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.