What Is Withholding? How to Issue a Withholding Invoice?

Withholding is one of the most commonly misunderstood topics in tax legislation and plays a critical role in businesses’ accurate invoicing and declaration processes, especially when VAT is involved. In the year 2025, updated withholding rates, thresholds, and application rules have made the process even more important for both sellers and buyers. So, what is withholding, in which transactions is it applied, and how is a withholding invoice issued? We answer these questions in this Papel Blog article.

What is withholding?

Withholding refers to a tax practice where the entire or a portion of the tax calculated during the purchase of a good or service is paid by the buyer instead of the seller. In this system, a certain portion of the VAT calculated on the invoice is deducted by the buyer (withholding transaction) and declared directly to the tax authority. The withholding practice, which remains applicable in many sectors in 2025, aims to secure tax collection, reduce unregistered transactions, and guarantee VAT revenues in high-risk sectors. In Türkiye, VAT withholding is particularly common.

Since transactions subject to withholding directly affect both invoicing and payment processes, they can be monitored more easily through collections, reporting, and accounting integrations made via the Papel Merchant Panel.

Because current withholding rates vary depending on the nature of the transaction, applying the correct rate when issuing a withholding invoice, checking through a sample VAT withholding invoice, and creating accurate accounting records are extremely important.

Difference between withholding and stoppage

Withholding and stoppage are similar concepts, but are used in different areas within the tax system. Stoppage refers to a deduction made on income earned, while withholding generally refers to a tax deduction made by the buyer in indirect taxes such as VAT. In other words, stoppage is the withholding applied at the source of income,e such as rent, wages, or self-employment payments, whereas a withholding transaction is based on the principle that a portion of the VAT in a goods or service purchase is paid by the buyer. Therefore, stoppage is associated with income tax, while withholding is mostly evaluated under VAT withholding. This fundamental difference in practice also leads to differences between withholding accounting records and stopping accounting records. In short, both concepts are based on the logic of tax being deducted at the source; however, their scope, application methods, and related tax types differ.

In which transactions is a withholding invoice issued?

A withholding invoice is issued for specific goods and service deliveries subject to withholding and for transactions made with institutions classified as designated buyers. VAT withholding is widely applied, especially in construction works, cleaning services, maintenance–repair services, consultancy services, labor supply, and machinery–equipment rental, which are considered high-risk sectors. Additionally, it is mandatory to apply withholding in purchases made by public institutions, municipalities, special budget administrations, and certain companies obliged to apply withholding. According to the 2025 withholding communiqué, the withholding rates determined for transactions may vary. Therefore, when determining whether a transaction is subject to withholding, it is necessary to consider both the type of service and whether the buyer is a withholding-liable entity. This ensures that the withholding invoice is issued correctly and that the deduction known as VAT withholding is accounted for properly.

What are the withholding rates?

VAT withholding rates vary based on the type of transaction, the status of the buyer, and the transaction amount threshold starting from 2025. Correct application of these rates, which are considered within the scope of withholding transactions, is critical for both sellers and buyers. For example, in partial withholding practices, rates are expressed as “4/10” or “9/10,” while in full withholding applications, the entire tax is declared by the buyer with a “10/10” rate. Additionally, the withholding practice is tied to conditions such as the threshold set for 2025, and according to the regulation, no withholding is applied for partial withholding transactions if the invoice amount,t including VAT is below 9,900 TL.

How is a withholding invoice issued?

When issuing a withholding invoice, the first step is to check whether the transaction is subject to withholding. This includes verifying whether the buyer is a withholding-liable entity, whether the transaction qualifies as a goods delivery or service purchase, and whether current withholding rates are applicable.

Next, the seller enters standard invoice details (buyer–seller information, goods/service description, quantity, unit price, taxable base, etc.) and determines the VAT rate and calculated VAT amount. The portion of VAT to be withheld by the buyer (e.g., 5/10, 9/10) must be explicitly stated on the invoice. For example, if a service subject to 18% VAT has a withholding rate of 5/10, half of the calculated VAT is withheld by the buyer. In this case, the invoice must include phrases such as “Withholding Rate: 5/10” and “VAT to Be Withheld by Buyer: … TL.” Finally, the seller collects the non-withheld portion from the buyer and declares this amount via the VAT-1 Return. The buyer, on the other hand, declares and pays the withheld VAT portion via the VAT-2 Return. The issued invoice must also comply with conditions such as the threshold valid for 2025.

 

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This blog post contains general information, not legal, financial, or investment advice. The content is prepared for informational purposes only, and you are advised to seek professional advice for your specific circumstances. The expressions in this article do not carry any binding nature or responsibility and reflect only the author’s evaluation. All your decisions are your responsibility, and Papel Electronic Money and Payment Services Inc. accepts no liability for any consequences arising from them.