What Is Transfer Pricing and How Does It Affect Related Companies?

The short answer to what transfer pricing is: transfer pricing is the price that persons belonging to the same group or otherwise related to each other apply in their transactions with one another for goods, services, rent and loans. Tax legislation requires this price to be consistent with the market price that would arise if there were no relationship between the parties. If the price departs from this principle, the difference is treated as a disguised distribution of profit and is taxed.

The topic mostly concerns companies with foreign shareholders. A Turkish company that buys products from its parent abroad, provides it with software or consulting services, or borrows from it is subject to this rule on every invoice. In this article we explain, in turn, the concept of related parties, how the arm's length price is determined, the methods in the law and which company must prepare which report.

What is transfer pricing and why is it a tax matter?

Transfer pricing concerns how prices are set in transactions between related companies and whether those prices are accepted for tax purposes. The tax administration wants to prevent group companies from shifting profit through pricing to a low-tax country or to a loss-making company. That is why the price between related parties is compared with the price two independent companies would reach through negotiation.

Consider a simple example. If a distribution company in Turkey buys a product from its parent abroad at well above the market price, the profit in Turkey decreases and the tax base shrinks. The same profit appears in the parent company's country. In this case, the law treats the difference as profit that the Turkish company has distributed to its shareholder in a disguised manner.

The rule is not limited to the purchase and sale of goods. Under Article 13 of Law No. 5520, purchase, sale, manufacturing and construction transactions, leasing, borrowing and lending money, and payments such as bonuses and salaries are in all cases treated as the purchase or sale of goods or services. Intra-group management fees, license fees and loans extended through intercompany current accounts are also within scope.

You can access the text of the article currently in force via Corporate Income Tax Law No. 5520 (mevzuat.gov.tr) . We explain the general structure, tax base and rates of corporate income tax in our article what is corporate income tax .

What is a related party, and how is the 10% threshold applied?

Related parties are the corporation's own shareholders and the individuals and corporations to which the corporation or its shareholders are directly or indirectly linked, or which they control, in terms of management, supervision or capital. The shareholder's spouse, the ascendants and descendants of the shareholder and spouse, and blood relatives and in-laws up to and including the third degree are also considered related parties. The definition is broad; it covers family ties as well as group companies.

The point most often confused regarding related parties is the percentage condition. Under Corporate Income Tax Law No. 5520, if the relationship is established through shareholding, a shareholding, voting or dividend right of at least 10% is required to fall within the scope of disguised profit distribution. Even without shareholding, the parties are considered related if there is a voting or dividend right of at least 10%, and the shares of related parties are taken into account together.

There is one more detail. All transactions with persons located in countries or regions announced by the President are treated as related-party transactions, even without a shareholding link. This provision is a safeguard aimed at places whose taxation capacity is not at the same level as Turkey's and which are closed to exchange of information.

What is the arm's length price, and how does the arm's length principle work?

The arm's length price is the price or consideration that would arise in a transaction between related parties if there were no relationship between them. The law defines this as the principle of conformity with comparables (emsallere uygunluk ilkesi); its name in the international literature is the “arm’s length” principle. The practical answer to someone asking what the arm's length price is: the price you would charge an independent customer.

To find the arm's length price, the transaction itself is defined first. What is being sold, which functions do the parties perform, who bears the inventory, currency or collection risk, and what are the contract terms? Independent transactions under the same or similar conditions are then sought. The more similar the transactions used for comparison, the more defensible the result in a tax audit.

The law requires the records, schedules and documents relating to these calculations to be kept as supporting evidence. In other words, applying an arm's length price is not enough; you also need to document how it was determined. This is the gap we encounter most often in practice: even if the price is reasonable, the basis for the calculation is not on file.

The financial data used in the comparability analysis comes from the company's financial statements. Note that in companies with foreign shareholders, parent company reporting is often prepared under international standards; we explain the differences between the two reporting languages in our article What Is TFRS article.

Transfer pricing methods: the 5 options in the law

The law requires the method most appropriate to the nature of the transaction to be chosen to determine the price in a related-party transaction. No hierarchy has been established among transfer pricing methods; the choice is determined by the type of transaction and the comparable data available. Below we summarize the five options in the order given in the law.

1. Comparable uncontrolled price method

Under this method, the price applied to the related party is compared with the market price independent parties apply among themselves for a comparable good or service. It is the most direct route for companies that sell the same product both to a group company and to an independent customer. The more the product, quantity, delivery and payment terms differ, the weaker the method becomes.

2. Cost plus method

Under the cost plus method, the arm's length price is found by adding a reasonable gross profit markup to the cost of the good or service. It is often used for Turkish companies that carry out contract manufacturing for the group or provide support services to the parent. Which costs go into the base and how the markup is determined are the main points of debate in this method.

3. Resale price method

This method finds the arm's length purchase price by deducting a reasonable gross sales margin from the price at which goods bought from a related party are resold to an independent customer. It is a natural option for distribution companies that buy products from a manufacturer abroad and sell them on the Turkish market. It gives more reliable results where the distributor does not add its own brand or significant processing to the product.

4. Transactional profit methods

Transactional profit methods are based on the profit arising from the transaction and are listed in the law as two methods. The transactional net margin method examines the net profit margin the company earns from the controlled transaction relative to a base such as costs, sales or assets. The profit split method allocates the total profit or loss from joint transactions in proportion to the functions and risks assumed by the parties.

5. Method determined by the taxpayer

If the arm's length price cannot be reached with any of the methods above, the taxpayer may use its own method suited to the nature of the transaction. This flexibility is provided for special transactions such as intangibles that are difficult to value. Justifying in the report why the chosen method is necessary and how it is applied is more important here than ever.

The first three methods in the table and the transactional profit methods are consistent with the approach in the OECD guidelines. The OECD states that the first version of the guidelines was approved by the OECD Council in 1995 and that the current version is dated January 2022; you can access the full text via the link OECD Transfer Pricing Guidelines 2022 . On matters for which Turkish legislation has no explicit provision, these guidelines provide guidance for interpretation.

Transfer pricing report: who prepares it and when?

The transfer pricing report is an annual document describing the transactions the company carried out with related parties in an accounting period, the method chosen and the comparability analysis. Who must prepare the report is set by General Communiqué Serial No. 1 on Disguised Profit Distribution through Transfer Pricing. The scope varies according to the tax office with which the company is registered.

Under the Communiqué as amended by Serial No. 4 (Official Gazette, 01.09.2020), corporations registered with the large taxpayers tax office prepare a report for both their domestic and cross-border transactions with related parties. For other corporate income taxpayers, the report covers only transactions with related parties abroad. With Communiqué Serial No. 5 (Official Gazette, 17.10.2024), the name of this office was updated to the Istanbul Defterdarlık Large Taxpayers Tax Office Directorate.

The annual report is prepared by the deadline for filing the corporate income tax return and, after that deadline, is submitted on request to the administration or to those authorized to conduct audits. For a company using the calendar year as its accounting period, this means the end of April, when the return is filed. The report is not sent with the return; however, related-party transactions are reported separately in the transfer pricing form attached to the return.

Who needs to prepare a master file and a country-by-country report?

There are two additional documents for large groups. The master file is prepared by corporations that belong to a multinational group of enterprises and whose total assets and net sales are both 500 million TL or more according to the previous accounting period's return. This report is prepared by the end of the accounting period following the relevant period and submitted on request.

The country-by-country report concerns multinational groups whose consolidated group revenue in the previous period was 750 million euros or more. The report is submitted electronically by the end of the twelfth month following the reported accounting period. Communiqué Serial No. 5 requires group members to submit the country-by-country reporting notification form by the end of the sixth month following the end of the accounting period.

Thresholds and deadlines may be updated by amendments to the Communiqué. We recommend checking the text of the Communiqué in force before preparing the report.

What does an advance pricing agreement provide?

An advance pricing agreement is an arrangement in which the company agrees in advance with the administration on the method it will use in its related-party transactions. Under the law, this method is binding within the period and conditions set in the agreement, not exceeding three years. The President is authorized to extend this period up to five years.

The agreement provides predictability for groups that repeat the same type of transaction in high volume every year. If the conditions are suitable, the agreed method may also be applied to past periods not yet time-barred. The application requires a detailed functional and risk analysis, so the preparation process takes longer than the annual report.

Tax consequences of a non-arm's length price

If the price is set contrary to the arm's length principle, the difference is treated as profit distributed in a disguised manner through transfer pricing. The law treats this amount, as of the last day of the accounting period in which the conditions are met, as a distributed dividend or, for limited taxpayers, as an amount transferred to the head office. Article 11 of the Law also lists this profit among the items not deductible in determining corporate income.

On the penalty side, documentation has a tangible benefit. For corporations that fulfill their documentation obligations fully and on time, the tax loss penalty arising from disguised profit distribution is applied with a 50% reduction. Tax loss caused by the acts listed in Article 359 of the Tax Procedure Law is excluded from this reduction. Preparing the report on time therefore provides directly measurable protection.

There is also a separate rule for domestic transactions. In domestic transactions between full taxpayer corporations and the permanent establishments or permanent representatives of foreign corporations in Turkey, disguised profit is only deemed to arise if there is a loss to the Treasury. A loss to the Treasury means that the parties' taxes were assessed short or late because of the non-arm's length price. The details of correcting and taxing disguised profit are the subject of a separate article.

Example scenario: choosing a method for a distribution company

The scenario below is entirely fictional. Suppose a limited liability company set up in Turkey by a manufacturing group in Germany buys the group's products and sells them to dealers in Turkey. The company does not process the products, and it bears the marketing and collection risk itself.

In this structure, the first method that comes to mind is the resale price method. If the gross profit margins of independent distributors performing similar functions are available, whether the purchase price from the parent is at arm's length is tested against this margin. If no data on independent distributors can be found, the operating profit margins of similar companies can be examined using the transactional net margin method.

If the company also provides consulting services to the parent for the Turkish market, this second transaction is assessed separately. For the service transaction, the cost plus method is in most cases more suitable. Using more than one method within a single company is normal; what matters is to write the rationale for the choice for each transaction into the report.

Mistakes we often see in practice

The same few gaps keep recurring in our clients' transfer pricing questions. The first is thinking the report is only an obligation for large groups; a small company issuing a single service invoice to a related party abroad also falls within the scope of the report. The second is issuing invoices without putting intra-group contracts in writing.

The third mistake is treating the global documentation prepared by the parent company as sufficient for Turkey. Turkish legislation requires an analysis specific to the transactions of the company in Turkey. The fourth is not taking into account the tax and invoicing effect of a one-off price adjustment made at year-end.

Finally, current account and loan relationships are often overlooked. Leaving a loan received from or given to a shareholder interest-free is also a related-party transaction under the law and is assessed in terms of an arm's length interest rate. You can find the general calendar of filing periods and other obligations in our article tax legislation category.

At Akal CPA, we treat transfer pricing not as a report filled in at year-end but as a process that starts with intra-group contracts. Through our Transfer pricing consulting service, we identify your related-party transactions, document the method selection and comparability analysis, and prepare the annual report in line with the filing calendar.

Last updated: 17.10.2026