Turkey: Funds To Be Added To The Share Capital Of Companies And Re-Assessment Of Fixed Assets

Last Updated: 25 September 2012
Article by Berna Asik Zibel

PROVISIONS OF THE NEW TURKISH COMMERCIAL CODE ON CAPITAL INCREASE FROM INTERNAL SOURCES

Article 462 of the new Turkish Commercial Code numbered 6102, which entered into force on 01.07.2012 ("NTCC") sets forth the provisions regarding the authorized capital increases through addition of internal sources to the capital. As per this article;

  • capital reserve funds, which are set aside for contingencies but not allocated for a special purpose,
  • the parts of the statutory reserves which can be freely disposed and
  • the funds, which are permitted by the law to be indicated in the balance sheet and to be added to the capital;

may be converted into share capital and the share capital can be increased by utilizing those internal sources.

In the event that the company has funds which are permitted by the law to be added to the share capital; the share capital cannot be increased by means of subscription.

According to the procedure, the amount, which will cover the increased part of the share capital, should be attested with the approved annual balance sheet and a clear written statement given by the board of directors. If more than six months passed from the date of the balance sheet, a new balance sheet shall be issued and approved by the board of directors. The capital increase becomes final upon the registration of the general assembly and board of directors resolutions and the amended articles of the articles of association to the related trade registry. As per the last paragraph of article 462 of the NTCC, the current shareholders of the company should automatically acquire the newly issued gratis shares pro-rata to their shareholding in the share capital of the company. The right to acquire gratis shares cannot be overruled, restricted or waived.

The secondary legislation with respect to the funds which are permitted to be added to the share capital has not yet been set forth as per the NTCC. Considering the secondary legislation under the Turkish Commercial Code numbered 6762, there is an Internal Trade Communiqué on Incorporation and Amendment of Articles of Associations of Joint Stock and Limited Liability Companies numbered 2003/3 which was announced in the Official Gazette dated 25 July 2003 by the Ministry of Industry and Trade ("Communiqué nr. 2003/3"). When this Communiqué nr. 2003/3 is reviewed, it is seen that Annex 2 of this Communiqué nr. 2003/3 sets forth the documents requested for the registration of the capital increase and within these documents, the ways of capital increase by utilizing internal sources is listed as "inclusion of share certificates, addition of value increase funds, value increase funds of affiliates, cost increase funds, profits from sales of affiliate shares or immovable properties".

The legal doctrine suggests that with respect to the funds permitted to be added to the share capital, article 462 of the NTCC provides merits to the tax rules set forth by the Tax Procedure Law numbered 213 ("TPL") under articles 298, reiterated article 298 and provisional article 25 on inflation accounting1. Therefore, those articles of TPL shall be evaluated in that regard.

TAX PROCEDURE LAW PROVISIONS ON RE-ASSESSMENTS AND SECONDARY LEGISLATION

The provisions of the TPL regarding the recordation of value increases to the balance sheet or addition to the share capital as a result of a re-assessment have been eliminated with reiterated article 298 which is entered into force with the "Law regarding the Amendments on Tax Procedure Law, Income Tax Law and Corporate Tax Law" numbered 5064 which was announced in the Official Gazette dated 30.12.2003 and numbered 25332 ("Law nr. 5064"). With this Law nr. 5064, inflation adjustment system is accepted under amended articles of TPL and the re-assessment system is overruled, thus the accounts regarding the "Increases upon Re-assessment of Fixed Assets" and "Increases upon Re-assessment of Affiliates" set forth in the balance sheets are no longer applicable. Similarly, since article 38/4 of the Income Tax Law numbered 193 ("ITL") has also been eliminated; the "Cost Increase Funds" which previously were permitted to be added to the share capital have also lost its applicability.

On the other hand, before those amendments made with Law nr. 5064, the ways of capital increase by utilizing the internal sources has been listed in the Annex 2 of the above mentioned Communiqué nr. 2003/3 and no correction has been made in this Communiqué after the law amendment. Therefore, it has been seen that the trade registries organized under the Ministry of Customs and Trade and the tax offices organized under the Ministry of Finance have conducted different implementation which are contrary to each other. Some trade registries have continued to register this kind of capital increases which are made upon re-assessment of fixed assets based on the certified accountant reports as per Communiqué nr. 2003/3.

Given the circumstances, this kind of capital increases should not be registered since the law is a higher legislative act than the communiqué and the discrepancies in the communiqué should be corrected.

Upon the amendments made by Law nr. 5024, the determination of the Company's equity can be requested from the court for only following circumstances;

  • for the contribution of an enterprise to a company as share capital (in other words, change of type, merger, de-merger transactions set forth under ITL 81, CPL 18, 19 and 20) and
  • in a situation where a company lost its entire share capital, for the determination whether the assets of the company is sufficient to cover the liabilities and whether the company becomes bankrupt or not.

Even though the circulars legalized under the NTCC indicate that the Communiqué nr. 2003/3 will be in force until the secondary legislation based on NTCC is approved, since the expression under the Communiqué nr. 2003/3 is contradictory to TPL, the capital increases based on this expression should not be accepted.

Istanbul Tax Authority declared a similar opinion in its private ruling dated 19.08.2011. According to this private ruling, the re-assessment system was eliminated with the inflation correction provision which was set forth under the reiterated article 298 of TPL by the Law nr. 5024 and it is no longer possible to make a re-assessment other than the inflation correction. Therefore, even the companies procure the re-assessment of their immovable properties; these re-assessed values cannot be accepted as values according to the tax procedure legislation. In addition, the excessive values determined as per the re-assessment can be recorded to the accounts solely for information purposes. On the basis of the foregoing, the re-assessment funds or cost increase funds are no longer accepted with the law as the funds that can be added to the share capital; therefore it is no longer possible to add these funds to the capital.

ACCOUNTING PRINCIPLES AND PROVISIONS REGARDING THE RE-ASSESSMENT UNDER NEW TURKISH COMMERCIAL CODE

The 5th Chapter of the NTCC under articles 64 et seq. regulates the provisions on accounting principles, balance sheets and assessment.

As per article 72 of the NTCC, in an enterprise; all assets, debts, all costs paid and income received in cash; in technical words all term defining accounts and all income and costs, are mandatory to be shown as truly assessed.

The assessment provisions regarding the company assets are set forth under articles 78-80. In general, the principles set forth under Turkish Accounting Standards are applicable for the assets and debts indicated in the financial statements. The values indicated in the closing balance sheet of the previous term should be equal to the values to be indicated in the opening balance sheet of the term of activity. On the closing date of the balance sheet, the assets and debts should separately be assessed and the method applied for the previous year should be preserved.

As per articles 79 and 80, the assessment of the fixed assets shall also be made according to the Turkish Accounting Standards.

The "principle of true and fair view" is accepted by article 515 of NTCC. According to this principle, the financial statements of a joint stock company should set forth all assets, debts and obligations, equity and the results of its activity in an understandable, comparable, transparent, trustworthy manner as convenient as to its needs and scope of activity in accordance with the Turkish Accounting Standards and should reflect the truth exactly, adequately and same as original.

In light of the above provisions, it seems possible to choose "true view method" for the assessment of the asset values in accordance with the accounting principles. On the other hand, since the secondary legislation with respect to the accounting principles is still pending and the link between the Turkish Accounting Standards and tax accounting system as per the Turkish tax procedure law has not yet been clearly defined, the reassessment of the fixed assets as per the "true view method" should be re-examined after those steps are taken.

THE CONSEQUENCES OF THE NON-COMPLIANCE

In the event of a capital increase by way of re-assessment of fixed assets contrary to reiterated article 298 of TPL and article 462 of NTCC; the following consequences may occur:

1. Non-approval of the Capital Increase Resolution by the Ministry Commissar or Non-registration of the Capital Increase Resolution by the Trade Registry:

Even though a re-assessment of the fixed assets was made before the court, the excessive value was recorded to the balance sheet as value increase funds and a capital increase was made by addition these funds to the share capital, since such a resolution will be contrary to the law, it is possible for the Ministry of Customs and Trade commissar not to approve the resolution or for the second step, it is also possible for the trade registry not to register the resolution.

2. Statements regarding the Capital Increase and the Audit

As per article 457 of the NTCC, for the capital increase procedures in a joint stock company, the board of directors shall sign a statement and in this statement, one of the issues that should be verified is legality, validity, existence and disposability of the funds, if such capital increase is made by addition the internal funds. Accordingly, for a capital increase from internal sources, the company board of directors shall declare and guarantee that the funds are the type of funds that are permitted to be added to the share capital as per the law. Otherwise, if there is a capital increase from funds that are not permitted, the statement of the board will be false and thus, the liability of board may arise and civil and penal sanctions will become applicable against the board of directors.

Article 398 of the NTCC sets forth that the audit of the company financial statements and annual board of directors' report also covers the audit on whether those are kept in compliance with the Turkish Accounting Principles, the law and the articles of association of the company. As per article 403, the auditor should provide an opinion letter and indicate any matter with respect to the financial statements causing any liability in this opinion. Non-compliance to these audit provisions and not-indicating the reservations and problems in the audit report may lead the liability of the auditor and may cause civil and penal sanctions.

3. Claims Against the Registered and Announced Capital Increase

As per article 456 of the NTCC, the incorporation provisions under article 353 are also applicable for capital increases by analogy. If this article is interpreted solely with its wording, same as incorporation, the capital increase resolution cannot be declared as null and/or void. As per the analogical interpretation, it would be possible to claim the termination of the capital increase which endangers or breaches the interests of the creditors, shareholders of the public with a legal action initiated by the creditors, board members, shareholders or the Ministry of Customs and Trade before the competent court. This legal action shall be filed within three months upon the registration and announce of the capital increase as per article 353/4.

On the other hand, there is a counter-doctrine, which states that claiming the nullity or voidness of the capital increase is possible2.In such case, these claims have no statute of limitation. The implementation of such article will be defined by the case law of High Court of Cassation in the future.

4. Liability and Sanctions

a. Civil Liability Provisions

Articles 549 et seq. of the NTCC set forth the provisions of civil liability for joint stock companies. As per the general provision under article 549, in the event that there are false, misleading or missing information or breach of law in the documents, declaration, undertakings or guaranties regarding the incorporation, capital increase or decrease, merger, de-merger, change of type or issuance of securities; the people who prepare those documents or who provide those statements are liable for their fault.

In addition, according to article 550, the people, who lead false and misleading impression with respect to the share capital, are liable for their fault and the fictional shares which cause the false impression shall be undertaken and paid jointly by those who are liable.

Therefore, should there be a capital increase by utilizing the funds that are not permitted to be added to the share capital, the current board members who provide the statement and other people who cause the wrong impression (e.g. the certified accountant who gives a positive report) will be liable and will be responsible for the losses against the company, the shareholders and also the company creditors.

As per article 554, the auditors or special auditors are also liable for their faults during fulfillment of their duties, for the losses against the company, the shareholders and also the company creditors. Therefore, should there be a capital increase by utilizing the funds that are not permitted to be added to the share capital, the current auditors, who do not point out this discrepancy, will be liable for it.

According to article 559 of NTCC, the liability of the board members, auditors regarding the incorporation or capital increases shall not be waived or released within four years upon the relevant registration. The claim of indemnification is subject to a statute of limitation of two years as of the date on which the loss and the liable person are learned and at most five years as of the date on which the action lead to loss is occurred. Should there be a longer statute of limitation under Turkish Penal Code for the same action, this statute of limitation shall apply the civil legal actions as well. The legal action shall be filed before the court where the company headquarters is registered.

b. Penal Liability Provisions

According to article 562 of the NTCC regarding the penal liability and sanctions, the above discrepancies set forth under article 549 regarding the incorporation, capital increase or decrease, merger, de-merger, change of type or issuance of securities, the people who prepared fictional documents and who make false and misleading records shall be subject to a penalty of 1-3 years imprisonment. In addition, as per article 550, the people, who cause wrong and misleading impression regarding the share capital, shall be subject to a penalty of 3 months – 2 years imprisonment or judicial fine.

CONCLUSION

In the light of the above, the increase of the share capital of a company by utilizing internal courses which are recorded as re-assessment funds upon a re-assessment of the fixed assets shall not be legally possible according to the reiterated article 298 of TPL which was amended with the law nr. 5024. Therefore, a capital increase conducted contrary to the relevant provisions of law may lead civil and penal liability of the board members, auditors or any related people.

Footnotes

1. Pulaşlı, Hasan; Yeni Şirketler Hukuk Genel Esaslar, Adalet Yayınevi, Ankara 2012, 1. Edition, p. 859.

2. Kendigelen, Abuzer; Türk Ticaret Kanunu Değişiklikler, Yenilikler ve İlk Tespitler, XII Levha, İstanbul 2011, p. 310, fn. 133.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions