When Liquidation Turns into a Tax Question: Tax Consequences of Closing a Turkish Company
I. Introduction
When foreign shareholders decide to close a Turkish company, the discussion often starts with corporate law: a resolution is adopted to dissolve the company, a liquidator is appointed and the entity formally enters into liquidation. For a solvent company, these are deliberate, strategic choices. What is less visible at the outset is the tax consequences of closing a Turkish company, since the real impact of liquidation is often determined by tax: how profits and losses during liquidation are treated, how distributions are characterized and what must be done before funds can be transferred abroad.
A company that is “in liquidation” remains a taxpayer until it is deleted from the trade registry and deregistered with the tax office. Under Corporate Tax Law No. 5520, the ordinary financial year is replaced by a “liquidation period” and the company continues to be subject to corporate income tax until the process is completed. The disposal of assets can trigger VAT under VAT Law No. 3065 and, in some cases, other transaction taxes.
Amounts paid to shareholders at the end of the process have to be separated into a return of paid-in capital and liquidation surplus, with different consequences for dividend withholding tax and, where relevant, double tax treaty relief. Banks and tax offices will look closely at how these elements have been documented before allowing significant transfers out of Turkey.
The legal framework and procedural steps of liquidation under the Turkish Commercial Code – from the shareholders’ resolution to the final deletion from the trade registry – are examined in our separate analysis on company liquidation in Turkey for foreign shareholders. Building on that background, the focus here is on the tax dimension: how liquidation is viewed from a Turkish tax perspective, which issues tend to be sensitive in practice and what foreign shareholders should pay particular attention to when planning an exit.
II. Tax Position of a Company in Liquidation
2.1. Liquidation and the Company’s Tax Status
Putting a company into liquidation does not turn off its tax obligations. Under Corporate Tax Law No. 5520, Article 17, once a company enters liquidation the ordinary accounting period is replaced by a “liquidation period”, and the company continues to be treated as a corporate income taxpayer until liquidation is completed and the entity is deregistered. During this time, it remains subject to corporate income tax, VAT and, where relevant, withholding and other taxes in much the same way as an operating company.
From a technical point of view, liquidation is therefore not a tax-free wind-down but a distinct tax phase. The company must continue to keep proper books, issue invoices where necessary and file all required returns. Profits realized in liquidation – for example, through the sale of assets or the collection of receivables – feed into the calculation of liquidation profit and are taxed as corporate income. The fact that the company has ceased its ordinary business does not prevent new tax liabilities, assessments, penalties or interest from arising, and all of these become part of the liquidation accounts that the liquidator must manage.
If the liquidation spans more than one calendar year, each year (or part of a year) is treated as a separate liquidation period for tax purposes. Where the overall result of liquidation is a loss, Article 17 allows earlier periods to be corrected so that excess corporate tax paid in those periods can be refunded. In other words, the tax system looks at both interim results and the final outcome of liquidation.
For foreign shareholders, the practical message is straightforward: liquidation does not mean tax drops quietly into the background. Until the company is fully closed from a tax perspective, it can still generate new obligations and compliance work, and these must be resolved before any final distribution of value.
2.2. Two Layers of Tax Consequences of Closing a Turkish Company: Company vs. Shareholder
Within this framework, it is useful to distinguish between two layers of taxation.
The first layer is the company’s own tax position during liquidation. Corporate tax rules continue to apply to profits and losses realised while the company is being wound up, based on the liquidation profit concept in Article 17 of the Corporate Tax Law. VAT and, where applicable, stamp tax or other transaction taxes still apply to supplies and documents issued in this period. These issues are dealt with at company level and are reflected in the interim and final liquidation balance sheets.
The second layer concerns what happens when value is finally returned to the shareholders. Here, Turkish practice makes an important distinction between the return of paid-in capital and amounts distributed above that level. In simplified terms, repaying capital is not regarded as a profit distribution, whereas the excess is treated as liquidation surplus. For non-resident shareholders, this surplus is generally viewed as dividend-type income and may be subject to withholding tax under Income Tax Law No. 193, Article 94/6-b, at the dividend rate in force at the time of distribution – currently 15% following recent presidential decisions – subject to any reduction available under a double taxation treaty.
This distinction between capital and surplus is not just theoretical. It determines whether, and to what extent, withholding tax applies to the amounts that shareholders actually receive at the end of liquidation, and it shapes how banks and tax authorities view cross-border transfers of those funds. Getting it right requires a clear final balance sheet and a consistent narrative across corporate, tax and banking documentation.
III. Liquidation Distributions to Shareholders
3.1. Return of Capital and Liquidation Surplus
Once creditors and taxes have been paid, whatever is left in the company belongs to the shareholders. Under the Turkish Commercial Code, paid-in share capital is returned first; only the balance, if any, is treated as surplus and distributed as profit. In tax terms, this distinction is crucial. The part that corresponds to the shareholder’s paid-in capital is a return of capital and is not regarded as taxable income. The part that exceeds capital is liquidation surplus and, as a rule, is treated like a dividend.
In straightforward cases, this is easy to see. In practice, years of capital increases, in-kind contributions, retained earnings, losses and reserve movements can make the picture less clear. Before any payment is made, the final liquidation balance sheet should therefore show, in a way that can be explained to the tax office and the bank, how much of the net assets represents paid-in capital and how much represents accumulated profit.
3.2. Withholding Tax and Documentation for Foreign Shareholders
Under Income Tax Law No. 193, Article 94/6-b, amounts treated as dividends are generally subject to withholding tax, currently 15% under the latest presidential decrees, unless an exemption or reduced treaty rate applies. For foreign shareholders, this usually means that:
- the return of capital portion of a liquidation payment is made without withholding; and
- the surplus portion is treated as dividend-type income and may be subject to withholding at 15%, potentially reduced under a double taxation treaty if the conditions and documentation requirements are satisfied.
From a practical standpoint, what matters is that the accounting, the shareholders’ resolution and the tax filings all tell the same story. The final balance sheet should separate capital and surplus; the resolution should reflect that breakdown; and the withholding returns and payment records should match. Turkish banks will often ask for this package before executing significant cross-border transfers of liquidation proceeds. When these pieces are consistent, repatriating funds is usually a technical step. When they are not, the discussion about rates and documentation tends to begin at the bank counter rather than at the planning stage.
IV. Capitalized Profits and Conflicting Interpretations
The distinction between capital and surplus becomes more delicate where past profits or reserves have been added to capital before liquidation. Turkish tax law contains the rule that adding profit to capital is not treated as a profit distribution in Article 94/6-b of Income Tax Law No. 193. The question is what happens years later, when that capital is finally returned to shareholders as part of liquidation.
4.1. Revenue Administration’s Approach
In several private rulings, the Turkish Revenue Administration has taken a substance-over-form view. In summary, the Administration stated that:
- offsetting past losses against past profits or legal reserves during liquidation does not amount to a profit distribution and therefore does not trigger dividend withholding; but
- amounts that were previously capitalized (for example, past years’ profits or certain reserves that were added to share capital) should be regarded as profit distributions when they are ultimately paid out to shareholders on liquidation, and therefore subject to withholding tax according to the recipient’s status.
The logic is that capitalization defers taxation: profits are not taxed as dividends when they are added to capital, but when the company’s life ends and those amounts are finally paid out, they are treated as dividends at that point. It should be noted that these private rulings are formally binding only for the taxpayer who requested them, but they are an important indication of administrative practice and are often relied upon by tax inspectors in audits.
4.2. The Council of State’s Approach (High Court Precedent)
The Council of State has taken a different view in its case precedents concerning this issue. The court mainly focuses on the wording and purpose of Article 94/6-b, and holds that once profits have been added to capital, they lose their character as distributable profit and become part of the company’s share capital. Returning that capital to shareholders in liquidation should therefore be treated as a return of capital, not as a dividend, and no withholding tax should be applied on that portion.
The Court emphasizes that the law expressly states that adding profit to capital is not a distribution, and that there is no separate provision that re-characterizes such capital as profit again at the liquidation stage. In its view, taxing capitalized profits upon liquidation would effectively introduce a new taxable event not clearly grounded in the statute.
V. Conclusion
For foreign shareholders, closing a Turkish company is not only a corporate law exercise. Once a liquidation decision has been taken, the way the process is handled from a tax perspective largely determines the real economic outcome of the exit. The company remains a taxpayer throughout the liquidation periods; profits and losses realized in that phase feed into liquidation profit under Corporate Tax Law No. 5520, and tax assessments, penalties or refunds all sit in the same liquidation accounts that the liquidator must manage.
At the shareholder level, the distinction between return of capital and liquidation surplus is central. It drives whether a final payment is treated as a simple repayment of investment or as dividend-type income subject to withholding tax and, where relevant, the constraints and protections of a double taxation treaty. Where past profits and reserves have been capitalized, the tension between Revenue Administration practice and the Council of State case law adds a further layer of complexity. In that environment, the quality of the final balance sheet, the consistency of the shareholder resolution and the accuracy of the tax filings become just as important as the headline numbers.
Approached early and in a structured way, liquidation can provide a clean and predictable exit from Turkey. Left to the end of the process or treated as a mere formality, the same liquidation can give rise to avoidable withholding, queries from the tax office and delays in repatriating proceeds.
