Introduction

According to the Turkish Commercial Code No. 6102 (“TCC”), the company capital must be specified in the articles of association of the company. The capital in the articles of association may be increased or decreased, provided that the provisions of the TCC are complied with. Companies may decide to increase or decrease their capital for a variety of reasons. These capital adjustments can be financed from external sources or from balance sheet items.

This article will explain how a company's shareholders' receivables are used in the capital increase within this framework.

Capitalisation of Receivables

Capital represents the resources that companies must have in order to trade or produce, and it is subject to a basic distinction between capital in kind and capital in cash. According to Article 128 of the TCC No. 6102, joint stock companies may be capitalised in cash (TCC Arts. 344-345) or in kind (TCC Arts. 342-343).

Assets that can be valued and exchanged for cash, such as digital assets and intellectual property rights, may be contributed as capital in kind. However, these assets must be free from attachment, injunction, and encumbrances. Notably, acts of service, personal labour, commercial reputation, and outstanding receivables cannot be classified as capital (TCC Arts. 307, 342, 581).

For capital in kind to be accepted according to the TCC, immovable properties must be included in the articles of association with their value determined by an expert and annotated to the title deed. Intellectual property rights and other values must be registered in special registries, if applicable, and movable assets must be entrusted to a reliable entity.

The economic assets that may be capitalised in companies are regulated under Article 127 of the TCC No. 6102. This article indicates that receivables and all kinds of assets that can be transferred and valued in cash may be capitalised in commercial companies. Capitalisation encompasses both the initial capitalisation of newly established businesses and the capitalisation of existing businesses through capital increases. According to the aforementioned article, commercial companies may be capitalised with money, receivables, negotiable instruments, shares of capital companies, intellectual property rights, movables, immovables, rights of utilisation and use of movables and immovables, personal labour, commercial reputation, commercial enterprises, transferable values such as electronic media, domains, names, and marks, mining licenses, and other rights of economic value.

Receivables may be capitalised in commercial companies, but certain qualifications apply.  Specifically, only assets, including intellectual property rights and digital assets, that are free from limited real rights, attachments, or injunctions, and that can be valued and transferred in cash, can be contributed as capital in kind. In contrast, acts of service, personal labour, commercial reputation, and outstanding receivables are not classified as capital.

The capital to be contributed must be valued by experts appointed by the commercial court of first instance in the place where the company's head office is located. The expert report must clarify the method applied, ensuring it is fair and appropriate for all parties involved, and must address the reality, validity, and compliance with Article 342 concerning the receivables contributed as capital, their collectability, and their full value. Additionally, the report must specify the number of shares allocated for each asset contributed in kind and their Turkish Lira equivalent, with satisfactory justifications in accordance with the principle of accountability. Founders and stakeholders may object to this report, but the expert decision approved by the court is final.

The basis of this provision relates to the principle of capital protection. This principle upholds the practice of valuing enterprises and assets during establishment, ensuring that capital in kind is appropriately evaluated by experts appointed by the court. An expert report is required to assess the value of capital in kind, ensuring compliance with legal standards.

However, when the assets contributed consist solely of cash debts owed by the shareholder to the company, the Ministry of Customs and Trade allows for a simpler process. In this scenario, the report prepared by a certified public accountant, public accountant, or auditor (in companies subject to audit) showing the amount of the company's cash-based debt to the shareholder and confirming its source as cash will suffice for the capital increase. This flexibility acknowledges that cash debts are straightforward in nature, making an expert valuation unnecessary.

Applying the Cash Capital Deduction to Debts and Shareholder Capital in Addition

The question of whether interest deduction can be utilised when the debt to the shareholder is paid before or after the cash capital increase remains uncertain, as differing opinions exist among the administration and judiciary. Nevertheless, some opinions have been finalised.

It has been clarified that “the capital increase made by adding the debt given to the company by the shareholder before the registration date of the capital increase to the capital cannot be considered a capital increase made by offsetting the balance sheet items against one another and should benefit from the deduction stipulated in the Law as a cash capital increase.”[1]

In this context, considering the Legislator's intent to strengthen the cash inflow and equity of the company, it can be concluded that the interest deduction stipulated in Article 10/1-I of the Corporate Tax Law No. 5520 can be utilised in the capital increase of shareholder receivables. Given these explanations, and considering that there is no restriction in the Law regarding the addition of shareholder receivables to capital, it can be concluded that the interest deduction stipulated in Article 10/1-I of the Corporate Tax Law should be utilised in the capital addition of shareholder receivables.

With thanks to Ebru Elaman for her contribution

References

File No: 2017/1362, Decision No: 2017/1898 (Ankara Regional Administrative Court -Only in Turkish- November 8, 2017).

Softa, M. (2024, July 17). Ortaklara Olan Borçların Sermayeye İlave Edilmesi ve Vergisel Sonuçları (Only in Turkish). Retrieved from Vergi Port: https://vergiport.com/blog/ortaklara-olan-borclarin-sermayeye-ilave-edilmesi-ve-vergisel-sonuclari