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