This Article is aimed to provide brief information regarding the tax implication on UAE based shareholder who owns shares in a Turkish Limited Liability Companies (LLC) or Joint Stock Companies (JSC) arising from the dividends paid.
The Avoidance of Double Taxation Treaty is signed by and between UAE and Turkey back in 1990s. The Treaty is introduced to Turkish legal system on 27 December 1994 in the Official Gazette numbered 22154.
The Treaty is applicable to the persons who are residents of one or both of the Contracting States being Turkey and UAE. The Treaty shall apply to taxes on income and on capital imposed on behalf of each Contracting State. The taxes to which the Treaty shall apply are, in particular:
- The income tax
- The corporation tax
The Agreement shall also apply to any identical or substantially similar taxes which are imposed after the date of signature of the Treaty in addition to, or in place of, the above-mentioned taxes.
Tax implications on UAE based legal person shareholders in Turkish companies
This article is drafted to provide some brief information for tax implications on the UAE based companies holding shares in Turkish companies. As known, Turkish jurisdiction allows foreign companies to have as much as shares they want (even they can be the sole shareholder) in a Turkish LLC or a JSC.
There are many investors from UAE who want to start a business in Turkey. It is important for them to understand the tax implications arising from the dividends that would possibly be paid.
Under Turkish law, dividends paid to a non-resident company are subject to a 15% withholding tax, unless the rate is reduced under a tax treaty.
Pursuant to Avoidance of Double Taxation between Turkey-UAE ; dividend withholding tax shall not exceed:
- 10% of the gross amount of the dividends if the recipient is a company which holds directly at least 25% of the capital of the company paying dividends;
- 12% of the gross amount of the dividends in all other cases.
The current dividend withholding tax applied in Turkey for UAE Companies is 10% in case the shareholder, who is a company from UAE, directly holds 25% or more of the shares. In case, a company from UAE holds less than 25% in a Turkish company (either in Turkish LLC or JSC), 12% dividend withholding tax will be applied.1
The term dividends as used in the Treaty means income from shares, jouissance shares or jouissance rights, founders' shares or other rights, not being debt-claims, participating in profits, as well as income from other corporate rights which is subjected to the same taxation treatment as income from shares by the laws of Turkey and income derived from an investment fund and investment trust.
Assume in Year 1 a Turkish Company (100% owned by a company from UAE) makes USD 1000 of profit. It distributes that profit to its shareholder in the form of a dividend. Such shareholder company from UAE will receive USD 900 following 10% dividend withholding tax. If UAE company further distributes that amount to its foreign shareholders in the form of a dividend, that dividend may also be considered as corporate profit and will be subject to other tax implications in the related country.
The above reduced rates shall not apply if the beneficial owner of the dividends being a resident of UAE, carries on business in Turkey through a permanent establishment situated therein, and the holding in respect of which the dividends are paid is effectively connected with such permanent establishment.
Footnote
1. Source: Official website of Turkish Revenue Adminstration, www.gib.gov.tr
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.