Business organization.  Foundation of company and company management in Turkey

Main institutional-legal forms of legal persons in Turkey

Companies founded by the foreign investors independently or together with the Turkish partners in Turkey on the basis of Turkish Commercial Code, are considered to be Turkish companies that have all the rights given to the companies founded by the Turkish citizens. Concerning that part of Turkish Commercial Code which addresses the issue of foundation of companies one may say that there are no fundamental differences between Turkish citizens and foreigners, partners and partners-founders, residents and non-residents.

In accordance with Turkish Commercial Code there are the following institutional-legal forms of the legal persons in Turkey:

  • Joint Stock Company in Turkey (“Anonim Sirketi” – A.S.)
  • Limited Liability Company in Turkey (“Limited Sirketi” – Ltd. Sti.)
  • General Partnerships (“Adi Ortaklik”)
  • Partnerships with limited liability (“Komandit Sirket”)
  • Registered partnerships (“Kollektiff Sirket”)
  • General partnerships, divided for shares (“Sermayesi Paylara Bolunmus Komandit Sirket”)
  • Individual entrepreneurs

Main factors while choosing a legal status for the company founded by the foreign investor in Turkey:

  • The choice of a legal status for business may vary from the foundation of the branch office which won’t be an independent legal entity to the affiliated company. A liaison office of the company can be also found but it won’t have a right of a long term activity because of the prohibition for the commercial activity.

  • Office for foreign investments of the Treasury Department regulates the branch office and independent affiliated company almost equally.

  • There are no separate rules for the foundation of the branch office or affiliated company
  • The Foreign head office is responsible for the obligations of the branch office.
  • Branch office has the tax privileges, only income got in Turkey is taxed while affiliated companies have a full tax burden i.e. their income is taxed despite their territorial source.
  • Tax subsidies are distributed to the branch offices as well as for the affiliated companies.
  • Branch offices are not obliged to form a reserve fund, on the contrary, affiliated companies are obliged to form a reserve fund in accordance with the Turkish Commercial Code.

Most often foreign organizations planning to run a business in Turkey found JSC or LLC.

Comparative characteristics of three most popular forms of business organization       

 

JSC in Turkey

LLC in Turkey

Branch Office in Turkey

Legal status of the company in Turkey

Independent legal entity

Independent legal entity

Dependent on foreign head office

Tax status of the firm in Turkey

Full taxation (resident)

Full taxation (resident)

Partial taxation (non-resident)

Quantity of the founders of the company

Min: 5/max.: unlimited

Min: 2/max.: 50

No

Requirement for the authorized capital

Minimal capital: 50 000 TL

Minimal capital: 5 000 TL (min. share of capital per one founder: 25 TL)

No special limitations

Governing body in Turkey

Board of directors

Governing partners and/or manager

Branch office manager

Liability of the founders for the taxes and losses

Depending on the size of the capital invested

Depending on the % share in capital

Managing company is liable

Income tax rate (corporate tax)

20%

20%

20%

Income tax rate for dividends

15% (if income is distributed)

15% (if income is distributed)

15% (if income is transferred)

Reserve fund

Obligatory

Obligatory

Not provided

Main rules of foundation of companies in Turkey by the foreign founders

Permission of the Office for foreign investments

As a result of amendments in the Turkish law in the part of foreign investments in June 2003 the permissions of the Office for the foreign investments are no longer required.

Permission of the Ministry of Industry and Trade

This permission is no longer required for the foundation of the joint stock companies as well as for the limited liability companies. Nevertheless the foundation of the mentioned below corporations still requires the permission of the Ministry of Industry and Trade of Turkey:

  • Supporting banks (earlier “special financial institutions”)
  • Banks
  • Holdings
  • Insurance companies
  • Factor-companies
  • Companies working in the sphere of consumer finances and credit cards
  • Resources management companies
  • Companies working as licensed storage
  • Companies working as licensed agricultural storage
  • Companies listed in the list of Trade Exchange
  • Companies selling foreign currency
  • Companies regulated by the Board of the Fund Market
  • Companies acting like department stores
  • Companies created as founders and operators of the Turkish free trade zone

Minimal requirements for the authorized capital while registration of a company in Turkey

There are no longer minimal requirements for the capital for foreign investors (earlier the authorized capital had to be no less than 50 000 USD for each foreign investor). Corresponding rules of the authorized capital concern the minimal volume of capital required for starting a business (legal entity) in Turkey; these rules are for all founders of the companies in Turkey, residents and non-residents.

Legal entity type

Minimal capital

JSC

50 000

LLC

5 000

Number of founders (shareholders) required for the foundation of the institution

Company’s type

Number of founders

Minimum

Maximum

JSC

5

Unlimited

LLC

2

50

Activities of the companies in Turkey founded by the foreigner:

Any types of activities except those forbidden by law are permitted for companies in Turkey.

Limits to the %share for the foreign founders

There are no limitations for the %share for the foreign shareholders in Turkey. There are only particular limitations for particular sectors such as telecommunications, port activity etc.

Foundation and Management – Joint Stock Company in Turkey

Turkish Commercial Code includes 2 different ways of foundation of JSC in Turkey:

  • One moment creation when the founders invest the whole sum of capital at once
  • Foundation on the base of consequent investments when a part or a whole sum of capital is formed at cost of open investments

In the second case the founders conclude a preliminary Statute of the joint stock company in Turkey and an offering memorandum against which the interested parties may invest shares in the capital. JSC may be founded if there are minimum 5 registered shareholders. JSC may freely choose its trade name in case this name depicts its type of activity. When founding a JSC one must prepare a statute signed and authorized by a state notary.

Statute of JSC in Turkey must include:

  • Commercial name of the organization
  • Terms of activity of organization (which may be unlimited)
  • Purposes of the organization and sphere of activity
  • Distribution of the invested capital
  • Number and groups of shares

Statute of the organization and document which certifies that the whole capital invested by the shareholders (one quarter must be paid during 3 months and the rest – during 3 years from the moment of the organization registration) must be applied to the Ministry of Industry and Trade.

Permissions for the JSC opening are issued by the Ministry of Industry and Trade. JSC must be registered in the Trade Registry in the head office’s premises. JSC is considered to be registered until it is introduced in the Trade Registry and its Statute is published in the Trade Registry newspaper.

Open JSC in Turkey

Those joint stock companies with shares and obligations put on the public market must be registered in the Turkish Board of the Fund Market – executive body which regulates the operations of the JSC. Only organizations founded in the form of JSC may sell their shares on the open market and their shares may be sold at the fund exchange. Open JSC is regulated by the Board of the Fund Market. Financial reporting and requirements to audit, offering memorandum of shares for open sale and statute are in its jurisdiction.

Authorized capital of a JSC in Turkey

Corporations may be founded with minimal authorized capital of 50 000 TL.

Liability of each shareholder is limited by the price for his shares; certificates may be for the bearer or in the claimed form. Constituent shares may be issued to the members-founders for the day of foundation. These shares may give the right to the shareholders for the additional dividends.

Obligatory reserves

5% income of the company left after the tax payment (in some cases till the tax payment) is saved as a first share of the obligatory reserve (Primary obligatory reserve) for covering all unforeseen expenses which the company may incur in future. This reserve must be formed until its joint share reaches 20% of capital invested. The second share of the obligatory reserve (Secondary obligatory reserve) must be formed from 10% of the income for distribution (except 5% of the paid capital, saved for issuing the first dividends) among the shareholders.

Here is an example of the tax and obligatory reserves of JSC in Turkey calculation (in case all incomes are distributed)

 

TL

Income before taxation

100.00

Income tax (100 TL  x 20%) a

(20.00)

Income after minus income tax

80.00

  • Primary obligatory reserve (80 TL x 5%) b

(4.00)

Income for distributing

76.00

  • First distribution of dividends (5% from the invested capital) c

(20.00)

Rest from the first distribution of dividends

56.00

  • Secondary obligatory reserve (56/11)
  • Second dividends distribution (according to the decision of the General Shareholders Meeting)

(5.09

50.91)

General sum of dividends for distribution

(20 + 50.91)

70.91

Income tax for dividends

15%*70.91) d

(10.64)

Clear dividends (70.91-10.64)

60.27

General tax burden

30.64

  1. JSC has no non-taxed incomes and expenses. 20% rate has power from January, 1st 2016.
  2. Primary obligatory reserve is formed until its total amount reaches 20% of the capital.
  3. Supposed sum of the capital – 400 TL
  4. Income tax from the dividends is charged at 15% rate

 

The rest extraordinary reserves are formed upon organization’s request and are defined by the Statute of organization or decision of the General Shareholders Meeting.

The managing body of the JSC in Turkey is the Board of Directors which consists of minimum 3 persons. Director must be also a shareholder if only he is not the representative of the shareholder of a legal entity. Maximum number of persons in the Board of Directors is not limited in the Commercial code of Turkey. Director is chosen at the general meeting of founders for the certain period of time defined by the shareholders and Statute. This period cannot exceed 3 years. Directors may be re-elected for the next three years period. The Board of Directors appoints physical persons authorized to represent the organization to posts and defines all the details concerning the signed countries. Foreigners may be also appointed by the members of the Board of Directors.

Meetings and decisions taking by the JSC in Turkey

The General Shareholders Meeting is the highest governing body of the corporation which consists of all shareholders. There are 2 types of general meetings:

  1. Regular general meeting of the shareholders held minimum 3 times a year during 3 months after the reporting period.
  2. Extraordinary general meeting of the shareholders held if necessary.

At the general meeting the shareholders have the right to make amendment in the Statute of the JSC; appoint directors and auditors to post; approve the reports about income, balance, auditors’ and directors’ reports; accept the acts of directors; exempt the Board of directors from the obligations; and also take on all important decisions which cannot be entrusted to other bodies by law.

Shareholders also have a right to approve the plan of directors for distributing of the dividends and also the amounts of the directors’ grants.

A general meeting of the shareholders is called by the Board of Directors or in case the Board of Directors doesn’t comply with its obligations – by the auditors by law. One or several shareholders representing minimum 1/10 part of the shares may call an extraordinary meeting of shareholders any time. This requirement must be in a written form with mentioning the aim of calling.

Generally the adoption of resolution and elections to the organization are held by the decision of the majority of voices. However some decisions require the quorum of 2/3 or more shares (the change of institutional-legal form of the company and increase of the share capital). Some decisions such as the conversion of the company or the increase of the subscription for the shares (not capital) require all the shares and 100% majority of voices.

Company’s liquidation, purchase of the company by the public organizations require the quorum of 2/3 of shares and half of voices of present people; if the quorum is not reached at the first demand, it is required only 1/3 of shares at the second meeting and half of voices of present people.

Requirement of the official audit of the JSC activity in Turkey

Individuals must be appointed by the official auditors of the JSC in Turkey and cannot be related to any member of the Board although they may have some shares in organization. Their revision is mainly considered to be formality. In case the amount of official auditors is more than one, they must form the government and act like organization. The amount of official auditors must not exceed 5 people. First official auditors are appointed for 1 year period. Further they are appointed by the General Meeting maximum for 3 years.

Besides the official auditors JSCs may appoint also independent auditors (certified public auditors), but such kind of audit is not obligatory for all JSCs except banks and open companies. JSC with more than 250 shareholders and concerns which issue valuable papers are obliged to be registered with the Council of the Fund Market. Registered organizations must regularly present the information about its financial state, checked by the independent audit firms to the Council. Council has the standards of audit in most part identical to the International standards of financial reporting.

Publishing the information about JSC’s activity in Turkey

Any changes in the Statute must be published in the official newspaper of the Trade Registry as well as the Statute’s announcement. Resolution about the move of the head office or protocols of the general meeting must be also published in the official newspaper of the Trade Registry.

Annual report is required for each reporting period and must be available for all shareholders 15 days before the annual general meeting.

Banks and insurance companies must present their quarterly and annual reports to different agencies and their financial reporting must be published in the newspaper. The format of the financial reporting must correspond to the standards approved by the public bodies which regulate the activity of banks and insurance companies.

Foundation and management – Limited Liability Company in Turkey

 LLC in Turkey is different from the JSC in Turkey by the minimal amount of shareholders and requirements to capital. In case of LLC, the share certificates - the shares for presenting the participation in the capital invested are not issued. The registration of the shareholders is an official registration of ownership. LLC in Turkey must have at least 2 shareholders.

Conditions of LLC foundation in Turkey

  • The founders must be at least 2 individuals and legal persons, the number of shareholders must not exceed 50. Material liability of the shareholders in the part of the unpaid taxes and similar obligations is proportional to the shares in the capital of organization (valid from July 29 1998).
  • Minimal requirements to the capital for the LLC – 5000 TL divided to the shares of 25 TL or multiple 25. Each shareholder receives a part of the gross profit proportional to the amount of the invested capital.
  • There must be at least 1 official auditor in the staff of LLC with over 20 shareholders. This auditor must have the same right and obligations as public auditors of the joint stock companies.

Decision taking and management of LLC in Turkey

  • The official representative of the LLC in Turkey for the state bodies, legal entities and individuals is a general director of LLC or the Board of directors.
  • General Director or directors of the company must have the certified circular of signature and stamp of LLC for giving to the document of LLC legitimacy.
  •  All decisions of the founders regarding the rules of management of LLC including those written in the Statute, appointment and dismiss of the director (directors) must be written into the Protocols Book of the company and certified by the notary.
  • Protocol meeting may be called unlimited times upon the LLC founders’ request.
  • For decision taking at the protocol meeting founders voting for the concrete decision must have at least 75% of authorized capital of LLC in Turkey plus one share from the authorized capital for decision taking about the question discussed.

Foreign company branch in Turkey

Previous permissive documentation issued by the Treasury Department – Directorate General of foreign investments of Turkey, was abolished by a new law about direct foreign investments. The branch of the foreign company in Turkey may be registered in accordance with the conditions written in the Commercial Code of Turkey and with permission of the Ministry of Industry and Trade.

A foreign company must get a permission from the Ministry of Industry and Trade, in the Directorate of inner trade, to found a branch in Turkey according to the norms.

For registering a branch of foreign company in Turkey the following documents are required:

  • The translation of the organization’s Statute
  • Permission of the Ministry of Industry and Trade of Turkey
  • Power of attorney to the manager of the foreign company manager from the parent company
  • Circular of signatures of the branch office company’s managers
  • Copy of ID card for the Turkish manager of the foreign company in Turkey; for the foreign manager – the copy of passport pages translation are required. All documents must be certified by the notary.

Managing of the branch office of the foreign company in Turkey

Branch office of the foreign company is managed by the manager of the branch office. Material liability for the activity of the branch office of the foreign company is born by the parent company.

Other forms of legal entities in Turkey, available for the registration by the foreign investors

Least common forms of legal entities registered by the foreign investors in Turkey are partnerships, cooperative companies and liaison offices of foreign companies. Let us consider these kinds of legal entities more.

Partnerships in Turkey

Partnerships in Turkey as a legal form are not very popular among foreign investors in Turkey. And although they are related to the legal entities (except simple partnerships) foreseen in the Commercial Code they are not such concerning taxation.

Instead of this the partners of the partnership in Turkey are considered to be individual payers for the taxes in regard to their shares in income. Partnerships in Turkey are also not convenient with regard to the increased liability of partners in the partnerships.

Our company does not advise such kind of form for foreign investors while organizing business in Turkey.

Legal person may be a partner in a simple partnership. In the partnership with limited liability all the partners must be physical persons. Partnerships with limited liability and simple partnership are the most popular types of partnerships in Turkey.

Cooperative companies in Turkey

Foreign companies may found cooperative companies in Turkey together with the physical persons or general partnerships with the aim of realizing a certain project and distributing income.

Cooperative companies in Turkey may be registered in the tax body to pay the income tax; or the parties that found a cooperative company may be taxed individually with regard to their status and shares in income. Cooperative companies in Turkey must be founded for realizing the projects with time limits. Parties forming a cooperative company must fulfill the work about the project jointly.

Liaison office of foreign companies in Turkey

Liaison office of the companies has no right to shift any commercial activity in Turkey. Their activity is limited to presenting the company at exhibitions, presentations etc. and also by collecting information. Directorate for foreign investments gives a 3-year permission for the foundation of such liaison office in Turkey. Expenses of the liaison office of the foreign company in Turkey must be covered by the money given by the head office abroad. Liaison offices can’t keep incomes at their own accounts in Turkey.

Liaison office of the foreign company is not a subject of taxation as it has no right to get any income. Nevertheless, it must have documentation and provide public bodies with necessary information on demand. The workers of the liaison office of the company are not taxed by the income tax provided that their earnings are paid from abroad in international currency (i.e. their wages must not be paid from the sources in Turkey).

The change of legal status of the company in Turkey

Merger, acquisition, shift to another institutional-legal form, division, exchange of shares of legal entities registered in Turkey

According to the article 147 of the Commercial Code of Turkey legal persons registered in Turkey – the objects of merger – must have the same institutional-legal form. Respectively a merger of LLC and JSC in Turkey is impossible. One of the companies must change its institutional-legal form. The shift of the company registered in Turkey to another institutional-legal form is equated with the merger.

If the merger of legal persons in Turkey is done in accordance with the conditions of the income tax law, as for the merger which is non-taxable, each income from the merger is not taxed by the income tax. Taxation is applied only in case one gets income from the cancelation of the company for the incomplete reporting period finishing at the date of a merger. Tax losses of the further periods of company’s cancelation may be taken by the merging company on appropriate terms.

Non-taxable full or partial division of companies, as well as the exchange of shares, may be done in accordance with the norms of income tax law.

The procedure of merger and cancelation is not taxed by VAT provided that it is done in accordance with the terms defined in the new income tax law in Turkey.

 

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