Setting Up a Turkish Subsidiary for Intra-Group Services

Setting Up a Turkish Subsidiary for Intra-Group Services: Intercompany Agreements, Arm’s Length Pricing, and Documentation

Turkey is often considered by multinational groups as a location for regional support, shared services, procurement coordination, technical assistance, sales support, finance operations, or management services. A Turkish subsidiary can provide operational substance, local employees, Turkish-language market capability, and proximity to Europe, the Middle East, Central Asia, and North Africa. It can also create tax, transfer pricing, VAT, withholding tax, and documentation obligations that should be designed before the first intercompany invoice is issued.

For foreign investors, the core issue is not only how to incorporate a company in Turkey. The more important question is how the Turkish entity will fit into the group’s value chain. If the subsidiary performs services for related parties, Turkish law and tax practice will generally expect the arrangement to be supported by a genuine service need, a written agreement, reliable cost records, an arm’s length pricing method, and contemporaneous documentation.

This article sets out the main structuring and compliance points for foreign groups establishing a Turkish subsidiary for intra-group services. It focuses on intercompany agreements, arm’s length pricing, and documentation rather than general market-entry strategy.

Choosing the Turkish Vehicle for Group Services

Foreign investors may establish companies in Turkey under the Turkish Commercial Code. The Presidency of the Republic of Turkey Investment Office notes that foreign investors are generally subject to equal treatment and may establish company forms available to local investors. In practice, the most common corporate forms for foreign-owned operating businesses are the joint stock company and the limited liability company.

For an intra-group services platform, the choice is usually between:

Vehicle	Typical use	Key point for service models
Joint stock company	Larger operations, multiple shareholders, regulated sectors, future financing or exit flexibility	Often preferred where governance formality, share classes, or institutional investor expectations matter
Limited liability company	Privately held operating subsidiaries with simpler ownership	Common for service companies where operational simplicity is important
Branch	Extension of a foreign company rather than a separate legal entity	May be less suitable where the group wants a distinct Turkish service provider with separate accounts and contracts
Liaison office	Non-commercial representation and market observation	Not appropriate for charging service fees, because liaison offices may not engage in commercial activities

A subsidiary that provides intra-group services will usually need ordinary corporate registrations, tax registration, legal books, a registered address, directors or managers, accounting systems, payroll processes, and, where relevant, social security registration for employees. The Investment Office’s establishment guide describes the use of MERSIS, the trade registry process, potential tax identification numbers for foreign shareholders and board members, legal book certification, and E-TUYS reporting for foreign investment data.

The company formation step should be coordinated with the transfer pricing design. The articles of association, registered activity codes, employee job descriptions, accounting chart, invoicing flows, and intercompany agreements should tell a consistent story about what the Turkish company actually does.

Defining the Service Model Before Incorporation

The most effective structure starts with a functional analysis. The group should identify the functions, assets, and risks of the Turkish subsidiary before deciding how it will be paid.

Typical intra-group service models include:

• A cost-plus service provider that performs routine support services for group companies
• A regional management or coordination entity with senior employees and decision-making authority
• A sales support or marketing support entity that assists foreign principals without concluding contracts
• A procurement support company that identifies suppliers, negotiates local terms, or manages quality control
• A technical or engineering support center serving manufacturing, software, construction, or energy projects
• A finance, accounting, HR, IT, or administrative shared services center

These categories should not be treated as labels only. Turkish tax authorities will look at conduct, not merely contract wording. For example, if the Turkish company negotiates and concludes contracts with Turkish customers, manages local customer relationships, bears credit risk, or controls pricing decisions, it may be difficult to characterize it as a limited-risk support provider. Conversely, a company with a small local team performing back-office tasks should not be documented as if it were a strategic entrepreneurial hub.

The service model should answer several questions:

• Which group entities receive the services?
• What specific services are performed in Turkey?
• Who requests, approves, and benefits from the services?
• Which costs are included in the service cost base?
• Which costs are excluded as shareholder costs, pass-through costs, or non-beneficial activities?
• What markup, if any, is applied?
• How are foreign exchange differences handled?
• How often are invoices issued and reconciled?
• What evidence will be retained to show that services were actually performed?

These questions should be resolved before the Turkish company begins operations. Retroactive agreements and unsupported year-end invoices are harder to defend.

Intercompany Agreements: More Than a Template

A written intercompany services agreement is not a substitute for economic substance, but it is a central control document. It should be signed before services begin or as close to commencement as possible. It should also be consistent with board approvals, budgets, transfer pricing studies, and accounting entries.

A robust agreement for a Turkish service subsidiary should typically cover the following areas.

Scope of Services

The agreement should describe the services in enough detail to be auditable. Broad wording such as “management services” or “business support” is rarely sufficient by itself. Schedules can be used to specify service categories, deliverables, responsible teams, and recipient entities.

Examples of service descriptions include:

• Finance and accounting support, including monthly reporting packs and accounts payable processing
• HR support, including recruitment coordination, onboarding administration, and payroll data preparation
• IT support, including helpdesk services, user administration, and local systems coordination
• Sales support, including lead identification, market research, and non-binding customer communication
• Engineering support, including technical review, design assistance, and project documentation

The agreement should also state what the Turkish company does not do. If it does not conclude contracts, hold inventory, assume warranty risk, own intellectual property, or make strategic decisions, those limitations should be reflected in the contract and actual conduct.

Pricing Clause

The pricing clause should state the selected method, the cost base, the markup or fee mechanism, invoicing frequency, currency, and adjustment process. For many routine services, a cost-plus method may be considered, but it must be supported by the facts and a benchmarking analysis or other reliable evidence.

The agreement should define the cost base carefully. Common issues include whether to include:

• Salary, bonuses, social security, and benefits
• Office rent, utilities, software licenses, and professional fees
• Travel and entertainment costs
• Depreciation and amortization
• Exchange gains and losses
• VAT, stamp tax, or other indirect taxes
• Pass-through third-party costs

Where certain costs are passed through without markup, the agreement should explain why. For example, a third-party cost incurred as agent for another group company may be treated differently from a cost incurred as part of the Turkish entity’s own service delivery.

Evidence and Reporting

The agreement should require the Turkish company to retain service evidence. This may include timesheets, project records, emails, meeting minutes, tickets, reports, deliverables, system logs, travel records, and management presentations.

The evidence should show three things:

• The services were actually performed
• The recipient received, or reasonably expected to receive, a benefit
• The charge was calculated according to the agreed method

This evidence is especially important for intra-group services because tax authorities often challenge whether the services provided real value or duplicated activities already performed elsewhere in the group.

Governance and Review

The agreement should include annual budget approval, periodic true-up mechanics, service change procedures, termination rights, confidentiality, intellectual property ownership, liability limitations, and dispute resolution. If Turkish employees create reports, software, technical materials, or market data, the agreement should clarify who owns the resulting rights and whether any separate license or royalty is involved.

The agreement should also be reviewed when the business model changes. A Turkish subsidiary that begins as an administrative support center may later hire senior managers, interact directly with customers, or assume regional responsibility. Transfer pricing should follow that evolution.

Arm’s Length Pricing Under Turkish Transfer Pricing Rules

Turkey’s transfer pricing rules are based on the arm’s length principle. The OECD Transfer Pricing Country Profile for Türkiye states that Turkey follows the OECD transfer pricing guidelines in several core areas, including comparability analysis and intra-group services. PwC’s Turkey corporate tax summary also notes that the Turkish Corporate Tax Law uses OECD guidelines as a basis and that profits from non-arm’s length related-party transactions may be treated as disguised profit distribution through transfer pricing.

For an intra-group services subsidiary, an arm’s length analysis should focus on the real nature of the services and the tested party. The Turkish entity is often the tested party if it performs routine services and reliable cost data is available. However, that should not be assumed automatically.

Common pricing approaches include:

• Cost-plus method for routine service providers
• Comparable uncontrolled price method where reliable third-party service pricing exists
• Transactional net margin method where operating margin comparables are more reliable than gross markups
• Profit split in limited cases where both parties make unique and valuable contributions

Turkey applies a “most appropriate method” approach rather than a rigid hierarchy. The method should be selected based on the transaction, available comparables, contractual allocation of risk, and actual conduct.

Intra-Group Services and the Benefit Test

For service charges, an arm’s length price is not enough. The group should also demonstrate that the recipient benefited from the service. A Turkish subsidiary charging a foreign parent or affiliate should be able to show that an independent enterprise would have been willing to pay for the service or perform it internally.

Activities that may create challenges include:

• Shareholder activities performed only because of ownership, such as parent-level investor reporting
• Duplicative services already performed by the recipient or another provider
• Incidental benefits arising from group membership rather than specific services
• Vague management oversight without identifiable deliverables
• Charges allocated by headcount, revenue, or sales without a clear link to benefit

Allocation keys may be acceptable when direct charging is impractical, but they should be rational, consistent, and tied to expected benefit. For example, IT helpdesk costs may be allocated by user count, HR support by employee headcount, and finance reporting support by transaction volume or entity complexity. A single revenue-based allocation for all services may be difficult to defend unless revenue is genuinely correlated with benefit.

Markups and Benchmarking

There is no universal markup that is automatically acceptable for Turkish intra-group services. Groups often use benchmarking studies to support a cost-plus return for routine services. The benchmark should consider the service type, geography, functional profile, risk level, and data quality.

A useful benchmark file should explain:

• Why the Turkish entity was selected as the tested party
• Which databases and search criteria were used
• Which companies were accepted or rejected
• Whether domestic or foreign comparables were used
• Which financial indicator was selected
• Whether multi-year data, interquartile ranges, or comparability adjustments were applied

The OECD profile for Türkiye indicates that arm’s length ranges and statistical tools may be used depending on the facts. This is helpful, but it does not remove the need for careful comparability work.

VAT, Withholding Tax, and Corporate Tax Considerations

Transfer pricing is only one part of the tax analysis. Intra-group services also raise indirect tax and withholding questions.

A Turkish company providing services to a foreign group company may need to analyze whether the service qualifies as an export of services for VAT purposes. Turkish VAT treatment depends on the nature of the service, the location of the customer, and where the service is used or benefited from. If a service is performed for a customer abroad and used abroad, exemption treatment may be relevant, but the file should include invoices, contracts, correspondence, and evidence of foreign use.

Services received from foreign related parties may create reverse-charge VAT obligations in Turkey, depending on the circumstances. Certain payments to non-residents, especially royalties, professional services, interest, or technical service fees, may also require withholding tax analysis under domestic law and any applicable double tax treaty. Treaty relief should not be assumed without reviewing beneficial ownership, residency certificates, limitation provisions, and procedural requirements.

Corporate tax should be considered at the entity level. Turkey generally treats each company as a separate taxpayer for corporate tax purposes. As of recent reporting, the general corporate income tax rate is 25 percent for most companies, while a higher rate applies to certain financial sector entities. Rates and incentives should always be checked for the relevant year, activity, and taxpayer profile.

Documentation Obligations in Turkey

Turkey has formal transfer pricing documentation requirements. These include annual transfer pricing reports, forms attached to the corporate income tax return, and, for qualifying multinational groups, master file and country-by-country reporting obligations. Thresholds and filing mechanics should be checked annually because they may change.

For a Turkish intra-group services subsidiary, the core documentation file should include:

• Intercompany services agreement and amendments
• Functional analysis of the Turkish company and service recipients
• Description of each controlled transaction
• Pricing method selection and rationale
• Benchmarking analysis or other arm’s length support
• Cost base calculation and allocation keys
• Invoices, ledgers, trial balances, and management accounts
• Evidence of service performance and recipient benefit
• VAT and withholding tax analysis
• Year-end true-up calculations, if any
• Board approvals or internal authorizations
• Master file references, where applicable

PwC’s summary notes that the annual transfer pricing report is prepared by the corporate income tax return deadline and submitted upon request, while the master file and country-by-country reporting framework follow separate timing rules. The OECD profile also notes that documentation prepared timely and properly may reduce tax penalties in the event of a transfer pricing assessment.

The practical lesson is simple: documentation should be built during the year, not assembled only after a tax authority request. Service evidence is much easier to collect while projects are active.

Common Risk Areas for Foreign Groups

Several issues recur in Turkish intra-group service structures.

Agreements Signed After the Fact

Late agreements create avoidable risk. They may still help describe the parties’ understanding, but they are less persuasive than agreements approved before services start. Groups should sign the main agreement before operations begin and update it when scope or pricing changes.

One Invoice, Many Services

A single annual invoice labeled “management fee” can be difficult to defend. Better practice is to categorize services, maintain cost center detail, and link charges to deliverables or allocation keys.

Insufficient Local Substance

A Turkish company cannot credibly charge for services it lacks the people, systems, authority, or expertise to perform. Payroll records, employee CVs, job descriptions, internal approvals, and system access logs can help support substance.

Misclassified Activities

Sales support can become sales agency. Procurement support can become principal buying activity. Technical support can involve valuable intangibles. The transfer pricing model should be reviewed if the Turkish team begins making decisions that affect group profits or risks.

Ignoring Currency and Inflation Effects

Turkey’s economic environment can make budgeting and true-ups more complex. Agreements should specify currency, exchange rate source, invoicing dates, and treatment of foreign exchange differences. Accounting entries should match the contractual approach.

Weak Benefit Evidence

The most persuasive service file is usually practical and operational. It shows what was done, who did it, when it was delivered, and why the recipient needed it. Generic slide decks and broad descriptions rarely carry the same weight.

Implementation Checklist

Before launching a Turkish intra-group services subsidiary, foreign investors should align legal, tax, finance, and operating teams around a single implementation plan.

Key steps include:

1. Define the Turkish entity’s function, assets, and risks.
2. Choose the legal form and prepare incorporation documents.
3. Register the company, obtain tax and social security registrations, and certify legal books.
4. Set up accounting codes that separate service lines, cost centers, and pass-through costs.
5. Draft and sign intercompany services agreements before transactions begin.
6. Select a pricing method and prepare benchmark support where needed.
7. Establish invoicing, VAT, withholding tax, and treaty review procedures.
8. Collect service evidence during the year.
9. Prepare annual transfer pricing documentation and return attachments.
10. Review the model whenever employees, customers, risks, or decision-making authority change.

Final Observations

A Turkish subsidiary can be an effective platform for intra-group services, but the structure should be built around real functions, clear agreements, arm’s length pricing, and disciplined documentation. The strongest files are consistent across legal contracts, accounting records, employee activity, tax filings, and business reality. For foreign investors, that consistency is the difference between a subsidiary that is merely incorporated in Turkey and one that is ready to withstand commercial, tax, and audit scrutiny.