In the Turkish tax system, one of the most critical and often misunderstood concepts is “hidden capital” (örtülü sermaye). Misjudging this concept can lead to significant penalties, especially for companies that receive loans from shareholders or related parties. In this article, we explain the definition of hidden capital in Turkey, provide updated examples, and outline the key tax implications for businesses.
What Is Hidden Capital in Turkey?
Article 12 of the Turkish Corporate Tax Law (KVK) defines hidden capital as follows:
“If a Turkish company borrows funds from its shareholders or related parties and uses them in the business, any portion of the loan exceeding three times the company’s equity at any time during the fiscal year is considered hidden capital.”
This rule prevents companies in Turkey from disguising equity injections as loans to reduce taxable profit.
Conditions for Hidden Capital in Turkey
A loan will be classified as hidden capital in Turkey if the following conditions are met:
- The debt is received from a shareholder or related party.
- The funds are used in the company’s operations.
- The amount exceeds three times the equity at the beginning of the fiscal year.
Who Are Related Parties Under Turkish Tax Law?
In Turkey, a related party is defined as an individual or entity owning directly or indirectly at least 10% of a company’s shares, voting rights, or profit participation rights. The same rule applies even to publicly traded companies in Borsa Istanbul.
How to Calculate Equity in Turkey
Equity is determined according to the Turkish Tax Procedure Law (VUK) as:
Equity = Total Assets – Total Liabilities
as of the beginning of the fiscal year.
In newly established companies in Turkey, the equity is calculated based on figures at the incorporation date. If the equity is zero or negative, all related-party loans are treated as hidden capital.
Example
- Total assets: 500,000 TL
- Total liabilities: 440,000 TL
- Equity: 60,000 TL
- Shareholder loan: 250,000 TL
Maximum allowed: 3 × 60,000 = 180,000 TL
Excess (hidden capital): 250,000 – 180,000 = 70,000 TL
Foreign Currency Loans and Hidden Capital in Turkey
If a Turkish company borrows in foreign currency, the exchange rate on the day the loan is received is used in the hidden capital calculation. Gains from hidden capital are not taxable, while expenses are not deductible.
Example:
- Equity: 100,000 TL
- $5,000 on March 1 (1 USD = 33 TL)
- $7,000 on June 1 (1 USD = 35 TL)
Total: 410,000 TL
Hidden capital limit: 3 × 100,000 = 300,000 TL
Excess = 110,000 TL
Tax Consequences of Hidden Capital in Turkey
Interest and other expenses attributable to hidden capital are not deductible for corporate tax purposes in Turkey. In addition, they are treated as dividends and subject to withholding tax.
Withholding Tax on Hidden Capital in Turkey
- No withholding tax for Turkish resident corporate lenders (KVK Art. 5).
- 10% withholding for non-resident entities and individuals.
- Reduced rates may apply under Double Tax Treaties (DTT). For example:
- Germany–Turkey DTT:
- Interest: 10%
- Dividend: 5% (if holding ≥25%), otherwise 15%
- Germany–Turkey DTT:
Example – Withholding Tax Calculation:
Net interest paid: 1,000 TL to a German company
Grossed up: 1,000 / (1 – 0.10) = 1,111.11 TL
Withholding tax: 111.11 TL
Hidden Capital and VAT in Turkey
Although hidden capital is not recognized as an actual service, the Turkish Revenue Administration (GİB) maintains that interest payments resulting from such transactions may be subject to VAT. However, VAT on interest related to hidden capital is not deductible, and the corresponding expenses are not tax-deductible either.
⚠ Even if interest is not accrued, if a company provides financial benefit to its shareholder free of charge, VAT may still apply under Article 5 of the VAT Law.
Loans Not Considered Hidden Capital
- Loans from banks or credit institutions: only 50% is considered.
- Loans given under the same terms to third parties.
- Loans backed by non-cash collateral from unrelated parties.
Why Companies Should Pay Attention
Misclassifying loans as regular debt when they fall under hidden capital can lead to serious tax exposure—including retroactive audits, disallowed deductions, and significant penalties. It can also trigger dividend withholding tax obligations unexpectedly.
Avoid Hidden Capital Risks in Turkey with Proper Tax Guidance
Companies operating in Turkey must carefully assess the financing they receive from shareholders and related parties. Understanding the rules around hidden capital is essential to avoid costly tax implications. The most effective way to stay compliant is to work with an experienced tax consultancy firm.
👉 Need help identifying hidden capital risks in your company? Contact us today for expert guidance.
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