, limited and branch companies, payroll costs and VATmechanism.Keywords you’ll find in our Tag Cloud for this report are Tax, Turkey, VAT,company, business, invest, employment, legal, incentives, accounting, commercial,labor, limited, registry, audit, stamp tax, accountant, Istanbul, IFRS, payslip, payroll,EU, doing business, Commercial Code, ledger, outsourcing, set up, setup, bookkeeping,invoicing, Germany, UK, Russia, export, import and website. 1/34
  • 2. Doing Business in TurkeyForewordThe Republic of Turkey’s standing as a cultural and geographic crossroads spanningEurope, Asia, the Middle East, the Mediterranean and North Africa underscores the country’sgrowing importance as an economic and geopolitical power.The large and growing domestic market, mature and dynamic private sector, its leading rolein the region, liberal and secure investment environment, supply of high quality and cost-effective labor force, customs union with EU countries and its neighbours, developedinfrastructure, a growth economy and competitive tax system make Turkey an attractiveplace to do business. Coupled with the traditional cornerstones of the Turkish way of life,hospitality and tolerance, the country is wide open for business and for foreign investors.Turkey has its place on the Silk Road of the Third Millennium which is home to some of theworld’s largest energy producers, wealthiest investors, fastest growing economies and morethan half the world’s population. • It is estimated that Turkey will overtake Canada in 2020 on GDP and Italy in 2024 according to PWC Price Waterhouse Coopers • Nearly 60 percent of Turkey’s overall exports carried out by small or medium enterprises - businesses employing less than 250 people. • SMEs and micro enterprises dominate the Turkish Market. They represent 99% of the number of companies and 75% of employment, and 46% of business turnover • The top ranked foreign trade was occupied by industrial exports and a majority of the business was done in EU countries. The largest Trading Partners are Germany (10%) and United Kingdom (8%). • Positive points are stronger-than expected growth but high energy prices, inflation and renewed global financial unrest pose risks to Turkey. • Presidential elections are due to take place in 2014Business in Turkey is personal and often done with friends and relatives and those whom areliked and trusted. So build friendships and networks first, and expect to make long-termrelationships. A seemingly endless trail of tea and coffee cups will lead you to the decisionmaker. Constantly pushing for yes or no answers does not bring results, but talk football anddoors will open. Most of all be patient and the rewards of doing business in such anhistorically and culturally rich environment will come. 2/34
  • 3. General Features of TurkeyThe Republic of Turkey is a Eurasian transcontinental country that stretches from SouthernEurope to Western Asia. It borders eight nations, Bulgaria, Greece, Georgia, Armenia,Azerbaijan, Iran, Iraq and Syria. To the south is the Mediterranean Sea, to the west theAegean and Marmara Seas and the Black Sea to the north. The coastal areas of Turkey inthe south have a temperate Mediterranean climate, the central plateau of the interior hassharply contrasting seasons and in the west winter temperatures are cold and summers hotand dry. The time zone is GMT + 2 hours.Turkey is 37th largest country in the world with a territoryof over 780,000 square kilometerssubdivided into 81 provinces in seven regions. Ankara is the capital while the largest city andthe country’s business heart is Istanbul with 13 million people. The total population is78,785,548 (July 2011 est.) people and growing at 1.2% per year. 70.5% of the populationlive in urban centers. Turkey is a democratic, secular, constitutional republic whose politicalsystem was established in 1923 by Mustafa Kemal Ataturk, following the fall of the 500 year-old Ottoman Empire after World War I.The official language is Turkish with a number of Kurdish speakers. The free-floating nationalcurrency is the Turkish Lira (TL). Office hours tend to be Monday to Friday, 9 – 6pm withworkers working a 45 hour week. Public holidays of 14 days per year are a mix of secularand religious holidays.Turkey is a rapidly developing country and the largest national economy in Central andEastern Europe. Turkeys dynamic economy is a complex mix of modern industry andcommerce along with a traditional agriculture sector that still accounts for about 30% ofemployment while industry accounts for (18.5%) and construction for (4.5%) of employment.It has a strong and rapidly growing private sector, yet the state remains a major participant inbasic industry, banking, transport, and communication.Turkey has the sixth largest economy in Europe and the 5th largest labor force. It is the 15thlargest economy in the world. Turkey’s gross domestic product (GDP) exceeded 1 trillionTurkish lira (nearly 644.3 billion USD) in 2010. Turkey’s economy showed an 8.9 percentgrowth in first three quarters of 2010. Turkey is ranked the 15th most attractive destinationfor foreign direct investment (FDI) in the world (UNCTAD World Investment ProspectsSurvey, 2008-2010). Turkey stands to gain from the forthcoming liberalization of trade in theEuro-Mediterranean Area which includes all 27 member states of the European Union, alongwith 16 partners across the Southern Mediterranean and the Middle East.Turkey’s population has an average age of 28.5 years with 28% of the population under 14years old and 64% are between 14 and 60 years old. In 2050 Turkey will have 25% of itspopulation in the over 60 years-old group; a cushion against the ageing demographic of othernations in Europe. The per capita GDP is $ $14.090 (PPP). GDP in third quarter of 2010increased by 6.4% compared to the same quarter of previous year, seasonal and GDPincreased by 1.1% compared to previous quarter. However, Turkey has bounced backquicker than other economies and forecasts growth of 5% in 2012.Since 2002, after the Bank Financial Crisis of Turkey, structural reforms aimed at increasingthe role of the private sector in the Turkish economy, enhancing the efficiency and resiliencyof the financial sector and putting social security system on a more sound footing have beenmade. The Turkish banking sector, with its strong capital base (around 18%) and effectiverisk management practices, is healthy and profitable. With its prudent fiscal policy, Turkeyhas reduced its debt stocks, becoming one of the best performers among OECD economiesand has been meeting the EU Maastricht Criteria since 2004. 3/34
  • 4. In fact, a monetary policy framework and notable structural reforms have helped to producethe best economic performance in Turkey’s modern history.Foreign trade, both in exports and imports, has grown rapidly and industrial products havenow overtaken the predominant role of agricultural products. Turkey became a member ofthe World Trade Organization (WTO) in 1995. Following and agreed a Customs Union withthe European Union on January 1, 1996. In 2008, the share of the European Union membercountries in overall Turkish exports was around 50%. Between 2002 and 2008, Turkey’sexports to the member countries of the Black Sea Economic Cooperation (BSEC), theOrganization of Islamic Conference (OIC) and the Commonwealth of Independent States(CIS) increased, and the total export value reached $67 billion with a share of 51% in 2008.Germany has the top place in a list of countries to receive the largest volume of Turkishexports in 2010 with $11.4 billion, according to Turkeys statistics authority. Britain and Iraqfollowed Germany in the second and third spots with $7.2 billion and $6.5 billion,respectively. Iran emerged as a rising trade partner for Turkey in 2010 which saw a 50.3percent increase in its imports from Turkey with $3.1 billion. Irans exports to Turkey also wasup by 124.5 percent to reach $7.6 billion. Russia (a major supplier of natural gas) was thetop country to make the largest volume of exports to Turkey with $21.6 billion. Turkey ran atrade deficit of some $17 billion with exports stood at $4.6 billion that marked an increase of45.2 percent over the previous year.Turkeys exports amounted to $113.9 billion and imports reached $185.9 billion in 2010. Risein foreign trade deficit increased 84.5 percent as imports has risen more than exports. Deficitin foreign trade balance is calculated as 71.6 percent.In 2010, capital inflows, excluding changes in reserves (CBRT and banks) were USD 43.9billion. Portfolio investments and the rise in deposits in domestic banks became the maindrivers of capital inflows. Capital inflows, excluding changes in reserves (CBRT and banks)were USD 2.9 billion in January 2011. The level of Central Bank reserves is quite robust, withUSD 86.2 billion as of March 25, 2011, serving as an insurance for external shocks.Energy is a massive growth sector with Turkey as a major energy hub with an annual transitcapacity of 221 million tons of oil and 43 billion M3 of natural gas. Turkey is also a leader inproducing high standard Voluntary Emission Reductions (VERs) from renewable energyprojects and has ratified the Kyoto Protocol in 2009. Voluntary carbon trading projects inTurkey have increased rapidly.The current account deficit is a structural problem of Turkey mainly due to her high energydependency. That is why Turkey has been applying structural and medium term policies forreducing the dependency of intermediate goods imports. Energy sector reform programincluding issues such as nuclear energy, renewable energy, energy efficiency andprivatization of distribution and generating companies has been carried out since 2003.The banking sector maintained its robust position during the crisis period as well. Net profit ofthe sector, which increased by 50,4 percent in 2009, rose by 9.6 percent in 2010 andreached TL 22.1 billion. Net return on equity of the banking sector was 20.1 percent in 2010.Capital adequacy ratio remained high with 18.4 percent as of January 2011 which is wellabove the legal rate of 8 percent and targeted ratio of 12 percent. 4/34
  • 5. Turkey-EU Association Council established 8 sub-committees on 11April 2000 to carry outan analytical examination of the level of harmonization of the Turkish legislation with theacquis communautaire. The European Council approved the Accession Partnership on 8March 2001. After the approval of the Accession Partnership, Turkish governmentannounced its own National Program for the Adoption of the Acquis (NPAA).A Revised Accession Partnership was approved by the European Council on 23 January2006 which set the short/medium-term priorities for Turkey. Turkey’s Program forHarmonization with the EU acquis was published on 17 April 2007. The said Program thatincludes the necessary legislative changes for the period 2007-2013 set a roadmap for theharmonization efforts within the framework of accession negotiations. The 13th ProgressReport on Turkey was published on 9 November 2010, together with the EnlargementStrategy Document.However, Turkey claims that ‘what we do not understand is how the process is taken hostageby narrowly defined interests of some Member States.’ And that 18 out of 22 chapterspending to be opened are blocked on political grounds.Turkish standardization in foreign trade regime: The new web-based Product Safety System(System), sought to carry out electronically import and export controls required by legislation,was launched in spring 2010 by the Under secretariat of Foreign Trade (UFT). Designed tobe reached from the web using e-Signature, the new control systems objective is to providesafe and quality products to consumers and firms, to rationalize the allocation of resources interms of the control of "risky" products, to reduce the waiting time at the customs, and overallto render Turkish trade policy more effective.In 2010, 28.6 million tourists visited Turkey and the country ranked 7th most visited holidaydestination in the world and 9th in terms of revenue from the tourism sector. According toTÜROFED (The Turkish Hotel Federation), 31 million Tourists are being expected to visitTurkey in 2011.Turkey has signed 27 FTAs, of which 10 of them have been terminated due to theenlargement of the EU in May 2004 and January 2007. Currently, 16 of these FTAs are inforce (EFTA, Macedonia, Croatia, Bosnia-Herzegovina, Albania, Israel, Palestine Authority,Morocco, Tunisia, Egypt, Syria, Georgia, Montenegro, Serbia, Chile and Jordan.) The FTAswith Lebanon will enter into force once the internal ratification processes are completed.Currently, negotiations are ongoing with 11 countries/country groups (Gulf CooperationCouncil, MERCOSUR, Faroe Islands, Ukraine, Libya, Mauritius, Seychelles, South Korea,Malaysia, Cameroon and Democratic Republic of Congo), and we have initiated to launchnegotiations with 11 countries/country groups (Algeria, Mexico, South African CustomsUnion, ASEAN, ANDEAN Community, Central America, African Caribbean States, India,Indonesia, Canada and Moldova). Turkey is a member of the The Euro-MediterraneanPartnership established in 1995 which has 44 members including the 27 European Unionmember states and 16 partner countries :Albania Algeria Bosnia & HerzegovinaCroatia Egypt IsraelJordan Lebanon MauritaniaMonaco Montenegro MoroccoPalestine Syria TunisiaAnd with the Free Trade Agreement with Jordan on 1st March 2011, Turkey hasestablished Free Trade Zones with all Euro-Mediterranean countries except Algeria. 5/34
  • 6. Since 1962, Turkey has been negotiating and signing agreements for the reciprocalpromotion and protection of investments. Turkey has signed bilateral investment treatieswith 80 countries, including with the United States, United Kingdom, Germany, theNetherlands, Belgium, Luxembourg, Denmark, Austria, Sweden, Switzerland, Spain, Finland,Italy, Portugal, Hungary, Poland, Romania, Tunisia, Kuwait, Bangladesh, China, Japan,South Korea, Indonesia, Croatia, Cuba, the Czech Republic, Estonia, Russian Federation(Russia), Azerbaijan, Kazakhstan, Georgia, Tajikistan, Ukraine, Uzbekistan, Belarus,Lithuania, Latvia, Slovakia, Macedonia, Pakistan, Turkmenistan, Moldova, Kyrgyzstan,Albania, Bulgaria, Argentina, Bosnia, Malaysia, Egypt, Mongolia, Greece, Israel, Afghanistan,Ethiopia, Iran, Lebanon, Syria, Slovenia, Jordan, and India. Turkey has avoidance of doubletaxation agreements with 71 countries.In the World Bank’s 2011 "Ease of Doing Business" table Turkey ranks 65 out of 183economies. To see the report click here: http://www.doingbusiness.orgCompany Establishment ProceduresNo pre-establishment permits are required. The company gets its ‘legal entity’ uponregistration at the Trade Registry.Types of entity will be affected by the Trade Law that comes into effect in July 2012,including that a resident Manager will be required for most companies and allows theestablishment of Joint Stock companies (“A.Ş.”) with a single shareholder or Limited Liabilitycompanies (“L.Ş.”) with a single partner.Turkey has a non-discrimination and equal treatment policy towards foreign investors, thusforeigners have the same rights and liabilities as locals. There are no rules requiring Turkishparticipation in the capital or management of a company with foreign capital; a company maybe established with 100 percent foreign capital. Almost all sectors are open to foreign capital.Applicants should check with a Trade Registry Office to find out if their trade names havealready been registered. The trade name must be in Turkish and not include any sensitivewords or expressions.The steps to establish a company are to prepare and notarize the Articles of Association,deposit 0.04% of the capital at the Central Bank, register the company at Trade RegistryOffice and Chamber of Commerce. Thereafter the Articles of Association are published in theTrade Registry Gazette. Once established the Company must be registered at tax the officeand receive its tax plate which must be clearly displayed at the place of business. A taxinspector will make a visit to verify it and the place of business within a few days ofincorporation. The Registry Office also notifies the Ministry of Labor and Social Security ofthe incorporation and both the company and its employees must be registered with thatadministration. The Registered address of the Company must be stated in the Articles ofAssociation, and any changes must be registered. The legal books of the company – theJournal, Ledger, cash book and Inventory book, must be certified by a notary on the day thecompany is registered.If all company capital is not paid in advance, 25% of the initial capital must be depositedwithin three months of company incorporation, and the balance of the subscribed capitalmust be paid within three years of incorporation. The capital can be used immediately. Thetransfer of capital from abroad must be clearly marked as ‘Capital Transfer’ Incorporation andpre-operating expenses are deductible. 6/34
  • 7. Electronic communications services may be provided and/or electronic communicationsnetworks or infrastructure may be constructed and operated in accordance with thestrategies and policies of the Ministry of Transport, upon receipt of the authorization knownas the “Authorization Certificate for Unrestricted Number of Use” from the Information andCommunication Technologies Authority (ICTA).Employment Work PermitsApplications for work permits can be made inside or outside Turkey: Foreigners residingoutside Turkey shall apply to the relevant Turkish Consulate of either his/her country ofresidence or his/her country of citizenship. Foreigners with a valid residence permit (valid fora minimum of 6 months, except for residence permits for educational purposes) can applydirectly to the Ministry of Labor and Social Security.At the workplace for which the work permit is requested, at least five persons who arecitizens of the Republic of Turkey must be employed. In case the foreigner requesting thework permit is a co-partner of the company, the aforementioned conditions related to theemployment of five Turkish citizens will be required for the last six months in order for workpermit to be granted by the Ministry. For every additional work permit an additional fiveTurkish are required to be employed.Independent AuditRegulated sectors such as Banks, Private Finance Institutions, Insurance, Financial Leasing,Factoring, Holdings, Foreign Currency Exchange Offices, Public Warehousing, founders andoperators of Free Trade Zones and companies are subject to the Capital Markets Law andmust register with The Ministry of Commerce and Industry. These entities are also subject toan Independent Audit. The New Turkish Commercial Code will bring new regulation wherebythe internal auditor of a Joint Stock Company (A.Ş.) is replaced by independent audit firms orby sworn financial advisers (Yeminli Mali Müşavir or YMM) or independent accountingfinancial advisers (Serbest Muhasebeci Mali Müşavir or SMMM). The auditor must bereplaced by another auditor for at least two years, if the auditor submitted audit reports forthat company for seven consecutive years. The independent auditor for the accounts for thefiscal year 2013 should be appointed before 1 March 2013.Company WebsitesAll companies are obliged to found a web site with a section for the use of shareholders andsociety. The web site shall include all the reports and announcements made by the company,annual reports, financial statements and audit reports. Penalties apply for failure to complywith these obligations.Foreign Exchange ControlsTurkish law guarantees the free transfer of profits, fees, and royalties, and repatriation ofcapital. There is no difficulty in obtaining foreign currency, and there are no restrictions onforeign currency except under some special circumstances connected to oil and gasexploration activities.Types of Business EntitiesThe main company types in Turkey are Limited companies, Joint Stock companies and partnerships ofcommandite and collective companies. Sole proprietors can also be established. All business can be100% owned by foreigners. Foreign businesses can also open Liaison or Branch Offices in Turkey. 7/34
  • 8. Participation to a previously established company can be done in two ways, through either sharetransfer or contribution to the companies’ capital increase.Limited Liability Company- Limited Sirket (Ltd. Sti)A Limited Liability Company can be set up by at least two and up to 50 real persons or legalentities. The liability of the shareholders is limited to the share capital of the company.Minimum capital requirement is 5,000 Turkish Lira (TL) in 25TL shares. No stock certificatesare issued. Decisions relating to capital increase, dividend distribution, appointing a localmanager and exit strategy are required to be taken by a majority of shareholders regardlessof their shareholding percentage. Therefore, if there are only two shareholders and both arenot available or in disagreement, the decision making process could be blocked. This is whyfour is the minimum recommended number of shareholders in order to manage a LimitedLiability Company effectively. In 2012 it will be possible with only one shareholder.Joint Stock Companies – Anonim Sirket (A.S)The company’s stock capital is divided into shares and the liability of the shareholders islimited to the capital subscribed and paid by the shareholder. The minimum number ofshareholders of a joint stock company is five whether real person so or legal entities. Theminimum share capital amount is 50,000TL. The company must hold a general assemblymeeting every year, hold a board of directors meeting attended by at least three members.The Articles of Association can be drafted in a way that provides more voting rights of to theminority shareholders to protect them from any unfair decisions by the majority shareholder.Banks, private finance institutions, insurance companies, capital leasing companies,factoring companies, holding companies, companies operating as foreign currency exchangeoffices, companies dealing with public warehousing, publicly held companies within thescope of the Capital Markets Law, companies established and operating within free zonesshould be established as Joint Stock Companies and are subject to permit by The Ministry ofIndustry and Trade. In 2012 it will be possible with only one shareholder.Branch Offices of Foreign Companies – ŞubeCompanies based abroad whose capital is divided into shares can open branches in Turkey.Opening a Branch requires prior approval from the Ministry of Industry and Commerce.Liability for the branch’s liabilities lies with the Parent Company. The process to open abranch is longer and more expensive than a simple limited company.Liaison Offices – Irtibat BurosuSpecial permission can be granted by the Directorate General of Foreign Investments forLiaison Office status. The office cannot issue invoices or get involved in revenue generatingactivities but solely acts as a sales and marketing office. Orders for goods are placed withthe related entity abroad. Liaison offices have all their expenses such as rental, utilities, carleasing, etc. paid for by the mother entity abroad. The liaison office permission is renewableon application once every three years. An annual statement is sent to the Foreign Ministry toshow all expenditures as paid for by the mother foreign entity. Liaison office employeesreceive their salary in foreign currency sent from abroad and are not liable to income tax if allapplicable conditions are met. The employer is liable to meet the social security costs of theliable employees in Turkey. However, many foreign nationals working in Turkey can apply forexemption if they continue to pay social insurance in their home country. Turkey has suchagreements with 22 countries.Starting a Business in TurkeyThe six steps to set up a business are:LIMITED COMPANY Legal Form: Ltd. Sirketi City: Istanbul 8/34
  • 9. Step 1Execute and notarize articles of association, signature declaration of the managers, copies ofeach manager’s identity card or passport and commercial books.Step 2Deposit of 0.04% capital to the account of the Competition Authority.To register with the Commercial Registry, founders must obtain the original receipt fromZiraat Bank. This receipt shows that 0.04% of the company’s capital has been paid to theCompetition Authority at the central bank or a public bank.Step 3File the incorporation notice, commitment letter, and Chamber registration statement at theTrade Registry Office. Membership fees of the Chamber of Commerce are based on capital.The Commercial Registry Office notifies the Tax Office and the District Employment Officeabout the company incorporation. The Registry arranges for an announcement in theCommercial Registration Gazette within about 10 days of company registration.A tax identification plaque is obtained from the local tax office after the Commercial RegistryOffice notifies it. The Registry Office also notifies the Ministry of Labor and Social Security,Directorate of the Social Security Institution of the incorporation. A social security number isobtained from the relevant Social Security Administration office, and company employeesmust be registered with that administration.Step 4Have a notary certify the legal books of Journal, Ledger, Case book and Inventory bookStep 5Follow up with the tax office on Commercial Registry’s notificationStep 6Deposit the initial capital in a bank and obtain the certificate of paid-in capital.For Further Information http://www.doingbusiness.org/data/exploreeconomies/turkey/Companies are required to appoint an accountant (SMMM).Closing a businessLiquidation requires the appointment of a clerk who will be responsible for closing thebusiness and, if there are no legal or tax issues, this may take up to 13 months. During thistime accounting services and paying stamp tax on declarations will still be required.Taxation in TurkeyTaxes are levied on income both personal and corporate, on property and on motor vehicles.Taxes are levied on expenditures and include Value Added Tax, Excise Duty, Customs Duty,Banking and Insurance Transactions Tax, Special Communications Tax, Stamp Duty andFees Tax. Other Taxes include Announcement and Advertisement Tax, Entertainment Tax, 9/34
  • 10. Communications Tax, Electricity and Gas Consumption Tax and Environmental ConsumptionTax.Approximately 70% of the total tax revenue in Turkey is collected through indirect taxesshowing that the Turkish state depends on indirect taxes in securing the necessary budgetfinancing.There is a special taxation method for multi-year construction and repair works that allow forthe final determination of the profit and loss in the year in which the work ends, and declaredin the tax return for that year. A withholding tax is levied on progress payments. In case thefinal offset is greater than the total taxes paid over the project period, difference is refundedto the tax payer. However, the receivables of the taxpayers who don’t submit an applicationwithin one year become null.Consolidation for tax purposes is not allowed. Each entity is subject to tax on a stand-alonebasis.Corporate Income TaxThe corporate Income tax is levied on the income and earning derived by corporations andcorporate bodies. The income elements by Corporate Tax Law are the same as thosecovered by the Income Tax Law. In other words, the Corporate Income Tax Law setsprovisions and rules applicable to the income derived from the activities of corporations andcorporate bodies, whereas the income Tax Law deals with the income derived by individuals.Corporations and corporate bodies specified by the Law as taxpayers in respect to thecorporate tax are as follows:- Capital companies and similar foreign companies;- Cooperatives;- Public enterprises;- Enterprises owned by foundations, societies and associations;- Joint ventures.Corporation Tax Annual Returns are generally filed between 1stand 25thApril. AdvanceCorporate Income Tax returns are filed by the 10th and paid by the 17th of the second monthafter each quarter. Corporate income tax rate 20% Corporate Income Tax Structure Example of calculation effective tax burden Corporate Income 100 Corporate Tax 20% -20 After-tax income 80 Distributable profit 80 10/34
  • 11. Dividend WHT 15% -12 Net Dividend 68 Effective Tax Burden 32%Legal ReservesTurkish companies are required to set aside legal reserves out of their profits at relatively lowpercentages.First level legal reservesJoint Stock (AS) and Limited Liability Companies must set aside 5% of their net profits eachyear as a first level legal reserve up to a maximum of 20% of the paid-up capital.Second level legal reservesThe second level reserves are equal to 10% of profits distributed after the deduction of thefirst level legal reserves and the minimum obligatory dividend pay-out (5% of the paid-incapital). There is no ceiling for the second legal reserves and they thus need to be set asideevery year.Payroll Taxes / CostsSocial Security is totally 33.5% of a maximum gross salary amount declared by the Ministryof Finance (MOF) once every 6 months of which, the employer’s contribution is 19.5% andthe employee’s contribution is 14%. Unemployment Fund contributions are 2% by theemployer and 1% by the employee of the gross salary amount declared by MOF once every6 months. Also, a Payroll Stamp Tax of 0.6% of the gross salary is applied. Premiums paidby an employee for personal private insurance should not exceed 5% of the monthly wageand premiums, membership fees and contribution shares shall not exceed 10% withoutattracting tax. Wages paid in foreign currency are converted at the FX market rate on thedate of payment. The employer pays the due taxes to tax office on behalf of the employee by20th of the following month. Typically work contracts are signed in net amounts with theemployer responsible for the gross amount. Cost of Employee to Employer Chart Minimum Monthly Wage $ 400 Gross Minimum Wage $ 506 Employee Deduction Social Security Premium (14%) $ 71 Unemployment Fund (1%) $5 Income tax (15%) $ 65 11/34
  • 12. Minimum living allowance $-38 Stamp tax (0.6%) $3 Total deduction $106 Cost for Employer Gross minimum wage $506 Employer’s share of social security premium (19.5%) $98 Employers payment into unemployment insurance fund (2%) $10 Total Cost for Employer $614 Source: Ministry of Labor and Social Security of the Republic of Turkey Valid for the first half of 2011 For single individuals without children and may vary according to marital status and number of children. USD 1 = TRY 1.58 in 2011Minimum WageMinimum (gross) wage, calculated per month of 30 days, to be applied for people older than16 ages has been determined as TL 796,50 monthly, TL 26,55 daily for the first half of 2011(01.01.2011 - 30.06.2011) and TL 837,00 monthly, TL 27,90 daily, for the second half of2011 (01.07.2011 – 31.12.2011) by Minimum Wage Determination Commission.Personal Income Tax‘Resident tax payers’, who have their legal residence in Turkey and who reside in Turkey fora continuous period of more than six months within one calendar year, are considered to besettled in Turkey and are taxed over their earnings and revenues in Turkey and abroad.Businessmen, scientists, experts, officials, press correspondents, and other individuals withsimilar status, as well as those who have arrived for purposes of education, or of medicaltreatment, shall not be considered settled in Turkey, even if they have remained for morethan six months in the country. Therefore, they are considered as ‘limited liability tax payers’and are taxed solely on their income acquired in Turkey.There are two tax scales – one for other income and one for salaried income: 2011 Progressive Income Tax Rate – Other Income 15% for income between 0 – 9400 TL 20% for income between 9401 – 23,000 TL 27% for income between 23,001 – 53,000 TL 35% for income of 53,001 TL and over 12/34
  • 13. 2011 Personal Progressive Income Tax Rate from SALARY 15% for income between 0 – 9400 TL 20% for income between 9401 – 23,000 TL 27% for income between 23,001 – 80,000 TL 35% for income of TL 80,001 TL and overAnnual Personal Income Tax return for other income is filed by 31st March of the yearfollowing the related tax year ending on 31st December. Self-employed people makeadvance payments 4 times in each year at a standard rate of 15% of the net profit.Payments such as severance payments in Turkey and retirement pension paid by socialsecurity institutions located in foreign countries, as well as lump sum payments to survivingspouses are excluded from assessment Indemnity and Assistance for income tax. There aremiscellaneous exclusions for benefits-in-kind such as free meals provided to employees inplaces of business or luncheon vouchers given to employees per working day which areexcluded from income tax. The portion exceeding the upper limit is subject to income tax.Mass transit in shuttle vehicles for employees from and to their homes is also excluded fromincome tax but vehicles for upper level employees used exclusively as a private cars shall betreated as wage payment. Provided that there is a ‘contract’ between the employer and theemployee, expenses incurred using the employee’s personal car for business purposes canbe deducted; as are the expenses in leasing a car in the name of the enterprise for theemployee’s use and they are not treated as taxable income.Exemption amounts to be applied for the payments to be made by the insurance companiesto those insured and severance pay and child allowance payments exempt from income tax,which are calculated based on the coefficients specified under article 21 of 2010 CentralManagement Budget Law accepted by the Turkish Grand National Assembly in their GeneralAssembly dated 26 December 2010 and which will be applied during 01.01.2011-30.06.2011period are: Maximum severance pay amount to be exempted from income tax TL 2.617,70.A radical cut in severance payments is one of the main reforms expected as part of Turkey’snew national employment strategy in 2012.Pay slips can be delivered electronically providing proof of delivery is available.Employees typically have seven days from the issue of documents such as dismissal noticesto dispute its contents.Minimum Living AllowanceA minimum living allowance amounts calculated at minimum wage is deducted from the finaltax liability calculation. This amount is published by the related authorities every year.Value Added Tax (VAT) 13/34
  • 14. The Turkish Tax System levies value added tax on the supply and the importation of goodsand services. The Turkish name for Value Added Tax is Katma Değer Vergisi, abbreviated toKDV.Liability for VAT arises; (a) When a person or entity performs commercial, industrial, agricultural or independent professional activities within Turkey, (b) When goods or services are imported into Turkey.VAT is levied at each stage of the production and the distribution process. Although liabilityfor the tax falls on part of the person who supplies, imports goods or services, the realburden of VAT is borne by the final consumer. This result is achieved by a tax-credit methodwhere the computation of the VAT liability is based on the difference between the VATliability of an entity on its sales (output VAT) and the amount of VAT the entity has alreadypaid on its purchases (input VAT).VAT Rates vary from 1% for certain agricultural products, 8% for basic foodstuff, textileproducts etc. and a general rate of 18%. VAT returns are submitted monthly by the 20th ofthe following month and paid by the 26th.Deliveries and services, importation of goods and services, communications servicesincluding radio and television, games of chance, professional concerts and sportscompetitions, auctions, movement of energy through pipelines, delivery and importation ofornaments and coins that contain gold, property rental are all subject to VAT. Nonresidence does not change the nature of these transactions.Where the taxpayer has no legal residence, place of business, the Ministry of Finance holdsthe taxpayer that is part of the related transaction in Turkey responsible for the transaction.VAT has to be recorded in the legal books and documents.VAT Deduction MechanismVAT payable on local purchases and on imports is regarded as "input VAT" while VATcalculated and collected on sales is considered as "output VAT". Input VAT is offset againstoutput VAT in the VAT return filed at the related tax office by the 20th of the following month.If output VAT is in excess of input VAT, the excess amount is paid to the related tax office.However, if input VAT exceeds the output VAT, the balance is carried forward to thefollowing months to be offset against future output VAT. There is no cash refund to recoverexcess input VAT, except for exportation and other special cases.According to the Turkish VAT law, there is a so-called reverse charge VAT mechanism,which requires the calculation of VAT by resident companies over payments to partiesabroad. Under this mechanism, VAT is calculated and paid to the related tax office by theTurkish company or customers on behalf of the non-resident company (foreign company).On the other hand, the local company treats this VAT as input VAT and offsets it in the samemonth. This VAT does not create a tax burden for the Turkish or for the non-residentcompany, except for its cash flow effect.Export exemption for VATTo recognize an export delivery, it must be made to a customer abroad, to a free zone, orbonded warehouse, it must cross the Customs Line of the Republic of Turkey and arrive in aforeign country. A service must have been performed for a customer abroad and the benefitderived abroad. 14/34
  • 15. Non-residents can reclaim VAT for goods they purchase to take out of Turkey by presentingthe invoice or sales document at the point the goods pass through customs.Goods and services purchased in connection with transport activities, participation in fairs,markets or exhibitions are refunded on the principle of reciprocity.VAT on goods delivered by manufacturers to exporters for subsequent export are not paid bythe exporter. This tax, is declared on the tax return, assessed, accrued and deferred. If thegoods are exported within three months (or extension period of up to additional threemonths) the deferred tax is written off. If the export is not made, the deferred tax plus a delaysurcharge is assessed. The VAT to be refunded to the manufacturer is paid following thecompletion of the export.Import VATThe VAT on importation of goods is assessed by the customs authorities on each individualimport and is payable together with customs duty. Where the transaction is exempt fromcustoms duty or in the case of international transportation, VAT is assessed upon a specialdeclaration made at the customs territory and is payable at the time the taxable event occurs.The taxpayer is the individual or entity who has the title of the imported goods.The tax base is the total value of the following elements: the value of the imported articleused for the assessment of customs duty or if the item is exempt then the value includinginsurance and freight charges (CIF); all taxes, duties, expenditures, and charges paid duringimportation; other expenditures such as price differentials and foreign exchange ratedifferentials based on the value of the article.Tax Base for VATThe taxable base of a transaction is generally the total value of the consideration received,not including the VAT itself. The VAT Law deals with the taxable base under four headings,namely the taxable base on deliveries and services, on importation, on internationaltransportation, and special types of taxable base.In case a consideration does not exist, is unknown or is in a form other than money, thetaxable base is the market value. Market value is the average price payable in the market forsimilar goods and services and is determined with reference to the Tax Procedural Law.In order for discounts to be excluded from the tax base they should be disclosed on theinvoice or documentation, at that time, and conform with commercial practices. Creditcharges, price differentials, interest and premiums, even if disclosed separately to theinvoice, are included in the tax base.In case if the cost has been quoted or indexed in foreign currency, the foreign gains accruedin favor of the supplier are taxed as component of the tax base. In the case of the foreignexchange gain in favor of the buyer, an invoice should be drawn up by the buyer to thesupplier covering the amount of foreign exchange gain that has been accrued. VAT isapplied as of the date which the goods or services were delivered.In the case of the return of the goods or non performance of the service the taxpayer subjectto taxation can correct and deduct the tax during the period in which the change occurred.VAT for PartnershipsOrdinary partnerships have a separate tax payer status and are required to keep legal books,file tax returns and pay taxes separately from its partners. Transfers of shares when they donot result in the termination of the partnership are exempt from VAT. Although the VAT 15/34
  • 16. return is drawn up in the name of the partnership and signed and filed by one of theshareholders, all shareholders are jointly responsible for the payment of the tax. A list shallbe attached with the names, addresses and the tax offices of the partners.VAT on Sales of SharesSales of shares in an Joint Stock company (Anonim Sirket A.S) are exempt from VAT. A saleof shares in a Limited Liability Company (Ltd. Sti.) by a company partner is exempted fromVAT, if the participation is held for at least two years. A sale of shares by an individual is notsubject to VAT.Withholding TaxUnder the Turkish tax system, certain taxes are collected through withholding by the payersin order to secure the collection of taxes. These include income tax on salaries of employees,lease payments to individual landlords, independent professional service fee payments toresident individuals, and royalty, license and service fee payments to nonresidents.Companies in Turkey are responsible to withhold such taxes on their payments and declarethem through their withholding tax returns.Filed by the 20th day and paid on the 26th of the following month. Companies with less than10 employees can apply to file quarterly.Tax withholding on dividends distributed by corporationsWithholding tax of 15% is applied on the dividends distributed by resident taxpayers toresident and non-resident real persons and non-resident corporations. Declarations are filedby the 20th day and tax paid by the 26th of the month following the dividend distribution.Royalties, management fees, technical assistance fees and similar professional service feespaid to a non-resident are normally subject to withholding tax at source at 20 percent, unlessa tax treaty provides relief. Dividends paid by a resident corporation to another residentcorporation (or to a Turkish branch of a foreign corporation) are not subject to dividendwithholding tax.Some types of payments to entities in low tax jurisdictions have a 30 percent withholding taxin line with anti avoidance rules.Other TaxesBanking and Insurance Transactions Tax (BITT):The subject of the tax is transactions and services produced by banks, bankers andinsurance companies. Taxpayers are banks, insurance companies and bankers. Alltransactions and services produced by banks and insurance companies. There will be the taxupon the money, which they collect under the name of interest, commission and expenditurebecause of the services they produced on behalf of them. Bankers’ certain transactions andservices produced and stated in Law are the subject of the tax. Other transactions of bankersare subject to VAT. Withholding Tax on interest 15%, Transaction tax on checks, alsoBanking and Insurance company transactions remain exempt from VAT, but are subject to a 16/34
  • 17. Banking and Insurance Transaction Tax (BITT) of 5%. Foreign exchange transactions aresubject to 0.1% BITT.Vehicle TaxesFuel tax included in fuel priceThe amount of Motor Vehicle Tax for land transportation vehicles is determined according totheir weight, age, cylinder capacity and is published annually in the official gazette.Property TaxProperty taxes are paid each year on the tax values of the related real estate at rates varyingfrom 0,1% to 0.3% of the value assessed and declared by the government every year foreach region of the country and for each type of real state. In the case of the sale of aproperty a 1% levy is paid on the sales value by both the buyer and the seller. Property taxreturns are filed in every four years and annual taxes are paid in two equal installments, thefirst being in March, April or May and the second in November.Property transfer fee 1.5% based on sale priceStamp duty on property sale 0.8%Stamp TaxStamp tax is levied as a percentage of the value stated on the agreements. Please note thatsalary payments are subject to stamp duty over the gross amounts paid, whereas a lumpsum stamp tax is calculated for financial statements.Some documents prepared in Turkey (contracts, share purchase agreements, loan contracts,and mortgage instruments, etc.) are subject to stamp duties, based on transaction value.Loan contracts (and security documents, such as a mortgage) for a loan from a local orforeign bank are exempt from the stamp duty. Merger agreements (taxable or tax-freemergers or tax-free divisions) are not subject to stamp duties. Stamp tax payments arerecorded in a ledger and declared periodically. Stamp Tax is payable by the parties who signa document. Each and every signed copy of the agreement is separately subject to StampTax.Special Consumption Tax (OTV)There are different product groups that are subject to OTV at different tax rates:(1) Petroleum products, natural gas, lubricating oil, solvents and derivatives of solvents(2) Automobiles and other vehicles, motorcycles, planes, helicopters, yachts(3) Tobacco and tobacco products, alcoholic beverages(4) Luxury productsEnvironment Protection TaxMunicipalities are authorized to collect what is called Environment Protection Tax incontribution to the financing of certain services, such as garbage collection. This tax is leviedat scheduled fixed amounts that vary according to the location of the office where the relatedservices are being provided. For houses, the environmental tax is levied according to thewater consumption of the domiciles. The taxpayer is considered to be the occupant of thepremises, whether as owner or tenant.Advertising TaxAdvertising tax at various rates especially for alcohol and tobacco advertising 17/34
  • 18. Tax Filing PeriodsCorporate income taxIf filing by calendar year financial statements due by April 25 - late filing subject to a fine.Advance corporate income taxFiled by the 10th and paid by the 17th of the second month after each quarter.Withholding taxFiled by the 20th day and paid on the 26th of the following month. Companies with less than10 employeescan apply to file quarterly.VATFiled monthly by the 20th of the following month and paid by the 26th.Personal income taxAnnual return filed by March 25 of the year following the end of the tax year on December31. Payment at the end of March and June.Other Tax IssuesTransfer PricingTurkey is a member of the OECD and acknowledges the organization’s transfer pricingguidelines. On the other hand, as Turkey’s transfer pricing regulations are new and at thedevelopment stage, they have yet to fully incorporate all the principles contained under theOECD Guidelines.As an attachment to the corporate tax returns taxpayers are required to submit an annualtransfer pricing form, including a list of related parties, relevant transactions during theperiod and their total amount, and the transfer pricing methods used.The term “related party” refers to: • Shareholders of an entity; • Individuals or entities related to shareholders or the entity itself; • Individuals or entities that area directly or indirectly under the management, audit , or capital control of the entity or its shareholders; • Shareholders’ spouses; • Relatives of the shareholders or their spouses including upper and lower lineage with third degree relationships by blood or marriage.In addition to the form, taxpayers should also prepare annual reports representing how armslength price and methodology are determined, together with sufficient supporting evidence.Disguised profit distribution through Transfer PricingThe four significant concepts are: if the person or entity is engaged in buying goods andservices; from related parties; at prices or amounts that do not conform to ‘arm’s length’ ormarket value principles; and as determined by the Ministry of Finance. Taxpayers are 18/34
  • 19. allowed to choose from: Comparable Price Method; Cost Plus Method with the cost of thegoods or services increased by a ‘reasonable gross profit ratio’; and Resale Price Method.Thin CapitalizationThe thin capitalization issue is rearranged in the Turkish Corporate Income Tax Law Article12. According to the article, if the ratio of the borrowings from shareholders or from personsrelated to the shareholders exceeds three times the shareholder’s equity of the borrowercompany at any time within the relevant year, the exceeding portion of the borrowing will beconsidered as thin capital. The scope of the term “related parties” consists of shareholdersand the persons who are related with the shareholders that own 10% or more of the shares,voting rights or rights to receive dividends of the company.The shareholder’s equity of the borrower company is defined as the total amount of theshareholder’s equity of the corporation at the beginning of the fiscal year, or the differencebetween the assets and the liabilities of the company. If the company has negativeshareholder’s equity at the beginning of the year, then any borrowings from related partieswill be considered as thin capital.If thin capitalization exists, the interest paid or accrued, foreign exchange losses and theother similar expenses calculated over the loans that are considered as thin capital aretreated as non-deductible for CIT purposes. Moreover, the interest paid or accrued andsimilar payments on thin capital will be reclassified at the end of the relevant fiscal year asdistributed dividends and will be subject to withholding tax.Intangible Rights and Disguised Profit DistributionThe arm’s length value should be the price that the owner of an intangible asset would agreeto transfer the right to a third party in an uncontrolled transaction.Works undertaken as an Ordinary Partnership / Joint Venture / ConsortiumOrdinary Partnerships do not have corporate income tax liability and its partners areseparately registered as liable for income tax or corporate income tax. Joint Ventures areliable for corporate income tax.However, Consortiums are not clearly defined in the Turkish Tax Legislation, but typicallyused for construction work with separable segments. Although one partner is the addresseeof the tax office, each member accounts for its own income and expenses and profit or lossper its own segment of the work. The consortium terminates on the completion of the work.Tax Assessment for Non-resident Foreign Transport CompaniesFirms are taxed on revenue considered to have been generated in Turkey. For land transportthe passenger, cargo and baggage transport fees within the borders of Turkey, sea and airtransport fees from loading points in Turkey and commission on tickets sold in Turkey areconsidered revenue.The corporate income tax base is assessed from the sum of the value multiplied by therelated ratio - land: 12%, sea: 15% and air: 5%.For example, value of 150,000 x Sea Ratio 15% = 22,500 TLCIT Base 22,500 TL x Tax Rate of 20% = 4,500 TL. A tax withholding will be applied on theportion of the revenue transferred to the head office: 22,500 – 4,500= 18,000 x 15% = 2,700TL.Offset LossesLosses can be carried forward five years. No carry back is possible. 19/34
  • 20. Employment LawEmployment in Turkey is mainly governed by Turkish Labor Law and Trade Union Law.Under Turkish Labour Law, there are four different types of job contract: a) Job contracts for “temporary” and “permanent” work b) Job contracts for a “definite period” or an “indefinite period” c) Job contracts for “part-time” work d) Job contracts for “work-upon-call”Job contracts do not have to be concluded in a specific format. However, if a job contract issigned for a definite period, it must be concluded in writing. Job contracts are exempt fromstamp tax and other duties.Any kind of discrimination among employees with respect to language, race, gender, politicalopinion, philosophical approach, religion or similar criteria is prohibited by law. Discriminationbased on the gender of an employee is prohibited when determining the amount ofremuneration for employees working in the same or equivalent jobs. Should the principle ofequality be violated, the employee who is subject to discrimination can request monetarycompensation.Turkey has signed many International Labor Organization (ILO) conventions protectingworkers rights. Turkeys labor force has a reputation for being hardworking, productive, anddependable.Working Hours, Overtime and Overtime WageUnder the Labor Law, the maximum normal working hours are 45 hours per week. Inprinciple, 45 hours should be split equally among the working days. However, under the newrules introduced by the new Labor Law, working hours may be distributed unevenly over theworking days provided that the total daily working hours do not exceed 11 hours a day andthat the parties agree on the uneven distribution of the working hours over the working days.Hours exceeding the limit of 45 hours per week are to be paid as “overtime hours”. Paymentfor the overtime hour must be 1.5 times the regular hourly wage/salary. Instead of theovertime payment, employees may be granted 1.5 hours of free time for every overtime hourworked. Overtime hours worked during weekends and public holidays are to be paid at twicethe regular hourly rate. These rates are the minimum set by law and may be increased onthe basis of a collective or bilateral agreement between employees and the employer. Thetotal number of overtime hours worked per year may not exceed 270 hours.Days offEmployees are allowed to take a rest for a minimum of twenty-four hours (weekly rest day)without interruption within a seven-day time period.Night Shifts“Night” means the part of the day beginning not later than 20:00 hours and ending not earlierthan 6:00 hours, and lasting no longer than 11 hours in any case. Night work for employees 20/34
  • 21. must not exceed seven and a half hours.In establishments where operations are carried on day and night by alternating shifts ofemployees, the alternation of shifts must be arranged that employees are engaged on nightwork for not more than one week and are then engaged on day work the following week.Alternation of work on night and day shifts may also be carried out on a two-week basis.Annual LeaveThere are five paid public holidays per year (January 1st, April 23rd, May 19th, August 30th,October 29th), plus two paid periods of religious holiday, which comes to eight days in total.Employees are entitled to paid annual vacation for the periods indicated below, provided thatthey have worked for at least one year including the probation period: Years of work Minimum paid leave period 1 - 5 years (inclusive) 14 days 5 - 15 years 20 days 15 years or longer 26 daysThese benefits are the minimum levels set by law and may be increased on the basis of acollective or bilateral agreement.Under the law on the amendments to Turkish Labor Law, wages and salaries must be paid inTurkish Lira (TL) into the bank account of employees. If wage and salary amounts are notpaid into employees bank accounts, an administrative penalty totaling TL 100 per employee(per month) is charged to the employer. It is possible to denominate wages/salaries in termsof a foreign currency. In this case, wages/salaries shall be paid in TL calculated on the basisof the relevant foreign currency rate prevailing as of the payment date.For employees below the age of eighteen and above the age of fifty, the length of annualleave with pay must not be less than twenty days. The length of annual leave with pay maybe increased by employment contracts and collective agreements.Foreign EmployeesForeigners employed legally in Turkey can either apply for Work Permits from the Ministry ofLabor and Social Security or from the Consulates and Embassies of the Turkish Republicabroad. Many visitors can buy a sticker visa on arrival and stay between 30 to 90 days, somepassport holders have to apply in advance for a visa. Please check with the Ministry ofForeign Affairs. Turkey has signed Social Security Agreements with 22 countries: Albania,Austria, Azerbaijan, Belgium, Bosnia and Herzegovina, Bulgaria, Canada and the Province ofQuebec, Czech Republic, Denmark, France, Georgia, Germany, Libya, Luxembourg,Macedonia, Norway, Romania, Sweden, Switzerland, Turkish Republic of Northern Cyprus,The Netherlands, The United Kingdom. 21/34
  • 22. Termination of Employment According to the relevant provisions of the Labor Law, employers and employees are required to give specified notification periods prior to the termination of employment, as shown in the following table. Required minimum notification periods for employers and employees Duration of service Duration of notification period 0 - 6 months 2 weeks 6 - 18 months 4 weeks 18 - 36 months 6 weeks more than 36 months 8 weeks There are two types of termination for a job contract: 1) Termination with notification 2) Termination without notification based on justifiable reasons Termination with notification Both the employee and the employer may terminate a job contract concluded for an indefinite period based on the notification periods indicated in the above table. The employer may terminate a job contract by paying the salary of the employee corresponding to the notification period. However, the employee covered by the labor security preserves the right to subject the validity of the termination of employment to judicial review. Termination without notification based on justifiable reasons Both the employer and employee have the right to terminate a job contract without notification under the following conditions:• Reasons of health• Cases arising from misconduct and similar reasons• “Force majeure” events that prevent the employee from working for a period exceeding one week. Termination indemnity (severance pay) A lump-sum termination indemnity is to be paid to employees whose employment is terminated due to retirement or for reasons other than resignation or misconduct. Such indemnity pay is calculated on the basis of thirty days pay per year of employment at the gross rate of pay applicable at the date of retirement or leaving. However, the thirty days’ payment per year of employment may not exceed a semi-annually determined limit. Indemnity may be agreed to be paid at an amount higher than the limit indicated above in case there is a provision in the contract of employment. Termination indemnity paid within the limit specified is exempt from income withholding tax. However, the amounts of indemnity paid in excess of the limit shall be subject to income tax. The reasons on the basis of which employees are entitled to receive termination indemnity are as follows: 22/34
  • 23. a) Leaving workplace due to the compulsory military service (for males)b) Retirement (in order to receive old age, retirement pension or disability allowance from therelevant insurance institutions)c) Voluntary termination by female employees within one year following the date of marriaged) Death of the employeeTurkish Social Security System (SGK)Social security premiums (as a percentage of employees gross earnings) are payable byboth employers and employees. The below table shows the rates that apply in the case ofoffice employees in the private sector. Rates for employees working in specific sectors (suchas mining, oil/gas exploration) may vary depending on the risk category of the workperformed. Social Security Premiums (office employees) Type of risk Employers Employees Total share (%) share (%) (%) Short - term risks 1-6.5* - 1-6.5* Long - term risks 11 9 20 General health insurance 7.5 5 12.5 Contribution to unemployment 2 1 3 insurance Total 21.5* 15 36.5* *The rates change according to the risk categories of jobs. Depending on the risk category, the employers share varies between 1% and 6.5%.Foreigners making social security contributions in their home countries do not have to paythe Turkish social security premiums if there is a reciprocal agreement between the homecountry and Turkey.Unemployment Insurance Premium PaymentsEmployees, employers and the state are required to make a compulsory contribution to theUnemployment Insurance Plan at the rates of 1%, 2% and 1%, respectively, of the grosssalary of the employee. Like the social security premium payments, unemployment insurancepremiums are also to be paid on a monthly basis. Employers are able to deduct suchcontributions from their taxable income. On the other hand, an employee’s contributions aredeductible from the income tax base of the employee.A foreign individual who remains covered under the compulsory social security system of his/her home country that has a social security agreement in effect with Turkey is not liable forinsurance payments to the Turkish social security. The proof of foreign coverage is to be filedwith the local social security office. If the employee is not subject to a foreign social security,full contributions would generally be imposed. Unemployment insurance premiums aredeclared and paid to the Social Security Institution together with social security premiumcontributions.Invoicing in TurkeyAll invoices must contain the following minimum information: the date, series and sequencenumber, the name and commercial title of the business, the business address; the 23/34
  • 24. company’s registered tax office and account number; the customer’s name, commercial title,the type, amount, price and total value of the goods or services; the date of delivery. Aconsignment invoice, which is a combination of invoice and waybill, is allowed but must bedrawn up in at least three copies; with two copies accompanying the goods in the vehiclecarrying the consignment. In the event of required information being missing the invoice isregarded as not having been issued at all.Invoices are to be given consecutive sequence numbers; issued with at least one originaland one copy, more than copy is to be marked with its number; the signature (which can beprinted) of the owner or authorized representative of the business and company stampshould be at the top of the invoice.Invoices have to be issued within seven days of the date of the delivery or performance ofthe service, otherwise they will be considered void. The customer is obliged to present itsdocuments for identity and tax office account number if requested by the issuer of theinvoice.Invoices have to be printed by a printing house that has a special contract with the Ministry ofFinance.There are penalties for failure to issue receipts and invoices.ExpensesAccounting for Deductible ExpensesExpenses should be directly relevant to the acquisition and continuation of business profits,that they are commensurate with the volume of the business. Some non deductible expensesinclude cell phones that are not recorded to the name of the enterprise.For expense recognition of hospitality and entertainment, there should be businessrelationship with the firm, the expenses in line with size of the business and expectedoutcome and should not breach public morality and laws. For business travel andaccommodation the ‘actual expense method’ or the ‘allowance method’ can be used. PerDiem levels are set against those given to State civil servants with the same monthly salary,or the highest limit granted by the State. Allowances exceeding this amount are subject totaxation as a wage payment. Recently, expense documents by sales representatives abroadcommensurate with the business have been recognized as deductible expenses, even incases where they are drawn up to the employee’s own name and not that of the firm. Medicalservices in private polyclinics paid by the enterprise are treated as wage expense andsubject to withholding tax and are treated as a benefit provided to employees.Expenditures incurred in tenders for construction work such as surveys, travel andmiscellaneous expenses incurred in connection with the tender guarantee and stamp duties,even if the tender is not awarded, are deductible. However, payments made for purposes ofpersuading other parties to withdraw a tender cannot be accepted as deductible expense.Payments that are not legal are disallowable. Expenses related to attorneys and lawsuitsmay be treated as deductible unless the lawsuits have been filed due to the personal fault ofthe enterprise.Grants and donations to recognized foundations are deductible as long as their total does notexceed 5% of that year’s corporate earnings. Grants to educational and health facilities maybe fully deductible as are donations made in cash or kind for national catastrophes. 24/34
  • 25. Non-documented expenditures such as train, boat, bus and parking lot fees can be deductedwith a detailed list of the date, amount and the name and location of the related parties.Sales slips/receipts including VAT and below a threshold limit, for goods such as stationery,office supplies, cleaning materials for use in the workplace can be accepted as deductibleexpenses.For tax purposes goods that are lost or stolen cannot be recorded as an expense. Normalshrinkage and in the cases of a ‘force majeure’ the cost of the goods may be written as anexpense.Sponsorship expenses cannot be deducted unless the sponsor has generated profits andthen 100% can be deducted for amateur sports and 50% for professional sportssponsorships.Sales staff can be reimbursed for daily transports costs and also one employee such as amessenger. Non sales staff cannot claim for a commuting allowance.Company CarsIf the company purchases cars for the employees use all expenses and depreciationexpenses are deductible.Lease car hire costs for employees use are deductible. A contract is made between thelease car supplier and the company is invoiced monthly with deductible VAT at 18%. There isa 0.825% stamp tax payable by the company based on the total amount of the initialcontract. You are required to have third party insurance and an optional comprehensiveinsurance. The employee signs a consignment note to confirm receipt of the car, statingthat the car will be used on company business. Expense claims for fuel, road toll fees andparking are deductible and submitted on a monthly expense claim form with receipts orinvoices addressed to the company - not in the employees name. These are not payroll-related expenses and should be reimbursed directly to the employee by the companysaccountant.If employees are using their own car for company business then there should be a writtenagreement between the employee and the employer about leasing the employees car sothat expenses such as petrol, road tolls and parking are deductible on a monthly expenseclaim form. If the annual amount paid to the employee is less than 23,000 TL then this is notdeclared for personal income tax. However, the employer has to deduct 20% withholding taxon the amount paid to the employee for using their car and also offset the 18% VAT.If employees use their own cars occasionally for business purposes then they can bereimbursed at approximately 0.60 to 0.80 TL per 1 km. This is based on a comparablejourney by state controlled taxi of 1.6 TL per km.Accounting in Istanbul and TurkeyThe New Commercial Code will be implemented in July 2012 and is broadly in line withTurkey’s accession targets for entry to the European Union. Under the Code all companiesother than small and medium-sized entities (SMEs) present their legal and consolidatedfinancial statements in accordance with Turkish Accounting Standards and which correspondto International Financial Reporting Standards (IFRS) and that all companies have an annual 25/34
  • 26. audit by a licensed independent audit or carried out in accordance with InternationalStandards of Auditing (ISA).In March 2006, the Turkish Accounting Standards (TAS) has been published by TurkishAccounting Standards Board which was declared to be effective as of January 1, 2006. Thelegal requirements to apply TAS has been referred to in the draft revised Turkish CommercialCode; however, such draft has not yet been approved by the Grand National Assembly ofTurkey. Accordingly, companies follow the existing Turkish Commercial Code, TurkishProcedural Tax Law and the communiqué issued by Ministry of Finance in 1992 applicable toall Turkish entities (excluding financial institutions) in preparing the statutory financialstatements.The Turkish Accounting and Auditing Standards Board (TMUDESK), founded in 1994, is amember of the International Accounting Standards Committee (IASC). The standards issuedby the Turkish Accounting and Auditing Standards Board are parallel to and in conformitywith the IFAC standards and may bear some minor revisions. The Turkish Uniform Chart ofAccounts was introduced 1 January 1994.Under Capital Markets Board (CMB) regulations, all listed companies, financialintermediaries, mutual funds, investment partnerships, and companies not listed butconsidered as publicly traded due to high number of shareholders (more than 250) aresubject to CMB regulations. However, since updates in IFRS thereon could not beimplemented in CMB standards, CMB announced that financial statements prepared inaccordance with IFRS are also acceptable.Starting from December 31, 2006, financial institutions other than insurance companies,prepare their financial statements in accordance with the Turkish Accounting Standardswhich are in line with IFRS. However, there are certain departures from IFRS as explained incommuniqués of Banking Regulations and Supervision Agency (BRSA) like non-consolidation of non-financial institutions.A separate set of accounting principles together with uniform chart of accounts applicable toinsurance companies are issued by Undersecretariat of Treasury.All types of commercial companies which are subject to corporation tax are considered ClassI Merchants and must maintain their books on a balance sheet basis.The statutory financial statements should include at least the following: Balance sheet,Profitand Loss Statement and Notes to the Financial Statements.Accountants are governed by Law Number 3568 and authorized by The Union of CertifiedPublic Accountants and Sworn-in Certified Public Accountants of Turkey (TURMOB).Certified Public Accountants are known as Serbest Muhasebeci Mali Musavir (SMMM) andSworn-in Certified Public Accountants known as Yeminili Mali Musavir (YMM), the latterhaving at least 10 years work experience as a Certified Public Accountant. They areauthorised to approve financial and tax statements with an authority similar to public officialsof the Revenues Directorate of the Ministry of Finance.The Turkish Accounting Standards Board, Turkish Auditing Standards Board, RevenuesAdministration, the General Directorate of Insurance of the Under Secretariat of Treasury,Capital Markets Board and the Banking Regulation and Supervision Agency are the bodiesoverseeing accounting rules. However, accounting regulations by the Ministry of Financetake precedence over all other regulations with limited exceptions for banks, insurance 26/34
  • 27. companies and listed companies. Therefore, these entities are required to prepare multiplesets of financial statements from their single set of underlying accounting records.Legal BooksAlthough maintaining the General Ledger is mandatory there is no requirement to have itcertified. However the following legal books need to be certified by a notary public: Journaland Inventory Registers; Operation Registers; Farmer’s Operation Registers; Manufacturingand Production Tax Registers; Transportation Tax Registers; Foreign Transport ProceedsRegisters; Independent Professional Earnings Register.There is a special Irregularity Fine for failure to have the daily cash register, daily retail salesand proceeds register, and self-employment earnings register at the place of business.DepreciationDepreciation is classified under four headings(1) Straight Line Method (2) Double Declining Method for taxpayers who keep their accountson the balance sheet basis (3) Depreciation in Mines determined separately for each quarry(4) Extraordinary Economic and Technical Depreciation as determined by the Ministry ofFinance.Depreciation is allowed for property held for investment. The portion of the cost allocable toland is not depreciable, but for the building itself and the furniture, appliances, carpeting, etc.a depreciation deduction may be taken.Real property (this is the legal definition of the house or other building) held forrental/investment may only be depreciated for Regular Tax purposes under the "straight-line"method, over a useful life of 27.5 years. Thus, a property with $275, 000 allocated to thebuilding would be depreciated at the rate of $10, 000 per year.Leased hold improvements (this is the legal definition of things such as furniture, appliances,carpeting and the like) may be depreciated for Regular Tax purposes under an "accelerated"method over a useful life of five years. An accelerated method allows a larger depreciationdeduction in the early years, in recognition of an obsolescence or decline-in-value factor thatyou see in new property (cars are a good example).Intellectual Property rightsTurkeys legal system provides means for enforcing property and contractual rights, andthere are written commercial and bankruptcy laws.Turkish law generally accepts binding international arbitration of investment disputesbetween foreign investors and the state. Secured interests in property, both movable andreal, are recognized and enforced. Real estate is registered at the land registry office.Turkeys copyright law provides deterrent penalties for copyright infringement. The lawcontains several strong anti-piracy provisions, including a ban on street sales of allcopyrighted products and authorization to take action without a complaint by the rightsholder. The law has minimum penalties of three months to two years imprisonment and /or a 27/34
  • 28. fine between 5,000 and 50,000 TL and amaximum penalty of three to six years imprisonmentand/or fines between 50,000 and 250,000 TL.Turkey is a signatory to a number of international conventions, including the Stockholm Actof the Paris Convention, the Patent Cooperation Treaty, the Strasbourg Agreement, and theWIPO Copyright Agreement and Performances and Phonograms Treaty.Turkeys Patent Law provides for penalties for infringement of up to 4 years in prison, or46,000 TL in fines, or both, closure of the business for at least one year, and a prohibition onthe owners participation in any commercial activity during that same period.Trademark holders have reported counterfeiting of their marks in Turkey, especially inapparel, film, cosmetics, detergent and pharmaceuticals. Turkey provides protection forcommercial seed under its Plant Variety Protection (PVP) Law.Investing in TurkeyThe foreign investment legislation is based on the principle of equal treatment for thedomestic and foreign investors. Istanbul Chambers Of Commerce reported that in 2010, atotal of 3,044 foreign investors registered companies at the chamber, with capital totaling823.3 million Turkish Liras.A new investment incentive system and R&D and Innovation Support Program were put intopractice aiming at increasing the competitive power as well as longer term capital inflows tothe country. The Assessment Council on Export-Oriented Production Strategy was set up inorder to develop strategies to increase the in-house production of intermediate goods. Inaddition, prudent fiscal policies and macro-prudential monetary policies are followed aimingat containing the domestic demand.The Investment Incentive System in TurkeyInvestment Incentive schemes are: General investment incentive regime; Incentives forlarge-scale investments; Region and sector-based incentive system; Incentives onemployment; R&D support; SMEs; Industrial Thesis (SANTEZ) program; Loans for technicaldevelopment projects; Training supports and State aids for exports.The general investment incentive regime is mainly a tax benefit program, in some cases withcredit possibilities. The implementation of the Turkish incentive regime varies depending onthe location, scale and subject of investments. The major incentives instruments areexemption from customs duties for imported machinery and equipment for projects with anincentive certificate and VAT exemption for locally purchased or imported machinery andequipment for projects with an incentive certificate.There are also incentives for large scale investments such as: Corporate Tax rates between2-10% for investments started before 31st December 2010 and between 4-15% forinvestments from 2011; Social Security premium contributionfor employers up to 7 years;and free land allocation.Large scale investments in the following sectors and investment amounts qualify for anIncentive Certificate: raw chemical materials production and in the oil industry for over 1billion TL investment; 300 million TL in other chemical production;transit pipeline services 28/34
  • 29. totaling a minimum of 50 million TL investment; automotive investments over 250 million TL;Railways over 50 million TL; Ports over 250 million TL; Electronics investments inLCD/Plasma screen manufacturing totaling a minimum of 1 billion TL and other electronicssector investments, including information and communication technologies, totaling aminimum of 50 million TL; Medical and optic devices over 50 million TL; Pharmaceuticalsover 100 million TL; Aviation industry minimum of 50 million TL; Machinery minimum of 50million TL; Mining investments in or processing facilities and integrated metals productionmills totaling a minimum of 50 million TL.Region and sector-based incentives offer the same incentives as above. They are based onzones. In Zone 1: Investments that generally require the use of advanced technology, suchas the automotive and supply industry, electronics, pharmaceuticals, machinery, medical andoptical devices will be covered by incentives. In Zone 2: Technology-intensive sectors will besupported. In this framework, machinery, smart multi-functional textile, non-metal mineralproduct, paper, and food & beverage investments will be incentivized. In Zones 3 and 4:Investments in agriculture, agriculture-based manufacturing industry, ready-to-wear, plastics,rubber, metal goods, tourism, health and education will be covered by incentives. Someadditional sectors will be incentivized regardless of location: Specialized Organized IndustrialZones (OIZ) established by the Ministry of Industry and Commerce; Investments related tothe transportation of cargo and/or passengers by sea; Railway investments by the privatesector for inter-city cargo and/or passenger transportation, as well as railway investments forlocal cargo transportation are subject to incentives in all regions; Housing heating/coolinginvestments, realized through geothermal energy and/or power plant waste energy, maybenefit from regional incentives.There are Employment Incentives for newly employed women and unemployed peoplebetween the ages of 18 and 29 and incentives for additional employment.Research and Development Incentives apply for projects in Turkey if a minimum of 50personnel are employed in an R&D center. The incentives within the new law are valid untilthe year 2024 and include; 100% deduction of R&D expenditures from the tax base if thenumber of researchers is over 500; Income withholding tax exemption for the employees(this item will be effective until December 31st, 2013; 50% of social security premiumexemption for employees for a period of 5 years; Stamp duty exemption for applicabledocuments; Techno-initiative capital for new scientists up to 100,000 TL; Deduction from thetax base of certain funds granted by public bodies and international organizations.With the establishment of Technology Development Zones (TDZ) companies are providedwith offices ready to rent, and infrastructure facilities are provided; Profits derived fromsoftware development and R&D activities are exempt from income and corporate taxes until31.12.2013; Deliveries of application software produced exclusively in TDZs are exempt fromVAT until 31.12.2013; Wages of researchers along with software and R&D personnelemployed in the zone are exempt from personal income tax until 31.12.2013; and 50% of theemployer’s share of the social security premium will be paid by the government for 5 yearsuntil 31st December 2024.TUBITAK (Scientific and Technological Research Council of Turkey) and TTGV (TurkishTechnology Development Foundation) both compensate or grant R&D related expenses andcapital loans for R&D projects.Small and Medium Enterprises (SMEs) operating in the manufacturing, agro-industry,tourism, education and healthcare, mining, and software development industries, employingless than 250 employees and earning less than 25 million TL in revenue or turnover per yearcan apply for incentives: Exemption from custom duties; VAT exemption for imported and 29/34
  • 30. domestically purchased machinery and equipment; Credit allocation; and New creditguarantee support. The Turkish Treasury announced the establishment of a new guaranteeprogram with a 1 billion TL fund transferred to the Credit Guarantee Fund (KGF) to createcredit capacity worth 10 billion TL. The Treasury will also guarantee a 65% share of thesecredits. The Small and Medium Sized Industry Development Organization (KOSGEB)contributes to strengthening SMEs by various support instruments in financing, R&D,common facilities, market research, investment site, marketing, export and training.An Industrial Thesis (SANTEZ) program offers direct financial support for new technologyadaptation, process development, quality improvement and environmental modificationprojects to be realized with university partnerships.The Technology Development Foundation of Turkey (TTGV) presents long term interest-freeloans for technology development, renewable energy production, energy efficiencyimprovement and environmental impact-reducing projects. Exemplary support forenvironmental project with the maximum contribution rate is 50% per project; a maximumbudget of USD 1 million per project; and the pay-back period is 4 years after the projectexecution.Listing Rules in TurkeyThe Istanbul Stock Exchange (ISE), 1986, is becoming a significant emerging market stockexchange. There are two markets for trading stocks on the ISE namely; the Stock Market,the Emerging Companies Market. In 2011 there are 320 national companies listed on theexchange. The Market value at the Istanbul Stock Exchange is over 300 billion TL.In the past ten years, share sales to foreign investors in IPOs stood at between 41 percentand 69 percent, according to the report. In 2010, the figure stood at 51 percent. Theassociation expects large IPOs in 2011, forecasting that the IPO volume will exceed 10billion TL, up from 3.1 billion TL in 2010.The Capital Markets Board is responsible for overseeing the activities of capital markets,including activities of ISE-quoted companies, and securities and investment houses.TheTurkish private sector is dominated by a number of large holding companies, whose uppermanagement is family-controlled. Most large businesses continue to float publicly only aminority portion of company shares in order to limit outside interference in companymanagement. There has been no attempt at a hostile takeover by either international ordomestic parties in recent memory. Capital market instruments are still developing inTurkey. Turkeys first mortgage law was adopted in 2007. Hedging instruments are alsovery limited. Izmirs futures market opened in 2003 and has recorded monthly transactionvolumes of around $12 billion.An independent Banking and Regulation Supervision Agency (BRSA) monitors andsupervises Turkeys banks. The BRSA is headed by a board whose seven members areappointed by the cabinet for six-year terms.In addition, bank deposits are protected by an independent deposit insurance agency, theState Deposit Insurance Fund (SDIF).Websites for further reading 30/34
  • 31. www.invest.gov.tr Investment Support and Promotion Agencywww.treasury.gov.tr The Turkish Treasurywww.dtm.gov.tr Foreign Trade and General Directorate of Importswww.oib.gov.tr Privatization Administrationwww.deik.org.tr Foreign Economic Relations Boardwww.tusiad.org.tr Turkish Industrialists and Businessmens Associationwww.epdk.gov.tr Energy Market Regulatory Authoritywww.bddk.org.tr Banking Regulation and Supervision Agencywww.cmb.gov.tr Capital Markets Board of Turkeywww.tubitak.gov.tr Scientific and Technological Research Council of Turkeywww.ttgv.org.tr Turkish Technology Development Foundationwww.kosgeb.gov.tr Small and Medium-sized Entities Development Organizationwww.yased.org.tr International Investors Associationwww.mfa.gov.tr Ministry of Foreign Affairs (for visa requirements)www.kapitalsmm.com Business Setup and Accounting Outsource Serviceswww.turkstat.gov.tr Turkish Statistical Institutewww.gib.gov.tr Revenue Administrationwww.yased.org.tr International Investment Associationwww.indexmundi.com StatisticsAbout Kapital Business Partners | Kapital Network | Kapital OnlineKapital Business Partners is a well-established accounting practice of high standing withoutsourcing, payroll and bookkeeping services in addition to the traditional service lines ofaudit & assurance, accounting and tax - a diverse range of business solutions and consultingservices, including corporate finance and transaction support, cross-border Tax andexpatriate services, corporate governance and risk assurance services, businessrestructuring, outsourcing and management consultancy. Founded in 1997, KapitalBusiness Partners s head office is located in Istanbul and serves clients across Turkey andthe region. Kapital Business Partners’ strengths lie in their being a well-known and trustedadviser; their understanding of the client, the nature of its business and the scope and timingof the assignment; and also that the partners of the firm came from the Turkish RevenueService, Capital Markets Board, and multi-national audit firms and conglomerates.Weathering the storm of the financial crisis of 2001 the firm emerged stronger and better ableto serve its clients.Clients of Kapital Business Partners include Turkish and international clients in theTechnology,Construction, Energy, Banking and Insurance, Retail, Manufacturing, Legal,Finance, Conference and Textiles sectors with operations throughout the Euro Med Area,China, the Middle East and Russia.Kapital Network has Regional reach through independent partners and Kapital Onlinedelivers secure online financial applications and payroll delivery throughout Turkey.Kapital serves clients with Oracle E Business Suite.TO find out more about Doing Business in Turkey please contact us here: 31/34
  • 32. Kapital Business Partners Buyukdere Cad. Altan Erbulak Sok. No: 3 Atasoy Is Hani Kat: 1 Mecidiyekoy Istanbul Turkey Tel: +90 212 213 9393 Fax: +90 212 213 9394 Contact: Mr. Zeki Ocal Email: zocal@kapitalnetwork.comKapital Network Websiteswww.kapitalsmm.com | www.kapitalbusinesspartners.comwww.kapitalonline.net | www.kapitalonline.net/kfshttp://www.kapitalnetwork.comKapital on Social MediaFor commenta and feedback please follow us here: 32/34
  • 33. http://www.linkedin.com/company/kapital-business-partnershttp://www.linkedin.com/company/kapital-onlinehttp://www.facebook.com/pages/Kapital-Business-Partners/125399164146100http://www.facebook.com/pages/Kapital-Online/155578637800112http://twitter.com/kapitalnetworkhttp://twitter.com/kapital_onlinehttp://twitter.com/kapital_Russianhttp://twitter.com/kapital_Turkcehttp://twitter.com/kapitalpayrollhttp://twitter.com/kapital_legalhttp://twitter.com/kapital_deutschFind Us 33/34
  • 34. For further updates please seehttp://www.kapitalsmm.com/en/catalog.htmlThanks for reading!Last Update: August 2011 (Alan Greenhalgh e:alan@kapital-online.net)ends. 34/34