Turkey: Prohibition On Hidden Income Shifting

Last Updated: 25 February 2015
Article by Tuna Colgar

Prohibition on hidden income shifting is one of the most important issues that is broadly regulated under Capital Markets Law No. 6362 ("CML"). In conjunction with CML Article 21, which has a broader context than Article 15 of the abrogated Capital Markets Law No. 2499, another significant step has been taken regarding one of the most primary aims of the Capital Markets Board ("CMB" or "Board"), a public regulatory authority, which is to provide protection on the rights of shareholders of public companies.

By virtue of the managerial abuses of joint stock companies that are subject to the capital markets legislation, the prevention of, particularly, the potential damages of the shareholders/minority shareholders, apart from the persons or group which hold the control of the company, in other words, the account owners who are capital market investors, is the primary purpose of the CML, and one of the preeminent duties and authorities of the CMB1.

The hidden income shifting problem has been regulated in the tax legislation in a more broad, but tax-oriented concept, at first, due to the fact that it triggers tax losses. On the other hand, the CML regulates this issue more distinctively, and within a narrower context, with regard to investing shareholders2. The components of the hidden income shifting prohibition are determined in the first paragraph of CML Article 21, entitled, "Prohibition of the Hidden Income Shifting."

The first paragraph of CML Article 21 states that "It is prohibited to the shift income of public companies and collective investment schemes, and their subsidiaries and affiliates, to real persons or legal entities with whom they have a direct or indirect relationship in terms of management, audit, or share capital, through reducing their profits or their assets, or preventing the increase of their profits or their assets, by virtue of performing transactions, such as forming contracts or commercial practices comprising different prices, fees, costs or conditions, or via producing a trading volume that is in violation to market practices (the arm's length principle3), according to prudence and honesty principles of commercial life."

A remarkable point in this provision is that its scope of application with respect to applicable persons is widened, in comparison to abrogated Article 15. In this Article, along with public companies' collective investment schemes, their subsidiaries and affiliates have been included in the scope of the Article. The opposite party of the transaction is regulated as the real or legal entity, with whom the persons as listed under four categories in the Article are either in a direct, or an indirect, relationship in terms of management, audit or share capital.

The Article, as a rule, specifically prohibits hidden income shifting. The first paragraph of the Article sets forth that such shifting can be executed through four different methods. These are; (i) the reduction of profits (ii) the reduction of assets and (iii) the prevention of the increase of profit or (iv) the prevention of the increase of assets.

The Article also sets forth that prohibited income shifting may be performed through forming contracts or commercial practices comprising different prices, fees, costs or conditions that are in violation of market practices, the arm's length principle, or prudence and honesty principles of commercial life, or through concluding transactions, such as producing transaction volumes.

The meaning of the word "transaction" as defined in CML Article 21 is accepted in the doctrine to include the avoidance of a typical or atypical agreement, such as service, attorney, work, sale/purchase or shareholders agreement, or avoidance of a behavior. Accordingly, it is concluded that income may also be shifted through the non-entrance into tenders that are in favor of the concerned persons, quotation of high prices, or the transfer of certain businesses to certain persons4.

The second paragraph of CML Article 21 states that the hidden income shifting prohibition can also be passively violated. The second paragraph of CML Article 21 sets forth that " In the cases where public companies and collective investment schemes, along with their subsidiaries and affiliates, do not perform the activities expected from them as prudent and honest merchants in accordance with their articles of association or their internal rules, or if they do not perform activities in order to conserve or increase their profits or assets in accordance with market practices, providing the increase of the profits or assets of real persons and legal entities with whom they are related shall also be deemed as hidden income shifting transactions."

The second paragraph of CML Article 21 prohibits the reduction of assets, along with the reduction of the profits of the company through transactions concluded by the company through a certain method and, accordingly, foresees a broader approach than Article 15 of the abrogated law.

When the first two paragraphs of the Article are jointly evaluated, it is clear that the active operations stipulated in the first paragraph as (i) the reduction of profits (ii) the reduction of assets and (iii) the prevention of the increase of profits or (iv) the prevention of the increase of assets, are prohibited, along with the passive operations as stipulated in the second paragraph of the Article, as (i) the non-performance of the activities that are expected to be performed in order to protect or increase the profit, and (ii) the non-performance of the activities that are expected to be performed in order to protect or increase the assets.

In this context, the new regulation not only aims to prohibit the reduction or prevention of increase the profits or assets through active behavior. Additionally, damaging the company through passive behaviors shall also be assessed within the scope of the hidden income shifting prohibition.

In accordance with CML Article 21, it is not necessary for the source shifting to be performed by the public company in person, and/or directly. The hidden income shifting may be performed via public company's subsidiary and/or affiliate, in person, or through its subsidiary and/or affiliate. Accordingly, along with direct income shifting, damages may occur within a public company, by virtue of the transactions conducted within the scope of the group relation5.

Together with the protection of the incomes of publicly held joint stock companies, another impact of the aforementioned regulation is that it introduces a provision parallel to the protection of the assets principle, which is also regulated under the Turkish Commercial Code ("TCC"). Through this provision on the prohibition of the hidden income shifting, the assets of the public company are protected, and the opportunity for the minority shareholders to obtain efficient and necessary amount of dividend is enabled. Additionally, it should be noted that the hidden transactions that result in the reduction of company's profits or assets, in other words, those transactions that cause damage, are generally considered as collusive transactions6.

The third paragraph of CML Article 21 imposes documentation and safekeeping obligations, and sets forth that "The public companies and collective investment schemes are obliged to certify that the related party transactions have been performed in accordance with arm's length principles, market practices, prudence and honesty principles of commercial life, and to preserve the documents and information so certifying for at least eight years. The Board shall determine the principles and procedures to be followed where a violation of the principles set forth under paragraph 1 occurs."

In the third paragraph of the said Article, the public companies and collective investment schemes shall be obliged to provide certification that the related party transactions have been performed under the conditions that are in conformity with the arm's length principle, market practices and prudence and honesty principles of commercial life, and are obliged to keep the documents and information so certifying this for at least eight years.

The fourth and last paragraph of CML Article 21 regulates the sanction that shall be applied where hidden income shifting occurs. In accordance with this paragraph, the public companies, collective investment schemes, together with their subsidiaries and affiliates, shall request from the parties to which an income transfer has been made, to return the transferred amount and its legal interest to the company or collective investment scheme whose assets or profits have been reduced, within the timeframe determined by the Board, where the income transfer has been detected by the Board. Moreover, the parties that have received an income transfer are obliged to return the transferred amount with its legal interest within the period determined by the CMB. Additionally, civil, penal and administrative sanctions may be applied in accordance with Articles 94 and 110 regarding the violation of the prohibition of hidden income shifting.

Within this context, the public company may request the repayment of the transferred amount, with interest, and disclose the audit results to the public, where income shifting is detected by the CMB. Sanctions, such as filing a restitution lawsuit, requesting compensation for the breach, filing lawsuits regarding annulment-nullity-invalidity, revocation of signatory authority, and/or dismissal may be applied with regards to the said transaction. "Abuse of Confidence" and "Administrative Fines" may be applied with regard to criminal liability.

In conclusion, as far as hidden income shifting is concerned, company assets will be negatively affected, and the subsequent decision of the investor will be negative as a consequence of the low profits. Additionally, the value of the securities will also be low. Therefore, the shares should be exchanged more frequently, and generally, the circulation should be in a manner that would result in the shares being transferred to major shareholders. Within this context, as per the regulation of Article 21 of the CML, the protection of the public company and, accordingly, the investing shareholders, and the prevention of company sources to be transferred to the related persons that have a controlling power, is intended. By virtue of this provision, the intervention to the source transfers/hidden income shifting transactions, directly, or indirectly executed, and whose execution is procured through the board of directors by those persons with the controlling power over the company, will reduce or prevent the increase of the company profits or assets7.


1. Arslan Kaya İÜHFM C. LXXI, S. 2, p. 193-204, 2013.

2. Arslan Kaya İÜHFM C. LXXI, S. 2, p. 193-204, 2013.

3. Please see Corporate Tax Law Article 13.

4. Ünal Tekinalp, Sermaye Piyasası Hukukunun Esasları, İstanbul 1982, p. 77.

5. Arslan Kaya İÜHFM C. LXXI, S. 2, p. 193-204, 2013.

6. Akbulak/Akbulak, Sermaye Piyasası Araçları p. 386-387.

7. Arslan Kaya İÜHFM C. LXXI, S. 2, p. 193-204, 2013.

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.

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”

Up-coming Events Search
Font Size:
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
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). 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 & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd 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 or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.