Service Allocation Transactions and VAT Withholding in Group Companies

The shared services and cost allocation between group companies are subject to various regulations under both the Corporate Tax Law and the Value Added Tax (VAT) Law. Rules to be followed, especially regarding the allocation of personnel costs and shared expenses, are critical for businesses. Here are some key considerations regarding this issue:

1. Evaluation Under the Corporate Tax Law

Pursuant to Article 13 of the Corporate Tax Law, transactions between group companies are evaluated within the scope of transfer pricing. This regulation mandates compliance with the arm’s length principle in the purchase and sale of goods and services conducted between related parties.

Arm’s Length Principle: Transactions between group companies must be priced in accordance with market conditions. These transactions should be assessed by comparing them to prices agreed upon between independent parties with no relationship.

Sharing of Electricity, Water, and Natural Gas Expenses: When expenses such as electricity, water, and natural gas are invoiced based on usage ratios among related parties, these transactions must also be carried out in accordance with the arm’s length principle.

Shared Workforce Usage: The allocation of costs arising from shared personnel usage among group companies, even when no profit margin is added, is evaluated within the scope of the arm’s length principle. Allocations must be made considering actual costs and market conditions.

2. Evaluation Under the VAT Law

According to the Value Added Tax Law No. 3065, all deliveries and services performed in Türkiye are subject to VAT. The VAT implications for services between group companies are as follows:

Allocation of Personnel Costs: Cost allocations related to the shared workforce among group companies are considered VAT-taxable services. However, since these transactions are not classified as workforce supply services, they are not subject to VAT withholding.

VAT Rate: The VAT rate applicable to service allocations is determined according to general principles. It is important to ensure that service fees are accurately included in the VAT base. The current general VAT rate is 20%.

VAT Based on Arm’s Length Value: Personnel costs must be calculated not merely based on actual costs but also by considering the arm’s length value. Additionally, VAT related to the service provided must be calculated accurately and invoiced at the correct rates.

Allocation of Shared Expenses: When expenses such as electricity, water, and natural gas are allocated based on usage, the VAT rate applicable to these expenses must be calculated accordingly.

3. Practical Application Recommendations

To ensure compliance in cost sharing and personnel allocation processes among your group companies, the following points should be noted:

  • Contracts and Invoicing: All transactions should be governed by a clear service agreement, and invoicing should be carried out within this framework.
  • Benchmarking: Ensure that pricing complies with arm’s length values. Market condition analyses can be conducted for this purpose.
  • VAT Calculation: Verify that the correct VAT rates are applied to all cost sharing and service allocation transactions.
  • Accounting Compliance: Ensure that invoices are recorded in accordance with accounting and tax regulations.

Source: Revenue Administration of Republic of Türkiye
Legal Notice: The information in this article is intended for information purposes only. It is not intended for professional information purposes specific to a person or an institution. Every institution has different requirements because of its own circumstances even though they bear a resemblance to each other. Consequently, it is your interest to consult on an expert before taking a decision based on information stated in this article and putting into practice. Neither Karen Audit nor related person or institutions are not responsible for any damages or losses that might occur in consequence of the use of the information in this article by private or formal, real or legal person and institutions.