Recently, our law firm in Turkey have been receiving questions from our foreigner legal entity clients who will engage in commercial activities in Turkey regarding whether it would be more beneficial to open a branch office OR a subsidiary, a limited liability company or a joint stock company with a foreigner legal entity partner. Foreign companies can set up a business in Turkey through subsidiaries, branch offices if they are willing to engage in trade or they either can chose to open liaison offices with the purpose such as to know the market and promote the goods and services of the main company.
We can say that generally foreign legal entities decide directly to use their investments to set up a branch office in Turkey or set up a subsidiary in Turkey in order to expand their brand and make profit. Within this Article, we will be explaining differences of a subsidiary and a branch in Turkey enabling you to make the right decision for your business plan.
A subsidiary is a separate legal entity owned by usually a bigger entity which is called a parent or holding company built to enter different markets and industries with the aim to increase value of the brand with new international markets, new consumers and sales possibilities. A subsidiary unlike a branch office has it’s own separate legal personality enabling a way for the parent company to enter into a new sector without putting companies future and investments at risk.
Subsidiaries differ from divisions which are integrated with the headquarters and are obliged to act within the scope of the commercial activities of its main company. As a result of not having a separate legal personality a headquarter is fully liable for the debts and obligations of its branch office.
The Turkish Company Law on Branches and Subsidiaries
Management and accounting of a subsidiary or a branch you will establish in Turkey will be subject to Tax Procedure Law (VUK), 6102 numbered Turkish Commercial Code, Trade Registry Regulation, Capital Market Law and Capital Market Board Communiques, Ministry of Finance Accounding Practice General Communiques and Uniform Accounting Plan, Banks Law and Uniform Accounting Plan of Banks, and finally Turkish Accounting Standards published by Turkish Accounting and Inspection Standards Board (TMUDESK).
Comparison Between The Branch And The Subsidiary In Turkey
The difference between a subsidiary (parent or holding company) and a division (branch) is that a subsidiary has its own separate legal personality from the parent company that it sits under while the division is a branch of a company undertaking a specific function within the legal personality of that company. Branches are part of the main company, which are formed to perform the same business operations as the main company in order to expand business of the head office. A subsidiary may or may not conduct the same type of business as its holding company. The liability of the branch office extends to the parent company meaning that when the branch is unable to pay its debts, they must be paid by the head office. On the other hand liability of the subsidiary do not extend to the holding company since it is limited to the subsidiary.
What is the difference between branch and subsidiary in Turkey?
The difference between a subsidiary (parent or holding company) and a division (branch) is that a subsidiary has its own separate legal personality from the parent company that it sits under while the division is a branch of a company undertaking a specific function within the legal personality of that company. Branches are part of the main company, which are formed to perform the same business operations as the main company in order to expand business of the head office. A subsidiary may or may not conduct the same type of business as its holding company. The liability of the branch office extends to the parent company meaning that when the branch is unable to pay its debts, they must be paid by the head office. On the other hand liability of the subsidiary do not extend to the holding company since it is limited to the subsidiary.
The Turkish Subsidiary Company
A subsidiary refers to the direct or indirect capital and management relationship established between a partnership and a parent company, which builds a link between the partnership and the parent company in terms of participating in the management of the said partnership and determining the partnership policies. Although the capital participation rate is not less than 10% in the partnerships in which the parent company participates directly or indirectly, if the voting right or the right to participate in the management due to the privilege is at least this ratio too, we can say that there is a subsidiary relationship between the parent company and the partnership.
On the other hand, a capital participation rate of more than 10%, but less than 10% of the voting rights or the right to participate in teh management, will not constitute a subsidiary relationship. In other words, in cases where the voting right and the right to participate in the management in another partnership are between 10% and 50%, the shares of the partnership are called subsidiaries. In cases where the share ratio is 50% or more, the partnership whose shares are owned is called an affiliate company.
A subsidiary can be established in the form of a Joint Stock Company or a Limited Liability Company. Pursuant to Article 329 of the 6102 numbered Turkish Commercial Code, a joint stock company (JSC) can briefly be defined as a type of company whose capital is definite and divided into shares, and which is liable for its debts only with its assets. Liability of shareholders for the debts of the company is limited to their participation in the share of capital and their liability is towards the company only, not towards third parties. The minimum capital amount is 50.000,00 Turkish Liras.
For non-public joint stock companies accepting the registered capital system, initial capital shall be minimum 100.000,00 Turkish Liras. On the other hand, it is possible to establish an LLC with 10.000,00 TL capital and to pay the total capital amount within 2 (two) years. A limited liability company can be defined as a company established by one or more real person or legal entity under a certain trade name, with fixed capital. There are differences between a Joint Stock Company and Limited Liability Company regarding withdrawal of the general assembly or the shareholder, the obligation to employ an in house lawyer, share transfer, liability of partners or members of the BOD, worth noting by clients before deciding the company type which we detailly explained within our Article, “Commercial and Corporation Law”.
Before determining type of company you are willing to establish, the results conduced by the differences of these two companies have, shall be evaluated rather than advantages of these two company types will bring. It will be healthier and realistic to consider compliance of company type to your business plans. According to Article 329 of Turkish Commercial Code, a joint stock company can briefly be defined as a type of company whose capital is determined and divided into shares, and which is liable for its debts only with its assets. Limited liability companies in Turkey are companies with a more closed structure than joint stock companies in Turkey are.
If you intend to operate in areas such as banking, insurance, financial leasing, the company you will establish must be in joint stock company structure. We recommend our client candidates who are willing to operate as a small business to prefer starting their business in limited liability company structure. If you are aiming for high sales and growth over time, however if you think that you will have difficulties in meeting the requirements of the joint stock company in terms of budget and cost, it will be beneficial to enter in the market through establishing a limited liability company.
Documents And Capital Share For Subsidiaries
Documents required for a limited liability company establishment in Turkey and a joint stock company establishment in Turkey and establishment procedures of both company types are entirely different. Our law firm in Turkey have prepared an Article detailly explaining the establishment procedures and required documents for company formation for your information. You can review mentioned Article, “Commercial and Corporation Law” and collect more information on how to set up your business.
What are the different types of company structures in Turkey?
General partnerships, limited partnerships, joint stock companies, limited liability companies and cooperatives are types of companies in Turkey. On the other hand, there are three different types of equity companies in Turkey as per 6102 numbered Turkish Commercial Code which are joint stock company, limited partnership divided into shares and limited liability company. We can say that joint stock companies and limited liability companies are the most common types of companies established in Turkey.
The Branch Office In Turkey
As per Article 118 of the Trade Registry Regulation, the branch office is defined as a location, other than the main office, where industrial or commercial activities are conducted on its own, regardless of whether if it has an independent capital or accounting or not, whether it is within the registry area where its head office is located or in another registry area. A branch office does not operate independently and is subordinate to the head office thus it cannot be considered as a separate commercial enterprise pursuant to Turkish law. Profit and loss of the branch is owned by the parent company thus owner of the rights and debts assumed through the branch is the head office, not the branch office. A branch formed in Turkey cannot engage in any commercial activity that are not specified in Articles of Association (AOA) of the head office.
Although the branch is dependent to the head office, they can act independently from the head office in their external relations as per Turkish law. It is accepted in the doctrine that the branch has the authority to carry out certain transactions, such as the transactions carried out by the head office, in a way that will result in favour of third parties, and that they have active and passive litigation capacity due to related transactions made by them. Of course, the independence of the branches in foreign relations is limited to the authority given to them by the headquarters. It is useful to indicate at this point, disputes arising from legal transactions to which the branch office in Turkey is a party, the capacity of the party should be determined according to whether the branch carried out the disputed transaction on its own behalf or on behalf of the head office.
Documents Related To Opening A Branch In Turkey
In order to register a branch office in Turkey having its head office in a foreign country, a physical branch office registration application before the Istanbul Chamber of Commerce shall be filed. Before the physical application, an online registration application shall be made electronically, through MERSIS system, and then unlike a limited liability company establishment, without an appointment, the applicant shall go directly to the Relevant Chamber of Commerce for physical branch office formation. Approval and registration of the branch will only take a day if no document is missing or if an additional document is not required by the Chamber of Commerce (ITO).
Our law firm in Turkey can set up your branch office within 1 day if all the documents for application is ready including their notarized sworn translations. Documents and procedures required for opening a branch office in Turkey are complex in nature. In order to establish a branch office in Turkey a headquarter must provide its tax registration certificate, trade registration certificate, signature circular and certificate of good standing apostilled.
There are other documents too required such as a Board of Directors resolution regarding opening a branch and appointing a fully authorized representative residing in Turkey. Content of such a Board of Directors resolution should be in accordance with directives Istanbul Chamber of Commerce publishes in its official web page and the Trade Registry Legislation published by the Official Gazette dd. 27/1/2013 and numbered 28541. Documents required for registration of a branch office in the country the headquarter is based in must also be submitted to Istanbul Chamber of Commerce.
In order to do that, it is necessary to receive an approval letter from the competent authority of the country where headquarter is located, stating that a branch can be established in or outside of mentioned country. Within content of the approval letter, the list of required documents for a fictitious branch office establishment where the headquarter is based in shall be listed. Also, the information that headquarter is able to and has already provided all the documents listed within the letter, shall be stated in the same letter. Documents required for branch office establishment in Turkey are not limited with these. In order to obtain more information on branch office establishment in Turkey, you can kindly visit our Article, “Open a Branch Office in Turkey” or directly ask our law firm in Turkey.
Taxation of Subsidiaries and Branches in Turkey
Branches doing business in Turkey and that generate income are taxpayers. Therefore, branch office which will be established in Turkey will be responsible for paying corporate tax, value added tax (VAT), provisional tax, income tax and withholding tax return. Branch office that will be established in Turkey will be also responsible to declare all taxes through its certified public accountant. When year-end profit comes to existence as a result of tax returns and if this profit will be sent to the mother company, amount of profit transfer will be subject to income and withholding tax. Percentages of income and withholding tax are being determined by international agreements signed between countries and generally are around %10, %15. We have published an Article detailly explaining taxation of branch offices in Turkey. You can kindly visit our Article, “Open a Branch Office in Turkey” and learn more.
On the other hand subsidiary will be treated as a local company based in Turkey since it is established in the form of a joint stock company or a limited liability company that which its shares are owned by a foreign legal entity. In Turkey, two main tax for companies are corporate tax and the value added tax (VAT). In Turkey companies are subject to corporate income tax rate of 20% for 2023. On the other hand companies also pay banking and insurance transactions tax, stamp duty, special consumption tax (SCT), social security contributions and digital service tax. On the other hand, since Turkey has signed various double taxation treaties protecting the foreign investors, foreign company operating in the Turkish territory through a subsidiary will be able to avoid double taxation, preventing the company to pay the same tax twice.
In order to obtain more information on taxation of subsidiaries in Turkey and on taxation of branches in Turkey, you can contact with our law firm in Turkey consisting of tax lawyers in Turkey that are also working together with teams of certified public accountants.
Registering a Company in Turkey
MESCI Law Firm, one of the top tier law firms of Istanbul is prepared to assist you with registering a company in Turkey, setting up your business in Turkey, developing a brand protection strategy, benefitting from virtual office services, company governance and monthly accounting in Turkey. We have been assisting to foreign legal entities from Kuwait, United States of America, Iran, France, Italy, China, India, Lebanon, United Kingdom, Morocco, Holland, Russia, Poland, Canada and many other countries. Our law firm in Turkey will open your company within two days only upon delivery of required documents for company establishment including their notarized translations.
