Legal Evaluation of the Company's Shareholders Receiving Fee From the Company
In practice, especially in small-scale companies with single or few shareholders, there are many examples where the shareholders of the company do not distinguish between their personal budgets and the company budget, and do not formalize the payments they receive from the company in return for their work. These cases can turn into a problem, especially if the company grows and receives an investment, a share transfer is to be made or a merger and acquisition process is entered.
In this respect, it is necessary to evaluate the legal characteristics of the payments received by the shareholders of the company in the scope of company law, labour law and tax law. Therefore, the following evaluations have been made to guide the problems that may be encountered in practice, without prejudice to the evaluations that should be made specific to the concrete case.
I. Companies Law Point of View
Article 132 of the Turkish Commercial Code (“TCC”) No. 6102, titled "Right to receive interest and fees", regulates that the shareholders of the company may be paid a fee for their services in the company.
Article 132 - Unless there is a contrary provision in the legislation, it can be accepted that the shareholders are paid interest for the capital they put in and fees for their services in the company with the articles of association.
A. Attendance Fee/Salary Formulization
Shareholders can receive payments as attendance fees or salaries from the company if the circumstances below are met.
1) One of the following prerequisites must exist:
The fact that;
a) Payment is regulated in the company's articles of association
b) A decision is made to make payment to shareholders by the General Assembly
c) The shareholder has sued to receive payment for their services.
2) There must be an actual service.
The shareholder who gets payments from the company must be active within the company. This activity can be anything if the company benefit from, in its operations.
3) The payment must be arm’s length.
It is necessary to determine whether the shareholder’s salary is arm’s length comparing the other companies’ paid shareholders who are doing a similar job and regarding the financial situation of the Company (Yargıtay 11. HD. 2019/1419 E., 2020/164 K.). In this respect, one of the main principles to be taken as a basis here is whether the payments received are reasonable according to the financial situation of the Company.
B. Dividend Advance Formulization
The payments received by the shareholders can have been considered as a dividend advance if the conditions arising from the Communique on Dividend Advance Distribution has been fulfilled. According to the Communique, for the Company to distribute advance dividends, there must be profit according to the interim financial statements of three, six or nine months prepared in the accounting period in which the advance dividend will be distributed, and the general assembly must take a decision regarding the distribution of advance dividends. If these conditions are not fulfilled, it is not possible to accept payments made to the partners neither as dividend advance nor intra legem.
If the shareholders get payments from the Company, without the above conditions, it violates the prohibition of return of capital. The Principle of Capital Maintenance is the legal basis of this prohibition. According to Article 601 of the TCC, except for the reduction of the capital, the capital share price cannot be returned to the shareholders, and the shareholders cannot be released from this debit. Violation of this principle has various consequences, including the invalidity of the relevant decisions (TCC Art. 644, 391; 622, 445-451) and the manager being held liable for the loss incurred by the company due to this reason (TCC Art. 644, 553).
Although the shareholders are not authorized to determine their own wages alone, there is no provision in the TCC prohibits them from voting in the general assembly to determine their own wages. Therefore, shareholders can vote their own wages in the general assembly (TCC 616.1.f).
II. Tax Law Point of View
It doesn't matter how the payments are named in terms of tax legislation. In any case, income tax will be paid. The difference exposes in corporation tax due to whether the payment can be written as an expense or not. Attendance fees or salaries can be written as expenses and help to reduce the corporate tax burden. On the other hand, dividend advance cannot be written as an expense, so it has no effect on the corporation tax base. Therefore, it seems more reasonable to name the fees paid to the shareholders as attendance fees or salaries.
According to the 2nd paragraph of the 13th article of the Corporate Income Tax Law No. 5520, shareholders are related persons to the company. The payments made to the shareholders must be arm’s length otherwise, it would mean that is a hidden profit distribution. In this case, these payments cannot be deducted from the corporate tax base as an expense.
Article 13 of the Corporate Income Tax Law No. 5520 regulates the arm's length principle as follows:
Article 13
(1) - If Corporates buys or sells goods or services with related persons at the price or fee, they have determined in violation of the arm's length principle, the payment is deemed to be hidden profit distributed through entirely or partially transfer pricing.
(3) - Arm's length principle means that the price or fee applied in the purchase or sale of goods or services with related persons is in accordance with the price or fee that would occur in the absence of such a relationship. It is obligatory to keep the records, tables and documents of the calculations regarding the price or fee determined in accordance with the arm's length principle, as proof papers.
Finally, a net fee should be paid by deducting 15% income tax and other obligatory taxes, pursuant to Articles 94 and 103 of the Income Tax Law No. 193, from the payments made to the shareholders of the Company.
III. Labour Law Point of View
Article 4 of the Social Insurance and Universal Health Insurance Law No. 5510 defines those who will be deemed to be insurance holders within the scope of the Law. According to the 3rd subparagraph of Art. 4/1-b Associates of joint-stock companies who members to board of directors, active partners of commandite companies of which capitals are divided into shares, all partners of other company and maritime joint–adventures shall be deemed insurance holders in terms of the implementing of short- and long-term insurance branches.
According to the legislation, the insurance in question is not optional but a legal obligation (Yargıtay 10. HD. 2016/1139 E. 2016/13639 K.). As the beginning of the insurance; for the founders, the date on which the establishment of the company is registered in the trade registry, and for the shareholders who have taken over the shares, the date on which the share transfer is registered in the trade registry shall be taken as the basis. While the insurance starting with the establishment is reported to the SGK automatically, the insurance through share transfer should be notified by the relevant party.