What Is the Financing Expense Restriction? Which Expenses Are Tax Deductible?

Financing growth plans or new investments with external funds is a very common financial strategy for businesses. However, the costs of the loans and credit you use cannot always be deducted directly as expenses when calculating your tax base. This is exactly where the Financing Expense Restriction (FGK) comes in.

So what exactly is the Financing Expense Restriction? How much of your loan, interest and foreign exchange loss expenses can you deduct from your corporate or income tax base? Here are all the details company owners and finance managers need to know...

🚀 At a Glance

• Scope: FGK applies only to businesses whose borrowed funds (liabilities) exceed their equity.

• Application: The restriction does not apply to total financing expenses, only to the expenses corresponding to the portion that exceeds equity.

• KKEG Rate: 10% of the financing expenses attributable to this portion are treated as non-deductible expenses (KKEG) and cannot be deducted from the tax base.

• Exception: Financing expenses added to the cost of investments are excluded from the restriction.

• Period: The calculation is repeated not only at year end but in every provisional tax period.

What Is the Financing Expense Restriction?

FGK is a rule that uses the tax system to limit companies operating with excessive borrowing relative to their equity. In businesses whose borrowed funds exceed their equity, part of the interest, commission and similar financing expenses corresponding to the excess is treated as KKEG and cannot be deducted from the tax base. The restriction rate has been 10% since 1 January 2021.

Who Does It Cover?

• Covered: Income and corporate tax payers keeping books on the balance sheet basis are subject to this rule.

• Not covered: Credit and financial institutions, financial leasing, factoring and financing companies are exempt from the restriction.

• Definition of borrowed funds: All debts obtained from third parties fall within this scope, including bank loans, amounts owed to suppliers, advances received and amounts owed to shareholders.

Step-by-Step Calculation Example

Suppose a business has borrowed funds of 2,000,000 TL, equity of 1,200,000 TL and total financing expenses of 300,000 TL:

Find the Portion Exceeding Equity:

Excess = Borrowed Funds - Equity = 2,000,000 - 1,200,000 = 800,000 TL

Calculate the Ratio of the Excess:

Ratio = Excess / Borrowed Funds = 800,000 / 2,000,000 = 40%

Find the Expense Subject to the Restriction:

300,000 x 40% = 120,000 TL

Determine the KKEG Amount:

120,000 x 10% = 12,000 TL

In summary, of your total financing expenses of 300,000 TL, you can deduct 288,000 TL from tax, while 12,000 TL cannot be shown as an expense. At the current corporate tax rate (25%), this means an additional tax cost of around 3,000 TL for your company.

⚠️ If equity is zero or negative, all debts are deemed to exceed equity. The restriction rate is therefore calculated directly on total financing expenses.

Get Results in Seconds with the Üstad FGK Calculator

Running this calculation manually every tax period can be complicated and time-consuming. Enter your borrowed funds, equity and financing expense figures into the Üstad FGK Calculator to see your non-deductible expense amount instantly.

⚠️ The tool is for information only; for definitive results, always confirm your figures with your accountant.

Common Mistakes

• Applying the restriction to all expenses: The 10% rate applies not to all financing expenses, only to the expenses corresponding to the debt that exceeds equity.

• Including expenses added to investment cost: Financing expenses added to the cost of fixed asset investments are not subject to the restriction.

• Using the wrong balance sheet: The comparison is made using the Tax Procedure Law (VUK) balance sheet before FGK; the balance sheet after the tax provision is set aside is not used.

• Skipping provisional tax periods: The calculation must be made separately in every provisional tax period, not only at year end.

• Overlooking negative equity: If equity is negative, the restriction applies to the full amount of total financing expenses.

What Should You Do?

• Check the balance between your borrowed funds and equity regularly in every provisional tax period.

• Track your financing expenses in separate accounts as "added to investment cost" and "expensed directly".

• Spread the calculation across the year to avoid unexpected tax surprises at period end.

• Use the Üstad FGK Calculator to confirm the correct amounts quickly.

Frequently Asked Questions

What is the financing expense restriction rate?

The rate applied since 1 January 2021 is 10%.

Is none of my financing expense deductible?

No, most of your expenses are deductible. Only 10% of the financing expenses corresponding to the debt that exceeds equity is disallowed.

Is interest added to investment cost subject to the restriction?

No, financing expenses included in the cost of investments are outside this restriction.

Does FGK also apply in provisional tax periods?

Yes. It is taken into account both in provisional tax periods and in the annual income/corporate tax return.

How is the calculation done if equity is negative?

If the company's equity is negative, all borrowed funds are deemed to exceed equity and the restriction is calculated directly on total financing expenses.