How to Recognize Foreign Doubtful Receivables for Tax Purposes in Turkey

Can foreign receivables be classified as doubtful debts in Turkey? This article explores the legal and tax conditions under which foreign trade receivables may be provisioned as doubtful, in light of Article 323 of the Tax Procedure Law, Private International Law, tax rulings, and Council of State decisions.

Judge's gavel on a law book placed over U.S. dollars — representing foreign doubtful receivables and tax treatment in Turkey.

Foreign Doubtful Receivables Turkey under Article 323 of the Tax Procedure Law

Foreign doubtful receivables Turkey is one of the most debated topics in tax practice. This article explains when and how such receivables can be recognized under Turkish tax law, based on Article 323 of the Tax Procedure Law, tax rulings, and Council of State decisions.

Article 323 of the Turkish Tax Procedure Law (TPL) allows taxpayers who keep books on a balance sheet basis to recognize certain receivables as “doubtful debts” and deduct them from the tax base. This provision is particularly relevant for receivables where the probability of collection is weakened.

According to the article, receivables may be considered doubtful if they:

  • Are subject to a lawsuit or enforcement proceeding;
  • Have not been collected despite repeated written requests and are too small to justify legal expenses.

This allowance applies only to unsecured receivables and must be recorded as a liability in the same fiscal year. If recovered later, the amount is recognized as income; if not, it is considered a loss.

While domestic doubtful receivables are relatively clear in practice, the situation becomes legally complex when the receivable arises from a foreign debtor. The absence of explicit provisions in the law and the conflicting views between tax authorities and courts in Turkey cause significant uncertainty in this area.

Foreign Receivables under Article 323 of the Turkish Tax Procedure Law

Article 323 does not explicitly regulate foreign receivables. This creates ambiguity regarding whether a foreign trade receivable can be considered doubtful simply by initiating legal action in Turkey against a debtor located abroad.

The Turkish Revenue Administration (TRA) generally requires that the creditor initiate a lawsuit or enforcement proceeding in the country where the debtor resides. Tax rulings indicate that filing a case solely in Turkey is not deemed sufficient for recognizing the debt as doubtful.

However, Turkish courts have not always shared this strict interpretation. Several Council of State rulings suggest that under certain conditions, initiating legal proceedings in Turkey may be sufficient for doubtful debt recognition, particularly when international private law supports Turkish jurisdiction.

Legal Basis for Foreign Doubtful Receivables Turkey under Law No. 5718

When it comes to foreign receivables, the applicable legal framework in Turkey is Law No. 5718, the Turkish Private International Law and Procedural Law. This law governs the choice of law and international jurisdiction in private legal relations involving a foreign element.

If a Governing Law is Specified in the Contract

Article 24 of Law No. 5718 allows the parties to a contract to choose the applicable law. If the contract includes a clause such as “This agreement is subject to Turkish law,” then the legal dispute is directly governed by Turkish law. Consequently, initiating a lawsuit in Turkey and recognizing the receivable as a foreign doubtful receivable under Turkish tax law becomes legally valid.

If No Governing Law is Chosen

If the parties have not specified a governing law, Article 24(4) applies. In such cases, the contract is governed by the law of the country with which it is most closely connected, typically determined based on the characteristic performance.

For example:

  • In a sales contract, the seller,
  • In a service contract, the service provider,
  • In an agency agreement, the agent

is considered the party performing the characteristic obligation.

In most export scenarios, the characteristic party is the Turkish exporter, which supports the application of Turkish law and jurisdiction in Turkey.

Jurisdiction of Turkish Courts (Article 40)

Article 40 of Law No. 5718 states that international jurisdiction is determined by the domestic jurisdiction rules of Turkish law. Therefore, if a Turkish court is competent under local law (e.g., based on the plaintiff’s residence), then it also has international jurisdiction. This is critical for the taxpayer to justify recognizing the receivable as a doubtful debt in Turkey.

Recognition and Enforcement of Foreign Doubtful Receivables Turkey

When a lawsuit is filed and concluded in Turkey regarding a foreign receivable, the resulting court decision must undergo recognition or enforcement procedures to be valid and enforceable in the debtor’s country. This necessity stems from the principle that a court’s jurisdiction is limited to the borders of its own country.

What is Enforcement (Tenfiz)?

Enforcement refers to the process of having a foreign court decision declared enforceable by a domestic court. A judgment rendered by a Turkish court cannot be subject to enforcement proceedings in another country unless it has first been recognized through that country’s enforcement process.

What is Recognition (Tanıma)?

Recognition, on the other hand, is the legal process by which a foreign court judgment is acknowledged in another jurisdiction without enforcement—meaning it is accepted as valid but cannot be executed (e.g., seizure of assets) unless further enforcement is obtained.

Relevance for Doubtful Receivables

If a legal case regarding a foreign doubtful receivable is concluded in Turkey, but the decision is not recognized or enforced in the country where the debtor is located, then the collection efforts are incomplete. This creates a legal and practical gap that may invalidate the doubtful debt provision under Article 323 of the Turkish Tax Procedure Law.

In other words:

  • If you file a lawsuit in Turkey → you may claim the receivable is doubtful;
  • But if collection must happen abroad → you must initiate recognition or enforcement abroad to fully justify the provision.

Therefore, recognition or enforcement abroad is not optional—it is an essential step to prove the receivable is truly doubtful under Turkish tax law.

Tax Authority’s Interpretation of Foreign Doubtful Receivables Turkey

The Turkish Revenue Administration (TRA) generally adopts a strict interpretation regarding the treatment of foreign doubtful receivables under Article 323 of the Turkish Tax Procedure Law. According to multiple tax rulings, the tax authority requires that the creditor initiate legal or enforcement proceedings in the country where the debtor resides in order to justify a doubtful debt provision.

Simply filing a lawsuit in Turkey is not considered sufficient.

Tax Ruling – Istanbul Tax Office (21.06.2012)

“…In order to prove that receivables originating from abroad are doubtful, legal action or enforcement must be initiated in the courts or enforcement offices of the country where the business partner is located…”
(Source: Istanbul Tax Office, Ruling dated 21.06.2012, Ref: B.07.1.GİB.4.34.19.02-105[323-2012/VUK-1-]-1942)

This ruling clearly states that Turkish courts are not considered competent by themselves when the debtor is located abroad.

Tax Ruling – Ankara Tax Office (28.04.2014)

“…In cases where legal proceedings or enforcement are initiated in the debtor’s country, the receivable can be considered doubtful under Article 323…”
(Source: Ankara Tax Office, Ruling dated 28.04.2014, Ref: 77058783-105-110)

According to the tax authority, Turkish jurisdiction alone does not legitimize the doubtful debt provision if the receivable is international in nature. Instead, action must be taken under the foreign country’s legal system.

In summary, the Turkish tax authority emphasizes the location of enforcement, rather than the taxpayer’s effort to initiate legal action in Turkey.

Judiciary’s View on Foreign Doubtful Receivables Turkey

Contrary to the Turkish Revenue Administration’s narrow interpretation, Turkish courts—particularly the Council of State—have adopted a more flexible and practical approach regarding the recognition of foreign doubtful receivables.

Several decisions suggest that initiating legal proceedings in Turkey may be sufficient to justify a doubtful debt provision, depending on the circumstances.

Council of State 4th Chamber – Decision dated 27.05.2010

“…Since it is a monetary claim, the place of performance under Article 73 of the Code of Obligations is the creditor’s place of residence. Therefore, the enforcement office in Istanbul is competent, and this enforcement proceeding does not prevent the debt from being considered doubtful…”
(Case No: 2008/399 – Decision No: 2010/3271)

The Council of State confirmed that if the creditor resides in Turkey and initiates enforcement proceedings there, the debt may be considered doubtful—even if the debtor is located abroad.

Council of State 4th Chamber – Decision dated 28.12.2015

“…Since the lawsuits filed before the Karaman Civil Court were ongoing and no ruling of lack of jurisdiction had been issued, there was no legal barrier to recognizing the receivable as doubtful…”
(Case No: 2011/5130 – Decision No: 2015/10182)

In this decision, the court emphasized that as long as:

  • The lawsuit is real (not fraudulent or symbolic), and
  • The Turkish court has not dismissed the case due to lack of jurisdiction,

then it is legally acceptable to classify the receivable as doubtful.

In summary, the Turkish judiciary takes the following position:

  • If the creditor initiates legal action in Turkey based on the debtor’s contractual or legal obligations,
  • And the Turkish court is not found to be incompetent,
  • Then the receivable may be accepted as doubtful, even if the debtor is located abroad.

This interpretation aligns more closely with the realities of international commerce and provides relief to taxpayers operating in foreign trade from Turkey.

Final Evaluation on Foreign Doubtful Receivables Turkey

The recognition of foreign doubtful receivables for tax purposes in Turkey is a legally ambiguous and controversial topic. While Article 323 of the Turkish Tax Procedure Law provides a clear framework for classifying domestic receivables as doubtful, it remains silent on how to handle receivables from foreign debtors.

The Turkish tax authority has consistently interpreted this silence narrowly, insisting that enforcement or legal action must be initiated in the debtor’s country. However, this view often fails to reflect commercial realities and is not always supported by Turkish courts.

On the other hand, both the Council of State rulings and the provisions of Private International Law No. 5718 demonstrate that:

  • If Turkish law is applicable (either by contract or by default under conflict of law rules),
  • And a lawsuit is legitimately filed in Turkey,
  • And the court does not issue a ruling of incompetence,

then the receivable may legally be regarded as doubtful under Turkish tax law.

Conclusion

A foreign receivable can be treated as doubtful for tax purposes in Turkey if certain legal conditions are met. These include:

  • A genuine attempt to collect the debt through Turkish legal channels;
  • Compliance with jurisdiction rules under Turkish Private International Law;
  • And ideally, enforcement or recognition procedures pursued in the debtor’s country.

It is not mandatory to initiate a lawsuit abroad if the Turkish court is legitimately competent and the contract points to Turkish law. However, the enforcement of any judgment abroad remains a critical step to demonstrate the seriousness of collection efforts.

Therefore, correctly applying both Turkish legal procedures and international enforcement obligations is essential when dealing with foreign doubtful receivables Turkey.

Practical Advice:

  • Include a governing law clause (preferably Turkish law) in all international contracts.
  • File genuine lawsuits—avoid symbolic or artificial actions.
  • Ensure that judgments are recognized or enforced in the debtor’s jurisdiction.

Finally, the Turkish tax authority is encouraged to align its position with the judicial precedent and international commercial practice, ensuring legal clarity for taxpayers engaged in foreign trade activities from Turkey.

If you’re exploring legal gray areas like foreign doubtful receivables Turkey, you might also want to check out our analysis on stamp tax base regulations. Legal Analysis of VAT and Other Taxes in the Stamp Tax Base (Turkey)

If you need professional guidance tailored to your company’s situation, please don’t hesitate to contact us here.

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