A capital reduction is the lowering of a company’s registered base or issued capital through the procedure prescribed by law. A reduction made to return funds to shareholders is not the same transaction as offsetting past losses against capital. The first may cause value to leave the company; the second essentially rearranges the capital and loss items on the balance sheet. The reduced amount should not be paid out to shareholders until the general assembly resolution, the protection of creditors, the shareholders’ rights and the tax calculation have been reviewed together.
For joint-stock companies, the core rules are Articles 473–475 of the Turkish Commercial Code (TTK). These provisions apply to limited companies by analogy, together with the special condition in Article 592. This article mainly addresses joint-stock and limited companies that are not publicly traded. For publicly traded companies, capital markets legislation, and for transactions such as demergers, a company’s acquisition of its own shares and liquidation, the relevant special provisions must also be applied.
For What Purposes Is Capital Reduced?
A return to shareholders and a loss offset have different consequences
If the company holds capital in excess of what its scale of operations requires, part of the capital may be returned to the shareholders under the conditions set by law. However, the fact that a shareholder once paid money into the company does not mean that the shareholder can withdraw the same money at will. TTK Article 480(3) for joint-stock companies and Article 601 for limited companies restrict the return of capital. A reduction carried out properly is assessed within this protective framework.
In a reduction aimed at covering losses, by contrast, no payment is made to the shareholders. The capital figure is brought into line with the amount of the loss. This accounting transaction does not by itself bring cash into the company, extinguish debts or improve creditors’ prospects of collection. The company’s liquidity needs must be resolved separately.
The capital account is not the same thing as the company’s bank balance or its total assets. For example, a company with high capital may have an empty cash box, while a company with lower capital may hold significant free assets. In a reduction file, a “distributable cash” figure cannot be calculated merely by looking at the capital amount in the articles of association; debts, liabilities and usable resources are assessed together.
| Purpose of the transaction | Value leaving for shareholders | Main review | Principal risk |
|---|---|---|---|
| Return of excess capital | Possible | Sufficiency of assets, creditor notice and payment/security | Weakening of creditors’ security |
| Offsetting an actual balance-sheet loss | None | Genuineness of the loss and limitation of the reduction to the deficit | Presenting what is in fact a return as a loss offset |
| Reduction combined with a capital increase | Aims at an inflow of new resources | Conditions of both transactions and shareholders’ rights | Unfairly diluting the minority’s shareholding ratio |
Three different outcomes depending on the purpose of the reduction. A reduction for the purpose of a return may cause value to leave the company. In an offset of an actual loss, no payment is made to a shareholder and no cash arises by itself. In a reduction combined with an increase, the inflow of financing and the shareholders’ share and pre-emptive rights are reviewed separately.
The method of reduction may change the shareholders’ position
A reduction may be carried out by methods such as lowering the nominal value of the shares or redeeming (itfa) shares in accordance with the law. Besides the total capital figure, the situation before and after should be compared for each shareholder’s number of shares, aggregate nominal value, voting power and any privilege. The principle of equal treatment in TTK Article 357 and the conformity of general assembly resolutions with the rule of good faith are taken into account.
A selective redemption of shares carried out to economically exclude a particular shareholder is not legitimized by a simple majority resolution. The shareholder’s consent, the protection of privileges and the basis of the specific transaction are reviewed separately. Nor can a company’s acquisition and subsequent cancellation of its own shares be reduced to the same procedure as a direct return of capital to shareholders.
Who Decides on a Capital Reduction, and Which Documents Are Required?
The general assembly’s authority and the voting majority
A capital reduction requires a resolution of the general assembly. The board of directors or the managers prepare and carry out the transaction; they cannot complete a reduction on their own by amending the capital clause. In a joint-stock company, because TTK Article 473(3) refers to Article 421(3), the affirmative votes of holders of shares representing at least 75 percent of the capital, or of their representatives, are required. This is not 75 percent of only those attending the meeting. If the required majority is not obtained at the first meeting, the statutory threshold is maintained at the subsequent meeting.
In a limited company, because Article 592 provides for analogous application, the special 75 percent majority for reductions is taken into account; the majority provided in Article 589 for an ordinary amendment of the articles of association is not accepted as sufficient on its own. Heavier requirements in the articles of association, and the majorities specific to other resolutions to be adopted in a combined transaction, are assessed separately.
The management report and the financial determination do not replace each other
Under TTK Article 473(1), the reasons, purpose and method of the reduction are explained in detail in the meeting notice documents. The management body submits a report containing these to the general assembly; the approved report is registered and announced. The exception for covering losses does not mean that this report is removed automatically.
The report should make intelligible the amount to be reduced, the method to be used, the capital after the transaction, whether any payment is made to the shareholders, the effect on each class of shares and the reasoning regarding the creditors’ position. A single sentence such as “it was resolved to reduce the capital” does not reveal the economic and legal reasoning for the transaction.
It must also be established that, after the reduction, assets sufficient to protect the creditors’ rights remain. Article 79 of the Trade Registry Regulation and, for limited companies, Article 96 govern the financial report and the application documents. Depending on the company’s situation, a report by a certified public accountant (SMMM/YMM) or auditor, the general assembly minutes, the necessary amendment of the articles of association, the notice announcements and the payment/security documents are prepared. Where the company’s incorporation or an amendment of its articles of association is subject to permission, the relevant permission conditions are also required.
The outdated references to the “transaction auditor” (işlem denetçisi) in older texts should not be confused with the current financial report requirement: the references to the transaction auditor were removed from TTK Article 473 by Law No. 6335. Even so, the obligation to document the sufficiency of assets and to submit the necessary financial report to the trade registry continues.
The minimum capital threshold and registration
From January 1, 2024, the general minimum capital is applied as TRY 250,000 for joint-stock companies and TRY 50,000 for limited companies; for non-public joint-stock companies in the registered capital system, the minimum initial capital is TRY 500,000. A reduction plan cannot breach the statutory lower limit or any sector-specific capital requirements.
For older companies, the date for compliance with the minimum capital provided in provisional Article 15 of the TTK is December 31, 2026, as of October 14, 2026. The transition period does not give authority to reduce existing higher capital below the new minimum. Because the Ministry has the authority to extend the period, the latest regulation should be monitored separately when planning the transaction timeline.
The application is prepared through MERSİS in accordance with the procedure of the relevant trade registry directorate. The electronic books or the resolution arrangements, the documents of representation and the company’s permission status affect which documents are to be submitted and in what form. Under TTK Article 475(4), the reduction cannot be registered without documents proving the required conditions. If share certificates need to be replaced or cancelled, the provisions of Article 475(2)–(3) and the relevant record updates must also be completed.
How Are Creditors Protected in a Capital Reduction?
Three notices and the two-month period running from the third notice
In an ordinary reduction, the management body announces the general assembly resolution in the Turkish Trade Registry Gazette three times at seven-day intervals. For companies within the scope of the notice arrangements in their articles of association and the website obligation, a website announcement also applies. A notice letter is additionally sent to creditors known to the company.
Creditors may, within two months from the third notice, report their claims and request payment or security. The period should not be calculated by taking the first notice, the day of the general assembly or the day the creditor learned of the matter as the starting point. Instead of automatically counting two months as 60 days, the relevant calendar and time-limit computation is applied.
A company cannot content itself with saying that it has made the announcements. The records of suppliers, banks, employees and other known creditors should be reviewed; the sending of personal notices and the outcome of the claims reported should be documented. The fact that a creditor has filed an ordinary action or enforcement proceedings does not make it unnecessary to show in the file the request for security to be asserted on account of the reduction.
Creditor protection timeline in an ordinary reduction. In an ordinary reduction, three notices are made at seven-day intervals and letters are sent to known creditors. The two-month period runs from the third notice. The capital is reduced, and registered with the documents, only once the period and the payment/security conditions concerning the reported claims have been completed. The exception for offsetting an actual loss under TTK Article 474(2) is assessed separately.
Having sufficient assets does not remove the payment or security stage
The sufficiency of assets under TTK Article 473(2) is a financial protection condition that applies before the resolution is adopted. The period, payment and security conditions in TTK Article 475(1), on the other hand, relate to the implementation of the transaction. A report stating that “the company’s assets are sufficient” does not remove the need to address a claim reported in time in an ordinary reduction.
The creditor should show the basis and amount of the claim with a contract, invoice, delivery document, bank record or enforcement file. The company, for its part, should present the payment document, the scope of the security or its concrete defense as to why the claim does not exist. Disputed or not-yet-due claims cannot be ignored merely by saying “not yet payable”; the need for security, the nature of the claim and the content of the dispute are assessed. The amount of the security matters, and so do its duration and its convertibility into cash.
In the decision of the 21st Civil Chamber of the Ankara Regional Court of Appeals (Ankara BAM) dated 16.12.2021, E.2019/1853, K.2021/1550, a reduction carried out on the grounds of set-off against a capital commitment and an excess of assets was not accepted as covering an actual balance-sheet loss. The appeal against the cancellation judgment was dismissed, taking into account the failure to give notice to the creditor bank, the financial situation and the breach of the statutory procedure. The practical significance of the decision is that what is decisive is not the name given to the reduction but how the money and the capital debt were in fact affected. This Regional Court of Appeals decision does not create a binding result for all cases.
Can the Creditor Notice Be Dispensed With in a Reduction to Cover Losses?
TTK Article 474(2) gives the management body the option of dispensing with calling the creditors and with securing their rights through payment or security, in a reduction made for the purpose of covering a deficit that has arisen on the balance sheet because of losses and in proportion to that deficit. This is not an automatic exemption; the actual loss, the reduction amount and the decision to dispense must be shown in the file.
As an illustrative example, suppose that a company with capital of TRY 8 million has an actual balance-sheet loss of TRY 3 million. Reducing the capital to TRY 5 million solely to offset this loss is different from paying TRY 1 million to a shareholder within the same reduction. The part involving a payment cannot be left outside creditor protection by taking refuge in the loss-covering exception. In addition, the minimum capital and asset sufficiency conditions are maintained.
Loss of capital and over-indebtedness (borca batıklık) are not the same. While the loss of a certain portion of the capital and statutory reserves through losses is assessed under TTK Article 376(1)–(2), the assets being insufficient to pay the debts brings into play the separate obligations in Article 376(3). Reducing the nominal capital does not by itself eliminate over-indebtedness. If over-indebtedness is suspected, interim balance sheets and the notification obligation to the court provided by law are addressed separately.
A further limit applies in a limited company: under TTK Article 592, a reduction aimed at improving an over-indebted balance sheet requires that the additional payment obligations provided for in the articles of association have been paid in full. This provision does not create an unlimited additional payment debt for all limited company shareholders that is absent from the articles; the scope and performance of the existing obligation are examined.
Can a Capital Reduction and Increase Be Made Together?
Yes. Contributing new capital together with offsetting losses against capital is one of the means of correcting the balance sheet and financing operations. However, carrying out the two transactions together does not entirely remove the conditions concerning notice, report, payment, pre-emptive rights and registration. The legal route on which the transaction rests, and the payment arrangement for the shares issued in place of the reduced portion, must be clearly determined.
Article 10 of the Communiqué on the Application of TTK Article 376 regulates, besides an increase simultaneous with a reduction, the options of a direct increase and of a reduction following an increase, under their conditions. For this reason, a general rule that every company that loses capital must necessarily reduce first cannot be established. Special regulation for publicly traded companies is reserved. The payment ratio and timing of the increased capital should be examined according to the sub-paragraph chosen and the distinction between joint-stock and limited companies.
In its decision of the 11th Civil Chamber of the Court of Cassation (Yargıtay) dated 23.06.2025, E.2024/5934, K.2025/4434, a Regional Court of Appeals decision that had held a direct increase unlawful in a company that had lost its capital was reversed. The Chamber took into account the financial need shown in the file, the absence of reserves and the need to restore the capital, and did not find the specific increase contrary to the law, the articles of association and the rules of good faith.
By contrast, the same Chamber’s decision dated 26.10.2023, E.2022/6150, K.2023/6213 upheld a cancellation judgment concerning an increase that had been assessed in terms of its purpose of worsening the shareholder’s position and the specific financial data. Read together, these decisions show that neither the conclusion “reduction first” nor the conclusion “a direct increase is always valid” can be reached without examining the company’s financing need and its effect on the shareholders.
The pre-emptive right must offer a genuine opportunity to exercise it; the price of the new shares, the payment schedule, the shareholding ratio if the shareholder does not participate and the reason for restricting the right should be visible. Article 461 is taken into account for joint-stock companies and Article 591 for limited companies. For the minority, the most useful document is a comparison showing the share and voting ratios before and after the transaction; for the company, it is a report showing the genuine financial need and why the alternatives are insufficient.
How Is Tax Determined in a Capital Reduction?
The tax calculation cannot be made on the reduction amount alone
CTL (Corporate Tax Law) Article 32/B regulates from which component of the capital a reduction is deemed to be made. Capital contributed by the shareholders in cash or in kind, profits later added to capital, and items arising from revaluation or inflation adjustment do not produce the same result. For this reason, a schedule of the source, amount and date of addition to capital should be prepared from the incorporation and increase records.
Before the five full years have been completed, the order in the law applies to a reduction: first the sources subject to corporate tax and to the withholding tied to distribution, then the sources subject only to withholding, and lastly the cash/in-kind capital that will not be taxed. For sources that have completed five full years, the apportionment principle in the law applies. Where new and old items are present together, the equity components that have not completed five full years are taken into account first; the relevant apportionment is made for the remaining amount.
The passing of five years does not make the whole reduction tax-free. Nor does writing “this is a cash return of capital” in the general assembly resolution change the statutory order. The periods are verified separately against the registration of each increase and the source records.
Distinguishing source and period in the tax calculation. First, the nature of each source and the date it was added to capital are determined. Equity components that have not completed five full years take priority in the statutory order. For the remaining amount, apportionment is made for the relevant older sources. The passing of five years does not create tax exemption. In offsetting against prior-year losses, no withholding tied to distribution is applied; any component subject to corporate tax is assessed separately.
No withholding on a loss offset does not mean all taxes fall away
Under CTL Article 32/B(5) and section 32.4.6 of the Corporate Tax General Communiqué, no payment is made to shareholders when prior-year losses are offset against capital, so the distribution-based tax withholding is not applied. On the other hand, if the reduced capital contains a component that should be subject to corporate tax, the relevant taxation may continue. An approach of “no money went to the shareholder, so no tax arises” is not safe.
Reducing an item that has been added to capital is also not the same as offsetting against a loss a fund that has not yet been added to capital, under its own special legislation. In particular for inflation adjustment and revaluation items, the relevant provision of the Tax Procedure Law (VUK), the period in which the fund arose and the entry made should be examined separately. The accounting technique of the transaction should be explained together with the basis for its tax result.
Burcu Yaşar’s 2026 study criticizes approaching capital reduction solely as tax planning and draws attention to other purposes, such as eliminating losses and structural transactions. This criticism is an assessment of legal scholarship; it does not by itself neutralize the ordering in the current Article 32/B or the explanation of the Revenue Administration (GİB) in the Communiqué. Having a legitimate purpose under company law is not, on its own, a tax exemption.
The rate, exemption and withholding to be applied are determined according to the nature of the source, the date of payment, whether the shareholder is an individual or an entity, and its full or limited tax liability status. If a payment is made to a foreign shareholder, the double taxation treaty, the residence certificate and the type of income under the treaty are reviewed separately. Provisions specific to partial demergers and to a company’s redemption of its own shares should not be carried over automatically into the calculation for an ordinary return of capital.
What Actions Can Be Brought Against an Unlawful Capital Reduction?
The creditor’s two years and the shareholder’s three months are different
Under TTK Article 475(1), in a reduction that breaches the period and payment/security conditions, a creditor may seek cancellation of the reduction before the commercial court of first instance at the company’s registered seat, within two years from the announcement of the registration of the reduction. The judicial route is also open where the security is insufficient. The defendant and any additional claims are determined according to the transaction and the loss; in a request for cancellation of the reduction, the company is named as defendant.
In a shareholder’s action to annul a general assembly resolution under TTK Articles 445–446, on the other hand, the general rule is a period of three months from the date of the resolution. A shareholder who attended the meeting must, as a rule, have voted against and had the dissent recorded in the minutes; special breaches concerning the notice, the agenda or the right to attend are assessed separately under Article 446. In a limited company, the reference in Article 622 is taken into account. A shareholder should not let his or her own three-month period lapse in reliance on the two-year period granted to creditors.
Three periods, three different starting points. The creditor’s notification period under TTK Article 474 is two months from the third notice. TTK Article 445 provides three months from the date of the resolution for annulling a general assembly resolution; the standing requirements of Article 446 apply separately. For the creditor’s special cancellation action, TTK Article 475 provides two years from the announcement of the registration of the reduction. These periods do not substitute for one another; claims of nullity (yokluk) and invalidity (butlan) require a separate legal characterization.
A claim of nullity or invalidity is not a route to bring an action without a time limit for every unlawful act. The absence of the constitutive elements of the resolution and the serious defects under Article 447 must be substantiated. A breach of a mandatory provision on the protection of capital may require an assessment different from annulment; merely labeling the claim “invalidity” in order to circumvent the time limit is not sufficient.
Mediation and interim legal protection
An action seeking only the annulment of a general assembly resolution or of the reduction is not the same as an action for a monetary claim. However, where an independent payment/damages claim, a claim for restitution or other claims have been added, the result sought should be reviewed separately for the purposes of TTK Article 5/A.
In its decision dated 24.11.2025, E.2025/2466, K.2025/6986, the 11th Civil Chamber of the Court of Cassation found it erroneous that a specific action, in which restitution was sought together with the nullity and cancellation of a sham reduction, was treated as merely a monetary claim action and dismissed for lack of mediation. The decision emphasized that the restitution claim depends first on determining whether the reduction was a sham. This decision does not mean that all capital-related monetary actions are exempt from mediation.
Filing an action does not by itself stop the carrying out of the reduction. In an action against a general assembly resolution, a stay of execution of the resolution under TTK Article 449 is considered; in other disputes, suitable interim injunctions under the Civil Procedure Code (HMK) are considered. The request should document an imminent payment, registration or outflow of assets and the risk that the right will become harder to obtain. It should be remembered that a precautionary attachment for a monetary claim has different requirements.
Which Records Should Be in the Transaction or Case File?
The review file should be built so as to show the legal basis and the financial result of the reduction resolution together:
• The current articles of association, the history of capital increases, the share ledger and the share classes.
• The latest financial statements, any necessary interim balance sheets, loss and asset-sufficiency calculations, and financial reports.
• The management report, the agenda and meeting notice documents, the meeting minutes, the affirmative/negative votes and the record of dissent.
• The three notices, letters to known creditors, creditor claim notifications, payment receipts and security documents.
• The source and registration date of each component of capital, the tax calculation, bank transactions and shareholder current account records.
• If there is a simultaneous increase, the subscription undertakings, payment documents and the shareholding table before and after the transaction.
If the company’s defense that “we offset losses” conflicts with a payment actually made to a shareholder, the bank and current account records are decisive. On the other hand, a creditor, too, should not presume loss merely on the basis that capital has decreased; the creditor should explain its own claim and the protective condition that was breached. Incomplete or mutually inconsistent financial reports may require the dispute to be assessed by an expert examination involving financial expertise.
The cost of the transaction may consist of registry and announcement fees, the financial advisor/auditor, any necessary notary or translation work, taxes and legal service fees. If an action is filed, court fees, the advance on expenses, the expert and, where necessary, security for an injunction are also taken into account. A single total fee or a definite duration cannot be given without knowing the company’s structure and the claims. In an ordinary reduction, the two-month period after the third notice is only a minimum protection stage; it is not the duration of the whole transaction.
In representing shareholders abroad, the scope of the power of attorney, the documents of representation of the foreign legal entity and, where applicable, the apostille/legalization and Turkish translation requirements should be resolved in advance. An information memorandum prepared in a foreign language does not replace the valid resolutions and documents in the Turkish trade registry. Deficiencies in service of process and representation may affect the transaction timeline and the right to sue.
Conclusion
Carrying out a capital reduction safely depends on consistency among the purpose, the actual financial situation, the effect on shareholders, creditor protection and the tax source. The loss-covering exception is limited to an actual loss and amount; a nominal reduction does not by itself remedy over-indebtedness. In a simultaneous increase, pre-emptive rights; in a structure with foreign shareholders, representation and the tax treaty; and in a dispute, the periods that vary by the standing of the party, must be addressed separately.
For management, the priority is to prepare a reasoned and documented transaction file; for a shareholder and a creditor, the priority is to determine without delay the time limit applicable to their own right, the payment flow and the litigation/injunction options.
Related articles: Annulment of a Company General Assembly Resolution: Time Limits, Invalidity and Stay of Execution; Loss of Capital and Over-Indebtedness: TTK 376 Measures; Shareholders’ Rights in Mergers and Demergers; Capital Increase and Pre-Emptive Rights in a Company; A Company’s Acquisition of Its Own Shares; Privileged Shares and the Protection of the Special Board.
Frequently Asked Questions
Does a shareholder necessarily receive money when capital is reduced?
No. In a loss offset, no payment is made to the shareholder. In a return of excess capital, payment can be made only after the necessary resolution, creditor protection, registration and tax procedures have been completed.
Is the period granted to creditors two months or three months?
Under TTK Article 474(1), the period is two months from the third notice in the Turkish Trade Registry Gazette. The three-month period in a shareholder’s annulment action against the general assembly resolution is different.
Does stating a loss-covering purpose remove the creditor notice?
Not by itself. There must be an actual balance-sheet deficit, a reduction limited to that deficit and a decision of the management body to dispense with the notice. A payment to a shareholder or another purpose may change the scope of the exception.
Can capital be reduced in limited companies?
Yes. Under TTK Article 592, the reduction provisions for joint-stock companies apply by analogy. Where the purpose is to improve an over-indebted balance sheet, full payment of the additional payment obligations provided in the articles of association is also required.
If the capital has stayed in the company for five years, is the return tax-free?
No. Five full years affect the method of determining the sources to be reduced. The items within the capital, the dates they were added and the shareholder’s tax status are examined.
If the company is making losses, must it reduce capital first?
Not in every case. The level of financial loss, over-indebtedness, the remedial method to be applied, and TTK Article 376 and the relevant Communiqué are assessed together. It cannot be said that a direct increase is automatically invalid.
Does filing an action stop payment to the shareholders?
Not by itself. Depending on the concrete risks, a stay of execution of the resolution or a suitable interim injunction should be requested. The court assesses the conditions and, where necessary, the security.
Sources
- Turkish Commercial Code No. 6102, in particular Articles 5/A, 332, 357, 376, 421, 445–449, 461, 473–475, 480, 580, 589–592, 601, 622 and provisional Article 15.
- Trade Registry Regulation, Articles 79, 80 and 96; Bursa Chamber of Commerce and Industry, Limited Company Capital Reduction.
- Ministry of Trade, Frequently Asked Questions on Companies, minimum capital and transition period; Presidential Decision No. 7887 dated 24.11.2023, Official Gazette 25.11.2023/32380.
- Communiqué on the Application of Article 376 of the Turkish Commercial Code No. 6102, in particular Articles 8–10; amendment dated 26.12.2020.
- Corporate Tax Law No. 5520, Article 32/B; Corporate Tax General Communiqué, section 32.4.
- Ankara Regional Court of Appeals, 21st Civil Chamber, 16.12.2021, E.2019/1853, K.2021/1550.
- Court of Cassation, 11th Civil Chamber, 26.10.2023, E.2022/6150, K.2023/6213.
- Court of Cassation, 11th Civil Chamber, 23.06.2025, E.2024/5934, K.2025/4434.
- Court of Cassation, 11th Civil Chamber, 24.11.2025, E.2025/2466, K.2025/6986. Links to case-law databases may require a login.
- Burcu Yaşar, “7420 Sayılı Kanun ile Sermaye Azaltımında Yapılan Düzenlemelerin Değerlendirilmesi” (An Evaluation of the Regulations on Capital Reduction under Law No. 7420), ETÜ Sentez Journal of Economic and Administrative Sciences, 2026, issue 17, pp. 51–64, in particular pp. 61–62, DOI: 10.5281/zenodo.21040623.