No Deductions, No Foreign Tax Credit: The Trade-Offs
Exemption, not a credit — and why that matters
The 20-year regime works by exemption, not by credit, and the distinction shapes everything that follows. Under a credit system, your foreign income would be taxed in Türkiye and you would then subtract the foreign tax already paid. Under an exemption system, the foreign income is simply outside the Turkish tax base — it is not taxed at all. Türkiye has chosen the second route: qualifying foreign-source income is exempt at 0% for twenty years, with no annual lump-sum charge.
Because the income is never brought into Turkish tax, two consequences follow automatically, and they are the trade-offs of the regime: you get no deduction for related expenses, and no foreign tax credit for foreign taxes you paid on that income.
No deduction for related expenses
Deductions exist to reduce taxable income. If the income itself is exempt, there is nothing to deduct against on the Turkish side. So the costs of earning your exempt foreign income — management fees on a foreign portfolio, agent and maintenance costs on a foreign rental, expenses of a foreign business — cannot be set against any Turkish tax. This is not a penalty; it is the logical flip-side of the income being untaxed. You do not pay Turkish tax on the gross, so you do not deduct the costs either.
No credit for foreign tax paid
A foreign tax credit only makes sense when the same income is being taxed twice — once abroad and once in Türkiye — and the credit relieves the overlap. Here there is no overlap to relieve: Türkiye is not taxing the income, so there is no Turkish liability against which a foreign tax could be credited. If the source country taxes the income, that foreign tax is a real cost, but it stays where it fell. Türkiye neither taxes the income nor refunds the foreign tax.
Who wins, and who should model it
Whether the regime is a clear win or a closer call turns on how heavily your foreign income is already taxed abroad and how large your deductible costs are.
| Your situation | How the exemption lands |
|---|---|
| Lightly-taxed or untaxed foreign income, few costs | Clear win — 0% Turkish tax and little lost by giving up deductions or a credit you would barely use |
| Foreign income taxed heavily at source | Model it — the foreign tax remains payable and cannot be credited in Türkiye, so the net benefit is only the Turkish layer |
| Large deductible expenses against the foreign income | Model it — you lose the ability to deduct those costs, which matters more when they are big |
A simple way to see it. Suppose you have foreign income that would otherwise be taxable in Türkiye. If little or no foreign tax was paid on it, the exemption hands you close to the full Turkish rate as a saving. But if that income was already taxed at a high rate at source, the exemption cannot recover that foreign tax for you — its value is limited to switching off the Turkish charge. In the heavily-taxed, high-cost case, it is worth comparing the exemption against how the income would be treated under ordinary rules with deductions and a credit before assuming the exemption is best. The starting point is knowing exactly which streams are in scope, covered in what foreign income is covered.
The trade-offs in one view
- Foreign income is exempt, not credited — it sits outside the Turkish tax base.
- No deduction for expenses related to the exempt income.
- No foreign tax credit for foreign taxes paid on that income.
- Best for lightly-taxed foreign income with modest costs.
- Worth modelling where foreign tax is high or deductible costs are large.
Model the exemption against your numbers
For lightly-taxed foreign income the exemption is an easy win; for heavily-taxed income with real costs, the loss of deductions and credits deserves a proper comparison. Bayraktar Attorneys models your position before you commit.
Get your position modelled →