Major Steps of Capital Injection for LLC in Turkey

-Board of shareholders decision (should be notarized)

The general assembly meeting of shareholders should convene and resolve to amend the articles of association of the company.

Such resolutions are subject to registration before the trade registry office where the headquarters of the company is located.

Registration deadline is within 30 days after the board decision.

-A report of the full payment of the previous capital prepared by a CPA

At the time of this registration application, a report certifying the full payment of the previous capital and prepared by a certified public accountant or independent accountant or auditor for companies subject to independent audit should also be submitted.

-Blockage letter from a bank

At least %25 of the amount to be injected as capital should have been paid before the registration. The amount is blocked by the bank until the registration. Outstanding amount should be paid within 24 months after the registration of the new capital

-Competition Board Fee

Capital amount is subject to competition board fee at the rate of 0,0004 of the amount to injected as capital. This fee should have been paid before registration

Cost Reflections and VAT in Turkey

According to article 1\1 of the VAT Law,  deliveries of goods and services related to commercial , industrial and professional activities realized in Turkey and importation of all types of goods and services are subject to VAT.

 

In order for transactions to be subject to VAT in Turkey, goods must be present in Turkey at the time of delivery and services must be rendered or benefited in Turkey.

 

Since there’s no services, profit and creation of adding value in the transactions such as cost recharge are not subject to VAT. My opinion is as follow:

 

-If any VAT incurred because of cost, VAT must be calculated over recharged costs;

-If the cost is not subject to VAT or exempted from VAT, cost recharging can be without VAT.

- If the cost is recharged with mark-up, the mark-up amount must be subject to VAT.

Cash Pooling in Turkey

Since 2008, Turkish companies are allowed to grant cash loans denominated in Turkish Lira or another foreign currency to their parent companies, participations and other group companies abroad. As a result, cash pooling arrangements are acceptable provided the tax implications of such arrangements are taken into account and the parties comply with the Turkish thin capitalization and transfer pricing rules.

While there are many variations, in essence there are two main forms of cash pooling: notional pooling and zero balancing. But the Turkish tax authority has not established a regulation about cash pooling yet. That’s why; we consider it as a credit/loan transaction.

The tax implications which should be taken into account are as follows:

a- Thin Capital Issue (When the Turkish Company is borrower)

According to Turkish Tax Legislation, every kind of loan directly or indirectly received from shareholders or persons related to shareholders for use in the business, if the debt-to-equity ratio exceeds 3:1, the exceeding amount will be considered as thin capital for the related fiscal year.

Debts used for business purposes will be considered within the scope of thin capitalization provided that:

 

·         The loans are directly or indirectly received from shareholders or persons related to shareholders,

·         The loans are used for business purposes,

·         The debt-to-equity ratio exceeds three times the equity at any time within the fiscal year.

The outcome of a portion of an intercompany loan exceeding the debt/equity ratio of 3:1 being considered as thin capital will be the non-deductibility of interest paid or foreign exchange losses, reverse charge VAT calculated on interest amount and similar expenses incurred.

b- Transfer Pricing Issue

In accordance with article 13 Corporate Tax Law; if a taxpayer enters into transactions regarding the sale or purchase of goods and services with related parties, where the prices are not set in accordance with the arm’s length principle, then related profits are considered to be distributed in a disguised manner through transfer pricing.

The expression of “purchase or sale of goods and services” is used in a broad scope that involves transactions such as buying, selling, manufacturing, construction, borrowing or lending money and other transactions such as payment of bonuses and wages etc.

 

In this respect interest rate related to cash pooling transactions must be determined in accordance with the arm’s length principle. (If the Turkish Company is borrower, it should get an interest gain in accordance with the arm’s length principle from use of the company cash by a group company)

c- Corporate Tax Law Issue (When the Company is borrower)

According to the Article 30 of Turkish Corporate Tax Law, the credit interest will be subject to withholding tax if the main creditor (intra-group company) is not a bank or financial institution.

Due to above mentioned information; interest payments made to the limited taxpayers are subject to withholding tax unless credit grantor isn’t a financial institution. Withholding tax rate to be applied is %10 according to the local tax legislation.

d- VAT Issue

Reverse Charge VAT is applied for the interest payments made to the limited taxpayers unless the lender company isn’t a financial institution. As we mentioned above if the interest amount is considered as thin cap, this VAT can’t be deductible from calculated VAT. (It should be booked as disallowable expense)

 

If the Turkish Company is lender, an interest amount calculated in accordance with the arm’s length should be charged to the group company.  

 

VAT exemption can be applicable over interest gains within the scope of exportation of services exemption. The conditions of mentioned exemption are as listed below;

 

·         Services have to be rendered for the customers abroad

·         Invoices and other documents must be issued in the name of the foreign customer

·         Fee for the services must be brought into Turkey as a foreign currency*

·         Services must be benefited abroad. (For example, the loan  should not be used by other Hilton hotels in Turkey)

 

* Fee can be deducted from debts to borrower

 f the four conditions have not fulfilled, the interest amount should be subject to VAT.

e- Resource Utilisation Support Fund (When the Turkish Company is borrower)

Foreign loans obtained by Turkish resident individuals or legal entities other than banks or financial institutions, can be subject to Resource Utilization Support Fund Levy (RUSF). The following points should be taken into account:

Average maturity	Currency	Base of Taxation	Creditor	Rate
Under 1 year	Foreign currency	Principal amount	Non Resident	3%
1 year or more – under 2 year	Foreign currency	Principal amount	Non Resident	1%
2 year or more – under 3 year	Foreign currency	Principal amount	Non Resident	0.5%
3 year or more	Foreign currency	Principal amount	Non Resident	0%
In all cases	Turkish Lira	Interest amount	Non Resident	3%

  f- Stamp Tax Duty Issue

Stamp Tax is applied to a wide range of documents, including but not limited to, contracts, agreements, notes payable, letters of credit and letters of guarantee, financial statements and payrolls. Stamp duty is levied as a percentage of the value stated on the document (other than rent contract and payroll) at rate of 0, 948%.

 

Due to above mentioned information stamp duty (0,948%) is applied over loan/pool agreements with companies other than banks or financial institutions.

 

 

 

Tax effects of mergers in Turkey

According to the article 18/1-2 of the corporate tax law; Merging of one or more corporations with another corporation is, as for the corporations that dissolve upon such merger, a dissolution. However, in mergers, the merger profit shall be the tax basis rather than the liquidation profit.

The provisions on the liquidation profit shall also apply to the determination of the merger profit. However, the assets that would be given to the shareholders or the owners of the dissolving corporation or corporations directly or indirectly shall be considered as the assets distributed in cases of winding-ups. The assets received from the post-merger corporation shall be treated according to the principles stated in the Tax Procedure Law.

On the other hand, the article 19 of the corporate tax law gives opportunity to a tax free merger called “take over” or “transfer” provided that two below requirements are satisfied.

1- Both of the acquiring and the acquired (dissolved) companies should be resident in Turkey (full taxpayer),

2- All the assets and the liabilities of the acquired (dissolved) company should be transferred to the acquiring company, at their book-values.

Exemptions on Taxes and Fees in case of a Tax Free Merger

a. Application of Corporate Tax Code

If the legal residence or headquarters of the absorbed entity and surviving entity are within the Republic of Turkey and the balance sheet values of the absorbed entity are taken over completely by the surviving entity where such values have been extracted by the surviving entity's balance sheet "as it is", such type of merger would be deemed as "take over" according to the Corporate Tax Code. Thus, only the earnings of the absorbed entity as of the date of the takeover shall be taxed; profits arising directly from the merger shall not be calculated or taxed.

The merging entities must submit to the relevant Tax Office a jointly signed statement within 30 days of the date of merger to which the takeover balance sheet shall be attached. The surviving entity needs to submit a further statement in connection with the tax debts undertaking the payment of any tax debts which have been incurred or will incur in connection with the absorbed entity. Moreover, the surviving entity will commit that it will fulfil other obligations of the absorbed entity that may arise in the future.

            a.1. Loss deduction in the case of transfer and division

In case of a transfer or complete division, corporates that took over the assets have the opportunity of deduction (discount) for the losses of divided or acquired institution under the restrictions stated below.

Accordingly, the transferee corporation can deduct losses occurred in the company;

. Losses under the equity value of the acquired institutions by the transfer date in the case of transfer,

. Losses under the equity value of the divided institution after the complete division,

from their incomes.

In case of division and transfer, carry-over loss is limited to the equity capital of the acquired or divided institution. In full-division process, the amount not exceeding the acquired equity of the acquired institution and loss proportional to inherited value can be deducted from losses of the divided institution.

b. Application of Value Added Tax ("VAT") Code

According to Article 17/4-c of the Value Added Tax Code, the merger that is deemed as a takeover according to the Corporate Tax Code as mentioned above is excluded from VAT. However, the transactions related with the merger which are exempted in this respect would not benefit from VAT deductions in full. Accordingly, at the end of the merger, the VAT's imposed on and not deducted by the absorbed entity will be made by the surviving entity subject to deduction by avoiding any duplication thereof.

In practice, the general tendency of the Ministry of Finance is to include the takeover procedures within the scope of full exemption. In fact, in previous applications regarding this issue it has been noted that the Ministry has issued rulings stating that the VAT's that were not deducted by the absorbed entity will be deductible by the surviving entity. A great number of merger operations in the past have been conducted based on such rulings.

c. Application of Stamp Tax Code

Any document issued in relation with the merger that is contemplated according to the Corporate Tax Code is exempted from tax duty due to the Schedule (II)-Section IV paragraph (17) annexed to the Stamp Tax Code No. 488.

Based on the aforementioned information there’s no obstacle or disadvantages arising from tax laws against the tax free merger provided that the requirements are satisfied.

 

Withholding tax base for payments to abroad (Gross up or net?) in Turkey

According to article 30 of the corporate tax law, corporation tax withholding shall be made from the various earnings and incomes of the corporations (e.g. royalty payments) that are subject to limited taxation, by those that pay and assess these earnings and incomes in cash or on the record, including the advances.
 

There are two ways to compute the withholding tax. One of them is gross-up method and the other one is to withhold tax from the invoice amount. The method to be applied can be chosen with the agreement of the parties. (We recommend that this agreement should be written and signed by the parties.) 

 

Example:

 

	Invoice amount (USD)	1.000,00
	Wth Tax Rate (For example)	10%
	Gross Up	Net
Withholding Tax Base	1.111,11	1.000,00
Withholding Tax	111,11	100,00
amount to be paid	1.000,00	900,00

The strange risk for the Turkish companies which accrued dividend but haven’t paid longtime

According to the law numbered 2308, if the dividend is not received within five years by the shareholders, the dividend should be transferred to the public treasury in three months. If not the company should paid three times of the dividend plus interest as indemnity.

We’ve never meet before this kind of situation, because the law is still in effect, we suggest you to take action.

 

That’s why we can offer you some solutions about this situation

 

The dividend can be:

 

1- paid to the shareholders before lapse of time

2- added to the paid in capital via capital increasing

3- kept as “extraordinary reserve” in the equity accounts with the General Assembly Decision

4- deducted from the previous years losses as “the loss recover fund”  with the General Assembly Decision

 

You can choose one of these options which are suitable for your company.

 

P.S. Companies which haven’t accrued dividend or keeping the profit in their retained earnings accounts have no risk.

Legal Results of Unprepared Affiliate Company Report

In case of not preparing an affiliate company report, board members of the affiliate company may be subject to the fines described in Turkish Commercial Law from 4.000 TL up to 73.000 TL.

Legal risks of not preparing this report can be summarised as below.

·         Since the responsibility to prepare the report belongs to board in corporations and managers in limited companies, members of board and managers are held responsible when the report was not prepared.

 

·         Due to the lack of the report; company shareholders may claim that any decision taken by the general assembly is invalid.

·         If a related company is subject to an independent audit, since the annual report, which is the conclusion part of the affiliate company report is mentioned in, is audited by an independent auditor, when the affiliate company report has not been prepared, the independent auditor may avoid giving opinion or can prefer to give a qualified opinion. At this point, independent auditor will just check whether the conclusion part of the affiliated company report is stated in the annual report. The affiliate company report will not be audited separately by the independent auditor.

 

Interest free loans from foreign group companies and VAT risk in Turkey

I’d like to inform you about a recently given tax ruling reflecting the Turkish tax authority’s opinion about  VAT responsibility of Turkish companies over interest free loan borrowed from a limited taxpayer which is not a financial institution.

 

This tax ruling closely concerns Turkish companies which have already an interest free loan from their foreign related parties.

 

The short summary of the tax ruling given to a Turkish company which plans to get an interest free loan from its limited taxpayer shareholder is as follow;

 

"Deliveries and services carried out in Turkey within the framework of commercial, industrial and professional activities are subject to value added tax.  The taxable base of deliveries and services states the monetary value of the transactions.

 

In cases where taxpayers have no residence, workplace, registered head office and business center in Turkey and in other cases where it is deemed necessary, the Ministry of Finance may hold those parties involved in the transactions for the payment of the tax in order to secure the due tax.

 

In cases of transaction whose value is unavailable or unknown and in case the value is the assets other than money such as goods, benefits and services, the taxable base is the imputed cost of transaction that is determined according to the nature of the transaction."

 

According to above mentioned information, even if a Turkish company borrows an interest free loan from its limited taxpayer shareholders, Turkish company must pay reverse charge VAT calculated over imputed interest cost of the transaction.  The interest amount which the reverse charge VAT will apply on should be calculated accordingly with the arm’s length interest.

 

Briefly, the tax ruling stipulates Turkish companies to calculate reverse charge value added tax over an interest accrual amount which must be calculated consistent with arm’s length principle , even if the company doesn’t have to pay interest over obtained loan from its related party.

 

For that reason, I recommend you to consider closing or capitalizing free-interest loans in order to avoid paying additional reverse charge VAT.

Stamp tax in Turkey

Documents specified by stamp tax law are subject to stamp tax. The term “documents” refers to the documents which are issued by writing on and signing or putting a mark that may substitute for signature and which can be presented to improve or indicate an issue and the documents which are prepared in magnetic environment and as electronic data.

Stamp tax is applied to a wide range of legal documents such as contracts, agreements, letters of undertaking, deeds of settlement, letters of cancellation, letters of guarantee, financial statements, returns and remunerations (payroll).

The taxpayers of the stamp tax are those who sign the documents. The companies who sign the contract are joint liable for the payment of the stamp tax. The taxes for the documents issued abroad or in the foreign embassies and consulates in Turkey are paid by those who present these documents to the official bodies in Turkey, who transfer or endorse them or who benefit from their provisions.

Contracts signed outside Turkey may not be subject to stamp tax. However, such a contract will still be within the scope of stamp tax practice if one of the following conditions is fulfilled.

·         Presenting to Turkish authorities (official departments),

·         Providing with a formality or endorsement,

·         Using (benefiting) in any way in Turkey.

The base of the stamp tax is the amount stated on the document. In case the amount is not clearly stated but if it is possible to calculate the value of the contract from the variables stated in the contract, calculated amount will be taken into consideration.

The loan agreements with banks or financial institutions are exempted from stamp duty tax, but the loan agreements with companies are subjected to stamp duty tax. 

The general stamp tax rate applicable to the agreements is 0.948 %. On the other hand the rate applied to rental agreements and to payroll receipts are different.   

Type of documents	Rate and amount
Documents related to agreements
Contract, letter of commitment etc	0.948%
Rental agreement	0.189%
Indemnities, Guarantees, etc	0.948%
Commercial documents
Certificates of original and country of origin	TL 14.40
Balance Sheet (e.g. submitted to Banks)	TL 31.80
Income statements  (same as above)	TL 15.40
Other documents and returns
Documents related to salaries, allowance of residence and business trip	0.759%
Annual income tax returns	TL 41.20
Corporate income tax returns	TL 55.00
VAT returns	TL 27.20
Withholding tax returns	TL 27.20
Other tax returns (excluding Stamp Tax)	TL 27.20
Returns submitted to custom office	TL 55.00
Social security premium returns	TL 20.30