The New Turkish Commercial Code No. 6102; which entered into effect on July 1, 2012 (the "TCC"); introduced an option for private companies to distribute current year profits generated in an interim accounting period in advance of the annual distributions made following the end of each financial year. On August 9, 2012, the Ministry of Customs and Trade issued a communiqué in the Official Gazette numbered 28379 to regulate such advance distribution of dividends (the "Communiqué").
Requirements Regarding Advance Dividend Distribution
Prior to the effectiveness of the TCC, privately held companies could only distribute previous years' profits. Only publicly traded companies were allowed to distribute current year profits as advance dividends. The TCC and the Communiqué now allow privately held companies to distribute advance dividends as well. A shareholders' assembly has the sole authority to determine that an advance dividend distribution be made, provided that the company is profitable during the relevant interim accounting period (i.e., three, six or nine months) in a financial year for which the advance dividend will be distributed. A resolution of the shareholders' assembly for advance dividend distribution must include: applicable remedies if there are not sufficient profits at the financial year-end. Such shareholders' assembly resolutions are subject to qualified meeting and decision quorums depending on the type of the company.
Limitations on the Amounts to be Distributed as Advance Dividends
The maximum amount of advance dividends distributed cannot exceed half of the total amount of dividends calculated after subtracting certain deductibles from the relevant interim period's profit. These deductibles, same as those applicable when calculating year-end profits, are balance sheet items such as previous year's losses, taxes, funds, legal reserves, other payables and amounts to be set aside for all other persons that have participation rights in the dividends. Shareholders are entitled to advance dividend distribution, pro rata to their shareholding percentages.
The Off-Set Mechanism
Under the Communiqué, advance dividend distribution is basically an off-set mechanism which requires the deduction of the distributed amount from the relevant year's net profit. Unless the deduction is made, the shareholders' assembly is not permitted to resolve to distribute year-end dividends or further advance dividends.
If the company yields loss, or if its net profit is lower than the already distributed advance dividends, such dividends distributed in advance that are short of actual profits must be revoked in the following fiscal period.
Taxation of advance dividends is not yet specifically regulated. However, laws applicable to taxation of dividend distribution in general provide that dividends are either exempt from or subject to withholding of a certain percentage (up to 15%) of distributed dividends depending on the legal status of the receiving party (e.g. individual, corporate, resident in Turkey, or not resident in Turkey). We expect advance dividends to be subject to the same tax treatment. Double tax treaties shall still be applicable on such withholdings.
In our view, in the event of revocation of all or part of advance dividends (due to losses or shortage of sufficient profits, respectively), the withholding taxes paid on distributions made should be reimbursed by the tax authorities through offsetting or refunding.