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.