Core Elements of Effective and Compliant Tax Strategies
Tax planning should not only ensure legal compliance but must also reflect real economic activity, commercial rationale, and the substantive nature of transactions. Today, tax authorities do not rely solely on formal documentation—they also scrutinize whether transactions are based on genuine economic purpose.
In this article, we explore the substantive aspects of tax planning with a focus on Turkey while referencing international standards.
1. What Is Substantive Tax Planning?
The substantive aspect of tax planning assesses whether a transaction or structure:
- Is based on genuine economic activity
- Has a commercial purpose beyond tax benefits
- Accurately reflects the beneficial owner of the income
- Produces realistic financial and economic outcomes
In other words, a transaction may be “legally valid on paper,” but if it lacks substance in practice, it may be classified as abuse of law or aggressive tax avoidance.
2. Assessment of Substantive Aspects in Turkey
The Turkish Revenue Administration (GİB) increasingly emphasizes not only formal compliance but also economic substance:
a. Beneficial Ownership Analysis
- Especially for interest, dividends, and royalty income, it is assessed whether the recipient is the true beneficial owner.
- Turkey actively applies this criterion in Double Tax Treaties (DTTs) and under the MLI (Multilateral Instrument).
b. Principal Purpose Test (PPT)
- If the main purpose of a transaction is to obtain a tax benefit, tax treaty provisions may be denied.
- Since 2021, Türkiye has implemented the PPT in many of its DTTs.
c. Commercial Justification of Transactions and Structures
- Transactions should serve business, financial, or operational purposes, not solely tax savings.
- For example, intra-group loans must reflect arm’s length interest rates consistent with market conditions.
3. International Alignment: OECD BEPS and Turkey
Turkey is a committed participant in the OECD BEPS (Base Erosion and Profit Shifting) project. To ensure substantive compliance, the following are emphasized:
- Anti-abuse provisions under Articles 6 and 7 of tax treaties
- Functional analysis of real business activities
- Demonstrating substance through local employees, offices, and decision-making power
- Adoption of MLI-based anti-avoidance rules
4. Common Substantive Errors in Turkey
- Conducting transactions with shell companies with no real activity
- Central management and control being located in a different country than reported
- Inflated costs or underreported revenues in related party transactions
- Using conduit entities to avoid withholding tax on dividends or interest
- Underreporting real estate transfers below market value
5. Recommendations for Robust Substantive Tax Planning
✅ Support all transactions with economic justifications (e.g. business plans, market studies, transfer pricing documentation)
✅ Ensure arm’s length compliance for related-party dealings
✅ Clearly demonstrate substantive presence (employees, decision-making authority, physical premises)
✅ Focus on long-term business strategy, not just short-term tax advantages, especially for cross-border structures
Substance Over Form: A New Reality in Turkish Tax Audits
Success in tax planning requires more than minimizing liabilities—it requires transparency, documentation, and commercial reality. In Türkiye, tax audits are becoming increasingly sophisticated, adopting a “substance-over-form” approach in line with international practices.
