Shareholder loans from abroad create up to four obligations for a company in Turkey: the Resource Utilization Support Fund levy known as KKDF, stamp duty, corporate withholding tax on the interest, and reverse-charge value added tax. Which of them applies, and at what rate, is determined by the currency of the loan, its average maturity and the interest rate.
The KKDF base depends on the currency: for foreign-currency loans it is the principal at the drawdown date, for Turkish lira loans it is the accrued interest. KKDF is zero for foreign-currency loans with an average maturity of 3 years or more, and for lira loans with an average maturity of 1 year or more. Interest payments carry 10 per cent withholding tax and 20 per cent reverse-charge value added tax. The loan agreement is subject to stamp duty at 0.948 per cent, and that duty arises even where the loan is interest-free.
Which taxes arise on shareholder loans from abroad
The table below assumes the lender is not a bank or credit institution but a shareholder or group company.
| Obligation | Base | Rate | How it applies |
|---|---|---|---|
| KKDF | Currency loan: principal, lira: interest | 0% – 3% | By average maturity, bank collects |
| Stamp duty | Loan amount in the agreement | 0.948% | Arises on interest-free loans too |
| Withholding tax | Interest paid or accrued | 10% | Monthly return, treaty rate may apply |
| Value added tax | Interest and commission | 20% | Reverse charge, recovered as input tax |
If the lender is authorised to lend in its country of operation and lends to third parties generally, not only to related companies, the withholding tax rate on interest is zero and no value added tax is calculated. Shareholders and group companies generally do not meet that condition.
Can shareholder loans from abroad be interest-free
Where a shareholder loan from abroad is interest-free there is no interest payment and therefore no withholding tax in Turkey. For that reason interest-free loans from related parties may be questioned in Turkish tax audits. The lender’s country may also impute arm’s length interest income to the lending company under its own transfer pricing rules and tax it.
We therefore recommend applying an arm’s length interest rate and documenting the basis for it. The arm’s length rate depends on the currency, the maturity, the borrower’s credit risk and the security provided. For lira loans the reference point is lira market rates; for foreign-currency loans it is market rates in the relevant currency.
If the interest rate exceeds the arm’s length rate, the excess is treated as a disguised profit distribution through transfer pricing under article 13 of the Corporate Tax Law: it is not deductible and is deemed a distributed dividend. Interest paid is reported as a related-party transaction in the annual transfer pricing form.
How KKDF is calculated
KKDF applies to loans obtained from abroad by persons resident in Turkey other than banks and financing companies, so a loan from a foreign shareholder or group company is within scope. The intermediary bank collects it. The base and the rate split by currency: for a foreign-currency loan the principal at the drawdown date, for a lira loan the accrued interest.
Foreign-currency and gold loans
KKDF is calculated on the principal amount at the drawdown date, by reference to the average maturity (Council of Ministers Decision No. 2012/4116, article 11).
| Average maturity | KKDF rate |
|---|---|
| Under 1 year | 3% |
| 1 year (inclusive) – 2 years | 1% |
| 2 years (inclusive) – 3 years | 0.5% |
| 3 years and over | 0% |
Turkish lira loans
KKDF is calculated on the accrued interest rather than the principal. The rates were set by Council of Ministers Decision No. 2017/9973.
| Average maturity | KKDF rate |
|---|---|
| Under 1 year | 1% |
| 1 year and over | 0% |
Lower bounds are inclusive: a foreign-currency loan with an average maturity of exactly 1 year falls in the 1 per cent band.
Not on a foreign-currency loan: the base is the principal, so whether interest is charged makes no difference. On a lira loan the base is the interest, so an interest-free lira loan carries no KKDF.
How instalment or early repayment affects KKDF
The rate is determined by the average maturity, not by the final maturity date. The average maturity weights each repayment amount by the time between drawdown and repayment. If a foreign-currency loan with a final maturity of 3 years is repaid in instalments, the average maturity falls below 3 years and KKDF arises. To stay in the zero band, the loan should be drawn down in a single amount and repaid in a single amount at maturity.
According to private rulings of the Turkish Revenue Administration, if the loan is repaid early on a date that brings the average maturity below three years, KKDF becomes payable. Repaying the loan with a new transfer from abroad is also treated as closing the loan.
The intermediary bank takes a copy of the loan agreement and the repayment schedule and monitors repayment. Any change to the schedule can change the average maturity and therefore the KKDF rate, so it should be notified to the bank.
Is the interest expense deductible for corporate tax
It is deductible, subject to three limits that are checked together.
Interest above the arm’s length rate is treated as a disguised profit distribution and is not deductible.
Interest and exchange differences on the part of borrowings from shareholders or their related parties exceeding three times the opening equity are not deductible. Interest on that part is deemed a distributed dividend and carries 15 per cent withholding tax, or a lower treaty rate.
Where borrowed funds exceed equity, 10 per cent of the interest, exchange differences and similar financing expenses attributable to the excess is not deductible.
Is stamp duty payable on the loan agreement
As an agreement stating a specific amount, the loan agreement is subject to stamp duty at 0.948 per cent of the loan amount stated in it. The maximum duty per document is increased each year by the revaluation rate and announced in a general communique on the Stamp Duty Law.
The loan exemptions in Table 2 annexed to the Stamp Duty Law cover loans extended by banks and credit institutions. A shareholder or group company is not a credit institution, so the exemption does not apply and duty arises even if the loan is interest-free.
Agreements signed abroad also become subject to stamp duty when submitted to a public authority in Turkey or otherwise relied upon in Turkey. Where the agreement is signed in several originals, the proportional duty is charged on one original only.
Foreign-currency or Turkish lira loan
Under article 17/A of Decree No. 32 on the Protection of the Value of the Turkish Currency, persons resident in Turkey may freely obtain lira loans from abroad. For foreign-currency loans, article 17 of the same decree and the foreign-currency income requirement of the Capital Movements Circular apply: companies without foreign-currency income cannot obtain foreign-currency loans from abroad, except in the cases listed in the circular. In all cases the loan is used through a bank in Turkey.
| Criterion | Foreign-currency loan | Turkish lira loan |
|---|---|---|
| Exchange control | Foreign-currency income required | Unrestricted |
| KKDF base | Principal | Accrued interest |
| Maturity for zero KKDF | 3 years and over | 1 year and over |
| KKDF if interest-free | Arises | Does not arise |
| Currency risk | Borrower | Lender |
| Withholding, VAT, stamp duty | Same | Same |
What the loan agreement should cover
- Currency of the loan and compliance with exchange control rules
- Drawdown and repayment schedule, with an average maturity matching the targeted KKDF band
- Early repayment clause and its KKDF consequence
- Arm’s length interest rate, calculation method and accrual periods
- Which party bears the withholding tax, that is the gross-up clause
- Loan amount stated clearly in the agreement
- Submission of the agreement and repayment schedule to the intermediary bank
- Transfer pricing documentation
- Assuming a maturity over 1 year removes KKDF on a foreign-currency loan. The zero band requires an average maturity of 3 years or more.
- Overlooking that instalment repayments shorten the average maturity. What counts is the average maturity, not the final maturity date.
- Assuming an interest-free foreign-currency loan carries no KKDF. The base is the principal, so the absence of interest changes nothing.
- Omitting stamp duty on a loan agreement with a group company. The exemption covers only loans from banks and credit institutions.
- Not monitoring the thin capitalisation limit during the year. The measure is the opening equity, and interest on the excess is deemed a distributed dividend.
Frequently asked questions
Can a company in Turkey take an interest-free loan from its foreign shareholder?
What is the KKDF rate for a loan with an average maturity of exactly 1 year?
What happens to KKDF if the loan is repaid early?
Is a loan agreement signed abroad subject to Turkish stamp duty?
Does a tax treaty reduce the withholding tax on interest?
Can a company without foreign-currency income borrow in foreign currency from abroad?
Is contributing capital better than lending?
Is KKDF deductible for corporate tax?
Ozbek CPA reviews borrowing from a foreign shareholder or group company before drawdown: calculating the KKDF outcome of the chosen currency and maturity, working out the average maturity and aligning the repayment schedule with it, documenting the arm’s length interest rate, monitoring the thin capitalisation and financing expense limits, and preparing the stamp duty and withholding filings together with the transfer pricing form. The legal drafting of the agreement is handled with legal counsel. See also our page on tax rates in Turkey.
