Under Article 241 of Turkish Criminal Law No. 5237 ("TCL"), lending for the sake to gain profit is forbidden. However, in practice, for the purpose of financing affiliated companies, intragroup loans are a frequently employed method.
The intention is to eliminate such prohibition as foreseen under the TCL, through an amendment to be introduced to Additional Article 1 of Law on Financial Leasing, Factoring and Financing Companies No. 6361 ("Law on Financing Companies"), through the Legislative Proposal on Amendments on Certain Law and Decree Laws dated 30.11.2018 and numbered 2/1369 ("Legislative Proposal").
Under this Article, the current legal status of intragroup loans, and the status to be construed through the Legislative Proposal, are evaluated.
As above-explained, the TCL forbids lending to gain profit, and deems the same to be the crime of usury. In contrast, however, the former Turkish Criminal Law No. 765 had regulated constancy as a material condition of such crime. Following the amendment as to the essential conditions of such crime, in the event of multiple implementations of such act, in other words, in the event of the existence of constancy, the Court of Appeal decisions[i] accept the existence of successive crime.
Although the application of interest in the case of lending money in the course of commercial life is usual, in the decisions of the Court of Appeal[ii], without considering whether the transactions are commercial transactions, it is deemed sufficient to apply interest for the existence of the material element of the crime.
On the other hand, there are various regulations preventing interest-free lending in commercial transactions. In the ongoing sections, regulations concerning lending, and the regulations on interest-free loans, will be evaluated.
Code of Obligations
Money lending is regulated under Article 386 of Turkish Code of Obligations No. 6098 ("TCO") under the concept of "consumption loans". It is regulated under Article 387 of the TCO that interest may be demanded for commercial loans, in any event, and for regular loans, if agreed to by the parties.
Additionally, Article 388 of the TCO foresees the designation method of interest rates in the cases in which the parties have not agreed upon the same. Also, the last paragraph of the Article forbids the application of compound interest.
Within this scope, under the TCO, in both commercial and regular loans, interest is allowed.
Capital Market Law
Pursuant to Article 21/1 of Capital Market Law No. 6362 ("CML"), it is forbidden for publicly-held corporations and collective investment schemes and their subsidiaries and affiliates to transfer 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 through 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 such cases, under the CML, there is the risk that loans granted interest-free to direct or indirect related parties, in other words, which are not in conformity with market practices and prudence, and honesty principles of commercial life, to be deemed as illegal transfer pricing activities.
Law on Financing Companies
Law on Financing Companies has abolished Decree Law on Lending No. 90 ("Decree No. 90").
The expression stated under Article 2/2 of Decree No. 90 as "Banks, insurance companies and other institutions which are authorized to lend money under other laws, and lending transactions of legal entities to other legal entities, which they have direct, or through their affiliates, indirect, shareholding relation...are not subject to this Decree Law," had been evaluated as intragroup loans are allowed.
As such expression included in Decree Law No. 90 is not included in the Financing Companies Law, and such evaluation is eliminated.
Turkish Commercial Code
Article 358 of Turkish Commercial Code No. 6102 ("TCC"), regulates loans granted to affiliated persons and group companies.
Pursuant to Article 358 of the TCC, shareholders cannot be granted loans by the company, unless they have paid their due obligations arising from their capital subscription and profit of the company and, together with its surplus legal reserves, are sufficient to cover its previous year's loss.
Under the TCC, there is no prohibition on lending money except by a company that has insufficient means to cover its losses to its shareholders, and which has not fulfilled its capital subscription.
Corporate Income Tax Law
Pursuant to Article 13 of Corporate Income Tax Law No. 5520 ("Law No. 5520"), the purchase or sale of goods or services of corporations to its related parties at a price or fee that they have determined, and which are in contradiction with the arm's length principle, the gain is deemed to be distributed in whole or in part through transfer pricing. Purchase, sale, production and construction operations, leasing and leasing transactions, borrowing and lending money, and other transactions requiring bonuses, fees and similar payments to be paid are deemed as service rendering and having so obtained.
Law No. 5520, in conformity with the regulation under the CML, requires the arm's length principle to be met. In the event that an interest-free (not comparable to similar transactions) loan is granted, the risk of such a transaction is that it may be deemed as illegal profit distribution through transfer pricing.
Despite the fact that various regulations forbid interest-free loans, due to the modality of regulation on the crime of usury under the TCL, in practice, companies suspense on whether intragroup loans construe a crime.
Therefore, a statement, similar to that which was regulated under the former Decree Law No. 90, such as "Under the provisions of Article 195 of the TCC, companies comprised of a group of companies may lend money to each other in accordance with the provisions of the relevant legislation on interest," is planned to be included in the Law on Financing Companies through Article 63 of Legislative Proposal.
Through such expression, the intention is to eliminate the risk of occurrence of the crime of usury, and such intention is explicitly stated under the preambles of the Legislative Proposal.
[i] Decision of Criminal Chamber of Court of Appeal numbered E. 2017/5-1131, K. 2018/331 and dated 03.07.2018; Decision of 15th Chamber of Court of Appeal numbered E. 2015/9915, K. 2018/6260 and dated 03.10.2018.
[ii] Decision of 5th Chamber of Court of Appeal numbered E. 2016/5192, K. 2018/4511, and dated 19.6.2018; Decision of 15th Chamber of Court of Appeal numbered E. 2015/9915, K. 2018/6260 and dated 03.10.2018.
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