Turkey: Distribution Of Profits And Calculation Of Distributable Profits Under Turkish Commercial Law

Last Updated: 24 November 2015
Article by Naz Bandik Hatipoğlu

Article by Av. Naz Bandik Hatipoğlu, Stj. and Av. Dicle Su Han

A. DISTRIBUTION OF PROFITS

Year-end Dividends and Dividend Advance

The distribution of profits and the payment of any year-end dividends in respect of the preceding financial year are made each year upon the recommendation of the Board of Directors ("BoD") and approval of the shareholders at the annual General Assembly ("GA"). Dividends are payable on a date and in the form determined at the annual GA. Advance dividend payments are also possible in joint stock companies under the TCC provided that the respective company is profitable during the relevant accounting period where the dividend advance will be distributed. Such calculations are made based on the profit generated according to interim financial statements (i.e. March, June, and September). It should be noted that such advance dividend is eventually deducted from the year end dividends and the decision of an advance dividend is rendered in the annual general assembly of the company. In other words, shareholders do not become entitled to receive dividends solely based on interim financial statements but receive an advance payment from the year-end financials. In the event that the net profit of the company based on the year-end financials does not cover the dividend advance within the year, the dividend advance exceeding the net profit will be deducted from the free reserves as in the balance sheet of the previous year and if the free reserves fall short of covering the distributed dividend advance, the excessive dividend advance is returned to the company by the shareholders upon notification by the BoD.

Under Turkish law, the statute of limitations in respect of dividend payments, including interim dividends, is five years following the date of the GA approving the distribution, after which time uncollected dividends are transferred to the Treasury.

Dividends can only be determined in Turkish Lira by the GA. A shareholder wishing to receive dividends in a foreign currency is exposed to currency fluctuations in general and particularly between the date on which dividends are declared and the date on which dividends are paid.

B. CALCULATION OF THE DISTRIBUTABLE PROFITS

It is also noteworthy to underline the relation of the independent auditing requirement with the distribution of profit which was introduced by the new TCC. The new system opened the door to new questions regarding the basis of the calculation of net profit. Before the launch of the new accounting and bookkeeping standards and requirements, all financial statements used to be prepared in accordance with the Tax Procedural Law, with the exception of public companies. However after 1 January 2013, companies became obligated to prepare two separate financial statements if they are subject to independent auditing, one under the Turkish Accounting Standards – a transposition of the International Financial Standards (IFRS) – and the other subject to the Tax Procedural Law, which inevitably caused certain accounting discrepancies. A recent development, the Decision of Public Monitoring, Accounting and Audit Standards Institution dated 26 August 2014, brings the requirement for the companies and institutions that are listed in its annex to prepare their financial statements pursuant to Turkish Accounting System and leaves an optional choice for the others that are not listed. The list contains a range of companies and institution such as banks, joint-stock companies, financing institutions etc.

Nevertheless, there is now a vital question waiting to be answered: briefly, which accounting system must a company, subject to independent auditing, take as the basis to calculate its profit?

The legislation does not provide any express provision in this regard. This ambiguity has already been settled for public companies as they are also required to prepare IFRS financial statements in addition to tax law based financial statements under the capital market legislation. Accordingly, the "Profit Share Guide" issued by Capital Market Board provides that the upper limit of the distributable profit for public companies is the profit calculated in accordance with the Tax Procedural Law based financial statements. Based on this provision, some argue that the net profits of the company should be calculated based on the Tax Procedural Law. On the other hand, a widely held view is that the net profits of the company subject to independent auditing should be calculated according to the annual balance sheet, which is prepared based on the Turkish Accounting Standards in order to comply with the requirements of the Turkish Commercial Code. Usually in practice, certified public accountants suggest that their clients calculate their profit in accordance with the system which brings the lowest level of profits, to be on the safe side. This might be either the Tax Procedural Law or the Turkish Accounting Standards, depending on the criteria they bring.

It seems that Turkish companies will continue to struggle with this ambiguity until the issue is addressed by supplementary legislation and the market practice is settled with relevant court precedents.

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.

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