Shareholder Borrowing Prohibition

The shareholder borrowing prohibition is designed to prevent company capital from being withdrawn by shareholders and leaving the company unprotected. Art. 358 of the Turkish Commercial Code, after its amendment by Law No. 6335 in 2012, changed from an absolute ban to a conditional one.

Conditions

Shareholders may not borrow from the company unless both of the following are met:

1. The shareholder has paid its due capital contribution obligations,
2. The company’s profit, together with free reserves, is sufficient to cover prior years’ losses.

The rule also covers practices such as drawing money from the shareholder current account, a shareholder using cash in the company’s till and the company paying a shareholder’s debt.

Consequences

• Criminal fine: Those who lend to shareholders in breach of the prohibition may face the criminal fine provided in the Code.
• Liability: Board members approving transactions in breach of the prohibition may be liable for the company’s loss; see Directors’ Liability.
• Tax: Even if the conditions are met, an arm’s-length interest (imputed interest) should be charged on money provided to a shareholder. Otherwise, the tax authority may treat it as disguised profit distribution through transfer pricing.

In Limited Liability Companies

The rule also applies to limited liability companies. Amounts drawn by shareholders are also relevant to shareholders’ liability for the company’s uncollectable public debts; see Shareholder Liability for Public Debts.

The lawful routes for payments from the company to shareholders are dividend distribution or an arm’s-length service or lease relationship. How receivables from shareholders are treated in capital loss calculations should also be considered.