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Decoding Financing Expense Restriction: A Guide to Corporate Taxation and Foreign Resources

Turkish Law Firm

Introduction to Financing Expense Restriction

When it comes to running a business, financing plays a crucial role in ensuring smooth operations, growth, and expansion. However, governments often encourage companies to utilize their own resources rather than relying heavily on foreign funds. To achieve this objective, laws have been introduced in various countries to restrict the deduction of certain expenses incurred from foreign financing when calculating corporate income tax. This legal provision is known as the "Financing Expense Restriction."

Unraveling the Origins of Financing Expense Restriction

The concept of Financing Expense Restriction was first introduced in 2013 under the 37th article of Law No. 6322 and was incorporated into the first paragraph of the 11th article of the Corporate Tax Law No. 5520 as subparagraph (i). The primary goal behind this law was to incentivize companies to meet their financing needs using their own resources, rather than relying excessively on foreign sources.

However, the practical application of this law was delayed until 2021, when Presidential Decision No. 3490 was issued. This decision, published in the Official Gazette on February 4, 2021, determined the applicable rate for the restriction to be 10%. Consequently, starting from January 1, 2021, any expenses and costs related to foreign resources used in a business, excluding those added to the cost of investment, could not be deducted in determining corporate income if the foreign resources exceeded their own resources.

Scope of the Financing Expense Restriction

The Financing Expense Restriction is applicable to corporate taxpayers whose foreign resources surpass their own resources. This means that companies subject to the balance sheet principle fall under the scope of this restriction, while those subject to the operating account principle are excluded from it.

However, certain businesses are exempted from this restriction, including:

  • Pension companies operating under Law No. 4632,

  • Banks established in Turkey operating under Law No. 5411, including deposit banks, participation banks, development and investment banks, branches of similar institutions established abroad in Turkey, and financial holding companies,

  • Insurance and reinsurance companies operating under Law No. 5684,

  • Financial leasing, factoring, financing companies, and savings finance companies operating according to relevant articles of Law No. 6361,

  • Institutions engaged in capital market activities under Law No. 6362.

The Period of Application of the Financing Expense Restriction

The implementation of the Financing Expense Restriction began with the first temporary taxation period of 2021. However, there is a notable controversy regarding its retroactive application. Although the law was enacted in 2013, the rate of the restriction was determined only in 2021. This retroactive application raises concerns about the principle of non-retroactivity of laws, which is essential for legal predictability and the Rule of Law.

Taxpayers have filed objections to this retroactivity, stating that the rate should apply only to foreign resources acquired from 2021 onwards, aligning with the effective date of the Presidential Decree.

Objections to the Definition of Foreign Resource

The Corporate Tax Circular No. 18, published in the Official Gazette No. 31491, defines foreign resources as the total of short-term and long-term foreign resources in the balance sheet. However, this broad definition has led to objections from taxpayers, as it includes accounts that are not financing-related debts, such as those related to suppliers, personnel debts, taxes, and funds to be paid.

Some tax courts have acknowledged these objections and ruled that the concept of foreign resources should be limited to debts aimed at financing the business. They argued that the inclusion of non-financing-related accounts in the calculation of foreign resources is legally inaccurate.

Litigation Path in Financial Expense Restriction

Despite the precedents set by the tax judiciary, tax offices continue to strictly apply the legislation, including foreign resources acquired from 2013 onwards in the calculation of the financing expense restriction for businesses.

In such cases, businesses may file lawsuits with a request to stop the execution. However, this may not automatically prevent the collection of accrued corporate tax. To avoid any grievances, businesses are advised to pay the part related to the financing expense restriction "with objection" and then file a cancellation lawsuit in the tax courts within 30 days.


The Financing Expense Restriction serves as a crucial tool in encouraging companies to utilize their own resources for financing needs. While its introduction dates back to 2013, its practical application only began in 2021. This restriction, despite its intent to promote self-reliance, has faced criticism due to its retroactive implementation and broad definition of foreign resources.

As businesses navigate this complex landscape of taxation and compliance, it is essential to seek professional advice to ensure accurate financial planning and adherence to the relevant laws and regulations. Understanding the nuances of the Financing Expense Restriction can empower businesses to make informed decisions and stay ahead in their financial strategies.

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