In Turkey, joint stock companies ("JSCs") and limited liability companies ("LLCs") are the most preferable types of legal entities incorporated by local and foreign investors. Establishment of LLCs is considered as the most plausible option for foreign investors who wish to establish a fully owned subsidiary with minimum capitalization and administration requirements. Establishing an LLC takes the same amount of time as establishing a JSC, however due to its simpler structure, an LLC is easier to administer in the long run. It must be noted that in principle, the liability of shareholders or partners of JSCs and LLCs is limited to their capital commitment. However, being a partner or a legal representative in LLCs encumbers additional liability with regard to tax and other public debts of the company and such additional liability is generally disregarded by foreign investors.
This article aims to provide information regarding the liability of partners and legal representatives in LLCs arising from tax and other public debts.
1. General Overview:
Under Turkish Law, in principle, legal representatives1 are not held liable for the debts of a company, regardless of whether such company is an LLC or a JSC, except for cases where debt results from the negligent acts or willful misconduct of the legal representative in performing his/her duties. However, in terms of liability as to tax and other public debts of companies, the lawmaker imposes an aggravated liability on legal representatives considering the public order nature of these debts and for the purpose of protection of public interest, since collection of tax and other public debts concerns the public and thus, is of essence.
2. Liability Arising from Tax Debts of Companies:
The liability of legal representatives arising from tax debts of companies is regulated under the Tax Procedure Law dated January 4, 1961 and numbered 213 (the "Tax Law"). Pursuant to Article 10 of the Tax Law, legal representatives must ensure that their companies duly pay their taxes. If legal representatives fail to fulfill this obligation, the amount of tax debt of a company which cannot be wholly or partially collected from the assets of the legal entity shall be collected from the personal assets of the legal representatives. Therefore, tax authorities will first try to collect the outstanding tax debt from the assets of a legal entity, however, in case the tax debt cannot be collected from the assets of the legal entity, or it is understood that the assets of the company will not be sufficient to pay the outstanding tax debt; legal representatives will be held liable for the tax debt of the company with their personal assets.
Liability attributed to legal representatives under Article 10 of the Tax Law is considered as an aggravated liability. According to the majority of Turkish scholars, in case where a company fails to pay an outstanding tax debt, such failure is automatically deemed to be arising from the negligent acts of legal representatives. Therefore, regardless of whether a legal representative is in fact negligent or not, he /she will be notified to pay the tax debt2, if the assets of the company are not, or if it is apparent from the situation of the company that the assets are not adequate to pay the outstanding tax debt. According to this opinion, the burden to prove that the legal representative acted diligently with no fault remains on the legal representative. Therefore, in a case where the tax debt of an LLC cannot be collected from the legal entity wholly or partially, the legal representatives are held personally liable from the tax debt of the company. According to Article 10 of the Tax Law, the right of the legal representative to recourse against the company is reserved.
3. Liability Arising from Other Public Debts of Companies:
The Law on Collection Procedure of Public Assets, dated July 28, 1953 and numbered 8469 (the "LCPA"), particularly regulates the collection procedure of all public debts of LLCs. Pursuant to Article 35 of the LCPA, in a case where other public debts cannot be collected from an LLC, the partners of the LLC will be held liable in person in proportion to their capital contribution. The liability of partners in this regard is not limited to the amount that they contributed to the share-capital of an LLC, but is proportional to their shareholding percentage in the share-capital of the company. It must be noted that the liability imposed under this article is specifically regulated for partners of LLCs, and thus does not apply to shareholders of JSCs, meaning that, shareholders of JSCs are in advantageous position with regard to unpaid other public debts of JSCs, since they will only be liable up to an amount of their capital contribution.
It must also be noted that tax debts are also among public debts; however, since the Tax Law is a more specific regulation than the LCPA, in terms of tax debts, Article 10 of the Tax Law is primarily applicable. Therefore, specifically, the outstanding tax debt of an LLC will first be collected from the assets of the company. If the assets of the company are not sufficient to fulfill its tax debt, then the legal representatives of such LLC will be personally liable for the outstanding tax debt of the company as explained above. Furthermore, if tax debt can not even be collected from the personal assets of the legal representatives, the partners of such LLC can be held liable in person in proportion to their shares in the company pursuant to Article 35 of the LCPA.
There is an Additional Article 35 of the LCPA which specifically regulates the liability of legal representatives arising from other public debts of companies. Additional Article 35 states that if the other public debts cannot be collected from the assets of legal entities, they will be collected from the personal assets of legal representatives. By interpreting Article 35 and the Additional Article 35 of the LCPA together, it can be stated that for the other public debts of an LLC, the company itself will be liable with its assets. If such public debts cannot be collected from the assets of an LLC, partners of the LLC will be held liable with their personal assets in proportion to their shareholding percentage in the share-capital of the company. Finally, if the public debts of the LLC can still not be collected wholly or partially, legal representatives of the LLC will be personally liable for such other public debts.
Moreover, with an amendment to the LCPA in 2008, the number of people to be liable from other public debts of LLCs has been increased. Accordingly, a partner who transfers his/her shares (transferor) will be jointly liable with the transferee in case other public debt arises before the transfer of shares. Therefore, the transferor should bear in mind that transferring shares in LLCs will not eliminate the liability arising from unpaid other public debts of the company which relate to the period up until the share transfer.
In light of the above, legal representatives of LLCs and JSCs are liable from non-payment of tax and other public debts, regardless of whether they are negligent or not for such non-payment.
In addition, partners of LLCs are liable with their personal assets in proportion to their capital contribution for tax and other public debts of the company whereas, the liability of shareholders of JSCs is limited to their capital contribution. Such discrepancy between the liability imposed on partners of LLCs and shareholders of JSCs has been a subject of discussion among scholars and creates discrimination among partners of LLCs and shareholders of JSCs. Therefore, while becoming a partner in an LLC, an investor must take into account the issue of personal liability arising from tax and other public debts.
1. A legal representative is a person who is not a partner of an LLC and to whom authority to administer and represent the LLC is granted.
2. In such a case, tax authorities send a payment order to the attention of the legal representative without analyzing whether the tax debt is arising from a faulty act of the legal representatives.
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.