Tax Exemption on Service Exports in Turkish Tax Law

Introduction

Export activities occupy a crucial position within the Turkish tax system due to their contribution to the country’s foreign trade balance and inflow of foreign currency. In recent years, alongside the traditional concept of goods exportation, the notion of service exportation has gained increasing importance. Particularly in fields such as information technologies, software, consultancy, and other professional services, various tax exemptions have been introduced for taxpayers engaged in cross-border activities.

Within Turkish tax legislation, service export regulations encompass specific exemptions and deductions under both Value Added Tax (VAT) and Income/Corporate Tax. This article provides an in-depth legal evaluation of the key aspects of service exports under Turkish tax law.

The Concept of Service Exportation

Service exportation refers to an economic activity where a taxpayer resident in Turkey performs a service within Turkey, but the benefit of such service is enjoyed abroad. The decisive element here is that the service is rendered domestically, yet its economic utility materializes outside Turkey.

For instance, when a Turkish software company develops a program and sells it to a foreign entity, or when consultancy services provided in Turkey are utilized by an investor abroad, such transactions fall within the scope of service exports. The Turkish Revenue Administration has consistently clarified through private rulings that the principal condition of service export is that the service must be utilized abroad.

VAT Exemption for Service Exports

Pursuant to Article 11/1-a of the Value Added Tax Law, export deliveries and related services are exempt from VAT. Article 12/2 further defines service exportation. According to the legislation, a service qualifies as an export if the following cumulative conditions are met:

The service is performed in Turkey,

The service is utilized abroad,

The service is provided for a customer located abroad,

The consideration is remitted to Turkey in foreign currency.

The critical factor in the VAT exemption is that although the service is executed in Turkey, its economic impact must be realized abroad. For example, if a report prepared in Turkey is used by a company outside the country, it qualifies for VAT exemption. Conversely, if the benefit of the service arises in Turkey, the exemption does not apply.

Income and Corporate Tax Exemption

Under Article 10/1-(ğ) of the Corporate Tax Law No. 5520 and Article 89 of the Income Tax Law No. 193, a portion of the earnings derived from service exports may be deducted from the tax base. Accordingly, 80% of the profits obtained from services rendered in Turkey but exclusively utilized abroad can be deducted when calculating the corporate tax base.

For the deduction to apply, the following conditions must be satisfied:

The service must fall within designated categories, such as architecture, engineering, design, software, medical reporting, bookkeeping, call centers, product testing, certification, data storage, data processing, and data analysis,

The service must be provided to a foreign customer,

The benefit of the service must accrue exclusively abroad,

The payment must be transferred into Turkey.

This scheme provides a substantial advantage, particularly for sectors such as software, IT, call centers, design, engineering, education, health tourism, and consultancy. Companies operating in Turkey but servicing foreign markets benefit from an 80% corporate tax deduction, significantly reducing their effective tax burden.

Practical Challenges in Application

Although the legal framework sets forth explicit provisions, certain ambiguities arise in practice. A key challenge concerns the determination of whether the service is indeed utilized abroad, which often becomes a subject of dispute during tax inspections.

The Revenue Administration denies the exemption if the service is found to have been enjoyed in Turkey, which exposes taxpayers to the risk of additional tax assessments and penalties. Likewise, the Council of State (Danıştay) has underscored in its rulings that the actual place where the service results are utilized is decisive, and the exemption only applies if the outcome of the service emerges abroad.

Accordingly, it is of critical importance for taxpayers to explicitly demonstrate in their contracts and invoices that the service has been utilized abroad.

Service Exports in the Software and IT Sector

The rapid growth of the software and IT industry in Turkey has magnified the relevance of service export exemptions for these sectors. Software companies that supply their products or services to foreign entities benefit from both VAT exemptions and corporate tax deductions.

Particularly in fields such as cloud-based software services, mobile application development, and game software, Turkish enterprises leverage these incentives to strengthen their competitive position in international markets.

Economic and Legal Implications of Service Export Exemptions

Tax exemptions on service exports enhance Turkey’s competitiveness in the global service trade and encourage foreign investors to procure services from Turkey. Moreover, when combined with the young entrepreneur incentive, these exemptions create significant advantages for entrepreneurs below a certain age threshold who export services.

For taxpayers, the reduction in the overall tax burden stimulates growth and employment within service industries, thereby generating broader economic benefits.

Conclusion

Tax exemptions granted to service exports under Turkish tax law provide major advantages from both VAT and corporate tax perspectives. Promoting service exports holds strategic importance for strengthening Turkey’s competitiveness in the global economy.

Nevertheless, correct assessment of the statutory requirements and substantiating that the service is utilized abroad remain crucial for benefitting from the exemptions. Taxpayers engaged in service exports should carefully review the applicable legislation, ensure that their contractual and invoicing practices clearly demonstrate the foreign use of services, and seek professional legal or tax consultancy where necessary.