Turkey: COVID-19: Procedures, Principles And Exceptions Defined For Limitation On Dividend Distribution

Recent Development

Within the scope of governmental measures taken due to COVID-19, dividend distributions were limited and provisional article 13 was added to the Turkish Commercial Code ("TCC"). The Communiqué on the Procedures and Principles for the Application of Provisional Article 13 of the Turkish Commercial Code ("Communiqué") was published in the Official Gazette dated May 17, 2020 and No. 31130.

Procedures and Principles the Communiqué Introduced

– The Communiqué clarifies which financial statements must be considered for the dividend calculation.

In calculating dividends, the Communiqué regulates that:

• companies that are obligated to prepare their financial statements in accordance with the standards defined by the Public Oversight Accounting and Auditing Standards Authority must take the financial statements prepared in accordance with Article 88 of the TCC into account; and
• other companies must take the financial statements prepared in accordance with Tax Procedural Code No. 231 into account.

In any case, the dividend amount to be distributed cannot exceed the total amount of the funds subject to dividend distribution in the records kept in accordance with the Tax Procedural Code. This matter, which is now legislatively justified, confirms our longstanding legal advice for our clients not to distribute dividends that do not exist according the companies' financial statements as per the Tax Procedural Code.

– The Communiqué explains the procedures for the application of provisional article 13 of the TCC.

• Retained earnings and free reserve funds cannot be distributed as dividends. This limitation does not apply to capital increases made from internal resources defined under Article 462 of the TCC. Companies can add the retained earnings and free reserve funds to the capital.
• In the fiscal year 2019 (for companies that utilize special fiscal years, their last fiscal year), if a company adopted a dividend distribution resolution from the free reserve funds before April 17, 2020, despite having incurred a loss, payments for the unpaid portion must be postponed until September 30, 2020.
• Despite a company's general assembly having adopted a dividend distribution resolution for fiscal year 2019 before April 17, 2020, no interest can accrue for the distribution amount postponed until September 30, 2020. This is applicable to payments exceeding 25% of the net profit for the fiscal year 2019 and not yet distributed dividends from the free reserve funds.
• The Communiqué underscores that a company's general assembly cannot grant the management body the authority to distribute advance dividends until September 30, 2020. If a general assembly previously granted the management body the authority to distribute advance dividends, the advance payments must be postponed until September 30, 2020.

Exceptions the Communiqué Introduced to the Dividend Distribution Limitation in Provisional Article 13 of the TCC

The Communiqué introduces three exception groups with regard to the dividend distribution limitation. The Ministry of Trade must assent to the exceptions.

In applying to the Ministry of Trade to obtain its assent to a dividend distribution exception, companies must also submit to the General Directorate of Domestic Trade the management body's notarized resolution; the relevant fiscal year's financial statement; and its profit or loss statement for all applications.

– First Group Exception: Companies that do not benefit from certain government support can make dividend distributions equal to or less than TRY 120,000.

Pursuant to Article 5/a of the Communiqué, companies that do not benefit from the government support defined below can make dividend distributions equal to or less than TRY 120,000.

• Companies that employ individuals who benefit from pecuniary wage support as per provisional Article 24 of the Unemployment Insurance Law No. 4447, and who also benefit from the short-term working allowance and/or took unpaid leave on the ground of a compelling reason due to COVID-19, as per additional Article 2 and provisional Article 23 of the same law; and
• Companies that benefitted from the credit guarantees supported by the Treasury as per provisional Article 20 of the Law on the Regulation of Public Financing and Debt Management and its related resolutions, and that currently have an unpaid credit debt balance.

In order for companies to discuss dividend distributions equal to or less than TRY 120,000 in general assembly meetings within the scope of the above exception, they must submit documents to the Ministry of Trade evidencing that they do not benefit from the government supports defined above.

– Second Group Exception: Companies can make dividend distributions without being subject to the limitation to enable its shareholders to pay their capital subscription debts to another company.

Pursuant to Article 5/b of the Communiqué, companies can adopt a resolution on dividend distribution if the shareholders will utilize more than half of the distributed dividend to pay their capital subscription debts to another company in cash and full, as per the provisions of the TCC.

In order to benefit from this exception, companies must submit documents to the Ministry of Trade evidencing that the persons entitled to receive more than half of the dividend to be distributed have capital subscription obligation to another company.

– Third Group Exception: Companies can make dividend distributions without being subject to the limitation if the shareholders will fulfil their due and payable credit and project finance liabilities, in cash.

Pursuant to Article 5/c of the Communiqué, companies can adopt a resolution on dividend distribution if the shareholders will use the distributed dividend to fulfill their liabilities within the scope of credit and project finance, in cash, and which are due until September 30, 2020. Companies distributing dividend under this exception must postpone the payment of dividend distributions that exceeds the mentioned liabilities of the shareholders until September 30, 2020.

Companies must submit documents evidencing their obligations within the scope of loan agreements and project finance agreements to the Ministry of Trade to benefit from this exception.

Conclusion

The Communiqué clarifies the principles on the limitation of dividend distributions and introduces exceptions to the same. Companies wishing to distribute dividends within the scope of the listed exceptions must obtain the Ministry of Trade's assent by applying and submitting the documents defined for each exception in the Communiqué prior to the discussion of the dividend distribution agenda at their general assembly meeting.

Originally published May 18, 2020

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.