Loans To Shareholders And Adat Invoice

It is fundamental that a company’s economic and financial resources be used primarily for its own commercial interests. Allowing these resources to be utilized for the benefit of others (such as shareholders) instead of the company itself is not only contrary to commercial principles but may also prejudice the rights of parties connected to the company’s operations, including creditors, banks, and other stakeholders.

Pursuant to Article 13 of Law No. 5520 Corporate Tax Law, when a corporation extends loans to its shareholders or related parties under certain conditions, this may be considered a “disguised profit distribution through transfer pricing.”

In this context, because companies are required to act in accordance with sound economic and commercial principles, allocating company resources to shareholders without consideration would be incompatible with both legal and accounting standards. Therefore, the invoicing method in question has been established to ensure compliance with these requirements.

Since these transactions constitute a financing service, interest must be calculated on the debit balance of the shareholders’ current account using the adat method. The calculated interest must then be included as income in the company’s Corporate Tax Return.

2. Legal Basis for the Adat Practice (Corporate Tax Law and Value Added Tax Law)

The starting point of the adat invoice lies in tax law. It is based on two primary legal sources:

• Disguised Profit Distribution Through Transfer Pricing - Article 13 of the Corporate Tax Law (“CTL”): When a company lends money to its shareholder without interest, such a transaction may violate the arm’s-length principle applicable to dealings between related parties. Under Article 13 of CTL and the relevant Transfer Pricing Communiqué, funds made available to shareholders must be priced using an arm’s-length interest rate; otherwise, a portion of the company’s profit is deemed to have been transferred to the shareholder in a disguised manner (by granting an advantage through non-collection of interest). In such cases, the tax authority may make a transfer-pricing adjustment, assess additional taxable income, and impose tax loss penalties. The purpose of applying for an adat is to eliminate this risk.

• Value Added Tax (“VAT”) - Article 24(c) of the VAT Law: The VAT Law explicitly provides that revenues such as price differentials, interest, and similar charges are included in the taxable base of a supply of goods or services. Adat interest is therefore treated as a financing service and becomes subject to VAT when calculated. In its private ruling dated 06/09/2013 and numbered 39044742-KDV.24-1447, the Turkish Revenue Administration also clearly stated that lending transactions between a company and its shareholders/related parties constitute a financing service and that adat interest is subject to VAT. Accordingly, the company must calculate VAT at the applicable rate for the relevant period on the imputed interest amount and reflect it on the invoice.

3. Who Can Be Issued an Adat Invoice?

It is understood from Article 13 of the Corporate Tax Law, titled “Disguised Profit Distribution through Transfer Pricing,” that an adat invoice is issued by the company to its shareholders or related parties due to the utilization of the company’s capital by such people.

Accordingly, the people to whom an adat invoice may be issued, as derived from the article, are:

• The shareholders of the corporation,
• Individuals or entities related to the corporation,
• Individuals or entities over which the corporation has direct or indirect control or influence in terms of management, supervision, or capital,
• Spouses of the shareholders,
• The shareholders’ or their spouses’ lineal ascendants and descendants,
• Collateral relatives (up to and including the third degree) and relatives by marriage of the shareholders or their spouses,
• Persons located in countries or regions announced by the President (these jurisdictions are determined by considering whether their tax systems provide a level of taxation comparable to the Turkish tax system and whether information exchange is ensured),
• Persons who, even without being shareholders, hold at least 10% of voting rights or profit-sharing rights, directly or indirectly.

4. How Is Adat Calculated?

The adat calculation formula is as follows:

Adat = Principal × Number of Days × Interest Rate / 36,500

This amount is regarded as the VAT base.

5. Determination of the Applicable Interest Rate

When a company lends money to its shareholder either interest-free or at an interest rate below the arm’s-length level, the appropriate arm’s-length interest rate must first be determined based on internal data, such as the company’s own borrowing costs, loans extended to third parties, or the financial instruments in which idle funds are invested. If the rate cannot be determined from internal data, external market indicators must be used, particularly the Central Bank of Turkey’s rates applied to short-term loans. Both the Revenue Administration and the Council of State consider the Central Bank’s rediscount rate appropriate for determining the arm’s-length rate. For foreign-currency borrowings, due to variations among the interest rates declared by private banks, the interest rates applied by state-owned banks should be taken as the basis.

6. Adat Invoice and the Equal Treatment Principle

Article 357 of the Turkish Commercial Code (Law No. 6102) sets out the equal treatment principle, which requires that all shareholders of a joint-stock company be treated under the same conditions. In this regard, any financing opportunities provided to shareholders must also be applied in a fair and balanced manner. When calculating adat interest, applying the same principles and interest calculations to all shareholders is essential to prevent both tax-related and legal risks. Failure to do so may result in granting unjust advantages to certain shareholders, creating inequality among the others, and exposing the company’s management to liability.