Primetax Guide: Controlled Foreign Corporation (CFC) Regime in Türkiye

1. When does the Turkish CFC regime apply?

Article 7 of Corporate Tax Law No. 5520 applies where Turkish-resident individuals and/or corporations directly or indirectly control a foreign entity and the foreign entity also satisfies three financial tests. The conditions are cumulative. A foreign company is not brought within the CFC regime merely because it is low-taxed, and a 50% ownership interest alone does not create a CFC inclusion.

In broad terms, the following four tests must be satisfied:

• Control: Turkish-resident individuals and/or corporations hold, directly or indirectly and separately or together, at least 50% of the foreign company’s capital, profit entitlement or voting rights.

• Passive income: at least 25% of the foreign company’s gross revenue consists of passive income.

• Low tax burden: the foreign company bears an overall income/corporate-type tax burden of less than 10% on its commercial balance-sheet profit under the statutory calculation.

• Gross revenue: the foreign company’s annual gross revenue exceeds the foreign-currency equivalent of TRY 100,000.

Only if all of these conditions are met does the CFC inclusion mechanism apply. This sequence matters in practice: each foreign subsidiary should be screened against the control test first and, where that test is met, the three financial conditions should then be documented.

2. The control test

Direct, indirect and collective control

A foreign company is controlled for Article 7 purposes if at least 50% of its capital, profit share or voting rights is held directly or indirectly by Turkish-resident individuals and corporations, separately or collectively. The test is therefore broader than a simple legal ownership test by one Turkish parent company.

Holdings of different Turkish-resident taxpayers are aggregated for the control test, and the taxpayers do not need to be related to each other. Indirect ownership is also traced through multiple tiers. A Turkish company with a 30% indirect interest can therefore participate in the control of a foreign company where another Turkish-resident person holds a further 20%, even though neither person individually holds 50%.

Highest percentage during the accounting period

For determining whether the 50% control threshold is met, the highest ownership, profit-entitlement or voting-right percentage held at any time during the foreign company’s accounting period is taken into account. A temporary reduction below 50% at year-end does not, by itself, erase the fact that control existed earlier in the period.

There is, however, an important exception in the Corporate Tax General Communiqué. If the entire participation in the foreign company is genuinely disposed of before the end of the foreign company’s accounting period and the disposal is not artificial or collusive, the CFC rules do not apply to that foreign company for the period.

Control test and taxable share are different

The percentage used to establish control is not necessarily the percentage used to calculate the Turkish taxable inclusion. The control test looks to the highest percentage during the period, while the amount included in the Turkish corporate taxpayer’s tax base is calculated by reference to the participation percentage held at the end of the foreign company’s accounting period. This distinction should be built into any ownership-change analysis.

3. The passive-income test

The second substantive condition is that at least 25% of the foreign company’s gross revenue must consist of passive income. The test is applied to gross revenue, not to accounting profit.

The legislation and the Corporate Tax General Communiqué identify interest, dividends, rent, licence fees and securities-sale income as typical passive items. The list is not exhaustive. The underlying principle is that income from a commercial, agricultural or professional activity is treated as active only where that activity is carried on with capital, organisation and employees commensurate with the activity.

This substance element is important. An item that is described locally as trading or business income may still be treated as passive for Turkish CFC purposes if the foreign company does not have an operational structure proportionate to the activity generating the income.

The 25% threshold is a gateway, not a limitation on the taxable amount

Once the passive-income ratio reaches 25% and the other CFC conditions are also met, Article 7 does not tax only the passive portion. The foreign company’s relevant CFC profit is brought into the Turkish tax base in accordance with the shareholder’s applicable participation percentage. A foreign company with both active and passive income should therefore not assume that only the interest, dividend or royalty component is exposed.

Dividends received by the foreign company remain passive in character for this test even if the underlying subsidiary paying the dividend conducts an active business. This can be particularly relevant for foreign holding, treasury, IP and investment companies.

4. The low-tax and gross-revenue tests

Tax burden below 10%

The foreign company must bear an overall income and corporate-type tax burden of less than 10% on its commercial balance-sheet profit. The test is based on the statutory tax-burden formula rather than the headline corporate tax rate of the jurisdiction.

In simplified form, the tax burden is calculated by dividing the relevant accrued income/corporate-type taxes by the sum of distributable corporate income and those accrued taxes. Incentives, exemptions, tax holidays, special regimes and other features that reduce the actual tax burden can therefore matter even where the jurisdiction’s nominal rate is above 10%.

The calculation should be prepared from the foreign company’s actual figures for the relevant period and retained with the Turkish tax file. A country-level rate comparison is not a substitute for the Article 7 test.

Gross revenue above TRY 100,000 equivalent

The final threshold is annual gross revenue exceeding the foreign-currency equivalent of TRY 100,000. The statutory text retains the legacy wording “100,000 YTL”, but the amount is applied as TRY 100,000. The foreign-currency amount is translated using the Central Bank of the Republic of Türkiye buying rate applicable on the last day of the foreign company’s accounting period.

This threshold has remained nominal and is therefore very low for most operating or investment companies. In practice, it should not be treated as a meaningful materiality safe harbour unless the foreign entity has genuinely minimal revenue.

5. How the taxable CFC income is determined

Where all CFC conditions are met, the foreign company’s profit is included in the Turkish corporate shareholder’s tax base in proportion to the participation percentage applicable at the end of the foreign company’s accounting period. The inclusion is made in the Turkish accounting period that contains the month in which the foreign company’s accounting period closes.

The Corporate Tax General Communiqué describes the CFC amount as the foreign company’s pre-tax corporate profit after expenses and loss offsets, but before exemptions. If the foreign company has accumulated prior-year losses such that there is no distributable profit after the loss offset, there is no CFC profit to include for that period.

By contrast, a loss incurred by the foreign CFC cannot be deducted from the Turkish shareholder’s own taxable income. Article 7 is an income-inclusion rule; it does not import the foreign company’s losses into the Turkish tax base.

Capitalisation of profits does not prevent CFC taxation

A decision by the foreign company to retain or capitalise its earnings does not prevent the application of Article 7. The purpose of the regime is precisely to remove the Turkish tax deferral that would otherwise arise from leaving qualifying profits undistributed abroad.

Applicable Turkish tax rate

The CFC amount is included in the Turkish taxpayer’s corporate tax base and is taxed at the corporate tax rate applicable to that taxpayer and the relevant income. It is not subject to a separate 10% CFC tax rate. The 10% figure is only the foreign tax-burden threshold used to determine whether the foreign company falls within the regime.

6. Changes in ownership and disposals

Ownership changes during the year can produce different answers for control and for the amount ultimately taxed. The correct review therefore needs both a “highest percentage” schedule and a “period-end percentage” schedule.

For example, if Turkish residents collectively hold 60% of a foreign company for part of the year but the Turkish corporate shareholder holds only 20% at the foreign company’s year-end, the 60% level can satisfy the control test while the Turkish corporate shareholder’s includible share of CFC profit is determined by its relevant year-end interest. The detailed result depends on the actual direct and indirect ownership chain.

If all of the relevant participation rights are genuinely sold before the foreign company’s accounting period closes, the Communiqué permits the CFC regime not to apply for that period. A temporary or artificial disposal designed only to interrupt the year-end holding should not be relied on. Documentation of the commercial purpose, consideration, purchaser and post-sale ownership is therefore important where a disposal occurs close to period-end.

7. Foreign tax credits and later profit distributions

Foreign taxes paid by the CFC

Corporate Tax Law Article 33 allows income and corporate-type taxes paid by the foreign CFC in the country where it is resident to be credited against the Turkish corporate tax calculated on the CFC income, subject to the statutory foreign-tax-credit limits and documentation requirements.

The Corporate Tax General Communiqué draws a narrower line for taxes suffered outside the CFC’s country of residence. A withholding tax paid in a third country on income received by the CFC is not, under the specific CFC credit mechanism, treated in the same way as the income or corporate tax paid by the CFC in its own country. The credit analysis should therefore distinguish the jurisdiction and legal nature of each foreign tax.

Later dividend distribution

If profits already taxed in Türkiye under the CFC regime are later distributed as dividends, the previously taxed portion is not taxed again under Article 7. Where the dividend exceeds the amount previously subjected to Turkish CFC taxation, the excess is dealt with under the normal Turkish rules applicable to foreign dividends.

Groups should therefore maintain a CFC-taxed earnings ledger by entity and year. Without that record, it can be difficult several years later to demonstrate what portion of a dividend has already been taxed in Türkiye and what portion remains subject to ordinary dividend rules.

8. Turkish-resident individual shareholders

The CFC regime is not relevant only to corporate groups. The 50% control test in Corporate Tax Law Article 7 expressly takes into account interests held by Turkish-resident individuals as well as Turkish-resident corporations. Those interests can be combined for purposes of determining whether the foreign company is controlled.

For a Turkish-resident individual, the taxation mechanism is found in Article 75 of the Income Tax Law. Where the Article 7 conditions are satisfied, the individual’s share of the foreign company’s qualifying income is treated as deemed dividend income in the year containing the end of the foreign company’s accounting period, even if the profit has not actually been distributed.

The individual’s annual filing position, any available foreign-tax credit and the treatment of a later actual distribution should therefore be reviewed separately under the Income Tax Law. The fact that an individual shareholder’s interest is also counted in a corporate shareholder’s CFC control test does not mean that the individual’s income is taxed through the corporate shareholder.

9. Treaties, participation exemption and global minimum tax

Double-tax treaties

The Corporate Tax General Communiqué states that Türkiye’s double-tax treaties do not prevent Türkiye from applying its CFC rules to its own residents merely because the foreign company is resident in a treaty country. The CFC inclusion arises before an actual dividend is paid. When the foreign company later makes an actual distribution, the treaty provisions on dividends and elimination of double taxation become relevant in the normal way.

Foreign participation exemption

CFC taxation and the foreign participation exemption are separate mechanisms and should not be conflated. Article 7 determines whether undistributed foreign profit is currently taxable in Türkiye. Article 5/1-b governs the treatment of an actual foreign dividend received by a Turkish corporate shareholder.

For 2026, Presidential Decision No. 11257 changed the simplified foreign participation exemption route under Article 5/1-b: where the Turkish corporate shareholder holds at least 20% of the foreign company and the statutory repatriation condition is met, the exemption rate under that route is 80%. These rules do not replace the CFC test. Where the same earnings have previously been taxed under Article 7, the subsequent distribution must be reconciled with the Article 7 anti-double-taxation mechanism and the applicable participation-exemption rules.

Global minimum tax / Pillar Two

Large multinational groups within Türkiye’s global minimum tax regime must also consider the interaction between CFC tax and Pillar Two. The local and global minimum tax rules introduced into the Corporate Tax Law operate separately from Article 7 and do not repeal the Turkish CFC regime.

Under the Turkish Pillar Two framework, tax arising at shareholder level under a CFC regime can be allocated to the relevant CFC as a covered tax for GloBE purposes, subject to the detailed allocation rules and the limitation applicable to passive income. For groups within the EUR 750 million consolidated-revenue threshold, the CFC computation should therefore be coordinated with the global minimum tax workstream rather than analysed in isolation.

10. Practical review and documentation

A reliable CFC review should be performed entity by entity and period by period. The following sequence is generally the most efficient:

• Map all direct and indirect ownership interests held by Turkish-resident individuals and corporations, including changes during the foreign company’s accounting period.

• Determine the highest capital, profit-entitlement and voting-right percentages during the period and the relevant participation percentage at period-end.

• Break down gross revenue between passive and active categories and retain evidence of the foreign company’s employees, functions, assets and operational substance.

• Calculate the foreign tax burden using the Article 7 / Article 5 methodology rather than relying on the jurisdiction’s headline tax rate.

• Confirm the gross-revenue threshold using the CBRT buying rate at the foreign company’s period-end.

• Calculate the foreign company’s includible pre-tax profit, taking account of its own allowable loss carryforwards but not Turkish shareholder losses.

• Prepare the foreign-tax-credit computation and retain evidence of the taxes paid in the CFC’s country of residence.

• Maintain a schedule of profits already taxed under the CFC regime so that later dividends can be reconciled without double taxation.

• For Turkish-resident individual shareholders, review the deemed-dividend and annual income tax return consequences separately.

• For multinational groups within Pillar Two, reconcile the CFC tax with the group’s covered-tax allocation and top-up tax computations.

The annual review should not be limited to entities in obvious low-tax jurisdictions. Foreign holding companies, financing vehicles, IP companies and investment entities can fall within Article 7 even in jurisdictions with relatively high headline tax rates if exemptions or special regimes reduce the effective tax burden and passive income exceeds the statutory threshold.

Equally, a foreign company should not be labelled a CFC solely because it is established in a low-tax country. The Turkish analysis remains a factual, four-test exercise. A documented failure of any one of the cumulative conditions is sufficient to take the foreign company outside Article 7 for the relevant period.