Dividend Distribution in a Turkish Joint Stock Company: Distributable Profit, Legal Reserves, the General Assembly and Dividend Advances (TCC 507-512, 519-523)
From what, and how, may a Turkish joint stock company (anonim şirket) pay a dividend? Under Article 509(2) of the Turkish Commercial Code (TCC, Law No. 6102), a dividend (kâr payı) may be distributed only from the net profit for the period (net dönem kârı) and from free reserves (serbest yedek akçeler), and TCC 509(1) states that no interest may be paid on capital. Under TCC 523(1), the dividend to be distributed to shareholders cannot be determined unless the legal reserves and the optional reserves provided for in the articles of association have been set aside, and under TCC 408(2)(d) the decisions on the disposal of annual profit and on the determination of dividends belong to the general assembly as a non-delegable power. Below: the sources of a dividend, the legal reserves that come first (TCC 519-523), the general assembly's decision (TCC 408, 409), the calculation (TCC 507, 508), dividend advances (TCC 509(3) and the Ministry communiqué), board members' profit shares (TCC 511), return of dividends (TCC 512), the capital-loss test in TCC 376, a comparison table and a checklist. The Capital Markets Law and related legislation are reserved by TCC 507(3) and is not covered here.
1. How Does a Turkish Joint Stock Company Distribute a Dividend? (TCC 507-509)
The direct answer. Under TCC 509(2), a dividend may be distributed only from the net profit for the period and from free reserves. Before the dividend can be determined, the legal reserves and the optional reserves provided for in the articles of association must have been set aside (TCC 523(1)), and the decision belongs to the general assembly (genel kurul), which cannot delegate it (TCC 408(2)(d)). Each shareholder then participates, in proportion to their share, in the net profit for the period that has been resolved to be distributed to shareholders in accordance with the law and the articles (TCC 507(1)).
The sequence. Reading these provisions together gives the order in which the questions arise:
- Is there distributable money? Net profit for the period or free reserves (TCC 509(2)); the annual profit is determined according to the annual balance sheet (TCC 508(2)).
- Have the reserves been set aside? The legal reserves under TCC 519 and 520 and the reserves in the articles under TCC 521 and 522, before the dividend is determined (TCC 523(1)).
- Has the general assembly decided? At the ordinary meeting, the manner of use of the profit and the rates of the dividends and profit shares to be distributed are discussed and resolved (TCC 409(1)).
- How much does each shareholder receive? In proportion to the payments made for the share capital, unless the articles provide otherwise (TCC 508(1)), subject to privileges (TCC 507(2)).
The right itself. TCC 507(1) frames the shareholder's right as a right to participate in net profit for the period that has been resolved to be distributed (dağıtılması kararlaştırılmış).
2. What Can a Dividend Be Paid From? Net Profit for the Period and Free Reserves (TCC 509 and 480(3))
The direct answer. TCC 509(2) names two sources: a dividend may be distributed only (ancak) from the net profit for the period and from free reserves. TCC 509(1) adds that no interest may be paid on capital, and TCC 480(3) provides that shareholders cannot demand back what they gave to the company as capital, while their rights to the liquidation share are reserved.
Annual profit and the balance sheet. Under TCC 508(2), the annual profit is determined according to the annual balance sheet. Under TCC 514(1), the board of directors prepares the financial statements for the past financial period provided for in the Turkish Accounting Standards, their annexes and the annual activity report within the first three months of the financial period following the balance sheet date, and submits them to the general assembly. Under TCC 397(2), for a company subject to audit, financial statements and the annual activity report that have not been audited are deemed not to have been drawn up (düzenlenmemiş hükmündedir).
Free reserves. The Communiqué on dividend advances defines free reserves for its own purposes as the part of the general legal reserves exceeding half of the capital or issued capital, together with reserves set aside by resolution of the general assembly other than those set aside under the Code and the articles (Communiqué Article 4(1)(d)). Under TCC 408(2)(d), decisions on the use of reserves, including adding reserves to the profit to be distributed, are taken by the general assembly.
What capital cannot do. Read together, TCC 509(1), 509(2) and 480(3) keep share capital out of the dividend. Returning capital to shareholders follows the separate procedure for capital reduction under TCC 473-475.
3. Which Legal Reserves (Yedek Akçe) Must Be Set Aside Before a Dividend? (TCC 519-523)
The direct answer. Under TCC 523(1), the dividend to be distributed to shareholders cannot be determined unless the legal reserves and the optional reserves provided for in the articles of association have been set aside. The first legal reserve is in TCC 519(1): five per cent of the annual profit is set aside to the general legal reserve (genel kanuni yedek akçe) until it reaches twenty per cent of the paid-in capital.
Additions after the twenty per cent limit. TCC 519(2) lists three amounts that are added to the general legal reserve even after the limit in TCC 519(1) has been reached:
- the part of the premium obtained on issuing new shares that has not been used for issue expenses, amortisation provisions and charitable payments (TCC 519(2)(a));
- the amount paid for the price of share certificates cancelled due to forfeiture (ıskat), after deducting the issue expenses of the new certificates to be issued in their place (TCC 519(2)(b)), covered in our article on unpaid share capital and forfeiture;
- after a dividend of five per cent has been paid to shareholders, ten per cent of the total amount to be distributed to persons who will receive a share of the profit (TCC 519(2)(c)).
What the general legal reserve may be used for. Under TCC 519(3), as long as the general legal reserve does not exceed half of the capital or of the issued capital, it may be used only for covering losses, for continuing the business when matters are not going well, or for taking measures suitable to prevent unemployment and mitigate its consequences. Paying a dividend is not among the uses listed in TCC 519(3). Under TCC 519(4), TCC 519(2)(c) and 519(3) do not apply to holding companies whose main purpose consists of participating in other enterprises, and under TCC 519(5) the provisions on the reserves of joint stock companies subject to special laws are reserved.
Reserve for the company's own shares. Under TCC 520(1), the company sets aside a reserve equal to the acquisition value of its own shares that it has acquired; these reserves can be released, in that amount, if the shares are transferred or destroyed.
Reserves in the articles of association. Under TCC 521(1), the articles may provide that more than five per cent of the annual profit is set aside to reserves and that the reserve may exceed twenty per cent of the paid-in capital; the articles may also provide for other reserves and set how they are spent in line with their allocated purpose. Under TCC 522(1), the articles may provide for a reserve to establish or maintain aid institutions for the company's managers, employees and workers, or to be given to public legal entities with that purpose.
Reserves decided by the general assembly. Under TCC 523(2), the general assembly may also decide to set aside reserves other than those provided for in the Code and the articles where this is necessary to restore assets, or where, taking into account the interests of all shareholders, it is justified for the continuous development of the company and a dividend distribution as stable as possible. Under TCC 523(3), even without a provision in the articles, the general assembly may set aside reserves from the balance sheet profit to establish or maintain aid funds and other aid organisations for the company's workers, or to serve other aid and charitable purposes.
4. Who Decides on the Dividend? The General Assembly's Non-Delegable Power (TCC 408 and 409)
The direct answer. The general assembly. TCC 408(2)(d) lists among the non-delegable duties and powers of the general assembly the taking of decisions on the financial statements, the board's annual report, the disposal of annual profit, the determination of dividends and profit shares, and the use of reserves, including adding the reserve to capital or to the profit to be distributed.
The ordinary meeting. Under TCC 409(1), the ordinary meeting is held within three months from the end of each activity period (faaliyet dönemi). At these meetings the general assembly discusses and resolves on, among other matters, the financial statements, the board's annual report, the manner of use of the profit, the determination of the rates of the dividends and profit shares to be distributed and the release of the board members.
Single-shareholder companies. Under TCC 408(3), in a joint stock company with a single shareholder, that shareholder has all the powers of the general assembly, and the decisions the single shareholder takes as the general assembly must be in writing to become valid. A foreign parent holding all the shares of its Turkish subsidiary therefore takes the profit decision in writing.
Challenging the decision. Under TCC 445(1), the persons listed in TCC 446 may file an action for annulment against general assembly resolutions that breach the law or the articles of association, and in particular the rule of good faith, within three months from the resolution date, before the commercial court of first instance where the company's head office is located. TCC 446(1) lists, among others, shareholders who attended the meeting, voted against the resolution and had their dissent recorded in the minutes, and the board of directors. For the full procedure, see our article on annulment and nullity of general assembly resolutions.
5. How Is Each Shareholder's Dividend Calculated? (TCC 507, 508 and 478)
The direct answer. Under TCC 508(1), unless the articles of association provide otherwise, the dividend and the liquidation share are calculated in proportion to the payments the shareholder has made to the company for the share capital. Under TCC 507(1), each shareholder participates in proportion to their share in the net profit for the period that has been resolved to be distributed.
Payments, not subscriptions. The reference point in TCC 508(1) is the payments made for the share capital (şirkete yaptığı ödemeler). Where shares are partly paid, the amounts actually paid are the basis of the calculation unless the articles set a different rule.
Privileges. TCC 507(2) reserves the privileges and special benefits granted in the articles of association to certain types of shares. TCC 478(2) defines a privilege as a superior right granted to a share in rights such as the dividend, the liquidation share, the pre-emption right and the voting right, or a new shareholder right not provided for in the Code. See our article on privileged shares under TCC 478.
6. Can a Turkish Company Pay a Dividend Advance? (TCC 509(3) and the Communiqué)
The direct answer. Yes, within the rules of a Ministry communiqué. Under TCC 509(3), in companies not subject to the Capital Markets Law, the dividend advance (kâr payı avansı) is regulated by a communiqué of the Ministry. The Communiqué on the Distribution of Dividend Advances (Kâr Payı Avansı Dağıtımı Hakkında Tebliğ, Official Gazette of 9 August 2012, No. 28379) requires, under its Article 5(1), a general assembly resolution to distribute a dividend advance and a profit according to the three-, six- or nine-month interim financial statements prepared in the financial period in which the advance is to be distributed. TCC 644(1)(b) applies TCC 509(3) to limited companies as well.
The resolution. Under Article 6(2), the matters in Article 6(1) are resolved at a general assembly meeting held within the financial period in which the advance is to be distributed; in joint stock companies the resolution requires the holders or representatives of shares representing at least one quarter of the capital to be present, that quorum to be maintained throughout the meeting, and the majority of the votes present to be cast in favour of the advance. Under Article 6(1)(a), the resolution must also state that, if at the end of the financial period no net profit arises in an amount covering the advances distributed during the year, the advances exceeding the net profit are set off against the free reserves, if any, in the previous year's balance sheet and, where the free reserves cannot cover them, the overpaid advances are returned to the company by the shareholders upon the warning of the management body. Under Article 6(1)(b), if a loss arises at the end of the period, the resolution must state that the free reserves, if any, in the previous year's balance sheet are first used to offset the loss and, where they cannot cover it, all the advances distributed during the period are returned by the shareholders upon the warning of the management body; where free reserves remain after offsetting the loss, the remaining amount is deducted from the advances and the part of the advances exceeding it is returned in the same way.
How much. Under Article 7(1), the advance is calculated by deducting from the interim profit the items listed there; among other items, the list includes all previous years' losses, if any, the reserves required to be set aside under the laws and the articles, and the amounts to be set aside, if any, for holders of usufruct certificates and for other persons who, under the articles, share in profit besides the shareholders. The advance to be paid cannot exceed half of the amount so calculated. Under Article 7(2), where profit also arises in later interim periods of the same financial period, the advances already paid in earlier interim periods are deducted as well, and the half limit applies again. Article 5(2) sets a separate rule for companies more than half of whose capital belongs to the public sector: they may distribute an advance from the profit shown in the end-of-period financial statements that have not yet been finalised, under a resolution of a general assembly held within two months from the end of the financial period, and that advance cannot exceed ninety per cent of the amount calculated from the end-of-period profit with the Article 7 deductions.
Who receives it. Under Article 8(1), unless the articles provide otherwise, the advance is paid in proportion to the payments the shareholder has made for the share capital as at the distribution dates, taking into account paragraph (2). Under Article 8(2), shares with a privilege in profit receive the advance taking the privilege into account; no dividend advance may be paid to holders of usufruct certificates (intifa senedi), to members of the management body or to other persons who, under the articles, share in profit besides the shareholders, except for the dividend advance distributed to them by reason of their being shareholders.
The board's tasks and timing. Under Article 9(1), where the general assembly has resolved to distribute a dividend advance and a profit has also arisen under the interim financial statements, the management body (in a joint stock company, the board) performs the following tasks in this order: it prepares a report stating that the interim financial statements were prepared in accordance with the true and fair view principle in TCC 515 and that the amount was calculated in accordance with Article 7, with the documents supporting the calculations and the fulfilment of the other conditions annexed to the report; it adopts a decision on paying the advance stated in the report to the shareholders and on the method of making those payments; and it pays the advances in accordance with Article 8 within six weeks at the latest following that decision.
7. When May Board Members Receive a Profit Share? (TCC 511)
The direct answer. Under TCC 511(1), profit shares (kazanç payları) may be given to members of the board of directors only from the net profit (net kâr), and only after the specific allocation for the legal reserve has been made and a dividend of five per cent of the paid-in capital, or a higher rate provided for in the articles of association, has been distributed to shareholders. The order in TCC 511(1) is reserve first, shareholders second, board members third.
Profit share and remuneration. TCC 408(2)(b) lists among the non-delegable powers of the general assembly the determination of board members' fees and rights such as attendance fees, bonuses and premiums, and TCC 408(2)(d) separately lists the determination of profit shares. The conditions in TCC 511(1) are written for the profit share.
Effect on the general legal reserve. TCC 519(2)(c) adds to the general legal reserve ten per cent of the total amount to be distributed to persons who will receive a share of the profit, after a five per cent dividend has been paid to shareholders, subject to the holding company exception in TCC 519(4).
8. What If a Dividend Was Paid Unlawfully? Return of Dividends (TCC 512 and 513)
The direct answer. Under TCC 512(1), shareholders who received a dividend or preparatory-period interest unjustly and in bad faith (haksız yere ve kötüniyetle) are obliged to return it, and the same rule applies to board members' profit shares. Under TCC 512(2), the right of recovery is time-barred (zamanaşımına uğrar) when five years have passed from the date on which the money was received.
Two conditions in one phrase. The text of TCC 512(1) joins the two elements with “and”: the payment was received unjustly, and it was received in bad faith. The verb in TCC 512(2) sets a limitation period (zamanaşımı) running from the date the money was received.
Board members in bankruptcy. Under TCC 513(1), if the company goes bankrupt, the board members are obliged towards the company's creditors to return the amounts they received within the last three years before the opening of bankruptcy as profit shares or under another name in return for their services, insofar as those amounts exceed appropriate remuneration and should not have been paid had the balance sheet been drawn up prudently on the basis of an appropriate amount of remuneration. Under TCC 513(2), there is no obligation to return amounts that could not be recovered under the provisions on unjust enrichment, and under TCC 513(3) the court exercises its discretion taking into account all the circumstances.
Overpaid advances. For dividend advances, the return follows the general assembly resolution required by Article 6(1) of the Communiqué, and under Article 9(3) the management body carries out the collection of overpaid advances from the shareholders.
9. How Do Dividends and Legal Reserves Relate to the Capital-Loss Test in TCC 376?
The direct answer. TCC 376 measures losses against the sum of the share capital and the legal reserves. Under TCC 376(1), if the last annual balance sheet shows that half of the total of the capital and the legal reserves is left uncovered due to losses, the board of directors immediately calls the general assembly to a meeting and submits to it the remedial measures it considers appropriate.
Two-thirds. Under TCC 376(2), if the last annual balance sheet shows that two-thirds of that total is left uncovered due to losses, the company ends automatically unless the general assembly, called to meet immediately, resolves to content itself with one third of the capital or to complete the capital. TCC 376(3) adds a separate procedure where there are signs raising the suspicion that the company is over-indebted.
Where reserves fit. The legal reserves set aside under TCC 519 are part of the total that TCC 376(1) and (2) use, and TCC 519(3) lists covering losses among the uses of the general legal reserve. For the board's duties in detail, see our article on capital loss and over-indebtedness under TCC 376.
10. Dividend Rules Compared
The table sets out each rule, its statutory basis, who acts and the condition the text sets.
| Rule | Statutory basis | Who acts | Condition in the text |
|---|---|---|---|
| Sources of a dividend | TCC 509(2) | General assembly | Net profit for the period and free reserves; no interest on capital (TCC 509(1)) |
| General legal reserve | TCC 519(1), (2) | Set aside from annual profit | Five per cent of the annual profit until twenty per cent of the paid-in capital; the additions in TCC 519(2) continue after that limit |
| Reserves before the dividend | TCC 523(1) | General assembly | Legal reserves and the optional reserves in the articles are set aside first |
| Decision on profit | TCC 408(2)(d), 409(1) | General assembly (non-delegable) | Ordinary meeting within three months from the end of the activity period |
| Calculation | TCC 508(1), 507(2) | Follows the resolution | In proportion to payments made for the share capital, unless the articles provide otherwise; privileges reserved |
| Dividend advance | TCC 509(3); Communiqué Arts. 5-9 | General assembly, then the board | Interim profit; at most half of the amount calculated under Article 7 (separate rule in Article 5(2) for companies more than half of whose capital belongs to the public sector); payment within six weeks of the board's decision |
| Board members' profit share | TCC 511(1) | General assembly (TCC 408(2)(d)) | From net profit, after the legal reserve allocation and a five per cent (or higher, per the articles) dividend |
| Return of a dividend | TCC 512 | Company | Received unjustly and in bad faith; time-barred five years after receipt |
11. Practical Checklist for Foreign Shareholders and Investors
Foreign shareholders preparing for an ordinary general assembly of a Turkish joint stock company can work through these statutory points:
- Read the financial statements. Annual profit is determined according to the annual balance sheet (TCC 508(2)); in a company subject to audit, unaudited statements are deemed not drawn up (TCC 397(2)).
- Check the source and the reserves. Net profit for the period or free reserves (TCC 509(2)), after the reserves required by TCC 523(1).
- Read the articles of association. Calculation basis (TCC 508(1)), privileges (TCC 507(2), 478(2)), a higher dividend rate before board profit shares (TCC 511(1)) and extra reserves (TCC 521(1)).
- Diarise the meeting. Within three months from the end of each activity period (faaliyet dönemi) (TCC 409(1)); in a single-shareholder company the decision is in writing (TCC 408(3)).
- For a dividend advance, check the interim financial statements, the resolution under Article 6 of the Communiqué, the half limit in Article 7 (subject to the separate rule in Article 5(2)) and the six-week period in Article 9(1)(c).
- Keep the dates. Three months from the resolution date for an annulment action (TCC 445(1)); five years from receipt for the right of recovery under TCC 512(2).
Frequently asked questions
Can a Turkish joint stock company pay dividends out of its share capital?
No. Under TCC 509(2), a dividend may be distributed only from the net profit for the period and from free reserves, and TCC 509(1) states that no interest may be paid on capital. Under TCC 480(3), shareholders cannot demand back what they gave to the company as capital; their rights to the liquidation share are reserved.
How much profit must go to the legal reserve before a dividend is paid?
Under TCC 519(1), five per cent of the annual profit is set aside to the general legal reserve until it reaches twenty per cent of the paid-in capital, and TCC 519(2) lists amounts added even after that limit, subject to TCC 519(4) for holding companies. Under TCC 523(1), the dividend cannot be determined until the legal reserves and the optional reserves in the articles have been set aside.
Can the board of directors decide on the dividend on its own?
No. TCC 408(2)(d) lists the decisions on the disposal of annual profit and the determination of dividends and profit shares among the general assembly's non-delegable powers. In a single-shareholder company, the shareholder has all the powers of the general assembly and those decisions must be in writing (TCC 408(3)).
Is my dividend calculated on the nominal value of my shares or on what I have paid?
Unless the articles of association provide otherwise, the dividend is calculated in proportion to the payments the shareholder has made to the company for the share capital (TCC 508(1)). Privileges and special benefits granted in the articles to certain types of shares are reserved (TCC 507(2)).
Can a Turkish company pay an interim dividend during the year?
In companies not subject to the Capital Markets Law, a dividend advance is regulated by a Ministry communiqué (TCC 509(3)). Under that Communiqué, a general assembly resolution and a profit according to three-, six- or nine-month interim financial statements are required (Article 5(1)), and the advance to be paid cannot exceed half of the amount calculated under Article 7; Article 5(2) sets a separate rule for companies more than half of whose capital belongs to the public sector.
Do I have to give back a dividend if the distribution turns out to be unlawful?
Under TCC 512(1), shareholders who received a dividend unjustly and in bad faith are obliged to return it, and the same rule applies to board members' profit shares. The right of recovery is time-barred five years after the date the money was received (TCC 512(2)).
How can a minority shareholder challenge a dividend resolution?
Under TCC 445(1), the persons listed in TCC 446 may file an action for annulment against general assembly resolutions that breach the law or the articles of association, and in particular the rule of good faith, within three months from the resolution date, before the commercial court of first instance where the company's head office is located.
