Thin Capitalization and Intercompany Loans in Turkey

A foreign parent can fund its Turkish subsidiary with share capital, with loans, or with a mix of both. Loans are attractive: they can be repaid without a capital reduction, and interest is normally a deductible expense in Turkey. Turkish tax law does not forbid shareholder loans, but it limits how far they can replace equity.

That limit is the thin capitalization rule (örtülü sermaye) in Article 12 of the Corporate Tax Law No. 5520 (KVK). Where borrowing from shareholders and related persons exceeds three times the company’s equity, the excess is treated for tax purposes as disguised capital. Interest and foreign-exchange losses on it stop being deductible, and the interest is treated as a dividend.

This guide explains the rule as the Revenue Administration (GİB) applies it, with a worked example. If you are still choosing how to capitalise a new subsidiary, read it together with our company formation in Turkey guide.

The Short Answer

• Debt obtained directly or indirectly from shareholders or persons related to them, and used in the business, is thin capital to the extent it exceeds three times the company’s equity at any date in the accounting period.
• Equity means the company’s equity at the beginning of the accounting period, determined under the Tax Procedure Law (VUK). For a new company, it is the equity on its formation date.
• Interest, foreign-exchange losses and similar costs on the excess are not deductible, including for provisional tax.
• Interest on the excess (not FX differences) is treated as a dividend distributed on the last day of the period. For a foreign lender, that means dividend withholding on the grossed-up amount, with credit for interest withholding already deducted.
• Transfer pricing applies to every related-party loan, even when the 3:1 limit is respected.

The Rule in Article 12

Under KVK Article 12(1), debts that a company obtains directly or indirectly from its shareholders or from persons related to its shareholders, and uses in its business, are thin capital for the period to the extent they exceed three times the company’s equity at any date during that period.

Three conditions must all be met:

1. the debt comes, directly or indirectly, from a shareholder or a person related to a shareholder;
2. the debt is used in the business; and
3. the debt exceeds three times the equity at some date in the accounting period.

Only the excess is affected. Article 12 is a tax rule: it changes how the excess and its financing costs are taxed. It does not cancel the debt, and it does not turn the loan into registered share capital.

Who Counts as a Related Lender

Shareholders. A loan from a shareholder is in scope whatever the size of its holding. GİB’s Corporate Tax General Communiqué No. 1 confirms there is no minimum shareholding for the shareholder itself. The exception is a lender that became a shareholder by acquiring the company’s shares traded on the stock exchange: there, Article 12(4) requires at least a 10% holding.

Persons related to a shareholder. Under Article 12(3)(a), these are:

• a company in which the shareholder holds, directly or indirectly, at least 10% of the capital, voting rights or dividend rights; and
• an individual or company that holds, directly or indirectly, at least 10% of the capital, voting or dividend rights of the shareholder or of such a related company.

Under Article 12(5), these percentages are applied to the lending shareholders and related persons together. In a multinational group, that usually brings sister companies and the group’s finance company into scope.

Indirect funding. The Communiqué says thin capital can arise when the money comes from a shareholder through a third party, even through several intermediaries. A back-to-back arrangement through an unrelated company does not take the debt out of scope.

Which Debts Count

The Communiqué gives practical rules on what goes into the calculation:

• Used in the business. If the borrowing company passes the loan on to another company on the same terms, that part is not used in its business and does not count for it. It does count for the company that finally uses it.
• Trade payables. Debts from purchases of goods and services on credit terms in line with market conditions and commercial practice are left out. Credit beyond those normal terms counts, and the related late-payment charges are treated as interest on thin capital.
• Advances. Advances received are treated as borrowing and count.
• No netting. A receivable the company holds from the same shareholder or related lender is not set off against the debt.

Debts That Are Not Thin Capital

Article 12(6) excludes several types of borrowing:

• Loans from third parties against a non-cash guarantee given by shareholders or related persons. A loan backed by cash collateral does count. The Communiqué treats cash and readily convertible items such as cheques, gold, government bonds, Treasury bills and listed shares and bonds as cash collateral; any other guarantee, such as a parent company guarantee, is non-cash.
• Group on-lending of bank finance. Loans that a subsidiary, shareholder or related person obtains from banks, financial institutions or capital markets and passes on on the same terms (maturity, interest rate and other conditions) are excluded.
• Borrowings made by banks operating under the Banking Law, and certain borrowings by leasing, factoring, financing and mortgage finance companies from related banks.

Related banks. Under Article 12(2), loans from a bank or similar credit institution that is a shareholder or related person, and lends in line with its main activity, are counted at 50% in the comparison. This does not apply to credit companies that only finance related companies.

Measuring Equity

Article 12(3)(b) defines equity as the company’s equity at the beginning of the accounting period, determined under the Tax Procedure Law. The Communiqué explains that, under VUK Article 192, equity is the difference between total assets (holdings and receivables) and liabilities. It is measured on the opening balance sheet, not on registered capital.

Four consequences matter in practice:

• Losses reduce capacity. Accumulated losses are already reflected in the difference between assets and liabilities, so a loss-making company has a lower limit than its registered capital suggests.
• Zero or negative equity. If opening equity is zero or negative, the Communiqué says all borrowing from shareholders and related persons is thin capital.
• New companies. For a newly formed company, equity determined on the formation date is used, and the beginning of the period is the date business started. Check what the opening tax balance sheet actually shows before relying on capital that has not yet been paid in.
• Mid-year capital does not help this year. Because the test uses beginning-of-period equity, a capital increase made during the year raises the limit only from the next accounting period. Our capital increase guide explains the registration steps.

Timing: Any Date in the Year

The comparison is not made once at year-end. The Communiqué says the excess is treated as thin capital for as long as it exceeds the limit. A balance that is within the limit on 31 December can still have produced thin capital earlier in the year.

For foreign-currency loans, each loan is converted at the exchange rate on the date it was received. If the loan runs into the next year, the next year’s calculation uses the unpaid balance as valued under the VUK on the balance sheet date.

Where several lenders are involved, the Communiqué’s examples allocate the thin capital among them in proportion to each lender’s share of the total related debt.

Worked Example

Assume a Turkish LLC with a calendar accounting year. Its tax-law equity on 1 January is TRY 2,000,000. Its foreign parent lent TRY 4,000,000 before the year started and lends another TRY 5,000,000 on 1 July. Both loans are in Turkish lira and the parent is not a bank. Interest on both loans for July to December totals TRY 900,000. All figures are illustrative.

Interest for January to June is not affected by Article 12, because the debt stayed within the limit. The TRY 300,000 is added back as a non-deductible expense (KKEG): in each provisional tax period, the share of the interest that falls in that period, and in full in the annual return.

Tax Consequences for the Turkish Company

KVK Article 11(1)(b) lists interest, foreign-exchange differences and similar expenses paid or calculated on thin capital among non-deductible expenses. The Communiqué adds that this applies in provisional tax periods too.

The rule also works in the other direction. If the Turkish lira strengthens and the thin-capital portion of a foreign-currency loan produces an FX gain, the Communiqué says that gain is not taxed either.

Deemed Dividend and Withholding When the Lender Is Abroad

Under Article 12(7), interest and similar payments or accruals on thin capital, excluding FX differences, are treated as a dividend distributed on the last day of the accounting period in which the thin capital conditions arose. For a non-resident lender, the Communiqué says this deemed dividend is treated as a net dividend, grossed up and subject to withholding at the dividend rate. Interest withholding already deducted on the same amount can be credited.

The current domestic rates come from Decision No. 2009/14593, as consolidated by GİB:

• interest paid to non-resident companies: 0% for loans from foreign states, international institutions, foreign banks, and foreign institutions licensed to lend in their country that lend to the public rather than only to related companies (and for certain bank subordinated and securitisation loans); 5% on late-payment charges arising from the supply of goods; 10% in other cases, which normally covers a loan from a non-bank parent; and
• dividends distributed to non-resident companies: 15%, a rate in force since 22 December 2024.

Continuing the example, at domestic rates and following the method in the Communiqué’s own example:

Two timing rules in the Communiqué are easy to miss. If the company knowingly did not expense the interest on the thin-capital portion and has not paid it, no dividend withholding arises until it is paid. But if the adjustment is made after the period has closed, for example after a tax audit, the dividend withholding is due as at the last day of that period whether or not the interest was paid.

A tax treaty between Turkey and the lender’s country can reduce the Turkish withholding on interest and on dividends. Confirm the treaty article, its conditions and the documents the Turkish payer needs before the first payment. Our double taxation agreements guide explains how treaties are applied, and our tax residency certificate guide covers the residence evidence side. For ordinary dividends paid to a foreign parent, see our dividend repatriation guide. Whether the parent’s home country recognises the deemed dividend, and how it gives credit, is a question for an adviser in that country.

Transfer Pricing Applies Even Below 3:1

KVK Article 13 expressly treats lending and borrowing money between related persons as a purchase or sale of goods or services that must be priced at arm’s length. A loan can be well within the 3:1 limit and still carry a non-arm’s-length interest rate. The excess interest is then disguised profit distribution, treated as a dividend at the end of the period.

Support the rate with currency, maturity, security, ranking, the borrower’s credit standing and market evidence. Keep the loan agreement, the board or general assembly approvals, the bank trail and the annual interest calculation together. Our transfer pricing guide covers the documentation side.

The Separate Financing-Expense Restriction

Thin capitalization is not the only limit on interest. Under KVK Article 11(1)(i), companies other than credit and financial institutions, leasing, factoring and financing companies, whose borrowed funds exceed their equity, cannot deduct part of the financing costs attributable to the excess. The Law caps that part at 10% of those costs and lets the President set the rate. Costs added to the cost of an investment are excluded. This restriction applies to all borrowing, including bank loans, so plan both tests together.

Debt or Equity?

Debt suits short-term working capital that the subsidiary can genuinely repay. Equity is usually the more coherent choice for permanent funding, for absorbing start-up losses, or where opening equity is too small for a meaningful 3:1 limit. Many parents use both: enough capital to support the planned loans, and loans for the remainder.

Ask the bank that will receive the funds which foreign-exchange and reporting rules apply to a loan from abroad before you sign. If the parent is itself a company, our guide to LLC formation with a corporate shareholder covers the documents the parent will need in Turkey.

A Practical Control Routine

1. Fix the tax-law opening equity on the first day of each period.
2. List every shareholder and related lender, including cash pools, advances and supplier credit beyond normal terms.
3. Track the related debt balance by lender and currency whenever it changes, not only at month-end.
4. Separate excluded borrowings and keep evidence: non-cash guarantee documents, same-terms on-lending agreements, and the status of any related bank.
5. Split interest and FX between the allowed and excess portions for each provisional tax period.
6. Update the transfer-pricing support and the treaty file for each lender.
7. At year-end, reconcile KKEG, deemed dividends and withholding returns.

Official Sources Used for This Review

• Revenue Administration: Corporate Tax Law No. 5520, Article 12, Article 13, Article 11 and Article 30
• Revenue Administration: Corporate Tax General Communiqué No. 1, consolidated text, section 12
• Revenue Administration: Decision No. 2009/14593 on withholding rates for non-resident companies, consolidated text

Intercompany Funding Support

Celikel CPA reviews funding plans for foreign-owned Turkish companies before the money moves: the equity and debt mix, the 3:1 calculation, withholding on interest, transfer-pricing support and the year-end KKEG and deemed-dividend entries. Loan agreements and the parent’s home-country position should also be reviewed by the group’s legal and tax advisers. We work with clients of every nationality. Consultations, correspondence and reports are in English (or Turkish, if preferred); official filings are made in Turkish.

Contact Celikel CPA with the planned loan amounts, currency and the subsidiary’s opening balance sheet.

Reviewed against official sources available on 19 October 2026. Rates and rules change, so confirm the current position before signing a loan or filing a return.