Franchise Fees, Royalties and Taxation in Turkey: A Comprehensive Legal Guide

Introduction

Financial provisions are among the most important and frequently disputed parts of a franchise agreement. A franchise relationship may involve an initial entry fee, continuing royalties, advertising contributions, technology charges, training expenses, supply-chain mark-ups, renewal fees and transfer fees. Each payment may have a different contractual purpose and may be treated differently for Turkish tax purposes.

A payment described in a franchise agreement as a “service fee” will not necessarily be treated as a service fee by the Turkish tax authorities. Its actual legal and economic nature will be examined. A payment made for the right to use a trademark, business system, confidential know-how or commercial formula may be classified as a royalty or payment for an intangible right, regardless of the terminology used by the parties.

This distinction is particularly significant in international franchise arrangements. Payments made by a Turkish franchisee to a foreign franchisor may be subject to Turkish withholding tax, value-added tax under the reverse-charge mechanism and applicable double taxation treaty provisions. The Turkish franchisee may also need to evaluate whether the payment is deductible, whether it must be capitalised and whether transfer-pricing documentation is required.

The general corporate tax rate applicable to ordinary corporate taxpayers in Türkiye is 25% for the 2026 accounting period. A 30% rate applies to certain financial-sector entities, but ordinary franchise companies will usually fall within the general 25% regime.

Since 2025, Türkiye has also applied a domestic minimum corporate tax regime. Subject to statutory exclusions and adjustments, the corporate tax calculated by covered taxpayers may not be less than 10% of corporate income before certain exemptions and deductions. Newly established companies are generally excluded from this domestic minimum tax for their first three accounting periods.

For these reasons, franchise fees and royalties should not be negotiated solely from a commercial perspective. The parties should determine the tax classification, invoice structure, withholding mechanism and net payment amount before signing the agreement.

This guide explains how franchise fees, royalties and related payments are taxed in Türkiye and identifies the contractual provisions that foreign franchisors and Turkish franchisees should consider.

What Payments Are Commonly Made Under a Franchise Agreement?

A franchise agreement may require several different types of payment. They should be listed separately rather than combined under a single general heading.

The most common payments include:

• An initial franchise or entry fee;
• Periodic royalty payments;
• Marketing and advertising contributions;
• Training and opening-support fees;
• Technology, software and system charges;
• Renewal fees;
• Transfer or assignment fees;
• Development fees;
• Management and consultancy charges;
• Payments for goods, equipment and supplies;
• Fees for additional locations;
• Audit and inspection expenses.

The contractual classification of each payment should reflect its actual commercial purpose.

An initial franchise fee may compensate the franchisor for granting access to the franchise system, providing initial training, approving the premises and supporting the opening process. However, where a substantial part of the fee is economically connected with the right to use a trademark or know-how over several years, it may be treated differently from a fee paid for a one-time service.

A continuing royalty is normally paid in consideration for the ongoing right to use the franchisor’s trademark, business format, operational knowledge and commercial system. It may be calculated as a percentage of turnover or as a fixed amount.

An advertising contribution is generally intended to fund national or regional marketing activities. A technology fee may relate to software access, licensing, maintenance, cloud systems or technical support.

The parties should not assume that placing several services and rights into one invoice will cause them to receive identical tax treatment. Turkish tax analysis generally follows the actual substance of the transaction.

Why the Classification of a Franchise Payment Matters

The legal characterisation of a franchise payment affects several tax issues.

First, it determines whether withholding tax applies to a payment made to a foreign franchisor. A royalty paid for the use of a trademark or know-how may be subject to withholding tax, while a genuine business service may receive different treatment under domestic law and an applicable double taxation treaty.

Second, classification affects VAT. A payment for a right or service used in Türkiye will generally fall within the Turkish VAT system, even where the supplier is established abroad.

Third, classification affects the Turkish franchisee’s corporate tax position. A recurring operational payment may potentially be deducted as a business expense, whereas an upfront payment providing a long-term intangible benefit may need to be recognised and amortised according to the applicable tax and accounting rules.

Fourth, the payment’s character may affect transfer pricing. Where the Turkish franchisee and foreign franchisor are related entities, the amount paid for trademarks, know-how, management support and technology must satisfy the arm’s-length principle.

A franchise agreement should therefore avoid artificial descriptions created solely to obtain a particular tax result. Tax authorities may recharacterise a payment according to its true economic nature.

Initial Franchise Fees in Turkey

The initial franchise fee is usually paid when the franchise agreement is signed or before the franchised outlet opens.

The fee may cover several components, including:

• Entry into the franchise network;
• Initial trademark and system rights;
• Site evaluation;
• Business planning;
• Store-design assistance;
• Initial training;
• Opening support;
• Delivery of manuals and operating procedures.

From a contractual perspective, these components should be identified clearly. Where appropriate, the agreement or invoice may allocate the total fee among distinct services and rights.

However, an allocation will be respected only if it reflects commercial reality. Dividing a royalty payment artificially into “consultancy,” “training” and “support” components will not necessarily prevent royalty taxation if the principal economic purpose remains the use of a trademark or know-how.

The agreement should also address whether the initial fee is refundable. Most franchisors state that the fee becomes non-refundable once training, site approval or system access begins. Nevertheless, the clause should explain what happens if the business cannot open because of regulatory refusal, the franchisor’s breach or failure to obtain trademark protection.

The tax treatment should be considered before payment. If the fee is paid to a Turkish franchisor, the franchisor will normally issue a Turkish invoice and apply VAT according to the relevant rules.

If the fee is paid to a foreign franchisor, the Turkish franchisee must analyse whether the payment includes a royalty, imported service or both. Withholding tax and reverse-charge VAT may apply even if the invoice is issued outside Türkiye.

Continuing Royalties

Continuing royalties are normally calculated as a percentage of the franchisee’s sales. The agreement may alternatively provide for a fixed monthly payment or a combination of a percentage royalty and a minimum guaranteed royalty.

The royalty clause must define the calculation base precisely. Expressions such as “gross sales” or “turnover” should not be left undefined.

The agreement should state whether the calculation includes:

• VAT;
• Sales returns;
• Cancelled transactions;
• Customer discounts;
• Gift-card sales and redemptions;
• Delivery charges;
• Service charges;
• Sales made through online platforms;
• Sales through mobile applications;
• Wholesale or institutional sales;
• Transactions between related companies;
• Insurance proceeds;
• Promotional products.

As a general drafting approach, VAT collected from customers should not ordinarily be treated as commercial turnover belonging to the franchisee. However, the contract must state this explicitly.

The agreement should also regulate the accounting period, payment date, exchange rate, reporting format and audit process.

Where royalties are calculated in a foreign currency but the franchisee records sales in Turkish lira, the agreement should identify the applicable conversion rate and date. Possible reference points include the invoice date, the final day of the royalty period or a specified official exchange rate.

An ambiguous exchange-rate clause may create significant disputes in a high-inflation or volatile-currency environment.

Withholding Tax on Royalties Paid to Foreign Franchisors

Payments made by a Turkish franchisee to a foreign franchisor for trademarks, trade names, patents, know-how and similar intangible rights may be subject to Turkish corporate withholding tax.

Under the Turkish domestic regime, withholding applies to certain payments made or accrued to non-resident corporations, including payments for intangible rights. The domestic withholding rate applicable to royalty payments is generally 20%. The obligation may arise when the payment is made in cash, credited to an account, accrued or paid in advance, depending on the transaction and applicable provisions.

For example, assume that a Turkish franchisee owes a foreign franchisor a gross royalty of EUR 100,000 and no treaty reduction applies. At a domestic withholding rate of 20%, the Turkish franchisee would generally withhold EUR 20,000 and transfer the remaining EUR 80,000 to the franchisor, subject to the detailed tax treatment and currency conversion rules.

The withholding tax is not an additional fee automatically payable by the franchisee unless the contract contains a gross-up clause. It is a tax deducted from the amount legally payable to the foreign recipient.

The franchise agreement should specify whether the commercial royalty is agreed on a gross or net basis.

A clause stating that the franchisor must receive “EUR 100,000 net of all Turkish taxes” may require the franchisee to gross up the payment so that the franchisor receives EUR 100,000 after withholding.

Gross-up clauses can significantly increase the franchisee’s effective cost. They should therefore include a calculation method and distinguish between:

• Taxes imposed on the franchisor’s income;
• VAT for which the franchisee is responsible;
• Bank charges;
• Taxes arising from the franchisor’s failure to provide treaty documents;
• Penalties caused by one party’s non-compliance.

Double Taxation Treaties and Reduced Royalty Rates

Türkiye has entered into double taxation treaties with many countries. These treaties commonly regulate royalties under Article 12.

A treaty may limit the rate of tax that Türkiye may impose on royalties paid to a resident of the other contracting state. The applicable treaty rate depends on the specific treaty, the type of royalty, the identity of the recipient and whether the recipient is the beneficial owner of the income.

The Turkish Revenue Administration explains that dividends, interest and royalties may be taxed in both the recipient’s state of residence and the source state, but the source state’s tax is limited by the maximum rate provided in the relevant treaty. If the royalty is effectively connected with a permanent establishment in the source state, a different treaty article may apply.

Many Turkish treaties provide a maximum royalty withholding rate of 10%, although this is not universal and the relevant treaty must always be checked. Official Turkish guidance concerning payments for trademark rights under treaties with countries such as Ireland, Germany and Malta illustrates a 10% maximum rate where the recipient is the beneficial owner and other treaty conditions are met.

A Turkish franchisee should not apply a reduced treaty rate solely because the franchisor’s invoice contains a foreign address.

The foreign franchisor will generally need to provide a valid tax-residence certificate issued by the competent authority of its country. The parties should also confirm that the franchisor is the actual beneficial owner of the royalties and is not merely a conduit company.

The agreement should require the franchisor to provide all documents necessary for treaty relief before payment. It should also state who bears the difference if the reduced rate cannot be applied because the franchisor fails to provide the required documentation.

Royalty Payments and Permanent Establishment Risk

A foreign franchisor may operate in Türkiye without incorporating a Turkish subsidiary. However, extensive local activities may raise questions concerning whether the foreign enterprise has created a Turkish permanent establishment.

A permanent establishment analysis may consider the existence of a fixed business location, personnel, local management activities and authority to conclude or materially negotiate contracts.

If the royalties are effectively connected with a Turkish permanent establishment of the foreign franchisor, the royalty article of the applicable tax treaty may cease to govern the payment. The income may instead be taxed as business profits attributable to the permanent establishment. Turkish treaty guidance expressly recognises that source-state royalty limitations may not apply where the income is connected with a local permanent establishment or fixed place.

Foreign franchisors should therefore review the activities of local employees, trainers, consultants and representatives.

A master franchisee is ordinarily an independent undertaking. Nevertheless, contractual independence alone does not eliminate tax risk if the foreign franchisor effectively conducts business through personnel or facilities in Türkiye.

The franchise agreement should avoid giving the local franchisee unrestricted authority to bind the foreign franchisor unless this is intentionally structured and its tax consequences have been considered.

VAT on Franchise Fees Paid to a Turkish Franchisor

Services and rights supplied in Türkiye within the scope of commercial activities are generally subject to Turkish VAT unless a specific exemption or reduced rate applies.

The standard Turkish VAT rate is currently 20% for taxable transactions not included in one of the reduced-rate lists.

Accordingly, a Turkish franchisor will generally add 20% VAT to initial franchise fees, royalties, training charges, consultancy fees, advertising contributions and technology services where no specific exemption or reduced rate applies.

For example, if a Turkish franchisor invoices a royalty of TRY 500,000, the invoice may normally include TRY 100,000 VAT, producing a total invoice value of TRY 600,000.

The franchisee may generally deduct input VAT incurred for its taxable business activities, provided that the statutory conditions, payment rules and documentary requirements are satisfied. The specific timing and deductibility of VAT should be reviewed with the franchisee’s accountant.

The parties should state whether contractual fees are VAT-inclusive or VAT-exclusive. A provision requiring the franchisee to pay “a monthly royalty of 5%” should specify whether VAT is added to the calculated royalty.

Reverse-Charge VAT on Payments to Foreign Franchisors

Where a foreign franchisor has no residence, workplace, legal centre or business centre in Türkiye and supplies a service or right used in Türkiye, the Turkish recipient may be responsible for declaring and paying the VAT under the reverse-charge mechanism.

The Turkish VAT General Application Communiqué states that where a foreign supplier has no relevant establishment in Türkiye, the entire VAT on a service used in Türkiye is declared and paid by the domestic recipient. This responsibility may apply even where the recipient is not otherwise registered as an ordinary VAT taxpayer.

In a typical cross-border franchise arrangement, the Turkish franchisee may therefore need to calculate VAT on royalties, franchise fees, software access, training or management services received from abroad and declare the amount through the No. 2 VAT return.

The responsible-party VAT return is generally filed by the 25th day of the month following the relevant tax period, and the tax is paid by the same deadline.

Reverse-charge VAT is separate from withholding tax. A single royalty payment may potentially trigger both:

• Corporate withholding tax on the foreign franchisor’s royalty income; and
• VAT declared by the Turkish franchisee as the recipient of the right or service.

The contractual payment clause should not confuse these obligations.

For example, a gross royalty may be subject to withholding tax when paid to the foreign franchisor, while VAT is calculated and declared separately by the Turkish franchisee.

The franchise agreement should identify whether fees are stated exclusive of VAT and confirm that VAT payable under the reverse-charge mechanism does not reduce the contractual royalty unless the parties expressly agree otherwise.

Corporate Taxation of the Turkish Franchisee

A Turkish company operating a franchised business is taxed on its taxable corporate income.

For 2026, the general corporate tax rate is 25%. Provisional corporate tax is also applied at 25% for ordinary corporate taxpayers.

The franchisee’s taxable income is generally calculated after deducting expenses legally incurred to generate and maintain business income, subject to documentation, tax-law limitations and transfer-pricing rules.

Royalties, advertising contributions, software charges and support fees may potentially be deductible where they are genuinely connected with the franchised business and properly documented.

However, deductibility should not be assumed merely because the contract describes a payment as a business expense.

The tax authorities may examine:

• Whether the payment was actually made or accrued;
• Whether the service or right was genuinely supplied;
• Whether the expense relates to the Turkish business;
• Whether the amount is commercially reasonable;
• Whether the invoice and supporting records are adequate;
• Whether withholding and VAT obligations were fulfilled;
• Whether related-party pricing is arm’s length.

A substantial initial payment granting rights for several years may need to be treated as the acquisition of an intangible benefit rather than deducted entirely in the first year. The correct accounting and amortisation treatment depends on the substance of the rights granted and applicable Turkish tax rules.

The parties should therefore obtain accounting advice before deciding how an initial franchise fee will be recorded.

Domestic Minimum Corporate Tax

The domestic minimum corporate tax regime has applied to qualifying corporate taxpayers since the 2025 accounting period.

Under this regime, the corporate tax payable may not be lower than 10% of corporate income calculated before certain exemptions and deductions, subject to statutory adjustments.

This rule may affect mature franchise companies benefiting from significant deductions, exemptions or incentives.

However, entities beginning operations for the first time are generally excluded from the domestic minimum tax for their first three accounting periods. The official guidance gives the example that a company formed in 2025 is not subject to the minimum tax for the 2025, 2026 and 2027 accounting periods.

This exemption can be relevant when a foreign franchisor forms a new Turkish subsidiary.

Nevertheless, restructurings, mergers, conversions and divisions are not automatically treated as the establishment of a genuinely new business for this purpose.

The domestic minimum tax should therefore be considered in long-term financial models, particularly where the franchise structure relies on incentives or substantial deductible payments to foreign related parties.

Transfer Pricing and Related-Party Royalties

Transfer pricing is a central issue where the Turkish franchisee and franchisor are related companies.

Under Article 13 of the Corporate Tax Law, transactions between related persons must comply with the arm’s-length principle. Where goods, services or rights are transferred at prices that differ from those that would have been agreed between independent parties, the resulting profit may be treated as having been distributed through transfer pricing.

The arm’s-length principle requires the price or fee applied in a related-party transaction to correspond to the amount that independent enterprises would have agreed under comparable circumstances.

For franchise royalties, the analysis may include:

• The strength and recognition of the trademark;
• The profitability of the franchise system;
• The territory granted;
• The level of exclusivity;
• The know-how transferred;
• Training and support obligations;
• Advertising expenditure;
• The franchisee’s functions and risks;
• Comparable independent franchise agreements;
• Royalty rates used by the group in other markets;
• The maturity of the Turkish business.

A royalty rate charged in a highly established market may not be automatically appropriate for a newly launched business in Türkiye.

The Turkish franchisee should maintain documents demonstrating the benefit received from the franchisor and the basis for the royalty rate.

The Turkish Corporate Tax General Communiqué requires taxpayers to preserve records, calculations, schedules and documents supporting the arm’s-length price. It recognises methods such as the comparable uncontrolled price, cost-plus and resale-price methods, with the most appropriate method selected according to the transaction.

A percentage royalty should not be treated as arm’s length merely because it is common within the group. The rate should be supported by a functional and comparability analysis.

Where the payment is found to exceed an arm’s-length amount, the excessive portion may be treated as a non-deductible distribution of profit. This may also create additional withholding, VAT, penalty and interest exposure.

Management, Consultancy and Support Fees

Franchise agreements often require separate payments for management, consultancy or technical support.

These payments should reflect genuine services distinct from the trademark and know-how licence.

The agreement should identify:

• The specific services to be supplied;
• The personnel responsible;
• The frequency of the services;
• Reporting requirements;
• The calculation method;
• Reimbursable expenses;
• Evidence of performance.

A vague obligation to provide “general international support” may be insufficient to demonstrate that a deductible service was received.

Where the service provider is a foreign related company, the franchisee should retain e-mails, reports, training records, meeting notes, travel documents and other evidence showing that the service was actually performed and benefited the Turkish business.

A payment may be classified under a treaty as business profits, technical services, independent professional services or royalties depending on the applicable treaty and the substance of the arrangement.

For example, software development or ordinary consultancy may receive different treatment from the transfer of software reproduction, modification or distribution rights. Official Turkish guidance distinguishes between an ordinary service and the acquisition of copyright-type rights, with the latter potentially classified as a royalty subject to withholding.

The franchise agreement and invoices should therefore separate services from intellectual property rights where they are genuinely distinct.

Advertising and Marketing Contributions

Franchisees are frequently required to contribute a percentage of turnover to a national marketing fund.

The tax treatment depends on the structure of the fund and the services provided.

Where the franchisor invoices the contribution as part of its commercial services, VAT may apply. The franchisee should receive an appropriate invoice or equivalent document.

The agreement should explain whether the advertising contribution is:

• Income belonging to the franchisor;
• Money held and spent on behalf of the network;
• A reimbursement of actual expenses;
• A payment to an independent advertising entity;
• A contribution to a jointly managed fund.

The accounting structure should be consistent with the contractual description.

The agreement should also state whether unused funds are carried forward, refunded or retained for future campaigns.

Foreign franchisors should be cautious where Turkish franchisees transfer advertising contributions abroad but the marketing activities are performed mainly in Türkiye. The economic benefit, invoicing structure, withholding implications and VAT treatment should be reviewed.

A global marketing fee should be supported by evidence that the Turkish network receives an identifiable commercial benefit.

Technology, Software and Digital-System Fees

Modern franchise systems commonly use central point-of-sale software, mobile applications, customer databases, reservation systems, inventory platforms and cloud-based reporting tools.

Technology payments may contain several elements:

• Software subscription;
• Copyright licence;
• Cloud hosting;
• Maintenance;
• Technical support;
• Data storage;
• Hardware rental;
• System integration.

The tax treatment may differ according to whether the franchisee merely uses standard software or acquires rights to reproduce, modify, distribute or commercially exploit the program.

Official Turkish tax guidance indicates that payments for rights allowing reproduction, modification, public distribution or similar exploitation of software may constitute payments for intangible rights and may be subject to royalty withholding.

The technology clause should therefore define the franchisee’s rights accurately.

A right limited to accessing a hosted platform should not be described as an unrestricted software licence. Conversely, a contract granting reproduction or modification rights should not be presented merely as a hosting service.

Cross-border technology fees may also trigger reverse-charge VAT where the service is used in Türkiye.

Stamp Duty on Franchise Agreements

Turkish stamp duty applies to certain signed documents that contain or evidence legally enforceable obligations.

Agreements, commitments and assignment documents containing a specified monetary amount are generally subject to stamp duty at the rate of 9.48 per thousand, subject to the applicable annual maximum and any relevant exemptions.

A franchise agreement may contain several monetary obligations, including:

• Initial fees;
• Minimum royalties;
• Development fees;
• Fixed advertising contributions;
• Guaranteed purchases;
• Contractual penalties;
• Security obligations.

The stamp-duty base must be assessed according to the wording of the document and the monetary amounts it contains.

Where an agreement includes both percentage-based royalties and minimum guaranteed payments, the determinable monetary obligations require careful analysis.

The parties should not assume that signing the agreement outside Türkiye automatically prevents Turkish stamp duty. A foreign-executed document may become taxable when it is submitted to Turkish authorities, relied upon before Turkish institutions or otherwise used in Türkiye under the applicable rules.

The contract should allocate responsibility for stamp duty. However, an internal allocation does not necessarily eliminate statutory liability toward the tax administration.

The parties should also review guarantees, surety clauses, settlement agreements, amendments and termination documents separately, because each document may have its own stamp-duty consequences.

Invoicing and Documentation

Tax compliance depends on proper documentation.

A Turkish franchisor should issue invoices in accordance with Turkish tax and electronic-document rules.

Where the franchisor is established abroad, the Turkish franchisee should retain:

• The foreign invoice;
• The franchise agreement;
• Royalty calculations;
• Sales reports;
• Bank-transfer records;
• Tax-residence certificates;
• Withholding declarations;
• Reverse-charge VAT records;
• Evidence of services received;
• Trademark and licence documents;
• Transfer-pricing analysis.

The invoice description should correspond to the agreement.

An invoice stating only “consultancy” may create difficulties where the payment actually relates to trademark use, software access and training.

The franchisee should be able to reconcile each invoice with the relevant contractual provision and royalty period.

The agreement should grant the franchisor audit rights while also requiring the franchisor to provide documents reasonably needed for the franchisee’s Turkish tax compliance.

Gross-Up Clauses

A gross-up clause protects the franchisor against a reduction in the amount it receives because of withholding tax.

For example, if the franchisor must receive EUR 100,000 net and the applicable withholding rate is 10%, the amount payable may need to be grossed up rather than calculated simply as EUR 100,000 plus 10%.

The basic gross-up formula is:

Gross payment = Net payment / (1 − applicable withholding rate)

At a 10% withholding rate, a EUR 100,000 net payment would require a gross amount of approximately EUR 111,111.11. The franchisee would withhold approximately EUR 11,111.11 and transfer EUR 100,000 to the franchisor.

Gross-up provisions should address:

• Domestic and treaty rates;
• Delayed residence certificates;
• Changes in tax law;
• Refunds obtained by the franchisor;
• Taxes attributable to the franchisor’s permanent establishment;
• Penalties caused by inaccurate information;
• Whether VAT is included;
• Whether bank charges are included.

The franchisee should avoid accepting an unlimited obligation to bear every tax imposed anywhere in the world.

A balanced clause should allocate taxes according to which party legally earns the income, controls the relevant information and causes any non-compliance.

Tax Indemnities and Audit Cooperation

Franchise agreements should contain tax-cooperation provisions.

The franchisor should provide residence certificates, beneficial-ownership confirmations, invoices and other documents needed to apply treaty relief.

The franchisee should calculate and pay Turkish withholding and reverse-charge VAT properly and provide evidence of payment to the franchisor.

The agreement should require both parties to cooperate in tax audits and refund applications.

A tax indemnity may apply where one party’s breach causes the other to incur tax, penalties or interest.

For example, the franchisor may indemnify the franchisee if the franchisor falsely claims treaty residence or beneficial ownership.

The franchisee may indemnify the franchisor where it fails to remit tax properly despite deducting it from the payment.

The clause should distinguish tax principal from penalties. A party should not automatically be responsible for penalties caused by the other party’s delay or negligence.

Practical Tax Example

Assume that a Turkish franchisee agrees to pay a foreign franchisor:

• An initial franchise fee of EUR 100,000;
• A monthly royalty of 6% of net sales;
• A marketing contribution of 2%;
• A technology fee of EUR 2,000 per month.

Before making payment, the parties should analyse the following:

First, what part of the initial fee relates to trademark and know-how rights, and what part relates to initial services?

Second, does the applicable double taxation treaty reduce the domestic royalty-withholding rate?

Third, has the franchisor provided a valid residence certificate and demonstrated beneficial ownership?

Fourth, does reverse-charge VAT apply to each payment?

Fifth, are the royalty and technology fees arm’s length if the parties are related?

Sixth, must any part of the initial fee be capitalised rather than deducted immediately?

Seventh, is the written agreement subject to stamp duty because it contains a determinable monetary amount?

Eighth, is the royalty agreed gross or net of withholding tax?

Ninth, which exchange rate will be used for invoicing, withholding and accounting?

Tenth, what evidence must be retained to prove the services and rights received?

The parties should resolve these questions before the first invoice is issued. Attempting to restructure payments after a tax audit begins is significantly more difficult.

Common Tax Mistakes in Turkish Franchise Transactions

One common mistake is describing all payments as consultancy fees even though the franchisee receives trademark and know-how rights.

Another mistake is applying a treaty rate without obtaining a valid residence certificate.

Some franchisees deduct tax from the franchisor’s payment but fail to provide a tax-payment certificate, preventing the franchisor from claiming foreign tax credit in its home jurisdiction.

Another frequent error is overlooking reverse-charge VAT. Withholding tax and VAT are separate obligations.

Franchisees may also deduct a large initial fee immediately even though it provides a multi-year intangible benefit.

Related companies often apply a global royalty rate without analysing whether the Turkish operation can reasonably bear that rate.

Some agreements state that all taxes are payable by the franchisee without explaining whether this includes the franchisor’s income taxes, VAT, stamp duty, penalties and foreign taxes.

Another mistake is failing to allocate the marketing fund clearly. The contract may describe the payment as a contribution while the franchisor treats it as unrestricted revenue.

Finally, many agreements do not address exchange-rate risk. The royalty may be calculated in Turkish lira but payable in euros, leading to disagreement about the conversion date.

Tax Checklist for Franchise Agreements in Turkey

Before signing a Turkish franchise agreement, the parties should confirm that:

1. Every fee is identified separately;
2. The commercial purpose of each payment is clear;
3. The royalty-calculation base is defined;
4. VAT is stated as included or excluded;
5. Domestic withholding-tax rules have been reviewed;
6. The relevant double taxation treaty has been examined;
7. A residence certificate will be obtained;
8. Beneficial ownership has been considered;
9. Gross-up obligations are clearly drafted;
10. Reverse-charge VAT responsibilities are allocated;
11. The initial fee’s deductibility or capitalisation has been reviewed;
12. Transfer-pricing support exists for related-party fees;
13. Advertising and technology charges are documented;
14. Stamp-duty exposure has been calculated;
15. The applicable exchange rate is defined;
16. Invoicing and payment documentation is specified;
17. Tax audit cooperation is regulated;
18. Penalties are allocated according to fault;
19. Permanent establishment risk has been assessed;
20. Turkish legal and tax advisers have reviewed the final structure.

Conclusion

Franchise fees, royalties and taxation in Türkiye require coordinated legal, commercial and accounting analysis.

The parties should not treat every payment in the same way. An initial franchise fee, continuing royalty, marketing contribution, technology fee and product purchase may have different tax consequences.

Royalties paid to a foreign franchisor are generally subject to a domestic withholding rate of 20%, although an applicable double taxation treaty may reduce the rate. Treaty relief generally requires proper residence documentation and an examination of beneficial ownership.

Payments for rights and services used in Türkiye may also be subject to VAT. Where the foreign franchisor has no relevant establishment in Türkiye, the Turkish franchisee may be required to declare the VAT under the reverse-charge mechanism.

The Turkish franchisee must also determine whether payments are deductible, must be capitalised or fall within transfer-pricing rules. Related-party royalties must satisfy the arm’s-length principle and be supported by documentation.

Stamp duty, exchange-rate clauses, invoicing, gross-up obligations and tax indemnities should be addressed directly in the franchise agreement.

A commercially attractive royalty rate may become unsustainable once withholding tax, VAT, stamp duty and exchange-rate effects are taken into account. The complete tax cost should therefore be modelled before the agreement is signed.

Careful drafting protects the foreign franchisor’s expected income while enabling the Turkish franchisee to comply with its tax responsibilities and claim lawful deductions.

Frequently Asked Questions

What is the corporate tax rate in Turkey in 2026?

The general corporate tax rate for ordinary corporate taxpayers is 25%. Certain financial-sector entities are subject to a 30% rate.

Are franchise royalties paid to a foreign company subject to withholding tax?

Generally, yes. The domestic withholding rate for royalty payments to non-resident corporations is ordinarily 20%, subject to reduction under an applicable double taxation treaty.

Can a tax treaty reduce the royalty withholding rate?

Yes. Many treaties limit Turkish withholding tax on royalties, commonly to 10%, although the exact rate depends on the relevant treaty.

Is a residence certificate required?

A valid tax-residence certificate is generally required to support the application of treaty benefits.

Is VAT payable on franchise royalties?

Generally, yes. Royalties and related rights used in Türkiye may be subject to VAT.

Who pays VAT when the franchisor is abroad?

Where the foreign franchisor has no relevant establishment in Türkiye, the Turkish franchisee may be required to declare and pay VAT under the reverse-charge mechanism.

Can the Turkish franchisee deduct the royalty as an expense?

A genuine business royalty may potentially be deductible if it is properly documented, connected with the business, compliant with withholding and VAT obligations and, where relevant, arm’s length. Upfront payments providing long-term benefits may require capitalisation.

What is a gross-up clause?

A gross-up clause requires the franchisee to increase the gross payment so that the franchisor receives an agreed net amount after withholding tax.

Are related-party franchise fees subject to transfer pricing?

Yes. Fees paid between related companies must comply with the arm’s-length principle and should be supported by appropriate documentation.

Is a franchise agreement subject to stamp duty?

A franchise agreement containing a specified or determinable monetary amount may be subject to stamp duty. The applicable base, rate and maximum should be calculated according to the document’s wording.

Are advertising contributions taxed in the same way as royalties?

Not necessarily. Their treatment depends on whether they are genuine marketing-service fees, expense reimbursements, fund contributions or part of the consideration for the franchise rights.

Can withholding tax and VAT apply to the same payment?

Yes. Withholding tax concerns the foreign recipient’s income, while VAT concerns the supply or use of the relevant service or right in Türkiye.

This article provides general legal and tax information as of July 2026 and does not constitute legal, accounting or tax advice. Tax rates, treaty procedures and administrative interpretations may change. Each franchise structure should be reviewed according to the parties, country of residence, payment type and legislation applicable on the payment date.