Primetax Guide: The Notional Interest Deduction for Cash Capital Injections in Türkiye

Introduction

Türkiye introduced the NID in 2015 to encourage equity financing by allowing qualifying capital companies to deduct a notional return on certain cash capital contributions from their corporate income tax base.

The deduction does not represent an actual financing cost and does not require an interest payment. It is a tax-base deduction calculated by reference to the amount of qualifying cash capital, the relevant interest rate published by the Central Bank of the Republic of Türkiye (CBRT), the applicable deduction rate and the period for which the capital qualifies.

The rules have been amended several times since their introduction. In particular, the deduction rate was increased for certain cash brought from abroad, a five-accounting-period limitation was introduced, and the incentive must now also be considered together with Türkiye’s domestic minimum corporate income tax regime.

Scope of the Deduction

The NID is available to Turkish capital companies in respect of qualifying cash capital. Broadly, the eligible amount consists of the cash-paid portion of a registered capital increase of an existing company or the cash-paid capital of a newly established company.

Institutions operating in the finance, banking and insurance sectors and state economic enterprises are outside the scope of the incentive.

The NID is linked to the legal and actual funding of the company. The timing of the capital increase resolution, trade registry registration and payment of the cash into the company’s bank account therefore affects both eligibility and the amount of the deduction.

Capital Contributions That Do Not Qualify

The NID is designed for genuine cash equity contributions. Capital increases arising from other sources do not form part of the qualifying base.

The principal exclusions include:

• capital increases arising from contributions in kind;

• capital increases funded from retained earnings, legal reserves or other existing equity items;

• capital increases arising from mergers, transfers or demergers; and

• capital increases funded through borrowings obtained by shareholders or related parties in circumstances covered by the applicable restrictions.

The source of the capital and the manner in which it is introduced into the company should therefore be reviewed before the expected NID benefit is quantified.

Calculation of the Deduction

The deductible amount is calculated by applying the relevant CBRT commercial loan interest rate and the applicable deduction rate to the qualifying cash capital, taking into account the period for which the capital qualifies during the accounting period.

The calculation may be expressed as follows:

Deductible amount = Qualifying cash capital × CBRT interest rate × applicable deduction rate × time fraction

The time fraction is determined by reference to the number of qualifying months in the accounting period. A fraction of a month is treated as a full month. Where the cash is paid before registration of the capital increase, the calculation begins from the month in which the increase is registered. Where payment is made after registration, the calculation begins from the month in which the cash is paid into the company’s bank account.

The relevant CBRT rate is the latest annual weighted average interest rate for Turkish-lira-denominated commercial loans published for the year in which the deduction is claimed. For this reason, a final annual rate should not be assumed before the relevant year-end rate has been published.

Applicable Deduction Rates

General Rate

The general deduction rate is 50%. The 50% rate is applied to the notional interest amount calculated under the statutory formula; it is not a limit expressed as 50% of taxable profit.

Cash Capital Brought from Abroad

For the qualifying portion of cash capital increases funded with cash brought from abroad, the deduction rate is 75% under the rule introduced in 2021. Appropriate evidence should be maintained to demonstrate that the relevant funds were brought from abroad and were used to fund the qualifying capital increase.

Listed Companies and Incentive-Certificate Investments

Council of Ministers Decree No. 2015/7910 provides for increases to the deduction rate in certain cases. These are percentage-point adjustments to the deduction rate; they are not basis-point adjustments to the CBRT interest rate.

For qualifying listed companies, 25 or 50 percentage points may be added to the general rate depending on the proportion of shares that meet the relevant trading criterion at year-end.

A 25 percentage-point increase may also apply, subject to the relevant limits, where the cash capital is used for qualifying investments under an investment incentive certificate, including certain production and industrial facilities, machinery and equipment and related land.

Cases Where a 0% Rate Applies

The legislation also applies a 0% deduction rate in certain circumstances. These restrictions are important because they can eliminate the NID for all or part of the qualifying capital even where the original capital contribution was made in cash.

The principal 0% rate cases include:

• companies whose passive income is at least 25% of total income;

• companies for which at least 50% of total assets consist of affiliated securities, participations or subsidiaries;

• the portion of increased cash capital contributed as capital to another company or made available to another company as a loan; and

• the portion of increased cash capital used for land and plot investments, subject to the separate rules applicable to qualifying investment-incentive expenditure.

The tests should be considered separately. In particular, a company may fall within the passive-income restriction even if it does not meet the asset-composition test, and vice versa.

The passive-income rule is also relevant where injected capital is placed in term deposits. The resulting interest income may increase passive income and, depending on the company’s overall income profile, may cause the 25% threshold to be exceeded.

Five-Accounting-Period Limitation

For qualifying capital increases made on or after 5 July 2022, the NID is available for five accounting periods. The first period is the accounting period in which the capital increase resolution, or the articles of association of a newly established company, is registered; the following four accounting periods complete the five-period window.

A transitional rule applies to qualifying capital increases made before 5 July 2022. Those capital increases may benefit from the deduction for five accounting periods beginning with 2022. For calendar-year taxpayers, 2026 is therefore the final accounting period of this transitional window.

If the company subsequently reduces its capital during the relevant benefit period, the effect of the reduction on the NID base must also be taken into account.

Carry-Forward of Unused Deduction

A company does not lose an otherwise valid NID merely because it has insufficient taxable income in a particular accounting period.

Where all or part of the calculated deduction cannot be used because the tax base is insufficient, the unused amount may be carried forward without indexation. Under the current rules and administrative guidance, amounts that remain unused because of insufficient taxable profit may continue to be carried forward beyond the five-accounting-period calculation window.

The five-period limitation therefore determines the periods for which new NID amounts are calculated. It does not, by itself, extinguish previously calculated amounts that could not be used because of insufficient taxable income.

Interaction with Domestic Minimum Corporate Income Tax

Türkiye’s domestic minimum corporate income tax regime applies from the 2025 accounting period onwards and should now be considered whenever the NID benefit is modelled.

The NID reduces the ordinary corporate income tax base. However, it is not one of the deductions that may be subtracted in determining the domestic minimum corporate tax base. As a result, a company may obtain an NID deduction in its ordinary corporate tax calculation but still become liable for additional tax under the minimum-tax computation.

The economic value of the NID should therefore be assessed by comparing both calculations rather than by applying the ordinary corporate tax rate mechanically to the amount of the deduction.

Entities commencing activities for the first time are, subject to the statutory conditions, outside the domestic minimum corporate tax regime for their first three accounting periods. This rule should be considered separately from the company’s eligibility for the NID.

Documentation and Practical Considerations

The NID is calculation-driven, but its availability depends heavily on the underlying corporate and banking documentation. Companies should maintain a clear audit trail supporting the amount, source, timing and use of the relevant cash capital.

In practice, the following matters should be reviewed:

• the capital increase resolution and trade registry registration date;

• the date and amount of each cash payment into the company’s bank account;

• the source of the funds, particularly where the 75% rate for cash brought from abroad is intended to apply;

• the company’s annual passive-income ratio and asset composition;

• whether any part of the capital has been on-lent, contributed to another company or used for land investments;

• the remaining period within the applicable five-accounting-period window;

• unused NID amounts carried forward from earlier years; and

• the effect of the domestic minimum corporate income tax calculation on the expected cash-tax benefit.

These points are particularly relevant in group restructurings and treasury arrangements, where the legal form of the capital increase may qualify but the subsequent use of the funds may reduce or eliminate the available deduction.

Conclusion

The NID remains an important incentive for companies that strengthen their equity base through qualifying cash capital contributions. The benefit can be particularly significant where the enhanced rate for cash brought from abroad applies.

The incentive should, however, be analysed as part of the company’s wider tax and funding position. The five-accounting-period limitation, the 0% rate restrictions, the carry-forward rules and the domestic minimum corporate income tax regime can each materially affect the amount and timing of the tax benefit.

A reliable NID analysis should therefore combine the corporate steps implementing the capital increase with the source and use of the funds, the company’s annual income and asset profile, and the interaction with the minimum-tax rules.