Companies that are established by foreign investors in Turkey under the provisions of the Turkish Commercial Code, either on their own or with Turkish partners, are regarded as Turkish companies and entitled to all the rights granted to companies founded by Turkish citizens. Turkish Commercial Code, in its provisions related to the formation of companies, makes no essential distinction between Turkish citizens and foreigners, nor does it distinguish between partners and founding partners, be they Turkish or foreigners. According to the Turkish Commercial Code (TCC), legal forms of business entities may be classified as follows:
The major guidelines for the choice of legal status by a foreign investor in Turkey are as follows:
Foreign firms that decide to operate in Turkey usually establish either corporations (A.S.) or limited liability companies (Ltd. Sti.).
| Corporation (A.S.) | Limited Liability Company (Ltd) | Branch | |
| Legal Status | Independent legal entity | Independent legal entity | Legally dependent on its headquarters |
| Tax Status | Full tax liability (resident) | Full tax liability (resident) | Limited tax liability |
| Number of shareholders | Min: 5 / Max: No limit | Min: 2 / Max: 50 | N/A |
| Capital Requirements |
Minimum Total Capital: TRL 50,000 | Minimum Total Capital: TRL 5,000 (minimum capital per shareholder: TRL25) |
No specific limit required |
| Executive Body | Board of Directors (BOD) | Managing Partners and/or Manager Branch | Manager |
| Responsibility of Shareholders for tax and public liabilities | Limited to the amount of capital contributed. | Liability is in proportion to the share in capital. | The headquarters will be liable. |
| Corporate Income Tax Rate | 20% | 20% | 20% |
| Dividend Withholding Tax Rate | 15% (if profit is distributed) | 15% (if profit is distributed) | 15% (if profits are remitted) |
| Legal Reserves | Must be provided | Must be provided | N/A |
1) Permission from the Foreign Investment Directorate (FID): As a result of the changes made in the Turkish Foreign Investment Legislation in June 2003, there is no longer a permission requirement from the FID of the UT.
2) Permission from the Ministry Industry and Commerce (MIC): Permission from the MIC is no longer required for establishment of both corporations and limited liability companies. However, the establishment of following types of corporations is still subject to the permission of the MIC:
3) Minimum Capital Requirement: There is no longer a minimum capital requirement for foreign investors (previously, there was a minimum capital requirement of USD 50,000 per each foreign investor). The relevant rules of TCC are applicable with respect to the minimum capital required for establishment.
| Type of Company | TRL | USD (*) |
| Corporation | 50,000 | 29,631 |
| Limited Liability Company | 5,000 | 2,963 |
(*) Based on the exchange rates prevailing as of 28 February 2009.
4) Number of Shareholders Required for Establishment:
| Type of Company | Minimum | Maximum |
| Corporation | 5 | No limit |
| Limited Liability Company | 2 | 50 |
5) Types of Activities: No limitation unless prohibited by Law.
6) Limitation for Foreign Shareholding Percentage: There is no limitation with regard to percentage of share held by foreign shareholder. There are certain limitations only for specific sectors like telecommunication, operation of ports etc.
Turkish Commercial Code allows two different methods of formation for corporations:
1. Formation in a single step, in which the founders contribute the whole capital stock.
2. Formation by successive subscription, in which some or all of the capital stock is raised by public subscription.
In the latter case, the founders draw up proposed Articles of Incorporation and a prospectus on the basis of which interested parties may subscribe to the capital stock. A corporation may be formed with a minimum of five registered shareholders. A corporation is free to choose its trade name on the condition that this name reflects the scope of the activity of the corporation in question. In order to establish a corporation, the Articles of Association must be prepared, signed, and notarized before the Notary Public.
The Articles must include:
Articles of Incorporation and a document representing that all the capital has been committed by shareholders (one fourth to be paid within three months and the remaining to be paid within three years at the latest from the registration date of the Company) must be submitted to the Ministry of Industry and Commerce.
Formation permit for corporations which require permission of the authority, is issued by the Ministry of Industry and Commerce. A corporation shall be registered in the Trade Registry where the head office of such corporation is located. A corporation is considered incorporated when it is registered before the Trade Registry and its Articles of Association is announced in the Trade Registry Gazette.
Publicly Held Companies
Corporations whose shares or bonds are offered to public must be registered with the Turkish Capital Market Board; the executive body governing the operations of publicly held companies. Only those companies established in the form of a corporation may go public and their shares can be traded on Stock Exchange. Public corporations are subject to the regulations of the Turkish Capital Market Board. These regulations cover financial reporting/audit requirements, disclosure and announcement of a prospectus for issuance of shares to the public, and the authorized share capital.
Capital
Corporations may be formed with a minimum capital of TRL 50,000. The subscribed share capital is to be paid in cash or in kind.
Each shareholder's liability is limited to the value of his or her shares, and share certificates may be in bearer or registered form. Founding shares may be issued to the founding members at the date of formation. These shares may entitle the holders to additional dividends.
Legal Reserves
Five percent of a company's profit after tax (or alternatively profit before tax) is set aside as the first apportionment of legal reserves (First Legal Reserve – FLR) to recover any unforeseen losses that may occur in the future. FLR must be provided until its cumulative balance reaches 20% of paid-in capital. A second apportionment of legal reserves (Second Legal Reserve – SLR) must be calculated as 10% of the amount of profit decided to be distributed (except for 5% of paidin share capital- set aside as “First Dividend”) to shareholders. (see Table 7.02).
Other extraordinary reserves are optional and are determined by Articles of Association or by a decision of the general assembly.
A company is managed by its Board of Directors (BOD) comprising a minimum of three persons. A director must also be a shareholder unless he is the representative of a legal entity shareholder. There is no limitation in the Turkish Commercial Code for the maximum number of persons in the BOD. The directors are elected at the General Assembly meeting for a certain time period by the shareholders or by the Articles of Association. However, this period can not exceed three years. They may be re-elected for a next period of three years. The BOD designates individuals authorized to represent the company and determines the details concerning signatory powers. Foreigners may also be appointed as members of the BOD.
Meeting and Votes
The general assembly of a corporation is the supreme authority and is composed of all shareholders. There are two types of general assembly meeting:
1. The ordinary general assembly meeting, which is to be held at least once a year within three months following the end of the accounting period.
2. The extraordinary general assembly meeting,which may be held as often as deemed necessary.
In a general assembly meeting, the shareholders have the right to modify the Articles of Incorporation; appoint directors and auditors; approve the income statement, balance sheet, statutory auditors’ and directors' reports; ratify the acts of the directors and acquit BOD; and make all important decisions that may not be delegated to any other body by Law.
The shareholders also have the right to approve the dividend distribution proposal of the directors as well as the amounts of the directors' emoluments.
A general assembly meeting is called by the BOD or, if the BOD fails to perform its duties, by the statutory auditors. One or more shareholders, representing at least one-tenth of the shares (minority shareholders), can at any time request extraordinary general assembly meeting. This request must be in written form, designating the purpose.
In general, a simple majority of votes represented at general assembly meetings is sufficient to pass a resolution and make elections to office. However, certain decisions require a quorum of two-thirds or more of the shares (i.e. changing legal type of the company and increasing the share capital). Some decisions like conversion of the company or increasing the shareholders’ subscription (not capital) requires a quorum of all of the shares and a voting majority of 100%.
Liquidation of the company, acquisition of the company by public enterprises requires a quorum of two- thirds of the shares and a voting majority of one-half of those present; if a quorum is not reached at the first call, a quorum of only one-half of the shares is required at the second call and a voting majority of one-half of those present.
In the case of issuing of debentures, profit distribution, an increase or decrease of capital, the approval of directors, or amendments to the Articles of Incorporation, a quorum of one-half of the shares is required and a voting majority of one-half of those present; if a quorum is not reached at the first call, a quorum of only one - third is required at the second call and a voting majority of one-half of those present.
Statutory Audit Requirements
Individuals must be appointed as statutory auditors and must not be related to any board member, although they can hold shares in the company. Their audit is generally considered to be almost purely a formality. In the event that the number of statutory auditors exceeds one, they constitute a board and act as a body. The number of statutory auditors may not exceed five. The first statutory auditors of a corporation are appointed for one year. In the years following the establishment, they are appointed by the General Assembly Meeting for at most three years.
In addition to statutory auditors, corporations may also appoint independent auditors (certified public accountants or the equivalent), but such an audit is not compulsory except for banks and publicly held companies. Corporations with more than 250 shareholders, as well as concerns that issue securities for public offering are obliged to register with the Capital Market Board (CMB). Registered companies must provide the CMB at regular intervals with information on their financial positions as audited by independent auditing firms. The CMB has accounting standards, which are very similar to the International Financial Reporting Standards (IFRS).
Publication of Information
Any changes in the Articles of Association of a corporation must be announced in the Official Trade Registry Gazette as well as the announcement of the Articles of Association. The resolutions regarding the transfer of head office or the minutes of the general assembly must also be announced in the Official Trade Registry Gazette.
An annual report is required for each accounting period and must be made available for inspection by all shareholders fifteen days prior to the annual general meeting.
Banks and insurance companies have to submit their quarterly and annual reports to various agencies, and their financial statements must be published in a newspaper. The format of financial statements must be in accordance with the standards approved by the related public authorities governing the operations of banks and insurance companies.
Limited liability companies differ from corporations with respect to the minimum number of shareholders and capital requirements. In the case of limited liability companies, no share certificates are issued to represent paid up capital. The registration of shareholders constitutes the legal record of ownership. Limited liability companies require a minimum of two shareholders.
The conditions for the formation of limited liability companies are as follows:
Previous pre-permits issued by the Undersecretariat of Treasury - General Directorate of Foreign Investment (GDFI) were abolished through the new Foreign Direct Investment Law. Branches can be established under the provisions of Turkish Commercial Code with the permission of the Ministry of Industry and Trade.
According to the regulations, to establish a branch, a foreign company is required to get permission from the Ministry of Industry and Trade, Domestic Commerce Directorate. The documents required are as follows:
1. A translated version of Articles of Association
2. Permission granted from the Ministry of Industry and Trade
3. Power of Attorney for the Branch Manager
4. Signature Circular of Branch Manager
5. For a Turkish branch manager, copies of
Identification Card (Notarized before a Notary
Public), for foreign branch manager, copies of
the photo bearing identification pages of their
passports, as notarized and apostilled,
Partnerships are not a common vehicle for foreign investment. Although they are considered as legal entities (except “ordinary partnerships”) under the Commercial Code, they are not recognized as such for tax purposes. Instead, the partners are assessed as individual income taxpayers on their respective shares of the profits.
A corporate entity can be a partner of an ordinary partnership. As for limited partnerships, all partners must be real persons. Limited partnerships and Limited Partnership Divided Into Shares are the two most common types of partnerships in use.
Foreign companies may establish joint ventures with individuals or ordinary limited partnerships in order to perform a certain project and to share the resulting profit. Joint ventures may either choose to register with the tax office to be subject to corporate income tax or the parties establishing the joint venture may each be liable to tax individually, according to their status, on their respective shares of the profits. Joint ventures should be established for projects that will be completed within a certain period of time. The parties forming the joint venture should jointly undertake the project. “Consortia” in which each party undertakes to conclude a different part of the job do not fall within the category of joint ventures.
Liaison offices are not permitted to perform any commercial activity in Turkey. Their activities are limited to representation and gathering of information. The FID initially gives a three - year term permission for the establishment of such liaison office. A liaison office’s expenses must be covered by funds sent by the head office abroad. The liaison office may not collect revenues on its own account in Turkey.
A liaison office is not itself subject to corporate income tax or personal income tax as it is not permitted to generate any income from its activities. However, it should maintain statutory books and file the necessary documentation to public authorities when required. Employees of a liaison office are not subject to income tax provided that their salaries are paid from abroad in terms of a foreign currency (i.e. the salaries must not be paid from Turkish sources).
According to Article 147 of the TCC, the companies that will merge are required to have the same legal form. Accordingly, it is not possible for a limited liability company (Ltd. Sti.) to merge with a corporation (A.S.). One of the companies has to change its legal form. Conversion of legal form is treated the same as a takeover.
If merger of companies is realized in accordance with those provisions of the Turkish Corporate Income Tax Law governing tax-free mergers, any income resulting from the merger is not subject to corporate income tax. Only the profit of the dissolving company for the partial accounting period ending as of the date of merger is subject to taxation. Carry-forward tax losses of the dissolved company can be utilized by the takeover company under certain conditions.
Tax-free full and partial de-mergers as well as share swaps can be realized based on the relevant rules of the new Corporate Income Tax Law.
The transaction of merging or dissolving itself is exempt from Value Added Tax provided that the transactions are realized in accordance with the conditions specified in the new Turkish Corporate Income Tax Law.