The principle of asset protection, which is one of the fundamental principles of corporate law, is particularly significant for publicity held corporations ("PHCs") due to their structure aimed at the continuity of the company and the protection of the interests of its stakeholders. The Capital Market Law No. 6362 ("CML"), the main purpose of which is to protect the investors, stipulates a number of measures aiming to prevent the total assets of the company from being reduced in various ways by the persons who have control of the company. One of these measures is the prohibition of illigal transfer pricing activities imposed on related party transactions of PHCs and collective investment schemes, as well as their subsidiaries and associates.
B. ELEMENTS OF ILLEGAL TRANSFER PRICING
Illegal transfer pricing activities are stipulated in the first paragraph of Article 21 of the CML:
"Publicly held corporations and collective investment schemes and their subsidiaries and associates are prohibited from transferring income to real persons or legal entities with whom they have a direct or indirect relationship in terms of management, audit or capital by decreasing their profits or their assets or by preventing the increase of their profits or their assets via performing transactions such as making contracts or commercial practices containing different prices, fees, costs or conditions or producing a trading volume in violation of the conformity with market practices and comparability to similar transactions, prudence and honesty principles of commercial life."
In the second paragraph of the aforementioned provision, the cases where these companies "do not perform activities in order to conserve or increase their profits or assets in accordance with market practices, thereby providing for an increase in the profits or assets of real persons and legal entities" are considered within the scope of illegal transfer pricing. Therefore, it is possible to say that both active and passive behaviors are present under the purview of the prohibition regulated by law.
The elements of illegal transfer pricing are listed in the doctrine as follows:
- Decrease in assets of decrease in profits/ prevention of increase; failure to carry out the activities expected to be carried out in order to maintain or increase profits or assets,
- The decrease to occur within PHCs and collective investment schemes and their subsidiaries and associates,
- Providing unfair advantage to the related party,
- Objective Component: The realisation of the transaction in violation of the arm's length principle, conformity with market practices, and prudence and honesty principles of commercial life,
- Subjective Component: Purpose to benefit the related party.
Companies and collective investment schemes subject to this provision are obliged to document that they have acted in compliance with the prohibition of illegal transfer pricing, and in this context, they are obliged to document that related party transactions have been performed under conditions in conformity with similar transactions, market practices, prudence and honesty principles of commercial life and, to keep the documents and information certifying this situation for at least eight years.
C. SANCTIONS FOR BREACH OF THE PROHIBITION OF ILLEGAL TRANSFER PRICING UNDER THE CML
1. Authority of the Capital Markets Board
According to the fourth paragraph or Article 21 of the CML, in the event that the income transfer is detected by the Capital Markets Board ("Board"), publicly held corporations, collective investment schemes as well as their subsidiaries and associates shall request from parties to which income transfer has been made, to return, the amount transferred and its legal interest to the corporation or collective investment scheme the assets or profit of which have been decreased, within the duration to be determined by the Board. Parties which have received an income transfer are obliged to return the transferred amount with its legal interest within the period to be determined by the Board.
Pursuant to Article 94 of the CML, the Board is authorized to request the announcement of supervision results from PHCs, and collective investment schemes as well as their associates and subsidiaries which have been determined to be engaged in illegal transfer pricing activities, and to file a suit for the return of the amount determined by the Board within the specified period.
In addition, in cases where it is determined by the Board that there is a capital or asset decrease or loss, in other words an active income transfer by the issuers subject to the CML, the Board is authorised under the first paragraph of Article 92 of the CML to;
- Request from related parties to take measures in order to resolve the violations and to make the envisioned transactions and convey the situation to the related authorities if necessary,
- File a lawsuit of nullity, and file a lawsuit for the determination of nullity and validity within the periods specified in the CML,
- Remove the authorities to sign of those who are responsible for these transactions if the existence of these acts are determined by the decision of the courts; in cases where an indictment is made about related persons, discharge them from office until the trial is finalised and assign new members of the board of directors to replace those who have been discharged from office until the first general assembly meeting.
The addressees of these transactions to be stipulated by the Board are those who are determined to have decreased the assets of the corporation, and they have the right to direct their claims against any of the parties.
In cases of passive income transfer, an administrative fine is imposed on the legal entity pursuant to the sixth paragraph of Article 103 of the CML, and for the board members responsible, pursuant to the first paragraph of the aforementioned article.
2. Offense of Abuse of Confidence
Article 110 of the CML regulates the punitive sanctions to be applied in case of concealed profit transfer. In subparagraph (b) of the first paragraph of this Article, the phrase "decreasing the profit or assets of publicly held corporations by carrying out deceitful transactions with another company or individual with whom they are is related directly or indirectly as of management, auditing or capital, applying prices, fees and charges which are obviously different from precedent", which was included in the abrogated Capital Markets Law No. 2499 regarding the prohibition of illegal transfer pricing activities, is used, indicating that even though the condition of the price difference being "obvious" has been abolished in the CML regulation, it is still used as a criterion.
In the abovementioned provision, it is specified that illegal transfer pricing activities constitute the qualified form of the offense of abuse of confidence regulated in Article 155 of the Turkish Penal Code No. 5237, and the penalty to be imposed cannot be less than 3 years. Additionally, if the person who commits the offense of abuse of confidence, pays, in addition to the amount stated in the fourth paragraph of Article 21, twice such amount to the Treasury by showing effective remorse;
- before the commencement of the investigation, no penalty shall be imposed against them,
- during the investigation phase, the imposed penalty shall be reduced by half,
- until a verdict is reached during the prosecution phase, the imposed penalty shall be reduced by one-third.
Within the scope of the CML, a number of regulations have been introduced for both issuers and investors in the market in order to regulate and supervise the capital markets in order to ensure the functioning and development of the capital markets in a reliable, transparent, effective, stable, fair and competitive environment and to protect the rights and interests of investors. The prohibition of concealed profit transfer is just one of these regulations. In this respect, in order to ensure an environment of confidence and stability in the economy, it is obligatory for the PHCs and collective investment schemes and their subsidiaries and associates to document whether they act in accordance with certain principles in their transactions with related persons, and administrative and criminal sanctions have been stipulated for those concerned in case of non-compliance with the relevant obligations.
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