| Gözde SARUHAN BERK Partner, Lawyer, Tax Disputes and Corporate Restructurings | Ecem Yağmur EROĞLU Lawyer |
ABSTRACT
The obligation of founders and shareholders in joint stock companies to fulfil their cash capital commitments is regulated by the imperative provisions of the Turkish Commercial Code No. 6102 (“TCC”). The share prices committed at establishment or during capital increase must be paid within 24 months after registration.¹ Capital commitments not paid in due time give rise to default; in this case, while the shareholder incurs an obligation to pay default interest, the board of directors may also deprive the defaulting partner of participation rights and transfer their shares through escrow. The subject of this study constitutes the legal consequences of unpaid capital commitments in joint stock companies. In light of recent Council of State decisions, the consequences that unpaid capital commitments may give rise to both in terms of corporate law and tax law will be addressed. ¹ VII – Payment of share prices 1. Cash capital ARTICLE 344- (1) At least twenty-five percent of the nominal values of shares committed in cash shall be paid before registration, and the remainder within twenty-four months following the registration of the company. All of the issue premiums of shares shall be paid before registration.
Keywords: Capital, Default, Transfer Pricing, Joint Stock Company, Capital Commitment, Escrow, Turkish Commercial Code, Transfer Pricing, Hidden Profit Transfer, Council of State Decisions.
INTRODUCTION
The consequences that will arise in case of non-fulfilment of capital commitment are discussed in doctrine and practice along two different axes. On one side, interpretations made within the scope of the Corporate Tax Law No. 5520 (“CTL”) are based on the view that a partner who does not fulfil their obligation to put capital into the company in time actually provides financing facility to the company and for this reason, hidden profit transfer through transfer pricing may be in question. On the other hand, it is accepted that pursuant to the imperative provisions of the TCC, this situation should essentially be evaluated within a private law relationship and should give rise to consequences within the framework of default provisions. Indeed, in recent Court of Cassation decisions, it is observed that more weight is given to the second view. These decisions clearly emphasise that unpaid capital commitments should be classified as “default” and particularly by linking the result to the application of default interest, they clarify the legal framework in the company-partner relationship.
I. CAPITAL DEBT AND UNPAID CAPITAL IN TERMS OF THE TURKISH COMMERCIAL CODE
Capital consists of values that can be measured with money necessary for the commercial enterprise to reach its objectives and continue its activities. Commercial companies operate thanks to the capital committed by their partners. This capital may consist of cash, cheques, promissory notes, bonds as well as immovables such as land, real estate, housing, and movables such as machinery, equipment, vehicles and fixtures.² Pursuant to Article 128 of the TCC, each partner is indebted to the company due to the capital they have committed to put in with a company contract duly arranged and signed, and it is stipulated in Article 344 of the same Law that the debt must be paid within twenty-four months following the registration of the company.³ Otherwise, in paragraph 7 of Article 128 of the TCC, it is also expressly stated that the company may request and sue for each partner to fulfil their capital contribution obligation, and may also request compensation for damages suffered due to delay in fulfilment. In Articles 128 and 482 of the TCC, it is explained that a shareholder who does not fulfil the capital contribution obligation within the prescribed time is obliged to pay default interest without the need for a notice. Whether the debtor is at fault or not, ultimately the debt has not been paid to the creditor in time. Default interest may also find application in monetary debts arising from a legal relationship outside the contract, as well as monetary debts arising from the contract.⁴ In this context, the primary financial sanction that the TCC attaches to unpaid capital is the obligation to pay default interest. The fulfilment of due debts arising from capital commitment comes to the fore in different situations, as in the example of being a precondition for borrowing from the company regulated in Article 358 of the TCC.⁵ In case the partner delays in paying the capital debt, the mechanisms envisaged in the TCC may be counted as:
- Payment of compensation,
- Precautionary measure,
- Default interest,
- Escrow.
II. CRITICISM OF UNPAID CAPITAL AS RESOURCES MADE AVAILABLE TO PARTNERS AND TRANSFER PRICING CRITICISM IN TERMS OF THE CORPORATE TAX LAW
When the subject is evaluated in terms of tax legislation, capital commitment not paid in due time is accepted, albeit indirectly rather than directly, as a resource made available to the partner by the company; thus, by bringing it within the scope of Article 13 of the CTL, it is evaluated as an interest-free fund from which partners benefit without paying any interest. Indeed, in the decision of the Council of State 3rd Chamber dated 21.05.2024 and numbered E.2023/10330, K.2024/3235, the Court of First Instance also made an evaluation in the same direction and justified its views within the framework of tax legislation and accepted that the partner received financing service from the company. The rationale of the said decision is as follows: “….as a result of the examination of the plaintiff company’s accounts and transactions for 2017 and 2018 in terms of value added tax, in the tax audit reports prepared, it was determined that the company increased its capital on 30/03/2015, 1/4 of the increased capital was paid before the registration of the capital increase, 3/4 of it was committed to be paid within 24 months from the registration date, but as of 30/03/2017, although 24 months had passed, it was not paid by the partners, thus financing service was provided by leaving the committed but unpaid capital receivable to the use of the partners, no invoice was issued regarding the financing service as no interest was calculated on this unpaid capital, therefore, by taking into account the funds made available to the partners due to the non-fulfilment of the capital increase commitment by the partners, adiation was made and the company made a hidden distribution through transfer pricing…” Additionally, pursuant to the Communiqué No. 1 on Hidden Profit Transfer Through Transfer Pricing (“Communiqué”), three fundamental conditions must be realised in order to speak of the existence of hidden profit transfer through transfer pricing: (i) the transaction must be carried out between related parties, (ii) there must be purchase-sale of goods or services in this transaction, and (iii) a price or consideration contrary to the arm’s length principle must be applied. In the presence of these conditions, transfer pricing comes to the agenda.⁷ Within the scope of the conditions mentioned above, it is beyond explanation to accept that the situation where the capital commitment is not fulfilled by the partner constitutes hidden profit transfer in the sense of transfer pricing. In other words, it is clear that capital commitment cannot be evaluated within the scope of Article 13 of the CTL, and for evaluation within the scope of Article 13 of the CTL, it is necessary to provide benefit through value transfer to related parties or application of different prices.
III. COUNCIL OF STATE’S EVALUATIONS AND DIFFERENCES OF OPINION REGARDING PARTNERS WHO DO NOT FULFIL CAPITAL COMMITMENT
In the decision of the Council of State 4th Chamber dated 24.12.1998 and numbered E.1997/4274, K.1998/5542; it was stated that it was not possible to evaluate the amount of capital that could not be collected in the balance sheet as if it were lent to the partners, therefore it was accepted that hidden profit could not be mentioned due to non-application of interest.⁸ On the other hand, the Council of State 4th Chamber, in its decision dated 29.06.2021 and numbered E. 2018/2640, K. 2021/3637, adopted exactly the opposite view and found the company’s not requesting interest contrary to commercial requirements. The following expression was included in the decision: “…it is clear that the amount of capital committed but not paid by the partners cannot be used by the company and there will be a loss of benefit for the company to the extent of the amount that cannot be used, and since the income obtained as a result of the money (debt) accepted as taken from the company with the capital that the partners did not fulfil their commitment was not transferred to the company, the plaintiff company was deprived of this income and as a result of the fact that tax was not accrued on the deprived income, the treasury suffered damage, taking this into consideration, the plaintiff company made hidden profit distribution by not calculating interest income on the capital committed by the partners but not paid…In this case, there is no illegality in making a penal assessment on the found base differences by calculating interest on the capital not paid by the partners to the plaintiff company over the rediscount interest rate applied by the Central Bank…” Therefore, the Council of State qualified the non-calculation of interest on unpaid capital as hidden profit distribution and, by overturning the lower court decisions, found the penal assessment compliant with the law. As can be understood from this, in the past, the Council of State gave decisions in different directions regarding whether non-payment of capital commitment in time would be considered hidden profit distribution through transfer pricing and did not display a stable attitude in its views. However, together with recently given decisions, it is observed that the Council of State has gained stability on this subject and now predominantly evaluates unpaid capital commitments within the scope of default status. When looking at the most recent decisions, in five different recent decisions of the Council of State, it has been clearly revealed that failure to fulfil the capital debt in due time should be addressed within the framework of default interest obligation arising pursuant to the TCC, not as hidden profit transfer through transfer pricing. In the decision of the Council of State 3rd Chamber dated 21.05.2024 and numbered E.2023/8923, K.2024/3231, unpaid capital commitments were also evaluated within the scope of default status: “…without carrying out a tax audit in terms of corporate tax within the scope of the Corporate Tax Law No. 5520, it is not possible to determine hidden profit distribution through transfer pricing.” On the other hand, in the decision of the Council of State 3rd Chamber dated 21.05.2024 and numbered E.2023/10330, K.2024/3235, an audit regarding a period in which the plaintiff company did not make a base increase was in question, and in this decision, it was concluded that capital commitments not fulfilled by the partners in due time could not be accepted as financing service provided by the company: “…in order to speak of hidden profit distribution to the corporate partner who is a related party, the money made available must first be allocated to the commercial activity of the institution, and for this, the money must be included in the company’s assets…it cannot be mentioned that the money that does not enter under the company’s custody is lent to the partner and made available interest-free. The partner’s not fulfilling the capital commitment is a state of default pursuant to the TCC; only default interest can be calculated due to this commitment not fulfilled in due time; this situation cannot be evaluated within the scope of hidden profit through transfer pricing.” The Council of State, by stating that the partners’ not fulfilling the capital commitment is default pursuant to the TCC, in this case at most default interest may come to the agenda, and furthermore since the committed amount never entered the company assets, it cannot be mentioned that loan/financing was provided to the related party, did not find the evaluation of hidden profit distribution through transfer pricing appropriate and overturned the BİM decision. Similarly, in the decision of the Council of State 3rd Chamber dated 21.05.2024 and numbered E. 2023/10539, K. 2024/3236 on the same date, capital commitments not fulfilled by the partners in due time were evaluated within the scope of default status without leaving any room for doubt. “…as mentioned above, in hidden profit distribution through transfer pricing, institutions must engage in a transaction with active participation with related parties. The fact that the capital contribution debt is not fulfilled in due time by the partners, although committed by them, both at the establishment stage of companies and during capital increase; cannot be evaluated for the relevant institution as sale of goods or services free of charge or at a low price envisaged in Article 13 of Law No. 5520 or as lending loan money without interest or at low interest considered as a transaction of this nature, nor can a resource transferred from within the institution to the partner be mentioned in the non-fulfilment of the capital increase debt. In the event, there is a state of default arising from the partner’s not fulfilling the capital contribution obligation, and it cannot be stated that not calculating default interest due to the capital contribution debt that the partner committed but could not fulfil in due time leads to hidden profit distribution through transfer pricing.” In the decisions given by the Council of State in 2025, the 3rd Chamber continued with a similar approach in its decision numbered E.2023/8286, K.2025/462 and stated that the unpaid capital debt should give rise to consequences within the scope of the TCC; and in terms of the CTL, it is not possible for it to give rise to consequences in the sense of transfer pricing. The rationale of the said decision is as follows: “…in order to be able to speak of hidden profit distribution through transfer pricing for corporate tax taxpayers, there must be transactions carried out with related parties over consideration or prices that constitute non-compliance with arm’s length, in other words, a value must be transferred gratuitously to related parties or benefit must be provided by being deprived of the profit to be obtained due to pricing contrary to arm’s length. Since there is no possibility for the values committed within the scope of capital increase by corporate partners but not yet included in the enterprise assets to be used by the company within the scope of commercial activity, it cannot be mentioned that within the scope of said values over which there is no possibility of disposition, transactions were carried out with related parties over prices or consideration contrary to arm’s length and thus benefit was provided to related parties. The fact that a capital commitment is made but subsequently default is fallen into in this commitment and default interest is not calculated by the company in the name of the defaulting partner due to the default, although it constitutes a violation of the provisions of the Turkish Commercial Code, this situation has no relation with any purchase or sale of goods or services. Since, in the hidden profit distribution institution which is envisaged as a tax security institution and entered our legislation as a special appearance form of collusion, the essence is that taxpayers apply prices different from the real situation in order to obtain tax advantages, it is also clear that in capital default where any provision of benefit is not possible, the application of hidden profit provisions would also constitute a violation of the spirit of the law. Although the defendant administration made an assessment on the grounds that interest was not calculated due to the capital left to the use of the company partners, thus hidden profit distribution was made through transfer pricing, in order to be able to speak of hidden profit distribution to the corporate partner who is a related party, the money made available must first be allocated to the commercial activity of the institution, and for this, the money must be included in the company’s assets, therefore it cannot be mentioned that the money that does not enter under the company’s custody was lent as a loan to the partner who is a related party and was made available interest-free, on the other hand, the partner’s not fulfilling the capital commitment is a state of default pursuant to Law No. 6102, only default interest can be calculated due to this commitment not fulfilled in due time, taking into consideration that this situation cannot be evaluated within the scope of hidden profit distribution through transfer pricing, since there is no compliance with the law in the assessment in question, the decision of the Tax Court of Disputes which rejected the lawsuit with respect to the provision of the judgment regarding the part corresponding to the base found as a result of applying the rediscount interest rate determined by the Central Bank in the year which is the subject of the dispute of the plaintiff on the unpaid capital on the grounds that the plaintiff made hidden profit distribution by not calculating interest income due to the capital committed by their partners but not paid, with the aforementioned provision of the judgment being overturned on the contrary reasoning; and the appeal request of the defendant administration should be rejected for this reason.”
CONCLUSION
The failure of partners in joint stock companies to fulfil their capital commitment in due time is expressly regulated as a state of default in terms of the TCC. The actions that the board of directors must take due to the non-fulfilment of the said debt are clear. However, despite the said clear regulations, the approach of the Tax Administration that the non-fulfilment of capital commitment should give rise to problems particularly in terms of hidden profit transfer through transfer pricing has rightly been subject to criticism, and the assessments made as a result of tax audits carried out at that time were also made the subject of litigation. Although favourable decisions were obtained before the Council of State in the said lawsuits, there were also decisions rendered against, and the said matter gave rise to negative consequences for taxpayers. Finally, the recent decisions of the Council of State reinforce the approach contained in the TCC; with the said decisions, the matter that the non-fulfilment of capital payment commitment should give rise to consequences in terms of the TCC has been clarified, and it has been emphasised that unpaid capital commitments cannot be evaluated within the scope of hidden profit distribution through transfer pricing.
¹ VII – Payment of share prices 1. Cash capital ARTICLE 344- (1) At least twenty-five percent of the nominal values of shares committed in cash shall be paid before registration, and the remainder within twenty-four months following the registration of the company. All of the issue premiums of shares shall be paid before registration.
² Aygül, E. (2008). Tax Consequences of Non-Fulfilment of Capital Commitment in Time. Finance Journal, No: 58, October 2008. (MDERGI/8871A.037)
³ SAĞLAM, Abdullah, Evaluation of Unpaid Capital Commitment Within the Scope of Transfer Pricing, Financial Solution Journal, No: 168, p. 253-270, November-December 2021.
⁴ Kemal BARLAS, Debtor’s Default in Fulfilment of Monetary Debts and General Provisions Regulated Regarding This Default, 1992, p. 127.
⁵ II – Prohibition of shareholders borrowing from the company ARTICLE 358- (Amended: 26/6/2012-6335/15 art.) (1) Shareholders cannot borrow from the company unless they fulfil their due debts arising from capital commitment and the company’s profit together with free reserves is not at a level to cover previous year losses.
⁶ Hidden profit distribution through transfer pricing ARTICLE 13- (1) If corporations engage in purchase or sale of goods or services with related parties over consideration or prices determined contrary to the arm’s length principle, the profit is deemed to have been distributed fully or partially in a hidden manner through transfer pricing.
⁷ “In order to speak of hidden profit distribution through transfer pricing; – A purchase or sale of goods or services must have been made by an institution (purchase, sale, manufacturing and construction transactions, rental, leasing transactions, borrowing and lending money, transactions requiring bonus, salary and similar payments are also within this scope.), – The said institution must have made this purchase or sale of goods or services with related parties, – In this purchase or sale of goods or services, price or consideration must have been determined contrary to the ‘arm’s length principle’. Therefore, in cases where institutions make purchase or sale of goods or services with related parties over prices or consideration determined in accordance with the arm’s length principle, hidden profit distribution through transfer pricing will not be mentioned.”
⁸ In the same direction; Council of State 4th Chamber’s decision dated 16.02.2022 and numbered E.2018/1134, K.2022/827