HOW PARTNERS CAN WITHDRAW MONEY FROM THE COMPANY ACCORDING TO TURKISH COMMERCIAL LAW?
In companies with a share capital, partners can withdraw money from the company in several different ways. These methods include receiving wages or attendance fees, receiving dividends or borrowing. Each of these methods is subject to different rules, and the tax consequences of each are quite different from each other. The main methods and their features are as follows:
According to Article 408 of the Turkish Commercial Code (TCC), the general assembly is authorized to dispose of the annual profit, to determine dividends and gain margins, and to resolve the usage of the reserve funds. Companies shall distribute dividends within the framework of their dividend distribution policies, which shall be determined by the general assembly. Profit-sharing may only be distributed from the annual net profit and voluntary reserves. Hence, the dividends cannot be determined unless the statutory reserves, as well as the reserves provided for by the articles of association, have been allotted.
Distributed dividends that are not written as an expense shall be deemed as ''profit share'' or ''affiliate earnings'' according to the legal status of shareholders. Dividends obtained from real person shareholders are subject to tax by declaring with an annual income tax return, depending on the source and fulfillment of certain conditions. Affiliation privilege is applied to dividend income earned by a legal entity.
Companies that distribute dividends apply dividend withholding tax over the dividends distributed, depending on the legal status of the partners. Legally obligated institutions are exempt from withholding tax on distributed dividends. On the contrary, real person shareholders and limited liability companies are subject to a 15 percent (the tax rate may vary depending on Double Taxation Treaties (DTT)) withholding tax while they are distributing dividends. Turkey has around 70 Double Taxation Treaties (DTT) signed with many countries. Therefore, if the DTT dividend withholding tax rate is lower than the generic 15% rate, the DTT rate may apply.
Part of the capital invested by the partner can be refunded through the capital reduction method.
If the capital is more excessive than the amount of operating budget, the company may partially return the capital share paid to the partners by reducing the capital. Furthermore, these amounts returned to the partners cannot be defined as "expenditure" for the company and "income" for the partners, because it is the partner's money that withdraws "himself" from the partnership, not the income of capital. However, in the event of capital deduction from a non-cash or non-in-kind capital item, withholding or corporate tax will arise as this deduction will be made from the source that requires the highest taxation.
Company can lend to partners
Pursuant to Article 358 of TCC shareholders cannot become indebted to the company, excluding the debt arising from subscription, unless the debt arises from a transaction conducted with the company as a requirement of the company’s scope of activity or the business of a shareholder’s enterprise and unless such debt is subject to identical and similar terms applicable in similar cases.
In order to get rid of the criticism that hidden income is distributed to the partners through transfer pricing by not charging interest on the debts given to the shareholders or by taking a low interest, it is necessary to apply interest at a benchmark rate and VAT at an overall rate (18 per cent) on this interest. In the case of VAT invoice is not applied to the debt, and if this situation is detected in tax inspections, corporate tax and VAT assessment will be executed in order to complete the unpaid and missing interest. Besides, withholding tax will be applied assuming that the profit distribution is performed. Therefore, lending to partners and calculating interest is a very obvious risk. This is a fact that can be easily detected during tax inspections.
In practice, the amounts that are seen as debt in the current accounts of the partners or the cash account, but not used by the partners personally, appearing from the payments of the company's undocumented expenses are also subject to VAT and withholding tax.
Attendance fees or premiums may be paid to board members
Provided that the amount is determined by the articles of association or the General Assembly resolution, board members who have shares in the company can be paid an honorarium, salary, bonus, a premium, and a portion of the annual profit following Article 394 of TCC. It is not mandatory to pay honorarium fees and can be paid monthly or per meeting attendance. Payments made to partners in this way are deemed taxable fees and are subject to withholding tax. In addition to these, wage payments that are deemed as expenses in the company shall apply withholding taxes up to 40 percent.
These payments can be an alternative, especially for companies that cannot distribute profits due to financial harm.
In this alternative, the legal relationship between the shareholders who are currently board members and the company are based on the company contract rather than the employment contract. Hence, the board members are described as agents, not employees, and are not covered by insurance.
The company can pay wages to the partners who work for service
The partners can work in the company with a "service contract". In this case, the company shall pay remuneration at the same amount of wage level paid to professional managers according to the precedent principle.
Wage payments based on service contracts are subject to income tax within the framework of general provisions. Thus, the company is liable to pay withholding and tax-based income tax. The difference of this model from the attendance fee and premium/bonus payments on a service contract is that the partners are regarded to be insured which increases the cost. However, the financial situation of the company may remain steady despite partners do not work for the company because the company will fill this position with professionals.
Benefits and expenses provided to shareholders within the scope of a board member or employee contract shall be deemed as a wage. Exceptions shall be applied to those who are part of the exemption if any, the parts exceeding the exception limits are taken to gross and will be subject to withholding tax.
There are also some tax exemptions for wages paid by companies operating in free zones or “technoparks”.
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