Turkish shareholders with foreign portfolio investments, should consider owning these investments through a Swiss company, in particular if these investments are held in Switzerland.
What are the Key Advantages?
a) Profit, taxed in Switzerland, will be at a rate between 10.1% and 13.99% rather than the relevant tax rate in Turkey of 22%.
b) The exemption of equity fluctuations from tax, rather than being subject to a tax rate of 22% in Turkey.
c) Reducing the information that needs to be provided to Turkey under the CRS Regulations.
Turkish CFC Rules and Swiss Corporate Tax
The Turkish corporate tax rate is 22%.
Many Turkish individuals and corporations have substantial banking assets abroad, particularly in Switzerland.
Under Turkish CFC rules, Turkish residents holding portfolio investments through ‘low’ tax companies, outside of Turkey, must pay Turkish corporate tax of 22% on the foreign company’s profits, there is no deferral.
If the foreign company’s corporate tax rate is above 10%, no corporate tax is paid in Turkey, but the foreign jurisdiction where the relevant foreign tax rate applies.
- Swiss companies present an interesting opportunity as their corporate tax rates vary between 10.1% and 13.99% (depending on which canton they are located in, within Switzerland).
Investment Currency Fluctuations
The significant decline of the Turkish Lira against all major currencies triggers taxable foreign exchange gains, when held by Turkish individuals and corporate taxpayers.
Investment currency fluctuations are taxed in Turkey, even when not realised. A Swiss company is not taxed on investment currency fluctuations, as long as the gains are not realised (eg not sold).
Equities are registered at their acquisition value in Swiss financial statements, as long as they are not sold. It would only be if they were sold that a profit would be realized and therefore subject to tax.
This is also relevant to intercompany loans, denominated in currencies other than Turkish Lira.
- The use of a Swiss company can therefore negate the need to pay Turkish tax on currency fluctuations. Such fluctuations will be taxed in Turkey, if the investment is held directly by a Turkish resident or if the investment is held by a foreign company with a corporate tax rate of less than 10%.
If a Swiss company distributes dividends to a Turkish shareholder, the effective withholding tax rates are 15% for an individual shareholder and 5% for a corporate shareholder.
A tax credit is available in Turkey against Turkish income taxation.
Exchange of Information – Swiss Portfolio Investments
If a ‘discretionary investment management agreement’ is provided to the relevant Swiss bank or independent asset manager (professional managed list), the Swiss Company will qualify as a Financial Institution (FI). In this instance, the directors of the Swiss company will only need to provide details of the shareholders, lenders and net asset value of the company to the Turkish Tax Administration, via the Swiss Tax Authorities.
Without a ‘discretionary investment management agreement’, the Swiss Company qualifies as a passive non-financial entity (NFE). In this instance the reporting obligations of the relevant bank, to the Turkish Tax Administration, will be far greater. These obligations will include information regarding: shareholders, lenders and assets, income, interest, and movements of funds (across all bank account transactions).