Disguised Profit Distribution Through Transfer Pricing: Tax Penalty and Litigation

Carrying out transactions between related companies is not, by itself, a disguised profit distribution. The dispute is resolved by whether the price or fee applied conforms to arm's length comparables, the reliability of the comparison chosen, and whether the other conditions required by the law are met. The fact that companies belong to the same group does not remove pricing from tax audit; nor does it give the administration authority to tax every price difference without reasons.

Within the framework of Article 13 of the Corporate Tax Law No. 5520 (Kurumlar Vergisi Kanunu, "KVK"), transactions in goods, services, financing, leasing and intangible rights may come into question. This article examines the evidentiary and litigation side of disputes that turn into tax assessments and tax penalties. It links to neighboring institutions such as thin capitalization (örtülü sermaye) and the financing expense restriction; it does not treat them as the same provision as transfer pricing.

What are the conditions of disguised profit distribution?

The order of examination is: determining the relationship between the parties, defining the real transaction, researching the arm's length price, and calculating the difference from the price applied. The tax consequence is then established for the relevant tax type and period. Merely stating "is a related person" in an audit report does not explain all the elements of the base difference.

Setting the sale price low and the purchase price high; making resources available interest-free or at low interest; and paying a high service or license fee may produce different consequences. The direction in which, and the amount in which, profit was transferred must be determined. Treating the whole gross transaction volume as the profit difference is not the same as calculating only the part that departs from the comparable.

Does the scope of related persons consist only of shareholders?

No. In addition to shareholding, management, supervision, capital connection, relationships of influence and the family ties specified in the law are also important. In relationships arising through shareholding, the 10 percent threshold in the law and how direct/indirect connections are calculated must be examined. This threshold is not a general safe harbor that ignores other types of relationship.

In litigation preparation, the shareholding and management structure of the period under examination must be drawn up. The current share distribution is not sufficient for a past year. A relationship chart can be built with documents on share transfers, voting rights, dividend rights and indirect ownership. A defense that no relationship exists cannot rest solely on the companies having different trade names.

How is the arm's length price determined?

Conformity to comparables researches the price or fee that independent parties would accept under comparable conditions. The nature of the product or service, contract terms, functions undertaken, assets used, risks, economic conditions and business strategies are assessed together. Two businesses operating in the same sector need not be comparables for each other in every transaction.

An internal comparable proceeds from comparable transactions the business has made with independent persons; an external comparable proceeds from other independent transactions. If it is said that an internal comparable exists, differences in maturity, quantity, warranty, geography and risk must be explained in addition to price. It cannot be expected that an unreliable internal transaction be accepted as a mandatory comparable merely because it appears in the company's records.

Why does the choice of method affect the outcome of the case?

The comparable uncontrolled price, cost plus and resale price methods, and the transactional profit methods, rely on different data needs. The suitability of the chosen method to the nature of the transaction must be shown. If it is said that a method could not be applied, the reason must also be explained. A method cannot be accepted as correct merely because a high base difference results.

Applying the profitability of all the company's activities directly to a single transaction carrying different risks and functions can be misleading. A segment-based calculation, the separation of expenses outside the comparison and the correction of different accounting classifications may be necessary. In expert examination, the verifiability of the data set used must be discussed as much as the choice of method.

When is an intra-group service fee disputed?

The words "management service" on an invoice do not by themselves prove that the service was provided and that its fee conforms to the comparable. It must be shown by which personnel, in which period and for the benefit of which company the service was provided. Invoicing a second time for work the recipient already performs in-house, or transferring expenses arising solely from the capacity of shareholder, is examined separately.

The administration may raise doubts about the reality of the service or its economic benefit. The company's answer should rest not only on the contract but also on meetings, reports, project outputs, working time and cost records. Even if the service was actually provided, an arbitrary allocation key may create a separate dispute as to the fee.

For example, allocating the fee for human resources services according to the number of employees, and for IT services according to user or usage data, may be more explainable. However, it cannot be said that a particular key is correct in every case. Why the criterion is connected to the service received must be made concrete.

How is making money available interest-free to a shareholder or group company assessed?

Lending and borrowing transactions fall under KVK Article 13. For how long the resource was used, in which currency, the credit risk of the party and the repayment terms affect the research into the arm's length interest rate. Calculating for the whole year on the year-end balance may not correctly reflect the movements during the year.

In the interest-product (adat) calculation, the start and end dates, collections, the debit/credit direction and duplicate entries must be audited. If it is argued that a commercial advance relates to a real order, contract, delivery and set-off documents must be submitted. Just as not every advance that remains open for a long time is automatically financing, giving an account the name "advance" cannot conceal a real financing relationship.

Why the comparable rate used is appropriate is also discussed separately. A short-term, secured TL loan and long-term, unsecured foreign currency financing should not be treated as the same. If a joint assessment with the thin capitalization provisions is required, the reason for which the same amount is adjusted and the risk of double taxation must be tracked clearly.

What does the Treasury loss condition mean in domestic transactions?

KVK Article 13/7 provides a Treasury loss condition for related domestic transactions carried out between the institutions listed in the law. Treasury loss is connected with the total taxes that should have accrued in the names of the relevant parties accruing incompletely or late. This condition does not apply unconditionally to all related-person transactions and all tax types.

Both parties being subject to the same corporate tax rate does not by itself end the examination. Elements such as loss offset, exemption, deduction, period differences and late accrual may change the result. Conversely, a report's failure to examine this element at all in a transaction in which the Treasury loss condition applies should also be made a subject of the defense.

VAT and the withholding tax linked to profit distribution are assessed separately under their own provisions. A defense raised with regard to corporate tax should not be assumed to produce the same result for other taxes. For each notice of assessment, the tax type, period, base and the relationship with the penalty should be drawn up.

How do documentation and the 50 percent penalty reduction apply?

Calculations, records and documents relating to transfer pricing must be kept. Obligations concerning the annual report, the general report, country-by-country reporting and annexes to the tax return vary according to the status of the taxpayer, the type of transaction and the relevant thresholds. It cannot be said that every report is mandatory for every company. However, an exemption from a particular report does not remove the need to explain the conformity of the price to the comparable.

KVK Article 13/8 provides a 50 percent reduction in the tax loss penalty on taxes accruing incompletely or late because of disguised distributed profit, on condition that the documentation obligations are fulfilled fully and on time. The exception for causing tax loss through acts within VUK Article 359 is also taken into account separately. It cannot be assumed that a report prepared afterwards satisfies the on-time documentation condition in every case.

This provision has a different basis from the penalty reduction and settlement options in VUK Article 376. Whether the reductions can be applied together should be checked according to the concrete tax and penalty procedure; the rates should not be added on top of each other mechanically. The grounds of objection to the principal tax and to the penalty should also be written separately.

What does the Council of State decision on trademark use show?

The decision of the Council of State (Danıştay) 3rd Chamber dated 10.04.2025, E.2023/3189, K.2025/1737, shows the importance of separating the trademark usage fee from the allocation of intra-group expenses. Because the general expense invoices and reports did not explain the trademark fee, it was not accepted that a usable internal comparable existed. The Chamber found the search for a comparable external comparable appropriate and reversed the part of the judgment in favor of the taxpayer.

This decision does not mean that every external comparable of the administration is treated as correct. It does, however, reveal the risk of the company being content with the defense that "the fee was within the general service invoices." The license right, terms of use, price calculation and service fee should be explained with separate and consistent records. The concrete features of the decision should not be carried automatically to other sectors.

What method should be followed in tax examination and litigation preparation?

For each adjustment in the audit report, the relationship, transaction, method, comparable, calculation and tax result should be put into a separate table. The information and documents requested by the administration are submitted on time and with a defined scope. Findings that are not agreed with are made concrete in the minutes or the explanatory petition; the distinction between signing and agreeing with every legal assessment is maintained.

The action is generally directed at final acts such as the tax and penalty notice of assessment. The audit report is in most cases not made the subject of an action on its own. Even so, whether a letter that reduces a prior-year loss or directly affects later periods is final and enforceable is assessed separately. Nor can it be said in advance that there is no act subject to action simply because no tax payable has yet arisen.

The general tax action time limit, unless a special provision applies, is 30 days. The date of service and electronic notification is determined. Submitting an explanation to the administration or considering the possibility of settlement does not mean that the time limit for filing an action is automatically protected. The application option and time limit should be tracked together for the principal tax, the penalty and different periods.

The effect of filing an action on collection is determined according to the type of procedure within the framework of İYUK Article 27. In situations such as declarations and collections made under a reservation of rights (ihtirazi kayıt), a stay of execution may also come into play separately. The right of appeal (istinaf) and appeal on points of law (temyiz) are also assessed separately according to the nature of the decision and the monetary thresholds that apply.

What routes exist for counterparty adjustment and in international transactions?

Under KVK Article 13, the assessment made in the name of the institution distributing disguised profit and the adjustment at the other side of the transaction are neither simultaneous nor unconditional. The finality and payment conditions in the law and the period of the adjustment must be examined. The fact that tax has been paid on one side does not mean that an automatic refund is made on the other.

In cross-border transactions, the mutual agreement procedure of the relevant double taxation treaty may also come into play separately. The application time limit, the competent authority and the relationship with domestic remedies may vary according to the treaty. A general international time limit should not be applied to all countries. The double taxation risk is assessed together with the adjustment conditions of the other country.

An advance pricing agreement, on the other hand, is a different instrument that can provide predictability as to the pricing method. It should not be seen as an amnesty that automatically removes all consequences of an existing assessment, or as a route that replaces litigation. Forward-looking compliance work and the defense of a past dispute are planned separately.

Related articles: Rights Against a Tax Inspection Report: Report Assessment, Hearing and Litigation; Appeals in Tax Cases (İstinaf and Temyiz): Deadline, Monetary Thresholds and Petition Preparation; Proof in Tax Cases: Evidence, Ex Officio Investigation and Expert Examination; Settlement in Tax Penalties: Audit Stage, Application After the Notice of Assessment and Preserving the Right to Sue.

Conclusion

What is decisive in a transfer pricing case is not merely rejecting the price difference, but explaining the relationship, the real transaction, the method and the tax effect in a verifiable way. Separating intra-group service, trademark and financing fees from one another; preserving comparable data for the period of the transaction; and examining the Treasury loss condition within its correct scope form the foundation of the defense. A deficiency in documentation may affect both the underlying dispute and the possibility of a penalty reduction.

Frequently Asked Questions

Is every transaction between companies in the same group a disguised profit?

No. In addition to the existence of the relationship, departure from comparables and the other applicable conditions are examined. Carrying out a normal commercial transaction is not prohibited. Related explanation

Is the existence of an invoice and a contract sufficient for the defense?

It is not always sufficient. Performance of the service, economic benefit, the pricing method, the allocation key and comparable conditions must be shown separately. Related explanation

Can interest-product (adat) be calculated for the whole year for an interest-free shareholder account?

The actual period of use and the daily movements must be examined. A calculation covering the whole year on the year-end balance alone cannot be accepted as correct without verification against concrete records. Related explanation

Does a transfer pricing report remove the tax penalty entirely?

No. Full and timely documentation may provide a 50 percent reduction in the tax loss penalty within the conditions and exceptions of the law; it does not by itself remove the merits of the assessment. Related explanation

Sources

1. Corporate Tax Law No. 5520 (5520 sayılı Kurumlar Vergisi Kanunu), in particular Articles 11, 12 and 13. Source text
2. General Communiqué No. 1 on Disguised Profit Distribution Through Transfer Pricing (Transfer Fiyatlandırması Yoluyla Örtülü Kazanç Dağıtımı Hakkında 1 Seri No.lu Genel Tebliğ) and its amendments. Official text of the Revenue Administration (GİB): Source text
3. Decision on Disguised Profit Distribution Through Transfer Pricing (Transfer Fiyatlandırması Yoluyla Örtülü Kazanç Dağıtımı Hakkında Karar); documentation and penalty reduction regime. Source text
4. Tax Procedure Law No. 213 (213 sayılı Vergi Usul Kanunu, "VUK"), in particular Articles 3, 134, 341, 344 and 359. Source text
5. Council of State (Danıştay) 3rd Chamber, 10.04.2025, E.2023/3189, K.2025/1737; trademark use, assessment of internal and external comparables. Source text
6. Law No. 2577 on Administrative Procedure (2577 sayılı İdari Yargılama Usulü Kanunu, "İYUK"), in particular Articles 7, 27, 45 and 46. Source text