12 Nov

The Turkish Petroleum Law, a touchstone for goals of attracting foreign investors to Turkish petroleum industry entered into force on 11 June 2013 and has been introduced as a revolution in oil and gas industry as it was leveling the playing field for foreign investors and removing the privileged rights of the state company.

However the expectations in taxation of income remain unchanged contrary to the expectations during the draft law and the sum of the income tax deductions on net income on behalf of the petroleum right owners is set not to exceed 55 percent. This was actually the result of animadversions of some environments saying that there will be considerable tax loss if it is applied not to exceed 40 percent and the parliament decided to remain it unchanged.

Apart from this a new type of incentive by means of deduction has been provided to limited liable tax payers that did not exist during the former law. Accordingly, the limited liable tax payers are allowed to deduct 5% of their taxes on payments made from their self-employment income. The law also defines the taxation regime for joint business activities of petroleum right owners saying that they are subject to taxation separately even they established a partnership for conducting petroleum operations.

In taxation of the petroleum operations of foreign companies, article 3/3 of the Corporate Tax Law, saying that the revenues and profits derived from operations of the foreign companies through their permanent representatives or office in Turkey are defined as the revenue in limited liable taxpayers, is not applicable for foreign petroleum operation even they derive revenue in same way.

Under new Turkish Petroleum Law, the revenues derived from production in return for the capital corresponding to the investment for operations of the foreign limited liable tax payer holding petroleum rights is also amortizable until regaining the capital amount to be calculated on the current exchange rates. This shall not apply for the royalty. Expenses of exploration, relinquishment and drilling and incidental drilling costs that are not productive shall be capitalized discretionary providing those items are approved by the Ministry of Energy and Natural Resources. The costs of economic values and the expenses to achieve the economic value made by the petroleum right owner together with installments shall either be amortized or recorded as capitalized excluding the costs and expenses of exploration, incidental drilling and drilling of wells. The amortization ratios are determined separately for each petroleum field by the Ministry of Energy and Natural Resources and the Ministry of Finance jointly taking the reserve conditions into account.

The import or delivery of all materials, equipment, fuel and land, sea and air transportation vehicles  particular to petroleum affairs and  providing they are approved by the General Directorate of Petroleum Affairs are exempt of custom duty and the conducted transactions and issued papers  related to those are exempt of  charges and duties under Turkish Petroleum Law. In former law the equipments were not counted as subject to the exemptions however the new law clarified it distinctively and put an end to discussion about interpretation of the law.  However the materials required for construction, erections and the operation of the building services and those required for administrative activities are not allowed the exemption. Drilling towers and equipments obtained in this respect are also allowed to be used for geothermal activities providing the application of petroleum right owner and approval by the Ministry of Energy and Natural Resources. The materials approved by the General Directorate of Petroleum Affairs and imported in this respect are also not subject to conformity assessment of Turkish Standards Institute. The aforesaid tax exemptions continue even if the materials are transferred between petroleum right owner to be used for petroleum operations however this again requires permission from General Directorate of Petroleum Affairs. In cases where the materials are transferred for non petroleum operations purposes and for use or sale in Turkey, all applicable taxes effective on transfer date are applied during the importation and usage however in  transfer of materials having less than one year economic life the values of the materials are  determined at the time of transfer or exportation.

The petroleum right owner whom imported or transferred these materials does not have the possessory rights of the materials unless ten years period has been passed commencing the date of the clearance of the materials and all imported materials to be used for petroleum operations  are allowed to be exported with the permission of the General Directorate of Petroleum Affairs.

As per the requirement of the Turkish Petroleum Law the materials imported to be  used  in petroleum operations, cash funds and other assets are  registered by the General Directorate of Petroleum Affairs and petroleum right owners are only allowed to transfer their cash fund and rights thereto and other assets including the capital assets to abroad  providing that they reserve the sum required for the payment of any outstanding  taxes, duties, fees, rentals and Royalties and upon application to the General Directorate of Petroleum Affairs.

The petroleum right owner, at any time, has right to request for  transfer that will be set off against its capital however  the transfer of the other transferrable net assets is possible at the end of the three months period of current year upon completion of the transfer of the capital. A petroleum right owner is also free to keep the foreign currency generated from the export of the petroleum in abroad. This amount is subject to offset against the capital imported to Turkey and the transfer of net values exceeding that amount.


Herdem Law Firm, Istanbul Turkey

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