Investing in Turkey (2023): Gov Incentives & Economic Zones

Turkey’s Investment Incentives: Opportunities in 2023

Historically, Turkey has been gradually harmonizing its incentive system with that of the European Union’s Customs Union agreement, a process initiated in 1995. The government, in 2012, introduced a new investment-incentives scheme (NIS) with the dual aim of augmenting domestic production of intermediate goods and spreading industrial development more uniformly across the country. This move effectively nullified the classification methods of the previous incentives model launched in 2009 and established four distinct incentives categories. Each of these categories comes with a suite of key support measures, which are implemented differently based on the project’s location within one of Turkey’s six investment regions (known as Regions I–VI, with Region I being the most developed).

The NIS, most recently updated by the Investment Office of the Presidency in April 2022, features four incentive categories, each with its own benefits and criteria. The General incentives category offers customs duties and value-added tax (VAT) exemption on machinery and equipment expenditures. It applies to all regions, demands a minimum fixed investment amount, and allows for income tax withholding on the portion of labour wages corresponding to the legal minimum wage if the investment is made in Region VI. The minimum fixed investment amounts for this category range from TL1.5m to TL3m, depending on the investment location and industry.

The Regional incentives category provides exemption from customs duties and VAT, corporate-tax reduction, social-security-premium support for employers and employees, land allocation, property-tax exemption, and interest-rate discounting through a percentage-points system. This category is designed to address economic imbalances between regions by encouraging investment in less developed areas. It identifies sectors suitable for investment by analyzing the economic potential of each province and the scalability of projects within them. The minimum investment amounts for projects in each region are determined on a case-by-case basis.

The Project-based incentives category focuses on promoting customs duties and VAT exemption, tax reduction of up to 200% of investment expenditures, social-security-premium support for employers and employees, cash support for employment and personnel training, income tax withholding support for ten years, and support of up to 50% of energy costs for up to ten years. It also offers interest-rate support for loans for up to ten years, capital support of up to 49% of investment expenditure, and land allocation for 49 years. To be eligible for this category, a minimum investment of TL1bn (US$53.8m) is required.

The Strategic incentives category promotes customs duties and VAT exemption, corporate-tax reduction equal to 50% of investment expenditures, social-security-premium support for employers and employees, land allocation, property-tax exemption, and interest-rate discounting of TL50m of 5% of the investment. This category encourages import substitution by fostering investments in the local production of high-value-added intermediate or final goods that have high import dependence. A minimum investment of TL50m is required for this category.

The NIS gives preference to projects that aim to produce high value-added, medium-high- or advanced-technology products, especially those listed on the “Priority Product List” of the Ministry of Industry and Technology. This focus on technology is reflected in the Project-based category of incentives introduced by Presidential Decree 1402 of 2019, associated with the government’s new Technology-Focused Industry Move Program. This program forms an essential part of Turkey’s 11th Development Plan for the years 2019–23 and replaces the earlier “large-scale” investment category within the NIS, which provided similar benefits but did not specifically target technology.

The central contractual document at the transaction level is the investment-incentive certificate, which encompasses the details agreed upon by all parties involved in an investment. The New Investment Incentives Scheme (NIS) primarily targets investment initiatives within the aerospace, aviation, biochemical, and defence sectors, applying equally to both foreign and domestic investors.

In 2016, the government introduced two additional incentive schemes designed to work in conjunction with the NIS. The first, established under Law 6745/2016, is known as the Super Incentives program, which implements project-based incentives for significant eligible investments (specifically those valued at no less than US$100m). This scheme offers a variety of around twelve different tax incentives, including customs tax, VAT, and corporate income tax exemptions. It also includes support for the employer’s portion of social-security-premium taxes, land allocation, guaranteed public procurements, and contributing 50% of a project’s energy expenditures for up to ten years. Investors interested in this scheme may apply directly to the Ministry of Trade. The second scheme, termed the Centres of Attraction program, aims to direct investment to 23 provinces in the less developed eastern and southeastern regions of Turkey.

Since the onset of the Covid-19 pandemic in early 2020, the government has implemented measures to help insulate businesses from the detrimental economic consequences. As of March 2021, the complete fiscal support scheme amounted to TL638bn (12.7% of GDP), of which around TL165bn (3.3% of GDP) consisted of direct “on-budget” measures. These measures encompassed loan guarantees from state-owned banks to small- and medium-sized enterprises and households, deferred loan services from state-owned banks, tax deferrals for businesses in various sectors such as automotive, steel, transport, retail, accommodation, food and drink, and textiles, equity injections into public banks, and a short-term work-allowance scheme. As of the end of October 2022, almost all of these programs had expired.

The Credit Guarantee Fund (Kredi Garanti Fonu—KGF) is an investment mechanism providing credit support to small and medium-sized enterprises (SMEs). Established in 1993, it was designed to assist SMEs, which often struggle to secure credit through the banking system due to the informal structure of many such businesses. The KGF has been accumulating capital and finalizing guarantee protocols with banks, leasing companies, and other counterparties for over two decades. The KGF’s primary shareholders are TOBB (Union of Chambers and Commodity Exchanges of Turkey) and KOSGEB (Small and Medium Enterprises Development Organization of Turkey), each owning just over 28% of shares, with most of the remaining shares held by Turkish banks. The KGF offers credit guarantees to financial institutions and other relevant corporations, including Turkish Eximbank, with its products encompassing guarantees on bank and direct loans backed by its own equity, as well as export, investment, and employment-support packages backed by the Turkish Treasury.

Regional Incentives

The new investment-incentives scheme (NIS) categorizes the country’s 81 provinces and two islands, Bozcaada and Gokceada, by their level of socio-economic development, arranging them into the following six regional groups from most developed to least developed:

• Region I: Ankara, Antalya, Bursa, Eskisehir, Istanbul, Izmir, Kocaeli, Mugla, and Tekirdag.
• Region II: Aydin, Balikesir, Bilecik, Bolu, Canakkale, Denizli, Edirne, Isparta, Karabuk, Kayseri, Kirklareli, Konya, Manisa, Sakarya, and Yalova.
• Region III: Adana, Burdur, Duzce, Gaziantep, Karaman, Kirikkale, Kutahya, Mersin, Rize, Samsun, Trabzon, Usak, and Zonguldak.
• Region IV: Afyonkarahisar, Aksaray, Amasya, Artvin, Bartin, Corum, Elazig, Erzincan, Hatay, Kastamonu, Kirsehir, Malatya, Nevsehir, and Sivas.
• Region V: Bayburt, Cankiri, Erzurum, Giresun, Gumushane, Kahramanmaras, Kilis, Nigde, Ordu, Osmaniye, Sinop, Tokat, Tunceli, and Yozgat.
• Region VI: Adiyaman, Agri, Ardahan, Batman, Bingol, Bitlis, Diyarbakir, Hakkari, Igdir, Kars, Mardin, Mus, Siirt, Sanliurfa, Sirnak, and Van.

The amount of tax reduction on profits from investments made under the NIS is determined by the established contribution-to-investment and tax-reduction percentages. With the regional and large-scale investment incentives schemes (refer to General incentives), these percentages increase from Region I to Region VI. For instance, in the regional scheme, the contribution-to-investment and tax-reduction rates escalate from 15% and 50% in Region I to 50% and 90% in Region VI, respectively. It’s crucial to acknowledge that the timeline of when the support measure’s contribution-to-investment is applied—either before or after the project’s completion—varies by region. Therefore, investments in Region I, the most developed region, will only reap benefits post-completion. Conversely, in Region VI, the least developed region, 80% of the contribution-to-investment is delivered upfront.

Support measures regarding interest and social-security premiums also escalate from Region I to Region VI. For instance, the support duration for the employer’s share of social-security payments (outside organized industrial zones) extends from two years in Region I to ten years in Region VI. Similarly, the interest-rate reduction on local-currency loans increases from zero points in Region I to seven points in Region VI.

Under the strategic scheme, regional rankings don’t apply, and support measures are consistent throughout. For example, the contribution-to-investment rate for tax reduction on strategic investments is a flat 50%, and the interest-rate reduction on local-currency loans is five points.

In 2016, the government rolled out an additional location-focused incentive scheme, the Center of Attraction program, to lure investment into 23 provinces in the country’s underdeveloped eastern and southeastern regions. Industrial, call centre, and data storage centre investments exceeding TL2m and situated in these regions are eligible for various supports, such as land allocation, building construction, energy supply, and interest-free investment loans, provided the investor promises to generate at least 30 jobs. The exact criteria vary depending on the sector involved in the project. Interested investors can apply to the Development Bank of Turkey or the regional development agencies.

Export Driven Incentives & Zones

In Turkey, there are three categories of special investment zones: technology development zones (TDZs), organized industrial zones (OIZs), and free-trade zones (FTZs). The main objective of these zones is to promote economic growth by fostering the clustering of investments in designated areas with special investment privileges.

Technology Development Zones (TDZs)

Technology Development Zones (TDZs) are special economic zones in Turkey that aim to support research-and-development (R&D) activities and attract investments to high-tech fields. There are currently 63 fully operational TDZs in Turkey, with another 21 under construction. The TDZs offer a number of benefits to investors, including:

• Tax exemptions: Revenues derived from software development and R&D activities are exempt from income and corporate taxes until December 31st 2023. Sales of application software produced exclusively in TDZs are also exempt from value-added tax (VAT) until December 31st 2023. In addition, the salaries of R&D and support personnel employed in the zone are exempt from all taxes until December 31st 2023, but the number of support personnel covered by the exemption may not exceed 10% of the R&D workers.
• Customs duty exemption: Imported R&D-related products are exempt from customs duty.
• Social security premium support: The government pays 50% of the employer’s share of the social-security premium for 5 years, until December 31st 2023.

Organized Industrial Zones (OIZs)

Organized Industrial Zones (OIZs) are special economic zones in Turkey that are designed to provide companies with ready-to-use infrastructure to facilitate their operations. There are currently 353 OIZs in Turkey, with 258 operational and 95 under construction.

The OIZs offer a number of benefits to investors, including:

• No VAT on land purchases: Investors who purchase land in an OIZ are not required to pay VAT.
• Exemption from real-property duty: Investors are exempt from real-property duty for 5 years after the construction of the plant.
• Low water, natural gas, and telecoms costs: The cost of water, natural gas, and telecoms services in OIZs is typically lower than in other parts of Turkey.
• Exemption from tax on unification and/or separation of plots: Investors are exempt from tax on unification and/or separation of plots in an OIZ.
• Exemption from municipality tax for construction and use of the plant: Investors are exempt from municipality tax for the construction and use of the plant in an OIZ.
• Exemption from municipality tax on solid waste: If the OIZ does not use the municipality’s sanitation services, investors are exempt from municipality tax on solid waste.
• Free land allocation program: In the provinces of Karabuk, Kirikkale, Samsun, and Zonguldak, the government sponsors a free land-allocation program for investors in the local OIZs.

The OIZs are a valuable resource for businesses that are looking to set up or expand their operations in Turkey. The benefits offered by the OIZs can help to reduce the cost of doing business and to attract top talent to the region.

Free-trade zones (FTZs)

Free-trade zones (FTZs) were established with the aim of promoting investments in businesses focused on exports. As of the end of October 2022, the Investment Office of the Presidency reported that there were 18 operational FTZs in Turkey, with one more under development. These zones are primarily situated in coastal regions, strategically located closer to export markets. FTZs are considered to be beyond the customs jurisdiction of Turkey, resulting in partial exemption from the commercial regulations that apply within the customs area. Investing in FTZs offers several advantages, including:

• 100% exemption from customs duties and various other duties.
• 100% exemption from corporate income tax for manufacturing companies.
• 100% exemption from value-added tax (VAT) and special consumption tax.
• 100% exemption from real-estate tax.
• 100% exemption from income tax on employees’ salaries for companies that export at least 85% of the free-on-board value of goods produced in the FTZs.
• No limitations on the duration goods can remain within FTZs.
• No restrictions on the transfer of profits from FTZs to destinations abroad or within Turkey.