Most international companies establish a contact office, branch or new Limited Liability Company or Joint Stock Company in Turkey due to its’ significant location and economical advantages. In most cases the legal entity established in Turkey requires increase of capital or cash flow in order to maintain it’s operations or expand it. But the transfer of money from one country to another even within the same company can cause legal problems.
There are two ways to establish a cash flow to company in Turkey from the foreign Company. Providing service to main company or capital inflow or increase of capital of Turkish Company.
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ToggleTransfer Money From Foreign Company Account to Turkish Company Account
Transferring money is the simple task. Money transfers from foreign bank accounts can be made easily to the companies’ or persons’ bank account in Turkey through any bank via SWIFT transfer. There is no custom procedure etc. that is required. But some countries such as USA, Spain, Portugal may require a reason of transfer for any amount or above a determined amount. Failure to comply a reason of transfer may end up a financial investigation due to various reasons.
Transfer of Money Due to a Service Provided to Main Company
The main company could be provided a service by the company set up in Turkey. Even if the company owners are the same, the transferred amount may have been sent due to a service provided to main company out of Turkey. The services could be; Consultancy fee, legal service fee, services on Information Technology, broker fee etc.
Tax Regulations
These services are usually paid following the invoice of the service provider whether a trade company or sole proprietorship. But since the foreign company does not bound to pay stoppage, the Turkish service provider whether legal or real person has to keep in mind that 20% of the net service fee shall be paid by to tax administration by themselves. In business life of Turkey, the stoppage in other words income tax, is paid by the person or legal entity who received the service(paid for the service).
But when dealing a business with foreign entity, since they are not bound by tax regulations of Turkey, they do not pay income tax to Turkish Authorities. As a result, if a Turkish company or real person invoices the foreign entity, they should consider that at the end of each tax year they will pay for the income tax.
After the Money Transfer
Important thing is, following the transfer of the money if the foreign currency is to be changed into Turkish Lira and kept in the Turkish Lira Account in the Bank there is no problem in terms of tax regulation because the service and fee has already been invoiced by the receiver and it will be taxed accordingly.
But if the receiver wants to held the transferred amount in foreign currency then due to the fluctuations of Turkish Lira against the foreign currency the account balance may worth more than the time it arrived at first to the bank account in Turkey. Since the increasing value will be treated as commercial income the difference will be subject to the Corporation Tax. The company needs the specify this commercial income for each three months.
For example, if 5,000 $ swift transfer has taken place to the company account in Turkey, when the US Dollar rate was $ 1 = 15 TL. If there is no increase in the dollar exchange rate when the company has to submit a tax declaration, there is no problem, but since the accounting records are kept in TL, assuming that there is an increase in the dollar exchange rate and 1 $ = 20 TL, the TL equivalent of the dollar has increased by 5 TL although there is no increase in the $ 5,000 in the company account. There is an increase of 25,000 TL. In the temporary tax return, 5,000 TL, which is the foreign currency exchange income, should be reported and corporate tax should be given as if the company had made a profit.
Foreign Capital Inflow
The other reason of cashflow is that the owners of the main company can transfer money to the company in Turkey without a provided service as a capital payment.
Though this transaction is from the same company owners; foreign partners’ transfer is essentially a “foreign capital inflow“.
Transfer of capital inflow from foreign resident partners of the company in Turkey is possible by our legislation.
As long as the capital advance remains in this account, it is an equity item (not a loan) that can be qualified as a capital reserve. For this reason, there is no VAT exemption.
Foreign Capital Inflow should be in Turkish Lira because it is not a loan. Money may come to Turkey as foreign currency but it should be kept in local currency, so that account should not be subjected to calculation of tax.
General Remarks of Capital Increase in the Company in Turkey
The partners of the companies with foreign capital, rather than providing equity within the scope of registered capital of the company in Turkey they can transfer Money from out of country with the intention to be transformed into registered capital, as CAPITAL INCREASE can provide equity as ADVANCES (below, this concept is called as capital advance payment).
Legal Basis of the Capital Advance Payment
Advance payment can be defined as an early payment for the amount or price of a future transaction.
One of the future transactions is the payment of the capital commitment debt to arise. Since advance payments can be made for all future payments, there is no legal barrier to Capital Advance Payment for future capital commitment debt.
The foreign company or foreign resident partner who sends the money should state the Money is been sent with the purpose of Advance Capital Payment ‘’Sermaye Avansı’’ in Turkish in the explanation of the transfer. Also the company that receives the advance presents a parallel statement by recording this Advance Capital Payment under the name of Capital Advance Payment in the company’s records.
Registry, Proof and Formation of the Capital Advance Payment
In the trade registry newspaper, the company resides in Turkey has a certain capital which is committed on establishment. If this commitment has not been fulfilled yet, money from abroad can be registered in the trade registry as for this commitment, or by accepting it as a capital increase, through the Financial Advisor(Accountant) service.
It is beneficial for the foreign partner to get a decision from the board of directors or shareholders from company in Turkey that the money is given as a capital advance and to indicate that the money is sent as a capital advance in the transfer receipt, and the company that takes the advance, to make a decision on the account opened under the name of capital advance.
Also, if the incoming transfer is a currency other than TL, it should be registered as foreign currency purchase rate of the Republic of Turkey Central bank’s on the date the Money arrived and currency Exchange difference and interest should not be applied to this account. This is the reason for being a capital advance payment. If exchange rate difference and / or interest is applied to this account than the tax Office may claims that this money is a loan and not a capital advance payment.
In Terms of Tax Applications:
Moreover, in the 38th article of the Tax Income Law, which is also valid for the corporations, the commercial gain is a positive difference between the holders at the end of the period compared to the equity amount at the beginning of the period. partners)), it is stated that the values added to the business will be deducted from this difference, and with this provision, the addition of equity is not limited to the registered capital increase only. Therefore, article 38 Tax Income Law shows that it is accepted that capital advance application can be made in terms of tax legislation.
Legal Nature of Capital Advance
The process of giving money as a capital advance is a transaction performed by the partner of the company within the scope of the free will, and when the company receiving the advance makes a decision and accounted in parallel with the will of the partner, a capital advance is formed.
If the sender partner makes a declaration about the money he / she gives as capital advance (no loan), this money should be among the capital.
In other words, the fact that the partner stated that he/she gave this money as a capital advance shows that this money is NOT loan for the company, IT IS A SELF ASSET ITEM.
If the capital advance is added to the capital, it continues to maintain the nature of the asset under a different name (not the Capital Advance name, but the Capital name), but the capital related provisions of the Turkish Commercial Code begin to be applied as of the date of addition to the capital.
Regarding the money obtained from abroad and used without interest, fort he Value Added Tax to be applied the equivalent Money must be with the purpose of a loan.
Due to the reasons we explained above, capital advances are not normally loans but capital items. Due to its capital nature, it does not require interest, nor can it be subject to peer interest seeking and implementation.
In Terms of Stoppage:
If there is no actual interest or payment, stoppage for the money withholding will not arise.
If there is a declaration of intent by the way in which foreign partners who have sent capital advance payment to companies in Turkey, interest does not need to be carried out for these advances.
If there is no interest, there will be no application of stoppage tax. In terms of income or corporate tax, there is no provision that a stoppage tax will occur on the equivalent income (equivalent interest) in cases where income does not actually occur. It is natural that there is no such provision. Because real income is taken into account in determining the income or corporate tax base.
Resource Utilization Support Fund(KKDF):
Loans obtained from people who do not exceed 1 year and who are not banks or financial institutions abroad are subject to a 3% Resource Utilization Support Fund (KKDF) payment.
In order to talk about KKDF, the money provided from abroad must be in the nature of debt.
Due to the points we explained above, capital advances do not fall under the subject of KKDF since they do not have the nature of loan.
Judicial Decisions
Foreign shareholders were not observed by the judicial decision relating to sending money as capital advances to companies established in Turkey. This situation indicates the minimum amount of tax problems related to capital advances from abroad.
Reasonable Time for Converting the Capital Advance Payment to Capital
It is seen in the doctrine that the capital advance should be added to the capital (not to be taken back) after a while to maintain this form and that this period should be reasonably short.
The feasibility of this practice has also been accepted by some legislative provisions and judicial decisions. Capital advances from abroad have the form of capital during their stay in the advance account. Capital Advance Payment from abroad are practically a foreign capital inflow. For further questions, you can get legal consultancy and advocacy services by contacting our office.
