During inflationary periods, delays in payment terms are unfortunately experienced, particularly within commercial life. Generally speaking, many businesses in Turkey do not operate on a contractual basis and instead try to shape their commercial dealings through more traditional methods. Foremost among these is the saying "a man's word is his bond." However, serious deviations in the balance of payments hit all market players. In the days ahead, we will encounter many more situations of this kind. Therefore, acting with awareness of certain issues and points will be in our own best interest.

First of all, I must point out that if there is no contract in your commercial dealings, and no payment term is specified in that contract, you start any potential legal process one-nil down. Therefore, with every customer, from the very beginning — even when sending a quotation form — you should at the very least include the contract terms; how product/service deliveries will take place; within what period invoicing will occur; how and within what period payment will be made; texts covering confidentiality and copyright matters, if any; and, again if applicable, matters falling within the scope of the KVKK (Turkish Personal Data Protection Law). How the stamp tax will be paid and the points of recourse in case of dispute should also be specified, and you should make sure to obtain the signatories' signature circulars and the trade registry gazettes evidencing their authority within the company — doing so will eliminate the situation in which you start one-nil down.

So, what if there is no contract, and even though you indicated a payment date on the invoice, you stated that a maturity difference (late-payment surcharge) would be charged in case of non-payment — is this valid? Unfortunately, since there is no uniformity in the courts on this matter, since differing opinions have been put forward and different rulings have led to different outcomes, it regrettably has no validity. Well then, what are Article 23 of the Turkish Commercial Code (TCC) and Article 1530 of the TCC, which appear on these invoices? Why are they on invoices at all? Let us examine them a little:

First, I quote TCC Article 23 verbatim here:

5. Commercial sales and exchange of goods

ARTICLE 23- (1) Provided that the special provisions in this article are reserved, the provisions of the Turkish Code of Obligations concerning the contract of sale and the contract of exchange of goods shall also apply to sales and exchanges of goods between merchants.

a) If, according to the nature of the contract, the purpose of the parties and the type of the goods, partial performance of the contract of sale is possible, or if, despite the absence of these conditions, the buyer has accepted partial delivery without raising any reservation, then, in the event of non-performance of part of the contract, the buyer may exercise its rights only with respect to the part not delivered. However, if, due to the non-delivery of that part, the possibility of obtaining the benefit expected from the contract or of achieving the intended purpose is eliminated or weakened, or if it is understood from the situation and the circumstances that the remaining part of the contract cannot be performed in full or as required, the buyer may terminate the contract.

b) If the buyer is in default, the seller may request the court to permit the sale of the goods. The court shall decide that the sale be carried out by public auction or through a person authorized for this task. If the seller so wishes, the person authorized for the sale shall have the characteristics of the goods to be offered for sale determined by an expert. After the sale expenses are deducted from the sale price, the remaining money shall be deposited by the seller, on behalf of the buyer, with a bank — or, where no bank is available, with a notary — provided that the seller's right of set-off is reserved, and the buyer shall be notified of the situation immediately.

c) If the defect in the goods is clearly evident at the time of delivery, the buyer must notify the seller of the situation within two days. If it is not clearly evident, the buyer is obliged to inspect the goods, or have them inspected, within eight days of taking delivery and, if this inspection reveals that the goods are defective, to notify the seller within this period in order to preserve its rights. In other cases, the second paragraph of Article 223 of the Turkish Code of Obligations shall apply.

And while we are on the subject, what does Article 223 of the Turkish Code of Obligations say? Let me add that as well:

ARTICLE 223- The buyer is obliged to examine the condition of the purchased goods as soon as practicable in the ordinary course of business and, if it detects a defect for which the seller is liable, to notify the seller within a reasonable period. If the buyer neglects the examination and the notification, it shall be deemed to have accepted the goods. However, this provision shall not apply where the goods contain a defect that could not be revealed by an ordinary examination. If the existence of such a defect is discovered later, the seller must be notified immediately; otherwise, the goods shall be deemed to have been accepted together with that defect.

Let us also add the other provision, TCC Article 1530, and then interpret them:

F) Transactions prohibited by commercial provisions and the consequences of late payment in the supply of goods and services

ARTICLE 1530- (1) Unless otherwise provided, transactions and conditions prohibited by commercial provisions are null and void. However, contracts exceeding the maximum limit set by law or by the competent authorities for the obligations to be performed under the contract shall be deemed to have been concluded at the maximum limit; performances exceeding the limit shall be recovered even if they were not rendered by mistake. Within these limits, the second sentence of the second paragraph of Article 27 of the Turkish Code of Obligations shall not apply.

(2) In transactions carried out between commercial enterprises for the purpose of the supply of goods and services, if the debtor — except in cases where it cannot be held responsible for the delay — fails to pay its debt on the date stipulated in the contract or within the specified payment period, even though the creditor has performed its supply obligation arising from law or contract, the debtor falls into default without the need for any notice.

(3) The creditor of a defaulting debtor becomes entitled to interest as of the date stipulated in the contract or the day following the end of the payment period, even if this has not been stipulated.

(4) If no payment date or period is specified in the contract, or if the specified period is contrary to the fifth paragraph, the debtor shall be deemed in default without the need for any notice at the end of the following periods, and the creditor becomes entitled to interest:

a) At the end of the thirty-day period following receipt of the invoice or an equivalent request for payment by the debtor.

b) If the date of receipt of the invoice or the equivalent request for payment is uncertain, at the end of the thirty-day period following receipt of the goods or services.

c) If the debtor has received the invoice or the equivalent request for payment before delivery of the goods or services, at the end of the thirty-day period following the date of delivery of the goods or services.

d) In cases where the law or the contract provides for a procedure of acceptance or inspection of the goods or services, if the debtor has received the invoice or the equivalent request for payment on, or earlier than, the date on which the acceptance or inspection took place, at the end of the thirty-day period following that date; provided, however, that if the period stipulated in the contract for acceptance or inspection exceeds thirty days from receipt of the goods or services and this constitutes a gross injustice against the creditor, the acceptance or inspection period shall be deemed to be thirty days from receipt of the goods or services.

(5) The payment period stipulated in the contract may not exceed sixty days from the date on which the invoice or the equivalent request for payment or the goods or services were received, or on which the inspection and acceptance procedure for the goods or services was completed. Provided, however, that the parties may, by express agreement and on condition that it does not create a gravely unjust situation against the creditor, stipulate a longer period. However, in cases where the creditor is a small or medium-sized enterprise (SME) or an agricultural or livestock producer, or the debtor qualifies as a large-scale enterprise, the payment period may not exceed sixty days.

(6) Contractual provisions stipulating that no default interest will be paid, or that interest will be paid in an amount so low as to be considered grossly unfair, or that the debtor will not be liable — or may be held liable only to a limited extent — for the loss the creditor will suffer due to late payment, are invalid. In case of invalidity, the seventh paragraph shall apply.

(7) In cases where the default interest rate applicable to late payments made to the creditor under the provisions of this article is not stipulated in the contract, or the relevant provisions are invalid, the interest rate to be applied and the minimum compensation amount that may be claimed for the costs of collecting the receivable shall be announced by the Central Bank of the Republic of Turkey every year in January. The interest rate must be at least eight percentage points higher than the default interest rate applicable to commercial transactions stipulated in the Law No. 3095 of 4/12/1984 on Legal Interest and Default Interest. (the relevant rates are available at this link)

(8) In cases where payment of the price of the goods or services in installments is stipulated, the provisions of this article governing payment periods shall apply with respect to the first installment. The unpaid portion of each installment amount shall be subject to default interest at the rate stipulated in the seventh paragraph. In cases where the creditor is a small or medium-sized enterprise or an agricultural or livestock producer and the debtor is a large-scale enterprise, contractual provisions stipulating payment in installments are invalid.

As can be seen, the relevant articles of the Turkish Commercial Code state that where payment falls into default — even by a single day — one is entitled to default interest. If no payment period has been specified, the matter leads to the conclusion that the legal action process should be initiated within a 30-day period from the delivery of the goods or services, generally from the invoice date. Well then, if what is written on the invoice carries no weight and means nothing from the standpoint of the Turkish Commercial Code, let me also examine the matter from the standpoint of the Tax Procedure Law (VUK). In this case, we need to examine Articles 229-230-231-232 of the VUK, which set out the formal requirements of an invoice. These articles contain no obligation, in terms of form, that such a statement must or must not be written. Nowadays, electronic invoices are used in almost all commerce, and outside the scope of the legal legislation, relevant notes, logos and statements can be added to the blank areas of the invoice. This being the case, writing the note "a 15% maturity difference will be invoiced for invoices not paid by their due date" has no legal basis. However, since payment was not made within the maturity — i.e. the payment period — you specified on the invoice, you may first demand payment by way of a formal notice and, if that produces no result, resort to legal enforcement channels for collection on the basis of the buyer's default. Here, too, the relevant rates are in any case published by the Central Bank. (The link is provided above.) It is worth stating this clearly: there is no harm in applying a maturity difference to invoices not paid on time, but neither does it carry any legal sanction merely because it is written on the invoice. Nevertheless, within commercial life it can, to some extent, create a deterrent effect.

Still, if an opinion is to be sought on this matter, it is first worth examining the decision of the General Assembly on the Unification of Case Law of the Court of Cassation dated 27.06.2023, No. E.2001/1, K.2003/1.

In essence, the decision states the following: in disputes arising from a valid contractual relationship between the parties which, however, was not concluded in writing, where the statement "in the event the price is not paid within a certain period, a maturity difference shall be payable" is written on the invoices and served on the other party, and the other party does not object within eight days pursuant to Article 23/2 of the TCC, this merely results in the finalization of the contents of the invoice; it does not mean that the maturity difference has been accepted and may be claimed by the claimant. According to the Assembly, the invoice relates to the performance of the contract. If no objection is raised to the invoice within eight days, the contents of the invoice become final. What is to be understood by the contents of the invoice are the matters ordinarily expected to appear on an invoice in connection with the performance of the contract, such as the type of the goods or the quantity, kind and price of the work performed. The presence on the invoice of a note stating "a maturity difference shall be charged in case of delay," and the absence of any objection to that note, does not mean that a note concerning a matter not regulated in the contract between the parties has been accepted, even though it appears on the invoice. Since the maturity difference note is not part of the mandatory content of the invoice, deeming it accepted merely because no objection was raised within the statutory eight-day period produces severe consequences. Where such a note appears on the invoice, it will also not be possible to benefit from the presumption in Article 23/1 of the TCC mentioned above. Moreover, an invoice is not, by its nature, a contract. Nor does the failure to object within the statutory period confer the status of a contract on the invoice. The Assembly reached its conclusion by evaluating all of these criteria (1)

It is also worth addressing the matter within the other elements of commercial life. This concerns the administration's view — and how practice should take shape — in terms of Value Added Tax and Corporate Tax with respect to elements we frequently encounter alongside the Maturity Difference, such as the Foreign Exchange Difference and the Delay Surcharge, in invoices, or in invoices or notifications based on court decisions. In this area, practice generally involves transactions based on rote habit. If there is a Maturity Difference or a Delay Surcharge, VAT is added separately, taking into account the VAT rate at which the underlying main transaction was carried out; if a Foreign Exchange Difference has arisen, the VAT is separated out using the internal discount method — that is, it is treated as VAT inclusive — and the VAT rate is, of course, determined according to the main element. Well, from what angle does the administration view this? We also need to evaluate these matters from the other side of the table, that is, from the administration's perspective. The administration's view on this matter is set out in advance tax rulings (özelge). The answers the administration has given to various questions posed to it from time to time are also provided below.

Hoping this article proves useful,

Respectfully yours,

**(1): KIZILOT Zuhal; "Faturada Vade Farkı Kaydının Bulunması ve Bir İçtihat" (The Presence of a Maturity Difference Note on the Invoice and a Precedent), Yaklaşım, Issue 136, pp. 205-208.

Date: 19/10/2006

Number: B.07.1.GİB.0.01.53/5328 -2239-82206

Institution: Revenue Administration (Headquarters)

Subject: In your petition on record, it is stated that uncertainty has arisen regarding the VAT rate to be applied to elements such as maturity differences, price differences, foreign exchange differences, interest and reclamation arising in connection with deliveries made within the scope of your commercial activity, and the opinion of our Directorate on the matter is requested.

Conclusion: Accordingly; 

1- Maturity differences, interest, price differences and — being no different from these in nature — foreign exchange differences arising in connection with a delivery of goods or performance of services subject to value added tax are taxed by being included in the tax base of the taxable transaction pursuant to Article 24 of the Law. Therefore, VAT must be applied to the said elements, which are in the nature of an extension of the price of the relevant goods or services, at the rate to which the relevant goods or services are subject (if the delivery or service is exempt from VAT, these elements must also be treated as falling within the scope of the exemption).

2- With respect to foreign exchange differences arising against the manufacturer in connection with deliveries made under export registration within the scope of Article (11/1-c) of the Law, transactions must be carried out in line with the explanations made in section (4.2.) of the VAT General Communiqué Serial No. 95; and with respect to foreign exchange differences arising in favor of the manufacturer, in line with the explanations made in section (D) of the VAT General Communiqué Serial No. 25.

3- Since the price reductions known as reclamation, arising because the goods sold do not conform to their specifications or are defective, cause a change in the tax base, transactions shall be carried out pursuant to Article 35 of the Law. In the invoices to be issued by the buyer for the reclamation amount, value added tax must be calculated at the rate to which the delivery or performance of services to which the reclamation relates is subject.

 4- If the reclamation arises in connection with goods that have been exported, since the exported goods are exempt from value added tax pursuant to Article (11/1-a) of the Law, no value added tax shall be calculated on the reclamation amount shown in the invoice to be issued by the buyer abroad or in the documents serving as invoices under the legislation of the relevant country.

However, in cases where such a document cannot be obtained from the buyer abroad, it is possible for the exporting company to issue a new document canceling the previous invoice and to use, as supporting evidence, a document showing that the portion corresponding to the reclamation amount has been refunded.

5- Where the said reclamation amount is passed on by the exporter to the lower stages (for example, to the manufacturer), transactions shall be carried out in line with the explanations made in section 3 above.

6- As for the reclamation amount arising in connection with imported goods, since this matter essentially relates to the import tax base, transactions must be established within the framework of the Customs Law.

Please be informed accordingly.

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Date: 27/12/2011

Number: B.07.1.GİB.4.35.17.01-35-02-761

Institution: IZMIR TAX OFFICE DIRECTORATE

Subject: Stating that your company manufactures to order; that when an order commitment is made, a check or promissory note denominated in foreign currency is issued; and that when the goods are delivered to the customer, the invoice is issued on the basis of the exchange rate as of the delivery date; the opinion of our Directorate is requested on the treatment, for value added tax purposes, of the foreign exchange differences arising where the checks or notes are collected before or after the delivery of the goods or are endorsed to the companies from which goods are purchased, on the declaration of foreign exchange differences, and on how the merged company will file its returns online pursuant to Provisional Article 5 of the Corporate Tax Law.

Conclusion: APPLICATION OF THE CORPORATE TAX LAW: since the accrual basis applies in the determination of commercial income, foreign exchange gains must be taken into account as income of the period in which they accrue, and foreign exchange losses as expenses of the period in which they accrue, in determining corporate income. For advance tax purposes, under the periodicity principle, foreign exchange gains or losses shall be taken into account in determining the income of whichever advance tax period they arise in.

In addition, arrangements have been made on the returns with respect to the reduced Corporate Tax calculations to be assessed within the scope of Provisional Articles 4 and 5 of the Corporate Tax Law, and they have been added to lines 76, 77 and 78 of table no. 5 of the corporate tax return and to lines 31, 32 and 33 of the corporate advance tax return.

APPLICATION OF THE VALUE ADDED TAX LAW: the explanations regarding the treatment of foreign exchange differences under the VAT regime are provided in section E/2 of the VAT General Communiqué Serial No. 105.

Accordingly, in transactions where the price is expressed in foreign currency, where payment is made after the date on which the taxable event occurs, the foreign exchange differences arising due to late payment are essentially an element in the nature of a maturity difference and must therefore be included in the tax base.

Therefore, the VAT relating to foreign exchange differences arising upon payment of checks or notes issued indexed to foreign currency over the VAT-inclusive total amount shall be calculated by the internal percentage method, taking into account the rate to which the transaction was subject at the moment the taxable event occurred; whereas the VAT relating to foreign exchange differences arising upon payment of checks or notes issued indexed to foreign currency over the VAT-exclusive amount shall be calculated by applying the rate to which the transaction was subject at the moment the taxable event occurred to the amount of the foreign exchange difference.

In addition, where checks indexed to or denominated in foreign currency are endorsed or discounted, the positive difference between the total value of the amount collected at the current exchange rate on that date and its value calculated at the exchange rate prevailing on the date the goods were delivered or the services performed is included in the tax base.

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Date: 16/01/2003

Number: B.07.0.GEL.0.54/5424-2-O2-

Institution: General Directorate of Revenues

Subject: Stating that, as you were unable to pay the price of the cement you purchased and the value added tax thereon by the due date, you issued promissory notes denominated in USD for the total amount, and that you paid some of the notes after their maturity, it is asked whether, in the invoice to be issued for the foreign exchange difference, the value added tax should be calculated separately or by the internal percentage method.

Conclusion: In transactions where the price is expressed in foreign currency, where payment is made after the date on which the taxable event occurs, the foreign exchange difference arising due to late payment is essentially an element in the nature of a maturity difference and shall therefore be included in the tax base.

In this framework, the value added tax relating to the foreign exchange difference in the nature of a maturity difference arising upon payment of the notes issued in USD for the sum of the goods price and the value added tax amounts must be calculated by applying the internal percentage rate to the amount of the foreign exchange difference.

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Date: 24/11/2015

Number: B.07.1.GİB.4.34.17.01-KDV.35-97216

Institution: ISTANBUL TAX OFFICE DIRECTORATE

Subject: The matter of which line of the VAT Return the value added tax on a price difference invoice should be shown in.

Conclusion: In this framework, it is possible for the VAT calculated on the price difference invoices issued to you on the basis of the sales invoices you issued to your customers to be deducted by being recorded in line no. 103 of the "Deductions" table under the "Deductions" tab of VAT return no. 1.

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Date: 03/03/2011

Number: B.07.1.GİB.4.06.17.01-2010-/14013-14-112

Institution: ANKARA TAX OFFICE DIRECTORATE

Subject: VAT on a Price Difference Invoice Within the Scope of an Investment Incentive Certificate

Conclusion: Since deliveries of machinery and equipment within the scope of an investment incentive certificate are exempt from value added tax pursuant to Article 13/d of the Law, no value added tax shall be calculated in the invoice to be issued on account of the price increases occurring in DSİ unit prices under the contract concluded with ... A.Ş., which holds an investment incentive certificate, provided that reference is made to the initial invoice issued within the scope of the exemption.

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Date: 25/07/2012

Number: B.07.1.GİB.4.16.16.02-300.12.17-316

Institution: BURSA TAX OFFICE DIRECTORATE

Subject: Whether an invoice should be issued, and whether VAT should be calculated, for interest amounts adjudged payable together with default interest as a result of litigation

Conclusion: IN TERMS OF VALUE ADDED TAX: Accordingly, since the VAT amounts shown on the default interest invoices issued in your company's name (dated 2006, 2007 and 2010) may be deducted in the taxation period in which the said documents are recorded in your statutory books, provided that the calendar year in which the taxable event occurred is not exceeded, it is not possible for you to benefit from the right of deduction on the basis of documents you recorded in your statutory books after the calendar year in which the taxable event occurred. However, the VAT amount shown on the invoices to be issued by the said company for the interest amounts adjudged payable, together with default interest, to Botaş Boru Hatları ile Petrol Taşıma A.Ş. as a result of litigation may be deducted, within the framework of the provisions of Articles 29 to 34 of the Law, in the taxation period in which the said documents are recorded in your statutory books, provided that the calendar [year] in which the taxable event occurred has not been exceeded.

IN TERMS OF THE TAX PROCEDURE LAW: Accordingly, the interest amounts adjudged payable, together with default interest, to BOTAŞ Boru Hatları ile Petrol Taşıma A.Ş. as a result of litigation must be documented by issuing an invoice. On the other hand, it has been understood that the lawsuit concerning the invoice amounts issued for the delay surcharge sought in respect of the years 2006, 2007 and 2010 and the VAT calculated thereon, which were adjudged payable together with default interest as a result of the lawsuit filed, was concluded in 2012; it is possible for the invoice amounts issued by your company in respect of the said years, which have not been taken into your records to date due to the dispute between you, to be recorded in the 2012 books, provided that general accounting principles are complied with and a connection is established with the income accounts of the relevant year. Furthermore, it goes without saying that if the transactions are not recorded in the books within the periods stated above, an irregularity penalty will be imposed pursuant to Article 352/1-6 of the Tax Procedure Law.

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Date: 07/03/2017

Number: B.07.1.GİB.4.46.15.01-130[9-2016/06]-490

Institution: KAHRAMANMARAŞ TAX OFFICE DIRECTORATE

Subject: In your advance ruling request form on record, it is stated that your health facility procures catering services including materials, and that, in connection with the work performed, a minimum wage price difference invoice was issued to you, attached to the meal invoice, on account of the personnel employed; the opinion of our Directorate is requested regarding the withholding rate to be applied on the invoice issued for the said price difference.

Conclusion: the "Work of Having Meals Prepared and Distributed, Including Materials, and Post-Distribution Services Performed" carried out by the contractor company is subject to VAT withholding at the rate of 5/10; and since the price difference calculated for the service provided — pursuant to Article (14/2) of the "Contract for the Procurement of 36-Month Meal Preparation, Including Materials, and Post-Distribution Services," based on the provision in Article 6 of the Decision annexed to the Council of Ministers Decision No. 2013/5215 published for the implementation of Law No. 4734 — cannot be considered separately from the service price, VAT withholding at the rate of 5/10 must likewise be applied, within this scope, on the minimum wage difference invoice issued.

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Date: 11/05/2016

Number: B.07.1.GİB.4.16.16.02-130[I-16-56]-116

Institution: BURSA TAX OFFICE DIRECTORATE

Subject: In your advance ruling request form on record, the opinion of our Directorate is requested regarding the value added tax (VAT) rate to be applied to maturity differences subsequently arising in connection with your fertilizer deliveries that are exempt from tax.

Conclusion: The regulations state: "After the transaction within the scope of the exemption has taken place, certain payments (maturity difference, foreign exchange difference, reclamation, etc.) may arise in favor of or against the seller. There is no question of such payments arising in connection with transactions within the scope of the exemption being subject to VAT. Since these amounts affect the VAT base, they must be taken into account in the calculation of the maximum tax amount refundable. Payments arising in favor of the party carrying out the transaction within the scope of the exemption are declared in the return for the relevant period in which they arise, in line with the declaration procedure applicable to the main transaction."

Accordingly, maturity differences subsequently arising in connection with deliveries and performances of services must be included in the VAT base, and VAT must be calculated on this amount at the VAT rate applicable on the date the delivery or service was performed. However, no VAT shall be calculated on the maturity difference invoices that may subsequently arise in connection with your fertilizer deliveries, which are exempt under Article 13/ı of the VAT Law.

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Date: 11/07/2013

Number: 39044742-KDV.1-1021

Institution: ISTANBUL TAX OFFICE DIRECTORATE

Subject: With the advance ruling request form on record, an opinion is sought as to whether the interest and foreign exchange difference calculated on disguised capital (thin capitalization) are subject to VAT, whether — if subject to VAT — they may be deducted, and their status under the Corporate Tax Law.

Conclusion:

1. IN TERMS OF THE CORPORATE TAX LAW: in order for the corporation extending the financing within the scope of disguised capital to be able to make an adjustment after the close of the accounting period, there must be an assessment made as a result of the adjustment carried out with respect to the corporation using the disguised capital, and the tax subject to that assessment must have become final; the amount to be taken into account in the adjustment shall be the finalized and paid amount.

In addition, interest and similar payments or calculated amounts on disguised capital — excluding foreign exchange differences — shall be deemed dividends distributed as of the last day of the accounting period in which the conditions for disguised capital are met, with respect to the said taxpayer corporation; and where the dividend obtained is derived by reason of participation in the capital of another corporation subject to full tax liability, it shall be exempt from corporate tax.

2. IN TERMS OF THE VALUE ADDED TAX LAW: Since lending transactions between the principal shareholder or related companies (the interest amount paid or calculated at the arm's-length interest rate on disguised capital and the foreign exchange difference) are treated as a financing service pursuant to Article 1/1 of the VAT Law, they shall be subject to VAT pursuant to Article 1/1 of the Law.

Pursuant to Article 12/7 of the Corporate Tax Law No. 5520, since interest and similar payments or calculated amounts on disguised capital — excluding foreign exchange differences — are deemed, in the application of the Income and Corporate Tax Laws, dividends distributed as of the last day of the accounting period in which the conditions for disguised capital are met, with respect to both the borrower and the lender, or amounts transferred to the head office in the case of limited taxpayers, the fact that commercial activities taking place between corporations and related persons are subsequently treated as disguised capital in the application of the Income and Corporate Tax Laws and deemed distributed dividends does not affect the transaction's character as a financing service for VAT purposes.

Since the deduction of interest and similar expenses paid or calculated on disguised capital is not accepted in the determination of corporate income, it is not possible for the VAT paid on account of these expenses to be deducted pursuant to Article 30/d of the VAT Law. Amounts previously deducted must be removed from the deduction accounts and declared by being added to the "VAT to be added" line of the VAT return for the period in which it is understood that the deduction of these amounts is not possible.

On the other hand, since the foreign exchange difference must also be regarded as one of the elements included in the tax base pursuant to Article 24/c of the VAT Law, the VAT calculated on the foreign exchange difference relating to disguised capital must be treated as being in the nature of VAT paid on account of interest and similar expenses and must not be deducted pursuant to Article 30/d of the Law.

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Date: 08/03/2018

Number: 38418978-125[12-16/1]-102776

Institution: ANKARA TAX OFFICE DIRECTORATE

Subject: Regarding whether maturity differences arising from purchases of goods and services from related persons may be treated within the scope of disguised capital.

Conclusion: The first paragraph of Article 12 of the Corporate Tax Law No. 5520 stipulates that "the portion of the borrowings obtained by corporations, directly or indirectly, from their shareholders or from persons related to their shareholders and used in the enterprise that exceeds, at any date within the accounting period, three times the corporation's equity shall be deemed disguised capital for the relevant accounting period." Subparagraph (b) of the first paragraph of Article 11 of the said Law, in turn, provides that interest, foreign exchange differences and similar expenses paid or calculated on disguised capital may not be recorded as expenses in the determination of corporate income.

Accordingly, where the transaction of borrowing from a shareholder, or from a company deemed related to a shareholder, falls within the scope of disguised capital, it is not possible for the interest, foreign exchange differences and similar expenses calculated and paid on the borrowed amount deemed disguised capital to be treated as an expense or cost element.

Detailed explanations on the subject have been provided in the section titled "12. Disguised Capital" of the Corporate Tax General Communiqué Serial No. 1, published regarding the implementation of the Corporate Tax Law No. 5520; the section of the said Communiqué titled "12.1.6. Amount of disguised capital" contains the following explanations: "Since the Law regards as disguised capital the portion of the borrowing that exceeds, at any date within the accounting period, three times the corporation's equity, it will not be possible to deduct from the tax base — including for advance tax periods — the interest, foreign exchange differences and similar expenses corresponding to the portion exceeding this limit.

In borrowings arising in connection with forward purchases of goods and services made in accordance with market conditions and commercial practice, even if maturity difference amounts have been calculated separately, these debt amounts shall not be taken into account in determining the existence of disguised capital. Debts arising from forward purchases exceeding the said periods shall be taken into account in determining the existence of disguised capital; the maturity differences corresponding to the disguised capital amount calculated in this manner shall be identified and treated as interest paid on disguised capital."

In this regard, the debt amounts relating to the purchases of goods and services stated to have been made by your company from the related person, whose normal payment terms have passed (together with the maturity difference and foreign exchange difference amounts calculated thereon), must be taken into account in determining the existence of disguised capital, and the maturity differences corresponding to the disguised capital amount calculated in this manner must be identified and treated as interest paid on disguised capital.

On the other hand, within the framework of Article 12 of the Corporate Tax Law, it is not possible for the interest, foreign exchange differences and similar expenses paid or calculated by your company on disguised capital to be deducted in the determination of corporate income.

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Date: 29/09/2017

Number: B.07.1.GİB.4.99.16.02-130-18134

Institution: LARGE TAXPAYERS TAX OFFICE DIRECTORATE

Subject: In your advance ruling request form on record, it is stated that your company is engaged in the marketing and sale of electronic products; that, pursuant to the Regulation on Bank Cards and Credit Cards published by the Banking Regulation and Supervision Agency, installments cannot be applied to telecommunications-related expenditures made with credit cards; that, accordingly, for consumers wishing to purchase products in installments, the sale of certain electronic products was carried out on a cash basis in return for consumer loans extended through the bank representatives present in your dealers and stores; that, however, this method led to a waste of resources and time, and major sales losses were suffered due to lengthy banking procedures; that a business model was developed in order to prevent this situation and, pursuant to the protocol signed between your company, the bank and the insurance company, a "Forward Sale Agreement" is signed between your company and the consumer; that under the said agreement the sale is made to the consumer on a deferred basis, over the cash sale price of the product, within the framework of the interest to be determined by the bank; that the interest amount is determined by the bank via the common software used by the bank and your company; that the said receivable amount is discounted to the bank within the framework of a factoring agreement and is collected from the bank over the cash sale price of the product; and the opinion of our Directorate is requested as to whether Value Added Tax (VAT) should be calculated by your company on the difference between the amount stated in the forward sale agreement and the amount collected in cash from the bank.

Conclusion: The VAT Law stipulates, in Article 1/1, that deliveries and services performed in Turkey within the framework of commercial, industrial and agricultural activities and independent professional activities are subject to VAT; in Article 4/1, that a service is any transaction other than a delivery, transactions deemed deliveries and the importation of goods, and that such transactions may take place in forms such as making, processing, creating, manufacturing, repairing, cleaning, preserving, preparing, appraising, renting out something, or undertaking not to do something; in Article 10, that the taxable event occurs, in cases of delivery of goods and performance of services, at the moment the goods are delivered or the service is performed, and, where an invoice or similar documents are issued before the delivery of the goods or the performance of the service, at the moment the invoice or similar documents are issued, limited to the amount shown in those documents; in Article 20, that in delivery and service transactions the tax base is the consideration constituting the counterpart of these transactions, and that the term "consideration" means the sum of the money, goods and benefits, services and values obtainable in other forms and expressible in money that are received, in whatever manner, from those taking delivery of the goods or receiving the service, or from those acting on their behalf, in return for these transactions, or that are owed by them; in Article 24/b, that packaging expenses, insurance, commission and similar expense allowances, as well as payments such as taxes, duties, charges, shares and fund allowances; and, in Article 24/c, that various income items such as maturity differences, price differences, interest and premiums, as well as all kinds of benefits, services and values provided under the name of service or similar names, are among the elements included in the tax base.  Accordingly, in the sales made within the framework of the forward sale agreement signed between your company and the consumer pursuant to the business model you have developed, and subsequently discounted to the bank within the framework of a factoring agreement, VAT must be calculated and declared on the total sale price of the goods, including the maturity difference and the bank commissions.

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Date: 29/01/2020

Number: B.07.1.GİB.4.41.15.01-125[12-13-2014/17]-12204

Institution: KOCAELİ TAX OFFICE DIRECTORATE

Subject: In your advance ruling request form on record, it is stated that you obtained a three-year foreign-currency loan from your foreign shareholder resident abroad; that, according to the agreement, the loan principal and interest will be paid in a lump sum at the end of the agreement; that your foreign shareholder is not a bank or a finance company authorized to extend loans in its country of residence; that, for this reason, you calculate value added tax (VAT) as the party liable (reverse charge) on the loan interest amount to be paid at maturity; that, in addition, for the said loan interest, interest is accrued every three months for the fractional periods and recorded in your book records as a financing expense; and that the interest under the agreement will be calculated according to the contractual interest rate and paid in a lump sum in the third year, that is, at maturity; and, stating that you have doubts on the following matters, the opinion of our Directorate is requested:

- Whether, as of the date on which the interest accrual is calculated and the financing expense entry is made in the book records, the said service should be deemed to have been received for the fractional periods for which interest is calculated, and VAT should be calculated as the party liable on the accrued interest amount,

- Whether the amount recorded in the Expense Accruals account, in which the interest accruals of the foreign-currency loan calculated as of the advance tax periods are tracked, will be subject to valuation,

- Whether the foreign exchange losses to arise as a result of the valuation will also be subject to VAT under the reverse charge mechanism,

- What should be done, in the event that a foreign exchange gain arises as a result of the valuation, with respect to the VAT withholding calculated and paid in previous periods for foreign exchange losses.

Conclusion: IN TERMS OF THE CORPORATE TAX LAW: Subparagraph (b) of the first paragraph of Article 11 of the Corporate Tax Law No. 5520 stipulates that interest, foreign exchange differences and similar expenses paid or calculated on disguised capital, and subparagraph (c) that earnings distributed in a disguised manner through transfer pricing, may not be deducted in the determination of corporate income.

Article 12 of the Corporate Tax Law No. 5520 provides, in its first paragraph: "The portion of the borrowings obtained by corporations, directly or indirectly, from their shareholders or from persons related to their shareholders and used in the enterprise that exceeds, at any date within the accounting period, three times the corporation's equity shall be deemed disguised capital for the relevant accounting period."

And in its seventh paragraph: "Interest and similar payments or calculated amounts on disguised capital — excluding foreign exchange differences — shall, in the application of the Income and Corporate Tax laws, be deemed dividends distributed as of the last day of the accounting period in which the conditions for disguised capital are met, with respect to both the borrower and the lender, or, for limited taxpayers, amounts transferred to the head office."

The section "12- Disguised Capital" of the Corporate Tax General Communiqué Serial No. 1 states that, for borrowings used in the enterprise to be deemed disguised capital, they must:

- be obtained, directly or indirectly, from a shareholder or from a person related to a shareholder,

- be used in the enterprise,

- and the borrowing used in this manner must exceed, at any date within the accounting period, three times the corporation's equity. "

The tenth paragraph of the same article stipulates that the term "payment on account" used in the article means all kinds of records and transactions that show those paying the earnings and revenues subject to withholding as debtors vis-à-vis the beneficiaries; the eleventh paragraph, that the tax withholding to be made shall be based on the gross amounts of the earnings and revenues, and that, where the tax required to be withheld is borne by the payer, the tax withholding shall be calculated on the sum of the amount actually paid and the tax borne by the payer; and the twelfth paragraph, that those making tax withholdings under this Law shall show the tax withholdings they have made separately in their records and accounts.

Accordingly, a 10% tax withholding must be made on the interest amounts paid in cash or on account for the loan obtained from your foreign shareholder resident abroad and used in the enterprise. Furthermore, for the purposes of the withholding tax application, the interest payment is deemed to have taken place at the moment the accrual entry relating to the loan interest is made in the statutory book records, irrespective of whether the interest amount is actually paid.

On the other hand, Article 13 of the same Law stipulates:

- In its first paragraph: that where corporations engage in the purchase or sale of goods or services with related persons at prices or considerations they have determined contrary to the arm's-length principle, the earnings shall be deemed to have been distributed, in whole or in part, in a disguised manner through transfer pricing; and that purchase, sale, manufacturing and construction transactions, renting and letting transactions, borrowing and lending of money, and transactions requiring payments such as bonuses, wages and the like shall in all cases and circumstances be regarded as the purchase or sale of goods or services,

- In its second paragraph: that "related person" means the corporations' own shareholders, the real persons or corporations with which the corporations or their shareholders are associated, and the real persons or corporations to which they are directly or indirectly bound, or which they hold under their influence, in terms of management, supervision or capital; that, for situations in which the relationship arises directly or indirectly through shareholding to be counted within the scope of disguised profit distribution, a shareholding, voting or dividend right of at least 10% is required; that the parties are also deemed related persons where, without any shareholding relationship, there is directly or indirectly a voting or dividend right of at least 10%; and that these ratios shall be taken into account collectively for related persons,

- In its third paragraph: that the arm's-length principle means that the price or consideration applied in the purchase or sale of goods or services with related persons must be consistent with the price or consideration that would have been formed had no such relationship existed between them…,

- In its fourth paragraph: that corporations shall determine the prices or considerations they will apply in transactions with related persons by using whichever of the methods set out in that paragraph is most appropriate to the nature of the transaction…,

...

- In its sixth paragraph: that earnings distributed, in whole or in part, in a disguised manner through transfer pricing shall, in the application of the Income and Corporate Tax laws, be deemed dividends distributed as of the last day of the accounting period in which the conditions set out in this article are met, or, for limited taxpayers, amounts transferred to the head office. 

The section titled "4- The Arm's-Length Principle" of the General Communiqué Serial No. 1 on Disguised Profit Distribution Through Transfer Pricing, which relates to the subject, includes the following explanations: "… The arm's-length price or consideration is the amount, also referred to as the market price, formed entirely under the conditions prevailing at the moment of the transaction between persons who have no relationship falling within the definition of related persons. This price or consideration is the most appropriate amount determined objectively, without any influence, at the moment of the transaction, and the price or consideration applied in transactions with related persons must be this amount.

Since, in transactions between real persons or corporations that have no relationship with each other, the price is determined according to market conditions, the same conditions must also apply in transactions between related persons. Consequently, the relationship between the parties must have no effect whatsoever on the pricing of the goods or services.

Where the price or consideration applied in the purchase or sale of goods or services between related persons does not reflect the market price, it shall be accepted that the price or consideration applied in the transactions between the related persons has been determined contrary to the arm's-length principle. "

Within the framework of these explanations, the interest rate on the loan you have obtained from the related person resident abroad must be at arm's length. It goes without saying that the arm's-length interest rate will be determined in accordance with the provision of Article 13 of the Law and the explanations made in the said Communiqué.

The first paragraph of Article 30 of the same Law, in which Tax Withholding under Limited Tax Liability is regulated, provides:

That corporate tax withholding at the rate of 15% shall be made on the earnings and revenues of corporations subject to limited tax liability specified in the paragraph, by those who pay or accrue such earnings and revenues, including advances, in cash or on account; and, in subparagraph (5) of Article 1 of the Council of Ministers Decision No. 2009/14593, published on the basis of the authority granted to the Council of Ministers by the eighth paragraph of the said article, it is stated that tax withholding shall be made on all kinds of loan interest; in sub-subparagraph (a) of the said subparagraph, the withholding rate to be applied to the interest payable on all kinds of loans obtained from foreign states, international institutions or foreign banks, or from institutions that are customarily authorized to extend loans in their country of residence and that extend loans not only to the entities with which they are related but to all real and legal persons (including the profit shares paid by participation banks for the funds and similar resources they obtain from abroad according to their own procedures)[1] has been set at 0%, and in sub-subparagraph (ç), the withholding rate to be applied to other loan interest payments at 10%.

Accordingly, a 10% tax withholding must be made on the interest amounts paid for the loan obtained from your foreign shareholder resident abroad and used in the enterprise.

In this framework, if the borrowings made by your company from its foreign shareholder become subject to disguised profit distribution through transfer pricing and/or the conditions for disguised capital are met, the earnings distributed in a disguised manner through transfer pricing or the payments made on disguised capital shall be deemed distributed dividends, and corporate tax withholding at the rate of 15% shall be made pursuant to the third paragraph of Article 30 of Law No. 5520. However, where a 10% tax withholding has previously been made on the interest amounts paid, the 10% tax previously withheld on the interest amounts paid to the foreign shareholder in respect of those amounts may be offset against the 15% tax withholding to be made.

On the other hand, it is not possible for interest, foreign exchange differences and similar expenses paid or calculated on disguised capital, or for earnings distributed in a disguised manner through transfer pricing, to be deducted as expenses in the determination of corporate income pursuant to subparagraphs (b) and (c) of the first paragraph of Article 11 of the Law.

Furthermore, it goes without saying that, where an Agreement for the Avoidance of Double Taxation with Respect to Taxes on Income and Wealth exists between the Republic of Turkey and the country of residence of the foreign company providing the service, the question of whether withholding will be applied to the payments made in connection with the said activities will be assessed within the framework of the agreements concluded with the relevant country.

IN TERMS OF THE TAX PROCEDURE LAW:

The Tax Procedure Law No. 213 provides:

- In its Article 280: "Foreign currencies are valued at the stock exchange rate. If it is understood that there is collusion in the establishment of the stock exchange rate, the acquisition price shall be taken as the basis instead of this rate. If the foreign currency has no stock exchange rate, the exchange rate to be applied in the valuation shall be determined by the Ministry of Finance. The provision of this article also applies to receivables and payables in foreign currency, whether or not evidenced by notes",

- In its Article 285: "Debts are valued at their recorded value. Debts based on deposit or loan agreements are taken into account together with the interest to be calculated up to the valuation day...",

- In its Article 287: "Revenues collected in advance that pertain to future accounting periods, and expenses that pertain to the current accounting period but have not yet been paid, are valued at their recorded values by being recognized as liabilities."

These are the applicable provisions.

The Tax Procedure Law General Communiqué Serial No. 163, in turn, states: "... 1- Of the interest on loans used in the financing of investments, the portion pertaining to the establishment period must be added to the investment cost so as to be amortized together with the fixed asset through depreciation; whereas the portion pertaining to the operating period may either be written off directly as an expense in the years to which it relates or be subjected to depreciation by being included in cost,

2- Of the foreign exchange differences arising during the importation of fixed assets from abroad through the use of foreign-currency loans, or subsequently due to the valuation of the debt installments relating to these assets, those arising up to the end of the period in which the fixed asset was acquired must be added to the cost of the asset; whereas the foreign exchange differences arising in relation to the same assets after the said period may either be written off directly as an expense in the years to which they relate or be included in cost and subjected to depreciation,

is possible." These are the explanations provided.

In addition, explanations on the subject have also been made in Tax Procedure Law Communiqué Serial No. 334.

Accordingly, the loan obtained by your company from your foreign shareholder resident abroad, denominated in foreign currency with a three-year maturity, must be subjected to exchange-rate valuation as of the valuation day pursuant to Article 280 of the Tax Procedure Law; the interest to be calculated on it as of the valuation day pursuant to Article 285 of the Law must be valued at recorded value by being recognized as a liability pursuant to Article 287 of the Law; furthermore, where the said loan is used in the acquisition of an economic asset, the portion of the interest on the loan up to the end of the accounting period in which the economic asset is capitalized must be included in the cost of the economic asset, while the portion attributable to the periods after that accounting period must be treated either by being included in cost or by being written off directly as an expense.

IN TERMS OF THE VALUE ADDED TAX LAW:

The VAT Law No. 3065 stipulates:

In its Article 1/1, that deliveries and services performed in Turkey within the framework of commercial, industrial and agricultural activities and independent professional activities are subject to VAT,

In its Article 6, that the performance of transactions in Turkey means that the goods are located in Turkey at the time of delivery, that the service is performed in Turkey, or that the service is benefited from in Turkey,

In its Article 9/1, that, in cases where the taxpayer has no residence, place of business, registered head office or business center in Turkey, and in other cases deemed necessary, the Ministry of Finance may, for the purpose of securing the tax receivable, hold those who are party to the taxable transactions liable for the payment of the tax,

In its Article 10/a, that, in cases of delivery of goods and performance of services, the taxable event occurs upon the delivery of the goods or the performance of the service,

In its Article 24/c, that various income items such as maturity differences, price differences, interest and premiums, as well as all kinds of benefits, services and values provided under the name of service or similar names, are included in the value added tax base,

And in its Article 26, that, where the consideration is calculated in foreign currency, the foreign currency shall be converted into Turkish currency at the current exchange rate prevailing at the moment the taxable event occurs.

In relation to the subject, section (I/C- 2.1.2.1) of the VAT General Implementation Communiqué explains that the services performed in Turkey by those who have no residence, place of business, registered head office or business center in Turkey, as well as the services they perform abroad but which are benefited from in Turkey, are subject to VAT; and that, in such performances of services, although the taxpayer is in principle the party performing the service, since it has no residence, place of business, registered head office or business center in Turkey, the entirety of the VAT shall be declared and paid, as the party liable, by the counterpart in Turkey benefiting from the service.

Section (III/A-5.3) of the same Communiqué explains that, in transactions where the consideration is expressed in foreign currency or indexed to foreign currency, where the consideration is paid, in part or in whole, after the date on which the taxable event occurred, the foreign exchange difference arising in favor of the seller is essentially in the nature of a maturity difference and must therefore be taxed as an element of the tax base; that, for the favorable foreign exchange difference arising between the date on which the delivery or service was performed and the date on which the consideration was collected, an invoice shall be issued by the seller, and VAT shall be calculated by applying, to the foreign exchange difference shown in the invoice, the rate applicable to these transactions on the date the delivery or service was performed; that, where a foreign exchange difference arises in favor of the buyer on the date the consideration is collected, an invoice shall be issued by the buyer to the seller for the foreign exchange difference amount, and VAT shall be calculated at the rate applicable on the date the delivery and service were performed; and that no VAT shall be calculated on the foreign exchange differences arising as a result of the valuations made pursuant to the Tax Procedure Law at year-ends and in advance tax periods.

Accordingly, since the loan you received from your foreign shareholder resident abroad, which is not an authorized finance company, is in the nature of a financing service, VAT must be calculated on the interest amounts to be calculated in connection with these transactions and declared by your company as the party liable; where the interest amounts are calculated in foreign currency, the foreign currency must be converted into Turkish currency at the current exchange rate prevailing at the moment the taxable event occurs. It is possible for the VAT declared and paid by your company as the party liable to be deducted in VAT return no. 1.

In addition, at year-ends and in advance tax periods, since the foreign exchange differences arising as a result of the valuations made pursuant to the Tax Procedure Law No. 213 do not constitute the consideration for any delivery or service, no VAT shall be calculated on these amounts.

Please be informed accordingly.

(although, at the date the ruling was issued, it was held that no invoice would be issued and no VAT applied for foreign exchange differences resulting from revaluations, since 2022 separate invoices have been issued for foreign exchange differences, and the resulting foreign exchange differences are invoiced on a VAT-inclusive basis)