The case arose from an audit which found that an electricity producer had ‘distributed hidden profits through transfer pricing’ by allowing shareholders to retain unpaid capital increase commitments, which was allegedly a financing service for which no interest was charged. Based on this, the tax authorities issued an adjusted tax assessment.
On appeal, the first instance court annulled the adjustment, but later the Regional Administrative Court reversed this decision, reasoning that the company should have charged interest and that not doing so constituted hidden profit distribution.
Judgment
The Council of State accepted the taxpayer’s appeal, overturned the Regional Administrative Court’s decision and rejected the tax authorities’ transfer pricing theory based on unpaid capital. The Council noted that applying hidden profit rules where no benefit is obtained would contradict the purpose of those rules.
The Council of State held that Article 13 of Corporate Tax Law No. 5520 requires an actual transaction with a related party involving the purchase or sale of goods or services, or a similar transaction, at a price inconsistent with arm’s length conditions. This results in a transfer of value out of the company. Unpaid capital commitments are not the company’s assets and cannot be used in its commercial activity. Therefore, a shareholder’s default on paying subscribed capital does not amount to a loan from the company to the shareholder, nor does the company’s failure to calculate default interest transform the situation into hidden profit distribution through transfer pricing. Any consequences of the default are governed by the Turkish Commercial Code, which provides for default interest and remedies against the partner. However, this does not create a transfer pricing case.
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