Why Turkish Free Zones Are a Smart Base for European Production and Assembly

By Şahin Tuhan

Production and assembly carried out inside a Turkish free zone for European customers can stay largely free of Turkish tax, provided the goods are re-exported.

For European companies that source production or assembly from Turkey, a free zone can remove most of the Turkish tax and customs cost from the work. Components can enter a zone without customs duty or import VAT, be processed inside it and leave again for Europe. The zone company’s earnings on that work can be exempt from corporate tax, and services performed in the zone are exempt from VAT.

Şahin Tuhan, a certified public accountant in Istanbul who has worked with exporters and foreign investors since 2003, explains how the model works and which conditions keep it intact.

Why Do Turkish Free Zones Matter for European Supply Chains?

Turkey’s 19 free zones are, above all, export platforms. According to Ministry of Trade data, companies operating in them exported a record $12.5 billion in 2025, and exports made up 75.5% of their combined sales abroad and to Turkey. The Aegean Free Zone in İzmir alone exported $3.26 billion.

International companies are well represented. Of the 1,968 firms active in the zones, 489 are foreign, and 57.4% of zone exports were medium-high or high-technology products.

For European companies sourcing production or assembly from Turkey, whether for cost, capacity or proximity, the attraction lies in the zones’ legal status. Under Article 6 of the Free Zones Law, a zone is treated as outside Turkey’s customs territory for import duties, trade policy measures and foreign exchange rules. Goods can arrive, be worked on and depart again without ever clearing into free circulation in Turkey.

How Can a European Company Use a Free Zone?

There are three practical routes, and the tax treatment differs for each (Exhibit 1).

The simplest is to buy finished goods from a manufacturer in the zone. Its profits on sales abroad carry no corporate tax, and if it exports at least 85% of its output, measured at FOB value, income tax on its staff’s wages is cancelled. Those savings can feed through into the price the European buyer pays.

The second is to send components to a zone company for assembly, repair, testing or packaging, and take the goods back. The law exempts the earnings from these listed services, provided every customer is based abroad and the goods go straight from the zone to another country, never entering the Turkish market.

The third route is a subsidiary in the zone. It can use either exemption, but as a group company it raises transfer pricing and group-level tax questions that buying from an independent supplier avoids.

Exhibit 1: Three ways to use a Turkish free zone

Source: Free Zones Law No. 3218, provisional Art. 3; VAT Law No. 3065, Art. 17(4)(ı).

In practice, the choice often follows the product: standardised components suit the first route, high-value assemblies the second, and long-term, high-volume programmes justify the third.

Which Turkish Costs Does a Free Zone Remove?

Taken together, the rules take most Turkish tax and customs costs out of work done in a zone for foreign customers (Exhibit 2). Beyond the tax itself, no cash is tied up in import VAT or duties while the goods are being worked on.

A European company that ships €10 million of components a year into a zone for assembly pays no Turkish import VAT or duty on them, and the zone firm’s invoice for the assembly work carries no VAT.

That VAT point deserves emphasis: services performed inside a zone are exempt from VAT. Nor does Turkey’s domestic minimum corporate tax claw the savings back, since the Corporate Tax Law lets companies subtract exempt free zone earnings when calculating its 10% floor.

Exhibit 2: Turkish costs a free zone can remove

Source: Free Zones Law No. 3218; VAT Law No. 3065. Law 3218 incentives last until the end of the tax year of Turkey’s EU accession.

What Conditions Keep the Benefits Intact?

The savings rest on conditions that are easy to breach in day-to-day operations:

• Customers abroad. For listed services, every customer must be based outside Turkey. A single Turkish customer can put the exemption at risk.
• Goods that bypass the Turkish market. Goods handled under the service exemption must go from the zone to another country without passing into Turkey, and a manufacturer’s profits on sales into Turkey are taxable. Shipping records are what prove this in an audit.
• The right licence. Zone licences are issued for specific activities, so the zone company’s licence should match the work it performs.
• No trading margins. For companies licensed today, buying and reselling goods is outside the exemption, so a zone company that trades as well as produces pays tax on the trading profit.

Contract manufacturing on materials owned by the customer is less clear-cut. The tax administration’s guidance has excluded it from the exemption, while the Council of State has ruled more than once that such work counts as production. Companies using this route should expect to defend it.

Supply contracts should oblige the zone partner to maintain these conditions and to share the evidence.

The payroll test is the most fragile. It is applied annually and works as a cliff: a manufacturer producing €50 million of goods that exports €43 million (86%) keeps the relief, but at €42 million (84%) it loses the entire year’s relief and pays the tax with late-payment interest, though no penalty. The test refers only to exports abroad, so sales to other zone companies may not count. The President can lower the threshold to as little as 50%, including selectively for strategic or large-scale investments.

What Should European Companies Check Before Committing?

Large groups need one more calculation. Under the EU Minimum Tax Directive, groups with consolidated revenue of at least €750 million can face a top-up tax wherever their effective tax rate in a country falls below 15%, and Turkey applies equivalent global minimum tax rules.

For such a group, a zone subsidiary’s exemption can be partly or fully offset by top-up tax. An independent zone supplier is different: it is not part of the group, so its exemption stays outside the group’s calculation and can show up in lower prices instead.

Before signing, five checks cover most of the risk:

• Pick the route. Decide between finished goods, a service on your own goods and your own subsidiary before negotiating prices.
• Vet the partner. Confirm the zone company’s licence and that its customer base keeps the exemption safe.
• Design the logistics. Route every shipment from the zone straight to its foreign destination, bypassing the Turkish market.
• Settle origin and EU duties. Turkish law treats zones as part of Turkey’s customs territory for origin purposes, but duties on arrival are decided under EU rules.
• Run the group numbers. Groups at or above €750 million should model the Turkish effective tax rate before counting any saving.

What Does This Mean for European Companies?

For European companies that need production or assembly capacity near their home markets, a Turkish free zone can take most Turkish tax and customs costs out of the work. The benefit is not automatic. It rests on customers abroad, goods that never enter the Turkish market, the right licence and, for large groups, a clear view of the global minimum tax. Companies that build those conditions into contracts and logistics from the outset, and review them every year, can turn the zone’s incentives into a lasting cost advantage.

About the Author

Şahin Tuhan heads accounting and tax services at Sistem Global Danışmanlık in Istanbul. A certified public accountant (SMMM) in practice since 2003, Tuhan specialises in Turkish corporate tax, investment incentives including free zones and technology development zones, and tax structuring for exporters and foreign investors.