Turkey

Consolidation of the accounts of group companies for tax purposes is not allowed in Turkey since each company is regarded as a separate taxpayer.

Transfer pricing

The Corporate Tax Law (CTL) includes transfer pricing regulations, using the OECD's guidelines as a basis. If a taxpayer enters into transactions regarding the sale or purchase of goods and services with related parties in which prices are not set in accordance with the arm's-length principle, the related profits are considered to have been distributed in a disguised manner through transfer pricing. Such disguised profit distribution through transfer pricing is not accepted as deductible for CIT purposes. The methods prescribed in the law are the traditional transaction methods described in the OECD's transfer pricing guidelines.

Transfer pricing documentation

The three-tiered approach that was adopted in many countries after the OECD Base Erosion and Profit Shifting (BEPS) project was included into the General Communique Serial No. 4 on Disguised Profit Distribution through Transfer Pricing, published in Turkey on 1 September 2020. Based on the current Turkish transfer pricing legislation effective as of 1 September 2020, there are four types of documentation requirements for taxpayers:

• Annual Transfer Pricing Report (preparation by the deadline of annual CIT return declaration, and submission to Turkish tax authorities upon request within 15 days).
• The Transfer Pricing, Controlled Foreign Corporations, and Thin Capitalization Form ('Appendix 3 Form', which is presented as an attachment to the annual CIT return).
• Master File (preparation by the end of the 12th month following the relevant fiscal year, and submission to Turkish tax authorities upon request within 15 days).
• Country-by-Country Report (CbCR) and CbCR Notification (submission to the Turkish tax authorities by the end of the 12th month following the relevant fiscal year and electronically by the end of June of the year following the relevant fiscal year, respectively).

Thin capitalisation

According to local thin capitalisation regulation, if the ratio of the borrowings from shareholders or from persons related to the shareholders exceeds triple the shareholders' equity of the borrower company at any time within the relevant year, the exceeding portion of the borrowing will be considered thin capital and the corresponding interest will not be deductible. Accordingly, the ratio of loans received from related parties to shareholders' equity must be no more than 3:1 in order to eliminate Turkish thin capitalisation issues.

Controlled foreign companies (CFCs)

Turkish taxpayers are generally not subject to Turkish taxation on the earnings of their foreign corporate subsidiaries. Instead, Turkish taxation on such earnings is generally deferred until the earnings are distributed to the Turkish shareholder. The major exception to this rule is the CFC regime regulated under Article 7 of the CIT Law. Under this regime, Turkish shareholders (individual or corporation) are subject to Turkish taxation on their pro rata share of a CFC’s undistributed earnings, as if such earnings had been distributed currently, based on certain conditions.

A CFC is a company established abroad with at least 50% of the organisation controlled directly or indirectly by tax-resident companies and real persons by means of separate or joint participation in the capital, dividends, or voting rights. A CFC also must meet certain conditions (e.g. 25% or more of its gross revenue must be comprised of passive income, it must be subject to an effective income tax rate lower than 10% for its commercial profit in its home country, gross revenue of the subsidiary established abroad must be more than the foreign currency equivalent of TRY 100,000 for the related fiscal year).

The CFC's profit is included in the CIT base of the controlling resident corporation at the rate of the shares controlled, irrespective of whether it is distributed.