How the debts to related parties fall to the thin capitalization in Turkey?

According to the article 12 of Turkish Corporate Tax Law;

For 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 (i.e. equity as of the beginning of the fiscal year) ratio exceeds 3:1, the exceeding amount will be considered as thin capital for the related fiscal year.

Related parties with regard to thin capitalization are defined as shareholders and persons related to shareholders that own, directly or indirectly, 10 % or more of the shares, the voting rights or the right to receive dividends of the company.

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

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

Ø  The loans are used in the borrower company,

Ø  The debt-to-equity ratio exceeds three times the equity ( as of the beginning of the fiscal year) at any time within the fiscal year.

The debts arisen from purchase on credit realised in line with the market conditions, even if the late interest is charged separately, don’t be included to thin capital amount. On the other hand the debts which the due date exceed market conditions should be included to thin capital amount.

As per the Article 12 of the Corporate Tax Code, in case a related party loan exceeds the 3:1 ratio, foreign exchange losses and interest expenses incurred on the exceeding portion of the concerning loan are required to be treated as a non-deductible expense. Moreover, the interest amounts that are actually paid in connection with the exceeding portion of the related party loans shall be treated as dividend distributed as of the last day of the fiscal period.

In case total loan amount and commercial debts exceeding arm’s length market conditions exceeds 3:1 debt-equity ratio; interest charge, forex losses and late charge calculated on the exceeding amount (thin capital) will be disallowable expense with regard to the corporate tax law and also interest and late charge calculated on the thin capital amount will be subject to dividend taxation.