Writer: Güray ÖĞREDİK
Yaklaşım Magazine / July 2005 / Sayı: 151
Contact offices or representative offices can be defined as “Offices opened by persons and institutions resident abroad for social, cultural and economic purposes such as communication, hospitality, contact, make market research and follow business opportunities closely in the country where investment will be made and inform center company. “
Since it is forbidden for contact offices to be involved in commercial activities as per foreign capital regulations, it is necessary to follow economic structure of these offices closely. Since they are not allowed to be involved in commercial activities there must not be institutions and added-value tax liabilities.
II- CHARACTER OF CONTACT OFFICES OPENED AS PER DIRECT FOREIGN INVESTMENTS LAW NO.4875
As per (h) subparagraph of the 3rd article of the law no. 4875 (1) Undersecretariat of Treasure is authorized to give permission to the companies established as per foreign country laws for opening contact office provided that they are not involved in commercial activity.
As per the aforementioned law, the below conditions are required to open a contact office in Turkey:
1- Persons who would like to open a contact office in Turkey must be established as per foreign country laws and established legal entity must have company status.
2- Contact office to be opened in Turkey must not be involved in commercial activity in Turkey.
III- NECESSARY DOCUMENTS FOR CONTACT OFFICES TO BE OPENED AND ACTIVITIES OF CONTACT OFFICES AS PER DIRECT FOREIGN INVESTMENTS LAW APPLICATION REGULATIONS
As per the provision of the 6th article of Direct Foreign Investments Law Application Regulations (2), Undersecretariat is authorized to allow companies established as per foreign country laws and extend this permission provided that they are not involved in commercial activity. In the regulation, Undersecreatiat of Treasury is authorized to extend the permission differently than law provision.
Applications for opening permission and extension of contact offices are completed within 5 work days following the application date provided that information and documents are complete.
In order to open a contact office in Turkey, application is made to Undersecretariat with the documents below:
1- Main company’s Operating Certificate (original) approved as per the provisions of Contract of Removing Affirmation Obligation of Foreign Official Letters prepared within the frame of Hague International Private Law Conference or the relevant Turkish Consulate
2- Activity Report or balance sheets and income table
3- Original of the authorization to be given to the person assigned to conduct the activities of the contact office
4- Original of power of attorney if foundation is conducted by another person
IV- PROVISIONS CONCERNING THE OPERATION OF CONTACT OFFICES
Principles below are applicable in the operation of contact offices:
A- TAKING PERMISSION FOR FOUNDATION AND REGISTERING THE CONTACT OFFICE TO TAX OFFICE
After permission is obtained from Undersecretariat of Treasury, id number must be obtained from tax office and liability for income tax must be installed. Therefore if they make any payment within the 94th article of GVK, they must make the necessary stoppage within this article and declare with summary declaration and pay. It is necessary to send a sample of “Registry Form for Legal Entities” to Foreign Capital General Directorate within maximum 1 month after it is filled and given to tax office. If contact offices rent the office they operate, they also must send the relevant rental contract to the General Directorate.
İrtibat bürolarının adres değişikliği durumunda da yeni adreslerini en geç 1 ay içinde Yabancı Sermaye Genel Müdürlüğü’ne ve vergi dairesine bildirmeleri gerekmektedir.
B- SENDING “INFORMATION FORM ABOUT ACTIVITIES” OF CONTACT OFFICES
“Information Form about Activities of Contact Offices” about last year’s activities which is in regulation appendix (Appendix: 4) of office is filled by contact offices and sent to the Undersecretariat every year up to the end of May at the latest. Documents indicating that the expenses of the last year are met by foreign currency sent from abroad are attached.
C- ACTIVITY PERIOD OF CONTACT OFFICES IN TURKEY
Contact offices are given operation permit for maximum 3 years. In the extension, each is given maximum 3 years with regard to the activities of the last year and prudential plans and goals.
D- EXPENSES OF CONTACT OFFICES
All the office expenses will be met by foreign currency brought from abroad
E- PROFIT TRANSFER
It is not possible for contact offices to request profit transfer since it is not possible for them to be involved in any income generating activity.
F- TRANSACTIONS TO DO AFTER THE EXPIRATION OF 3 YEARS’ PERIOD GIVEN BY FOREIGN CAPITAL GENERAL DIRECTORATE
Contact offices are given maximum 3 years’ operating permit. It is possible to extend this period at the end. Also obligants can make contact office company or branch.
V- SITUATION OF CONTACT OFFICES AGAINST 94TH ARTICLE OF INCOME TAX LAW
Contact offices which belong to foreign country institutions operating in Turkey make certain payments to resident persons, organizations and institutions in Turkey.
These payments are more wage payments to service competents, rental payments made to the real estate capital voluntary owner if office is rented, professional payments made to freelancer who keeps the books if these offices keep books and professional payments made to those responsible for translation of documents prepared abroad into Turkish, payments to those brought for office cleaning etc.
In the 1st paragraph of the 94th article of GVK, persons, organization and institutions, who have to make stoppage from the payments listed in this article are listed. There is no discrimination of fully or limited obligated about the persons, organizations and institutions to make the payments listed in this article in the mentioned paragraph.
Therefore persons, organizations and institutions, resident abroad, which found the contact offices operating in Turkey have to make stoppage during when they make payments listed in this article in cash or by account if they can be examined within these persons, organizations and institutions listed in this paragraph. As explained above, companies founded in foreign countries are given the permission to open a contact office in Turkey with the law no. 4875 and consequently these companies are similar to the persons, organizations and institutions listed in the 94th article of GVK in terms of legal status.
On the other hand, as per the foreign capital regulations, contact offices are forbidden to perform commercial activity. Or rather, contact offices operating in Turkey are not possible to deal with any activity to generate income as per the foreign capital regulations.
However it does not mean that contact offices cannot make any kind of income in Turkey.
These offices are possible to make income as a result of some activities they perform in Turkey. For example contact offices may make income by sale or rent of the personal or real estates or inventories, or by evaluation of inactive funds.
In such cases, if persons, organizations and institutions stated in 94th article of GVK make the payments stated in the article to the contact offices in cash or by account, in the event that incomes and revenues stated in the 24th article of KVK instead of 94th article of GVK are made from the payments, they have to make stoppage as per the 24th article of KVK.
Within tax collected from incomes such as this frame, rent and deposit interest or repo income by detention will be ultimate tax for contact offices.
Also if contact offices perform any activity to generate income, corporate tax liability will have to be instituted to these offices.
VI – PAYMENT OF PERSONNEL TO BE EMPLOYED IN CONTACT OFFICES
A- As per the 23/14 no. subparagraph of Income Tax Law; “Payments made to employees, working for employers subject to limited obligation whose legal and business center is not in Turkey, are exception from income tax.”
As it is seen, payments made to the personnel employed in contact offices are exception from income tax within certain conditions, that is to say from stoppage which employer has to make with liable role within the 94th article of GVK
1- Payment will be made upon the income made abroad by limited obligant employer, which means personnel payments will be covered by the main company abroad and sent to Turkey. Here it will be more accurate to send the transfers directly to the bank account of the relevant personnel for demonstration.
2- Payments will not be in TRY but in foreign currency
3- It is certainly obligatory to provide and keep the necessary documents (bank receipts, exchange purchase documents, receipts of transfer abroad) for control.
B- Since there is no provision which makes the payments, made to the personnel working in contact offices, an exemption from tax, there will be stamp tax deduction from the payments and it will be declared with brief declaration and paid within legal periods
C- Also since personnel employed in contact offices will be considered to have insurance within Social Insurances Law, contact office must be notified to the institution at the status of limited obligant employer.
Contact offices are liable to give the business notice, sample of which was prepared by the institution, at the date when they start to employ someone with insurance at the latest.
Those with insurance (personnel) must be notified to the relevant Provincial Insurance Directorate with the employment with insurance notice before starting to work.
VII – BOOK, RECORD AND DOCUMENT ORDER IN CONTACT OFFICES
As explained in the introduction, since contact offices are forbidden to perform commercial activity as per foreign capital regulations, it is necessary to follow the economic structure of these offices in terms of Finance Office in particular.
As seen above, contact offices will not institute liability in terms of corporate tax and value added tax unless they perform commercial activity. However they have some declaration and payment liabilities in terms of 94th article of GVK, Stamp Tax Law and SSK (Social Insurances Institution) due to their a number of payments.
Also in various opinions given by Finance Office, it is explained that enterprises’ liabilities as limited obligant must be registered and they must fulfill obligations such as keeping book, preparing document and keeping and submission of them for contact offices’ activities to be determined and followed up to find out if they constitute a business or not within the agreement though they do not perform commercial activity.
The reason why administration wants to subject contact offices to liability as limited obligant institution is explained by “…to be determined and followed up to find out if they constitute a business or not within the agreement…” in advance ruling.
Administration’s opinions concerning contact offices are based upon that they may perform commercial activity at any time. Following up (by instituting liability) and controlling (by making them give declaration) contact offices is a result of this approach.
Besides all these, contact offices may face liability of making certain stoppages and declarations for some of their payments as explained above. As it is known, all declarations must be evincible by valid documents and records. For example documents and records concerning the stoppage in a summary declaration to give may be needed to examine. Insurance and unemployment premiums for the personnel to be employed must be evincible by valid rolls and records. Various money transfers (from abroad to contact office), bank transactions and other cash payments or following check making out etc. (not just for control, but also for contact office activities to be conducted accurately) can only be possible by entering these to book records neatly. As it is known, it is a legal obligation that any transaction recorded to book is based on an explanatory and substantiating document
As a result, contact office to be found is liable to keep journal, ledger and inventory subject to balance sheet basis and get them confirmed within the provisions of VUK and keep them. It is also necessary that they give summary declaration for some payments it may make within 94th article of GVK and institute liability at tax office since there will be stamp tax deductions from payments to the employees. However, it is contentious if they are obliged to give corporate tax declaration by instituting liability at the status of limited obligant though they do not perform commercial activity. Even if they are, this declaration is only to be given “as empty declaration” just for information.
As explained above, contact offices cannot perform commercial activity by no means, however it does not mean they cannot generate some income, such as evaluating inactive funds to get interest income or renting some real estates which belong to the office. However such matters are open to discuss. Because punished assessment may be faced because of the comments that some possible incomes (interest, rent etc. even if they are not commercial activity) should have been mentioned in the declaration. So contact office should work in line with its purposes, if any payment is to be made, necessary money transfer from abroad should be waited for and money should not be kept in contact office for as far as possible (or should be kept only short term daily ordinary incomes), and specific investments such as getting real estate should be avoided since it can be evaluated as an activity going beyond its purpose.