Basic Principle: The Company Account Is Not the Shareholder's Personal Account
Joint-stock companies (A.Ş.) and limited liability companies (Ltd. Şti.) have a separate legal personality and separate assets. The fact that a shareholder is a shareholder does not give the right to use the money in the company bank account freely as personal property. Every money movement out of the company must have a legal and economic reason from the company's standpoint, an appropriate accounting entry and, where necessary, a corporate body resolution.
The approach "the company is mine, so the money is mine" is common especially in family companies and single-shareholder structures. A single-shareholder company also has a legal personality separate from its shareholder. Ignoring this separation may cause problems in respect of a tax audit, accounts between shareholders, the liability of managers and the company's creditors.
May a Shareholder Borrow from the Company under TCC Art. 358?
TCC Art. 358 does not entirely prohibit shareholders from borrowing from the company, but it makes it subject to two basic conditions. A shareholder may not borrow from the company if the shareholder has not performed a matured debt arising from a capital commitment. In addition, the company's profit, together with its free reserves, must be at a level that covers the losses of previous years.
The purpose of this provision is to protect the company's capital and its creditors. Therefore, transferring company resources to a shareholder unconditionally and without limit under the name of "shareholder current account" is not consistent with the system of the TCC.
The same rule applies to a shareholder of a limited liability company
TCC Art. 644 expressly provides that Article 358, on the prohibition of borrowing from the company in joint-stock companies, also applies to limited liability companies. For this reason, the conditions of Art. 358 must also be taken into account when a shareholder of a limited liability company withdraws money from the company.
Additional restrictions may apply to a manager or a member of the board of directors
TCC Art. 395/2 prohibits members of the board of directors who are not shareholders, and relatives of non-shareholders specified in the article, from borrowing cash from the company; it also restricts the company from providing surety, guarantees and security for them or assuming their debts. TCC Art. 644 carries a certain part of this provision over to limited liability companies as well. Where a person is both a shareholder and a manager, each capacity must be assessed separately.
On What Legal Grounds May a Company Shareholder Receive Money from the Company?
Distribution of dividends
If the company has distributable profit and the necessary general assembly resolution has been adopted, the shareholder may receive a dividend. The distribution of a dividend is different from withdrawing money from the company account without explanation and later calling the transaction a "dividend". Financial statements, statutory reserves, distributable profit and tax withholdings must be assessed together.
Remuneration, attendance fee, bonus or similar manager payments
The shareholder may at the same time be a member of the board of directors, a manager or an employee of the company. Under TCC Art. 394, members of the board of directors may be paid an attendance fee, remuneration, a gratuity, a bonus and a share of the annual profit, by the articles of association or by a general assembly resolution. In a limited liability company, the legal basis of a manager's remuneration and the resolution of the competent body must be assessed separately. The payment must be consistent with genuine services and correct payroll and tax treatment.
Reimbursement of a genuine company expense to the shareholder
If the shareholder has paid a genuine company expense in the company's name with a personal card or account, the company may reimburse this amount to the shareholder, provided it is appropriately documented. This is not a withdrawal of money but the repayment of an expenditure made on behalf of the company. The relation of the document to the company's activity and the name in which it was issued are important.
Work advance or expense advance
An advance may be given for travel, a purchase or a specific company task. However, the purpose of use, the period and the closing documents of the advance must be clear. Indefinite and unexplained advance balances may in fact turn into a shareholder debt.
The company lending to the shareholder or a current account relationship
If the conditions of TCC Art. 358 are met and the transaction is structured in accordance with the company's interest, the tax rules and the internal authority of the company, a debt relationship between the company and the shareholder may arise. However, the amount, maturity, interest, repayment, competent body and accounting entry must be clear. "Shareholder current account" is merely the name of an accounting account; it does not replace a legal basis.
What Is a Shareholder Current Account and Why Is It Risky?
The shareholder current account is an account used to follow, in accounting, the mutual money movements between the company and the shareholder. Money the shareholder has lent to the company, payments made on behalf of the company, or amounts received from the company may be followed in this account. However, the existence of a current account balance does not mean that a withdrawal is automatically in compliance with the law and tax legislation.
What does it mean when the current account constantly shows a debit balance?
The company becoming a creditor of the shareholder may show that the shareholder is using company resources. The size of the amount, its duration, repayment movements and whether interest is charged should be examined. Closing the account at year-end by changing the description does not change the nature of the genuine economic transaction.
The real legal basis of every money movement must be determined
The same bank transfer may, depending on the specific case, be a dividend, remuneration, expense reimbursement, a loan or an advance. If the accounting description contradicts the legal relationship, this creates problems of proof and tax in the future.
For Tax Law, the Shareholder Is a "Related Person" of the Company
KVK Art. 13 regulates the treatment of earnings as having been distributed disguisedly through transfer pricing where corporations carry out transactions with related persons at a price or consideration contrary to the arm's length principle. The law also expressly lists the receiving and lending of money among the transactions covered together with the purchase and sale of goods or services. Shareholders fall within the definition of related person.
For this reason, where a company lets a shareholder use resources for a long time without interest or on terms not consistent with comparable transactions, this is examined not only under company law but also under tax law.
The risk of arm's length interest and transfer pricing
If the company does not ask its shareholder for the economic return it would demand when lending to a third party, or sets it far below the comparable level, the tax administration may invoke the arm's length principle. This assessment cannot be reduced to an automatic fixed interest rate; the date of the transaction, the amount, the maturity, the currency, the security and market conditions are important.
The consequence of disguised profit distribution
Under KVK Art. 13/6, earnings distributed disguisedly, wholly or partly, through transfer pricing are deemed to be a distributed dividend as of the last day of the relevant accounting period. This consequence requires a separate assessment as to the corporate income tax base and the tax consequences linked to profit distribution.
Why Is Paying Personal Expenses from the Company Account Problematic?
When the shareholder's household expenses, personal travel, private shopping or family spending are paid from the company account, it cannot be assumed that the amount is a company expense. Recording a personal expenditure unrelated to the business as an expense creates a risk for the tax base; the transaction may also be classified separately as a debt of the shareholder or a benefit provided.
Mixing personal spending and company expenses on the same credit card or bank account weakens the document system and internal control. Even if the company is small, a separate account and payment policy should be established.
What Is the Difference between a Dividend and a Loan?
A dividend is not given to be repaid
A dividend is a distribution made to the shareholder out of distributable profit and by a resolution of the competent body. Tax withholding and other conditions come into play.
A loan creates a repayment obligation
In a loan relationship, the shareholder has an obligation to repay the company. The maturity, interest and security terms show the true nature of the transaction. "Loan" entries that are not expected to be repaid may give rise to a dispute as to whether the transaction is in reality a transfer of profit.
What Documents Should Exist When the Company Lends to the Shareholder?
- A written contract or resolution showing the legal basis of the debt relationship.
- The amount, currency, maturity and repayment plan.
- An arm's length assessment and, where necessary, the basis of the interest rate.
- Verification of the competent body and of representation.
- Bank receipts and their descriptions.
- The shareholder current account statement and periodic reconciliation.
- Repayment records.
- Consistency of the tax and accounting entries with the true nature of the transaction.
When May Manager Liability Arise?
Allowing company resources to be used for the benefit of one shareholder, contrary to the company's interest, may harm the interests of the other shareholders and of the company's creditors. If members of the board of directors, managers and executives cause damage to the company by breaching, through their fault, their obligations arising from the law and the articles of association/company agreement, the liability provisions of the TCC may apply.
This assessment does not automatically convert every current account balance into manager liability. The suitability of the transaction to the company's interest, the decision process, arm's length terms, the ability to pay and whether damage has occurred are examined on the specific facts.
Which Records Become Important When a Dispute Arises between Shareholders?
- Bank account movements.
- The shareholder current account and the relevant accounts in the trial balance.
- Resolutions of the general assembly, the board of directors or the board of managers.
- Loan contracts and payment plans.
- Profit distribution resolutions.
- Expense documents and expense forms.
- Emails and correspondence.
- The company agreement and the shareholders' agreement.
The fact that the other shareholders remained silent while one shareholder regularly withdrew money from the company account for years does not make every transaction lawful on its own. However, the parties' knowledge, approval, the established accounting practice and reconciliations made later may have evidentiary value in a dispute.
Five-Step Check That Can Be Applied Before Withdrawing Money from the Company
- Determine the legal basis: Is it a dividend, remuneration, a loan, an advance or an expense reimbursement?
- Check authority: Which body or person is authorized for the payment or the borrowing?
- Examine the conditions of TCC Art. 358: Are the conditions concerning the capital debt and the covering of previous years' losses met?
- Assess the tax and arm's length conditions: Are the price/interest terms reasonable for a related-person transaction?
- Document and reconcile: Do the bank description, resolution, contract, current account and repayment confirm one another?
Conclusion
A company shareholder's withdrawal of money from the company account is assessed not by the name of the transaction but by its true legal and economic basis. A dividend, remuneration, expense reimbursement and a loan are subject to different regimes. TCC Art. 358 and, for limited liability companies, the reference in Art. 644, make the use of company resources by the shareholder subject to conditions. In tax law as well, a loan given to the shareholder is a related-person transaction and is subject to the arm's length principle. Instead of using the company account like a personal account, a system should be established in which every money movement is classified and documented in advance.
Frequently Asked Questions
Can a company shareholder withdraw money from the company account whenever he or she wishes?
No. Ownership of a share does not give an unlimited right of personal disposal over the company account. The payment must rest on a legal basis such as a dividend, remuneration, expense reimbursement, an advance or a loan, and satisfy the relevant conditions.
Does TCC Art. 358 also apply to limited liability companies?
Yes. TCC Art. 644 applies Art. 358, on the prohibition of shareholders borrowing from the company, to limited liability companies as well.
Is it prohibited to have a debit balance in the shareholder current account?
The mere existence of an accounting balance does not automatically mean a prohibition. However, the real reason for the debt, the conditions of TCC Art. 358, the maturity, the repayment and arm's length terms for tax purposes must be examined.
Can the company lend to a shareholder without interest?
Not only company law but also tax law is important here. KVK Art. 13 brings loan-of-money transactions within the scope of transfer pricing. Providing resources without interest or contrary to comparable terms may attract tax criticism; the specific terms of the transaction must be analyzed.
Can money withdrawn from the company later be treated as a dividend?
For a dividend, the requirements of company law and tax law apply, first of all distributable profit and a resolution of the competent body. Converting an unexplained withdrawal into a dividend afterwards by a unilateral accounting entry is not a safe method.
Can a shareholder's personal credit card debt be paid from the company account?
A personal debt paid by the company is not a company expense. The recording of the transaction as a shareholder debt or benefit provided, and its tax consequence, must be assessed separately.
Can a shareholder recover an expense made on behalf of the company?
Yes. The shareholder may be reimbursed provided the expenditure is a genuine company expense, an appropriate document exists and the accounting entry is made correctly.
Can a member of the board of directors or a manager borrow from the company?
The person's status as a shareholder or not, and the capacity held, matter. TCC Art. 395/2 contains special prohibitions for members of the board of directors who are not shareholders and for relatives listed in the law; for limited liability companies the reference in Art. 644 is taken into account. The specific structure of capacities must be examined separately.
How often should the shareholder current account balance be checked?
It should be checked regularly during the period, not only at year-end. Especially for high-value balances or balances that have remained open for a long time, the legal basis, reconciliation, repayment and tax assessment should be made.
Sources
- Turkish Commercial Code No. 6102, in particular Art. 358, Arts. 394-395, Art. 553 and Art. 644.
- Ministry of Trade of the Republic of Türkiye, full text of the Turkish Commercial Code. Source
- Corporate Income Tax Law No. 5520, Art. 13, Revenue Administration (GİB) legislation page. Source
- Revenue Administration (GİB), General Communiqué on Disguised Profit Distribution through Transfer Pricing (Series No: 1). Source
- Ministry of Trade of the Republic of Türkiye, "Company Information". Source