Allocation And Usage Of The Statutory & Discretionary Reserves Under The Terms Of The Turkish Commercial Code
Soner Altaş
Turkish Tax News, 16 May 2016
Reserves are among the items that compose the joint-stock company’s equity. Reserves are regulated in the Turkish Commercial Code (herein after referred as “TCC”). According to the Turkish Commercial Code, joint-stock companies are obliged to allocate statutory reserves in some cases. The Code also allows joint-stock companies to allocate discretionary reserves in order to perform some goals and strengthen the financial structure of the company. The allocation of statutory and discretionary reserves by a joint-stock company is briefly explained under the terms of the Turkish Commercial Code, numbered 6102.
I. STATUTORY RESERVES
Allocation and usage of statutory reserves are mentioned in the Article 519 and Article 520 of the Turkish Commercial Code. Statutory reserves are classified into two as the general statutory reserves and reserves to be allocated with respect to the company’s own shares acquired. They are explained below.
I.a. General statutory reserve
It is compulsory for a joint-stock company to set out 5% of its annual profits as general statutory reserves each year, until it reaches 20% of the paid-up or issued capital. We call this as the “first allocation of statutory reserves”.
The following amounts are added to the general statutory reserves even after it has reached the aforementioned legal limit:
a) The portion which has not been expended for amortization, assistance or charity, out of revenues obtained in excess of the nominal value when issuing shares,
b) The balance remaining on payments made on account of the price of canceled shares, after having closed the deficit resulting from the shares which have replaced the same,
c) After the payment of 5% of the net profits to shareholders (we call it as the “first dividend distribution), one tenth of the portion that has been decided to be distributed among persons having shares in the profits. (we call this as the “second allocation of statutory reserves”)
As long as the general statutory reserves do not exceed one half of the stock capital, they cannot be expended exclusively for covering losses, for taking the proper measures, for maintaining the undertaking in times where business is not good for preventing unemployment or for reducing the consequences thereof.
However, holding companies are exempt from two of these obligations:
First one is that, holding companies are not obliged to do the second allocation. In other words, holding companies are not obliged to allocate one tenth of second dividend distibution as statutory reserves.
Second exemption is about the usage of statutory reserves. Thus, holding companies may use their statutory reserves for covering the losses of the company or for taking the proper measures, maintaining the undertaking in times where business is not good for preventing unemployment or for reducing the consequences thereof even if the general statutory reserves do not exceed one half of the stock capital.
I.b. Reserves Allocated With Respect To The Company’s Own Shares Acquired
In the case where the company acquires its own shares, the company is obliged to allocate reserves that correspond to the acquisition values. These reserves may be cleared if the related shares have been transferred or disposed of.
In accordance with the regulation with regard to revaluation fund, reserves as included on the passive side of the balance sheet may be cleared if:
– They have been converted to capital and the related revalued assets have been depreciated,
– The related assets have been transferred.
II. DISCRETIONARY RESERVES
Allocation of discretionary reserves are mentioned in the Article 521 and Article 522 of the Turkish Commercial Code. They are briefly explained below.
II.a. Discretionary Reserves In General
The company may decide to assign on a discretionary basis a portion of the net income to the limit established in the articles of association and by law. A provision may be specified in the articles of association indicating that:
a) An amount exceeding 5% of the annual net income may be appropriated to reserves,
b) General reserves may exceed 20% of the paid-up capital.
Appropriation of other reserves may also be specified in the articles of association and their spending and conditions may be determined.
II.b. Reserves To Be Appropriated In Favor Of Employees And Workers
The articles of association may stipulate provisions that enable the appropriation of reserves for the company’s directors, managers, employees and workers in order to establish or sustain a charity organization or to be granted to a public organization.
It is obligatory to establish a charitable foundation and a cooperative by diverging the reserves and other assets which have been allocated to the charity. The charity foundation deed may state that the assets of the charity foundation may solely be the debt against the company.
III. RELATION BETWEEN THE DIVIDEND DISTRIBUTION AND RESERVES
Due to Article 523 of the TCC, dividend to be distributed to the shareholders cannot be determined unless general statutory reserves and discretionary reserves as specified in the articles of association are allocated.
The general assembly may decide to allocate special reserves other than those as specified in law and the articles of association in order to protect assets to the extent necessary and sustain the company and secure dividend distribution for the benefits of all shareholders.
