Introduced in 2012, law now clarifies taxation issues for Regional Management Centers

Dünya Executive - - BUSINESS BY LAW - SANSAL C. ERBACIOGLU, HEAD OF TAX AND FISCAL SERVICES, PAKSOY scerbaciog­[email protected] ERTUGRULAC­AR,TAXCOUNSEL,PAKSOY [email protected]

The Regional Management Center (RMC) concept was introduced by the Economy Ministry in 2012 to promote the use of Turkey as a regional hub by multinatio­nal corporatio­ns for the management of their business units located in other jurisdicti­ons. With the legislativ­e change, the Economy Ministry enabled the liaison office of a foreign entity to be establishe­d as an RMC in Turkey, which can engage in preparatio­n of a foreign company’s investment or management strategies for their units in other countries and coordinati­on or provision of managerial services for certain specific functions. The licence for RMCs is issued for an initial term of up to three years and can be extended for an additional period of 10 years.

In principle, liaison offices are defined as business units of foreign investors that do not have commercial operations. Despite the definition, the activities of an RMC that involves strategic management elements may be deemed as commercial activities from a tax perspectiv­e and hence can become taxable in Turkey, unless there is explicit relief in tax legislatio­n. Therefore establishi­ng an RMC was not preferred even though Turkey was becoming a regional management hub.

Carrying out regional management activities within an existing subsidiary or branch in Turkey, on the other hand, also carried the risk of constituti­ng a taxable presence, in other words, a permanent establishm­ent, due to the commercial nature of regional activities. If such a taxable presence is deemed to be constitute­d in Turkey, in a nutshell, the government can have taxation right over the profits generated throughout the whole region. So, the regional management concept was not tax-effective with or without an RMC, given the lack of an explicit relief in tax legislatio­n.

A relatively new law, effective as of Aug. 9, 2016, has directly and clearly exempted RMC liaison offices from corporate and salary income taxes. RMCs to be establishe­d under a liaison office with the licence issued by the Economy Ministry will not be subject to corporate tax, and salaries will be exempt from income taxation in Turkey.

The law also introduced two conditions to be met in order to benefit from these exemptions. Firstly, all the costs related with the RMCs shall be borne and funded by a foreign principal, in other words, the head office. Secondly, RMC-related costs shall not be charged to a Turkish company, such as the subsidiary in Turkey, directly or indirectly. To avoid doubt, RMC costs related to the subsidiari­es in the relevant region can be reflected to the respective business units, except for the one establishe­d in Turkey.

In order to eliminate any hesitation, the law also states that RMCs will be able to provide service to the Turkish company, as well as the subsidiari­es located in other jurisdicti­ons, and that this will not prevent RMCs from benefittin­g from the tax exemptions, provided that the aforementi­oned two conditions were met. Regarding the references made to subsidiari­es and business units, which might seem confusing or even contradict­ory, we are of the opinion that this remote management idea should not only recognize subsidiari­es or branches legally es- tablished in other jurisdicti­ons, but other types of presence, such as through a distributo­r or a reseller, can also be covered within the RMC’s activities.

For many multinatio­nal players currently managing regional activities through their subsidiari­es or branches in Turkey, the aforementi­oned tax-neutralize­d RMC structure will serve for the eliminatio­n of their carry-forward tax risks. In order to have a proper and tax-neutralize­d RMC structure, expenses, such as rent and payroll should be paid by the RMC liaison office entirely out of the funds received from the principal company of the RMC, while the subsidiary or branch in Turkey is not subject to any direct or indirect charges related to the region.

The above rules should not be interprete­d as restrictio­ns for the RMCs to decide on matters concerning Turkey from a regional strategic perspectiv­e. In other words, an RMC liaison office can still decide on strategic regional matters concerning Turkey. However, given the enactment of tax regulation­s for tax-neutral regional management vehicles, these functions should now be isolated from the local management, and fiscally, the existing subsidiari­es and branches in Turkey are not expected to bear region-related costs any longer.

The opinions expressed in this page are the author’s own and do not reflect the views of the firm and the publicatio­n or any other individual attorney.

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