A Dutch holding owns a Turkish software subsidiary. The parent funds the Turkish team with a convertible shareholder loan rather than equity, charges a monthly group services fee for finance, HR and cloud infrastructure, and lets the subsidiary invoice it for development work at cost. Each is a related-party transaction that the Corporate Tax Law No. 5520 (KVK) measures against the arm’s-length standard: a wrong price costs the deduction and is treated as a dividend to the parent, with withholding on top, and a loan that is too large relative to equity turns its interest into disguised capital with the same result. This article sets out the transfer pricing rules of KVK Article 13, the thin capitalisation rules of Article 12, the non-deductible expenses of Article 11 and the Law No. 4875 notifications that run alongside, with the shareholder loan and the management fee as worked examples. It follows on from the company formation guide for foreign founders.
Related parties under Article 13
The Turkish subsidiary is a full taxpayer under KVK Article 3(1), taxed on worldwide income at the Article 32(1) rate of 25 per cent, and Law 4875 Article 3(a) treats it like any domestic company, anti-avoidance rules included. Article 13(1) provides that where a corporation buys or sells goods or services with related persons at a price that departs from the arm’s-length principle (emsallere uygunluk ilkesi), the profit is deemed to have been distributed in a disguised manner through transfer pricing. Its second sentence treats purchase, sale, manufacturing, leasing, borrowing and lending money, and bonus, wage and similar payments “in all circumstances” as purchases or sales of goods or services. A shareholder loan is therefore a transfer pricing transaction as well as a thin capitalisation one.
Article 13(2) defines the related person (ilişkili kişi): the corporation’s shareholders; persons connected with the corporation or its shareholders; persons bound to it, or under its influence, through management, control or capital; and the shareholders’ spouses and relatives up to the third degree. Where the relationship runs through shareholding, a direct or indirect holding of at least ten per cent of the capital, votes or dividend rights is required, and the percentages are aggregated. A parent and every sister company under it are related, and all transactions with persons in countries announced by the President for their low taxation or lack of information exchange are deemed related-party transactions whatever the ownership link.
The arm’s-length standard and the methods
Article 13(3) defines the arm’s-length principle as the requirement that the price applied between related persons match the price that would have formed had no such relationship existed. Article 13(4) lists the methods and requires the one most appropriate to the transaction: the comparable uncontrolled price method (karşılaştırılabilir fiyat yöntemi); the cost plus method (maliyet artı yöntemi), which adds a reasonable gross margin to cost; the resale price method (yeniden satış fiyatı yöntemi), which deducts a reasonable gross margin from the resale price to unrelated parties; and the transactional profit methods (işlemsel kâr yöntemleri), namely the transactional net margin method and the profit split method, which divides the combined profit in proportion to functions and risks. Under paragraph (4)(d), if none of these works, the taxpayer may use a method of its own.
For a startup group, cost plus is the natural fit for a Turkish development centre working for the parent and, run in reverse, for the parent’s group services fee: the parent’s allocable costs plus a benchmarked mark-up are the ceiling the Turkish company can deduct. Article 13(5) offers certainty: the method may be agreed with the Ministry in an advance pricing agreement (peşin fiyatlandırma anlaşması), binding for up to three years, which Article 13(9) lets the President extend to five.
Documentation: what must be kept and why it halves the penalty
The second sentence of Article 13(3) requires the records, schedules and documents behind arm’s-length prices to be kept as evidential documents (ispat edici kâğıtlar), and Article 253 of the Tax Procedure Law No. 213 fixes retention at five years from the start of the following calendar year. Article 13(9) lets the President define the documentation obligations, including information on related persons abroad in line with international agreements. The documentation is not a formality: under Article 13(8), where it has been fulfilled completely and on time, the tax loss penalty on taxes under-assessed because of a disguised distribution is halved, except for the fraud cases of Article 359 of the Tax Procedure Law. A contemporaneous file on the management fee and the intercompany loan therefore halves the penalty if the price is later adjusted.
Consequences: lost deduction and a deemed dividend to the parent
Article 11(1)(c) lists profits distributed in a disguised manner through transfer pricing among the deductions not accepted, so the excess over the arm’s-length price is added back and taxed at 25 per cent. Article 13(6) then treats the disguised distribution, for income and corporate tax purposes, as a dividend distributed on the last day of the accounting period, or, for limited taxpayers, as an amount transferred to the head office. A deemed dividend to a non-resident parent attracts the withholding of Article 30(3); the rate is 15 per cent, as set by Presidential Decision No. 9286 (Official Gazette 22 December 2024, No. 32760) for dividends distributed from that date, subject to any lower rate under an applicable tax treaty; Article 30(8) lets the President set the rate anywhere from zero to double the statutory rate. The corresponding adjustment at the other party is conditional on the distributing company’s assessed taxes being final and paid. Article 13(7) limits the Treasury-loss (Hazine zararı) defence to domestic transactions between full taxpayers or Turkish places of business of foreign companies, so a cross-border management fee cannot rely on it.
Take the group services fee. The parent charges the subsidiary 1,200,000 lira a year; a benchmark shows that allocable costs plus an arm’s-length mark-up come to 800,000 lira. The 400,000 lira excess is non-deductible under Article 11(1)(c), is a dividend distributed on 31 December under Article 13(6) and is withheld on at the rate then in force. Service fees paid abroad may separately fall under Article 30(1)(b) when paid, depending on characterisation and any treaty. The analysis also runs the other way: a subsidiary that invoices the parent for development work at bare cost forgoes a margin that is a disguised distribution.
Thin capitalisation: the three-times-equity test of Article 12
Article 12(1) provides that the portion of the debts a corporation obtains, directly or indirectly, from its shareholders or persons related to them and uses in the business that exceeds three times its equity at any date within the accounting period is disguised capital (örtülü sermaye) for that period. Three details decide most cases: equity under Article 12(3)(b) is the equity at the beginning of the period under the Tax Procedure Law, so a capital increase in June does not raise the denominator until next year; the test is “at any date”, so a loan repaid in April still fails for the year; and under Article 12(5) the ratio is applied to lending shareholders and their related persons collectively, so splitting the loan with a sister company does not help. A related person under Article 12(3)(a) is a corporation in which the shareholder holds at least ten per cent of the capital, votes or dividend rights, or a person holding at least ten per cent of the shareholder or of such a corporation; for branches of foreign companies Article 22(4) drops the threshold.
Under Article 12(2) borrowings from banks or similar credit institutions that operate within their main business and are shareholders or related to shareholders count at 50 per cent, except for credit companies that finance only related companies; the text is a counting rule rather than an express six-times limit, but the arithmetic is that related-bank debt can reach six times equity. Article 12(6) excludes third-party loans obtained against non-cash guarantees given by shareholders or their related persons, funds that shareholders or related persons have raised from banks or capital markets and on-lent on the same terms, and borrowings by banks and finance companies. A parent that borrows from its bank and passes the loan down on identical terms therefore stays outside Article 12, provided the chain is documented.
The consequences mirror transfer pricing. Article 11(1)(b) denies the deduction of interest, exchange differences and similar expenses on disguised capital, and Article 12(7) treats interest and similar amounts on disguised capital, excluding exchange differences, as a dividend distributed on the last day of the period at the level of both borrower and lender, or for limited taxpayers as an amount transferred to the head office, which for a foreign parent means the Article 30(3) withholding. Exchange losses on the disguised portion are non-deductible but not recharacterised. Separately, Article 11(1)(i) lets the President disallow, for enterprises whose debt exceeds their equity and only on the excess, up to ten per cent of all financing costs other than those capitalised into investments; the portion set by Presidential Decision is not in the statute text and applies to bank debt too.
Worked example: the convertible shareholder loan
The subsidiary started the year with tax-balance-sheet equity of 2,000,000 lira; in February the parent lent it the equivalent of 9,000,000 lira at a market rate, convertible at the next round. Three times equity is 6,000,000 lira; the 3,000,000 lira excess is disguised capital for the whole year under Article 12(1), even if the loan is converted in November. One third of the interest is non-deductible under Article 11(1)(b) and is a dividend to the parent on 31 December under Article 12(7), withheld on under Article 30(3) at the rate in force. The remaining two thirds are deductible only if the rate is arm’s length under Article 13, with the supporting file kept under Article 13(3). An interest-free loan is not a safe harbour: it avoids Article 12 at the subsidiary but raises an Article 13 question, and a subsidiary lending to its parent without interest makes a disguised distribution itself. The alternatives are a capital increase before the loan, which raises next year’s denominator and is notified through E-TUYS within one month, or a bank loan guaranteed by the parent, which Article 12(6)(a) keeps outside the test. The TCC Article 376 side of the same decision is in the TCC 376 playbook.
Law 4875: transfers and notifications alongside the tax rules
None of this restricts the flows themselves. Article 3(c) of Law 4875 guarantees the free transfer abroad, through banks, of management and licence fees, loan principal and interest and dividends; the tax rules decide what is deductible and withheld, not whether the money may leave. Under the regulation made under Article 4, companies with foreign capital file the annual Activity Information Form through E-TUYS by the end of May and notify capital increases and share transfers within one month, so converting the loan into equity triggers the one-month notice. The Law says the statistical information so notified may not be used as evidence for other purposes; that protection does not extend to the transfer pricing file kept under Article 13(3), which will be read against the E-TUYS filings and the cap table.
The parent charges no management fee at all. Is that safe?
Not automatically. A zero price departs from arm’s length as much as an inflated one, although the exposure then sits at the parent’s end. The Turkish risk arises when services run the other way: a subsidiary that works for the parent for free, or at cost, has forgone a margin that Article 13(6) treats as a distributed dividend.
The loan was converted into capital before year end. Does thin capitalisation still apply?
Yes, for the period before conversion: Article 12(1) tests the debt at any date in the period, and interest accrued while the excess existed is disguised-capital interest under Article 12(7). Conversion stops the problem going forward, raises the denominator from the next period and is notified through E-TUYS within one month.
Is a transfer pricing report mandatory for a small subsidiary?
Article 13(3) requires every company to keep the records behind the arm’s-length price for every related-party transaction; the report format and thresholds are set under Article 13(9) in secondary legislation. Whatever the threshold, the 50 per cent penalty reduction in Article 13(8) requires documentation that was complete and on time.
Related: company formation for foreign founders · international desk · TCC 376 playbook · cap table.
Sources. Corporate Tax Law No. 5520 (Articles 3, 11, 12, 13, 22, 30, 32); Tax Procedure Law No. 213 (Articles 253, 359); Foreign Direct Investment Law No. 4875 (Articles 3, 4); Presidential Decision No. 9286 (Official Gazette 22 December 2024, No. 32760) on dividend withholding rates under KVK Article 30; Implementing Regulation of Law 4875 (Article 5, E-TUYS). Statute links open the official Turkish texts on mevzuat.gov.tr.
This article is provided for general information only and does not constitute legal advice. Please seek legal support for an assessment of any specific matter.
