When considering the main rationale behind establishing a joint stock company, the most important is the financial benefits of being a shareholder of a joint stock company which is the opportunity to participate in the profit sharing. Under Turkish law, any shareholder is entitled to obtain dividends, which is deemed as a basic shareholders' right.
1. Distribution of Dividends in Joint Stock Companies
a. Joint Stock Companies
Net profit is determined pertinent to the balance sheet and Article 469 of the Turkish Commercial Code directs that unless the legal and facultative reserves and other sums, which must be set aside in accordance with law and articles of association, are fulfilled, dividends must not be distributed. How dividends are to be distributed is resolved by way of a general assembly. Whether the general assembly resolves to not distribute dividends is a matter of controversy. The Turkish Commercial Code does not impose a sanction for the non-distribution of dividends. Nevertheless, according to the Court of Appeal, non-distribution of dividends is actually an infringement of a shareholder's basic rights unless reasons for such action is justified e.g. to realize investment objectives. Such justification will be reviewed by an expert appointed by the court.
b. Publicly Held Joint Stock Companies With Shares Not Traded on the Stock Exchange
Pursuant to Article 15 of the Capital Market Law, publicly held joint stock companies must set out a ratio for the distribution of first dividends in the Articles of Associations thereof. Article 4 of the Communiqué Serial IV No: 27 of the Capital Market Board directs that no less than 20% of distributable profit should remain after deduction from reserves required to be set aside as per the law as well as taxes, funds, financial payments and if any, the losses of previous year must be determined as first dividend ratio. As a principal rule, these companies are obliged to distribute the first dividends in cash. Nevertheless, publicly held joint stock corporations whose total assets fall below TRY 50,000, according to the last annual financial statements drawn up in accordance with the standards determined by the Capital Market Board, may distribute the first dividend in cash and/or as a bonus share certificate. Furthermore, in the event that either the amount of the distributable first dividend calculated in accordance with the regulations of the Capital Market Board is less than 10% of the paid-in capital for publicly held joint stock corporations with total assets of less than TRY 50,000, or the amount of distributable first dividend calculated in accordance with the Capital Market Board regulations is less than 5% of the issued capital in publicly held Joint Stock corporations with total assets exceeding TRY 50,000, the first dividend for the relevant accounting periods may be retained provided that the Capital Market Board approves the application of the corporation. However, approval of the Capital Market Board may be secured after the General Assembly resolution for distribution of profits, pursuant to the Newsletter by the Capital Market Board, No: 2008/16.
c. Publicly Held Joint Stock Companies With Shares Traded on the Stock Exchange
As per Article 5 of the Communiqué Serial IV No: 27, similar to those with shares not traded on the stock exchange, publicly held joint stock companies with shares traded on the stock exchange must determine a ratio for the first dividend in their articles of associations as well as no less than 20% of distributable profit after deduction of reserves as per the law, as well as taxes, funds, financial payments and if any, the losses of previous year must be determined as first dividend ratio. Nevertheless, dividends distributed entirely in cash or entirely in bonus share certificate or else both as a bonus share certificate and in cash at a certain amount are permissible if the remaining amount is kept in the company. If not, such amount may be retained by the company instead of paying dividends in the event that the first dividend, calculated as outlined above, is less than 5% of the issued capital pursuant to the Newsletter by the Capital Market Board No: 2008/16. Distributing dividends in cash may be obligatory on two instances; firstly, the Capital Market Board may oblige those companies to distribute the first dividend set aside from previous years profit in cash until the agenda for the general assembly is announced; and secondly, when companies have made capital increase in cash, prior payment of first dividends from previous period's profit and shares thereof are listed separately as 'old' and 'new' on the Stock Exchange as well as those companies who prefer distributing profit gained at the end of the accounting period.2. Transfer of Dividends Abroad for Joint Stock Companies
As per Article 3 of the Foreign Direct Investment Law, foreign investors may freely transfer net profits, dividends and proceeds arising from their operations and transactions in the Republic of Turkey abroad. Therefore, there are no obstacles in the transfer of the dividends abroad provided that tax obligations are fulfilled. Furthermore, as per Article 26/2 of the Circular by the Central Bank numbered I-M, transfer transactions of dividends may be accomplished through banks or private financial institutions upon request. Such transfer is conducted as per Circular numbered 2000/YB-4, dated 13.01.2000.
From the perspective of tax issues, the respective rate of withholding tax, stated in the relevant Double Taxation Treaty, is imposed before the transfer of dividends as per the Income Tax Law. Furthermore, double taxation is avoided for the transfer of dividends abroad for joint stock companies by virtue of the Double Taxation Treaty entered into between Republic of Turkey and the relevant transferee country.
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.