Financing transactions between international group companies, particularly where companies resident in Turkey provide funds to their parent companies abroad, should be treated not only as a commercial transaction but also as a transaction that may give rise to legal liability, tax obligations and, under certain circumstances, criminal consequences. The duties and responsibilities of company directors under the Turkish Commercial Code (TCC), the Corporate Tax Law (CTL) and the Turkish Penal Code (TPC) constitute the fundamental areas that must be carefully evaluated in such transactions.
This study comprehensively addresses the risks that may be encountered in the process of lending to a foreign parent company, the legislation-based framework, and the main elements to be considered in terms of compliance, in line with the ÖzbekCPA expertise approach.
Legal Liability of Directors under the Turkish Commercial Code (TCC Art. 553)
- Under the Turkish Commercial Code, company directors are obliged to act with due care and loyalty when performing their duties. If directors negligently breach their obligations arising from the law or the articles of association, they may be held liable to the company, its shareholders and creditors.
- The duty of care requires financial decisions to be made in accordance with the standard of a prudent businessperson. In transactions such as lending to the parent company, it is mandatory to evaluate factors such as the interest rate, collateral structure, repayment capacity, and the company’s liquidity balance using objective criteria.
- The duty of loyalty, on the other hand, means that the company’s interests must be prioritised. Using company assets solely for the benefit of the group may be considered a situation that could give rise to the director’s liability.
Assessment in Terms of Breach of Duty of Care and Loyalty
In the process of lending to a parent company abroad, the following issues are particularly important in terms of the director’s responsibility:
- Failure to conduct financial and legal analyses regarding the lending transaction
- Interest rates, maturities, or collateral structures that are contrary to market conditions
- Transfer of funds on a scale that will adversely affect the company’s cash flow
- Transactions carried out without the approval of the authorised body
- Failure to take the necessary legal steps in the collection process
The prudent businessperson standard is examined according to objective commercial standards, not the director’s subjective assessment.
Tax Framework: Transfer Pricing and Hidden Profit Distribution Risk (KVK m.13)
Under the Corporate Tax Law, the parent company abroad is considered a related party to the company in Turkey. Therefore, intra-group lending transactions are evaluated within the framework of the arm’s length principle.
Loan transactions carried out without interest or at interest rates below market conditions may be criticised as hidden profit distribution. In this case, the following consequences may arise:
- Addition of the calculated comparable interest income to the corporate profit,
- Additional corporation tax assessment,
- Tax penalty and late payment interest
Therefore, it is important that lending transactions are structured and documented in accordance with transfer pricing rules.
Personal Liability of the Legal Representative for Tax Debt
Pursuant to Article 35 of the Law on the Collection of Public Receivables, legal representatives may be personally liable for public debts that cannot be collected from the company’s assets.
In this context, the director may be held jointly and severally liable for public receivables, including corporation tax debt, tax penalty and late payment interest. In order for the director to be exempt from liability, it is important to prove that due diligence has been exercised and tax obligations have been fulfilled.
Possible Areas of Liability under the Turkish Penal Code
Under certain conditions, lending to the parent company abroad may also be subject to criminal liability assessment:
Abuse of trust in the course of service (TCK Art. 155): Use of company assets to the detriment of the company
Fraudulent bankruptcy (TCK Art. 161): Deliberate weakening of the company’s financial structure as a result of uncontrolled fund transfers
Criminal liability assessment is made based on criteria such as the specific characteristics of the case, the element of intent, and the existence of company damage.
Risk Management and Compliance Processes
In situations where lending to the foreign parent company is planned, it is recommended that the following elements be taken into consideration:
- Conducting comparability analysis and preparing transfer pricing reports
- Obtaining board of directors or shareholders’ committee resolutions containing the rationale and conditions of the transaction
- Establishing robust collateral mechanisms
- Applying interest rates in line with market conditions
- Initiating legal proceedings for receivables that have fallen due
Documents prepared within this framework are among the important elements demonstrating the director’s duty of care in potential tax audits and legal proceedings. Loan transactions to foreign parent companies are processes that require a multifaceted assessment in terms of commercial, legal and tax aspects. The responsibilities of directors under the Turkish Commercial Code, transfer pricing rules under the Corporate Tax Law and possible criminal risks under the Turkish Penal Code should be considered together; a comprehensive analysis and documentation process should be carried out prior to the transaction.
- ÖzbekCPA offers professional consultancy services in structuring intra-group financing transactions, transfer pricing compliance, establishing management decision-making processes, and assessing tax audit risks. For a detailed assessment, please contact us.
