Under Act 5527, published in the Official Gazette of 7 July 2006, the income withholding tax rate on qualifying interest income and capital gains derived by non-resident individuals and companies has been reduced from 15% to zero. The former 15% withholding tax was applicable from 1 January 2006 on payments by banks, stock brokers and intermediary institutions. The rate reduction does not cover resident investors. However, it is expected that, under the authority given by the Act, the Council of Ministers will reduce the withholding tax rate on payments to residents to 10%.

Interest

According to the new provisions, effective from 7 July 2006, the income withholding tax rate on interest income of non-residents from the following securities has been reduced to zero:

-		Turkish government bonds and debentures issued on or after 1 January 2006; and
-		bonds and debentures issued by companies on or after 1 January 2006

Interest from bank accounts and repo transactions remains subject to the 15% income withholding tax.

The final rate structure for interest income of non-residents is as follows:

A rate of 0% applies to

-		interest on Turkish government bonds and debentures issued before 1 January 2006 (including those issued abroad);
-		interest on Turkish government bonds and debentures issued on or after 1 January 2006 (including those issued abroad);
-		interest on bonds and debentures issued by companies on or after 1 January 2006; and
-		interest on credit contracts paid to foreign states, international institutions or to foreign banks and other financial institutions.

A rate of 10% applies to:

-		other loan interest; and
-		interest on debentures issued by companies before 1 January 2006

A rate of 15% applies to:

-		interest on deposit accounts;
-		profit shares received from interest-free loans;
-		profit shares received from profit/loss partnership certificates; and
-		income from repo transactions concerning government bonds and debentures

Capital gains

Under Act 5527, the 15% withholding tax applied by banks, stock brokers and intermediary institutions on the capital gains derived by non-residents from the disposal of securities (shares and bonds) and certain capital market instruments is reduced to zero with effect from 7 July 2006. Accordingly, gains from the sale of the following securities are not subject to withholding tax:

-		shares and other capital market instruments, such as profit/loss certificates, acquired on or after 1 January 2006; and
-		bonds and debentures issued on or after 1 January 2006

Capital gains from investment funds and investment partnerships to be subject to income withholding tax

Under Act 5527, capital gains derived from the disposal of participation shares of investment funds and investment partnerships will be subject to income withholding tax with effect from 1 October 2006. The new regime will be applicable for both resident and non-resident investors. Currently, such gains are exempt from withholding tax.

Under the Act, withholding tax rate is set at 15%. According to a ministerial press release, however, the rate will be reduced to 10% under the authority given by the Act to the Council of Ministers. If participation shares of investment funds (at least 51% of the portfolio must be made of stocks quoted on the Istanbul Stock Exchange) are held for more than 1 year, gains derived from the sale of such shares will be exempt from withholding tax.

Income withholding tax rate on dividends increased

By way of Decree No. 2006/10731 (Official Gazette of 23 July 2006), the Council of Ministers increased the withholding tax rate on dividends from 10% to 15%.

Accordingly, with effect from 23 July 2006, dividend payments by resident companies to resident and non-resident individuals, and non-resident companies without a permanent establishment in Turkey, are subject to 15% income withholding tax. Income withholding tax rate applied to the branch profits transferred to the head office by Turkish permanent establishments of non-residents has also been increased from 10% to 15%.