An overview: geography and population

The Republic of Turkey is situated at the geographic crossroads of Europe and Asia. Turkey shares European borders with Greece and Bulgaria and neighbors Syria, Iraq, Iran, Azerbaijan, Armenia and Georgia in Asia. It is surrounded by seas on three sides. The Black Sea forms its northern coastline and links Turkey with Southeastern Europe, Russia and the Caucasus. The Aegean Sea borders its western coastline and channels through Europe. The Mediterranean Sea borders its southern coastline and ties Turkey with the Middle East and North Africa.

Turkey is also positioned at the intersection of strategic trade routes on three continents. Istanbul is a major regional air hub connecting passengers within a four-hour flight radius to capital cities in Europe, Western and Central Asia, the Middle East and Africa.

Turkey is a member of the OECD, WTO and NATO and has been a European Union accession candidate since 2005.

Turkey is home to the second largest population in Europe. According to TURKSTAT, the population of Turkey in 2018 is approximately 82 million people. Nearly three quarters of the population is between the ages 15 to 64, with a median age of 32, ten years lower than that of the European Union.

Economic overview

Introduction

A largely free-market economy with a combination of traditional agriculture, modern industry and a dynamic services sector, Turkey’s economy is one of the largest in Europe and the MENA region. The IMF World Economic Outlook Database currently ranks Turkey as having the 17th highest GDP in the world as measured according to purchasing power parity.

Often viewed by investors as having a large, skilled and cost-effective workforce, the OECD ranks Turkey as the third largest labor pool among European Union member countries.

Main sectors

According to Ministry of Finance data, agriculture, industry and services are all key components of the Turkish economy, contributing roughly 3.3 percent, 22.2 percent and 66.4 percent respectively of the GDP. Manufacturing is driven by strong sectors such as automotive, textile and consumer goods. Turkey’s automotive industry is the 14th largest producer in the world. The services industry is driven by the financial services, telecommunications, construction, tourism and healthcare sectors. In particular, the real estate and construction sectors have been a strong target of foreign investment.

Energy

Turkey’s growing economy and the increasing demand for energy, which cannot be met by domestic energy resources, has resulted in a dependency on energy imports, primarily oil and gas. According to the International Energy Agency up to 87 percent of the oil resources and 99 percent of the gas resources used in Turkey are imported.

Approximately 25 percent of Turkey’s energy needs are met by its own resources notably hard coal, lignite reserves and hydro. In recent years, dependency on fuel imports and environmental concerns have led to a focus on renewable energy sources such as wind, solar and geothermal. In addition, integration of nuclear power into the Turkish energy mix has become a key aspect of the country’s plans for economic growth. Construction of the first of three planned nuclear power plants—the Akkuyu facility on the Mediterranean coast—began in April 2015.

Liberalization of the energy market, through privatization of production and distribution assets as well as market deregulation, has created significant investment opportunities in almost all components of the value chain for electricity, natural gas, oil and coal.

Turkey is a critical energy corridor facilitating the trade of oil and gas between the world’s crucial suppliers in Western Asia and the large consumer market in Europe. Several large pipeline projects are in operation or under development. Of significance are the Baku-Tbilisi-Ceyhan (BTC) crude oil pipeline which runs from the Caspian Sea to the Mediterranean passing through Azerbaijan, Georgia and Turkey, and the Trans-Anatolian Natural Gas Pipeline (TANAP) which will run from Azerbaijan through Turkey to Europe.

Investment figures to date

According to the World Bank, the total volume of Foreign Direct Investment (FDI) in Turkey exceeded US$144bn in the past decade. This is a remarkable increase considering that total FDI between 1974 and 2004 was US$19bn. In 2016, total FDI in equity capital amounted to US$6.9bn with 64 percent made via European countries and 29 percent made via Asian countries. The industrial sector accounted for 38 percent of FDI while the services sector accounted for 61 percent.

According to Central Bank data covering the period between 2002 and 2018, services (banking, insurance, telecommunications, wholesale and retail trade, etc.), manufacturing (food, beverages and tobacco, chemicals, computers electronic/electrical equipment, etc.) and energy have been the most attractive sectors for foreign investment.

Taxation

There are three general categories of taxes in Turkey: income taxes, taxes on wealth and taxes on expenditure. In addition, there are social security contribution requirements for both employers and employees.

Income taxes are applicable to real persons as well as corporations. While the corporate tax rate is flat, personal income tax is levied at progressive rates on an individual’s annual taxable income. As of the date of this publication, the corporate tax rate in Turkey is 22 percent and the highest rate for personal income tax is 35 percent.

Taxes on wealth include real property tax, motor vehicles tax, inheritance tax and gift tax. Real property tax ranges between 0.1 percent and 0.6 percent of the registered value of the real property. The rate of motor vehicles tax depends on the age and engine capacity of the vehicle. Inheritance and gift taxes are levied at a rate of 1 percent to 30 percent.

Taxes on expenditures include value added tax (VAT), special consumption tax, stamp tax and banking and insurance transaction tax (BITT). Unless there is a specific exemption, VAT is levied at a rate that varies between 1 percent and 18 percent on the purchase (including importation) of various goods and services. Special consumption tax applies to the sale of certain goods such as alcohol and tobacco. Please see Section V, Sub-section G for further details on taxes.

Social security contributions are calculated on the basis of monthly wages and are paid jointly by the employer and the employee. As of the date of this publication, the employer’s share is 22.5 percent and the employee’s share is 15 percent of monthly gross earnings, including salaries and bonuses, where gross earnings are capped at a monthly amount (currently 19,188 Turkish Lira). In addition, employers and employees are required to make contributions of 2 percent and 1 percent, respectively, of the employee’s gross salary to the unemployment insurance fund.

Turkey has several investment incentive programs which provide benefits and exemptions from one or more types of taxes. Eligibility for an incentive program depends upon the scale, geographical location and strategic nature of an investment.

The Parliament is the primary competent authority that imposes, amends and revokes tax obligations. The Parliament may also delegate to the President the right to set the rate, within the range specified by the relevant tax law. The Ministry of Finance implements tax laws and regulations.

Turkey is party to double-taxation treaties with many countries. These treaties prevent double taxation and allow cooperation between Turkey and other applicable tax authorities. Please see Section III, Sub-section B regarding Turkey’s international treaties.

Currency

Based on the official foreign exchange bid prices published by the Central Bank, as of September 30, 2019, exchange rates for the Turkish Lira are as follows:

5.64 Turkish Lira = 1 US$

6.16 Turkish Lira = 1 €

6.93 Turkish Lira = 1 £