What is gross-up?
A gross-up clause requires the payer of a sum (interest, fees, dividends, royalties) to increase the payment amount so that, after deduction of any applicable withholding tax, the recipient receives the originally promised net amount. If a USD 1M payment subject to 15% withholding would deliver only USD 850K net, a gross-up clause requires the payer to actually pay USD 1.176M so the recipient nets USD 1M.
Where gross-up applies
Common in cross-border transactions: (1) Loan agreements — borrower must gross up interest payments for any withholding tax applicable to foreign lenders. (2) License/royalty agreements — licensor receives the promised royalty net of withholding. (3) Dividend agreements with foreign shareholders. (4) Executive compensation involving expatriate employees facing dual taxation.
The economic burden shift
Gross-up effectively shifts the tax burden from recipient to payer. In commercial negotiations, this is a meaningful concession — typically only granted when the recipient has alternative parties willing to fund without gross-up. Sophisticated payers resist gross-up clauses or limit them to specific tax types and excludethe payer’s own jurisdictional taxes.
Tax treaty implications
Gross-up obligations interact with double tax treaties: if the recipient can obtain a treaty rate reduction (e.g., reducing 15% to 5%), the gross-up obligation correspondingly reduces. Tax-residence certificates and beneficial-owner certifications become critical operational documents in any agreement with gross-up clauses.
Türkiye context — KVK Article 30 withholding
Turkish KVK (Corporate Tax Code) Article 30 imposes withholding tax on payments to non-residents — interest at 0-20%, royalties at 20%, dividends at 15% (reduced by treaty). Cross-border financing involving Turkish borrowers and foreign lenders increasingly includes gross-up clauses; structuring through treaty jurisdictions (Netherlands, Cyprus, Luxembourg) can materially reduce the gross-up obligation.
Related: Tax Indemnification, Forward Triangular Merger, Statutory Merger.