Capital increase and reduction: methods, sources and loss of capital
Ways of increasing capital in limited and joint stock companies (cash, from the shareholder current account, in kind, internal resources), capital reduction, loss of capital and over-indebtedness (TCC 376), costs and tax aspects.
Capital is both the company's commitment at formation and a guarantee to creditors. A change in capital comes up to meet tender requirements, correct shareholder debt, cover losses or present a stronger balance sheet to banks.
The four sources of a capital increase
| Source | How? | Watch out |
|---|---|---|
| Cash | Partners commit new capital and deposit it in a bank account | The payment period for the commitment depends on the articles of association and the type of company |
| Shareholder receivables | A partner's receivable from the company (shareholders' current account) is added to capital | The existence and amount of the receivable must be shown with a report and records |
| Contributions in kind | Assets such as real estate, vehicles, machinery or trademarks are contributed as capital | A valuation by a court-appointed expert is required |
| Internal resources | Reserves, retained earnings and revaluation funds are added to capital | Partners are given new shares; there is no cash inflow |
Converting shareholder debt into capital is a particularly important tool. If the shareholder's loan to the company exceeds three times equity, the excess may count as thin capital: Thin capitalisation
Process
- Resolution: in a limited company the general assembly, and in a joint stock company the general assembly (or the board of directors under the registered capital system), passes the resolution. A capital increase is an amendment to the articles of association.
- Commitment and payment: new shares are committed; in a cash increase, payment is made into a bank account.
- Documents: depending on the case, a bank receipt, a sworn or certified public accountant's report, or an expert report is prepared.
- Competition Authority share: paid at 0.04% of the capital increase.
- Registration and publication: registered in the trade registry and published in the Turkish Trade Registry Gazette.
To see the cost and registry fees: Capital increase cost
Capital reduction
Capital can be reduced for reasons such as covering losses, returning capital to partners or a partner leaving. There are additional conditions to protect creditors:
- It is shown in an audit report that the reduction does not endanger creditors' rights.
- Creditors are invited by notices in the Turkish Trade Registry Gazette and on the company's website; claims of creditors who come forward are paid or secured.
- After the reduction, capital cannot fall below the minimum capital amount. If it would, an increase must be made at the same time.
Reduction to cover losses: if capital is reduced to cover losses on the company's balance sheet and an increase of at least the reduced amount is made at the same time, some conditions, such as inviting creditors, do not apply.
Loss of capital and over-indebtedness
If the balance sheet shows that capital has been substantially lost, the Turkish Commercial Code imposes obligations on management:
| Situation | Obligation |
|---|---|
| Half of capital and statutory reserves is uncovered due to losses | Management immediately calls the general assembly and presents the remedial measures it considers appropriate |
| Two thirds is uncovered | If the general assembly does not resolve to make do with one third of the capital (reduction) or to restore the capital, the company is deemed dissolved |
| Suspicion of over-indebtedness | An interim balance sheet is drawn up; if assets do not cover creditors' claims, management notifies the court |
In the calculation, claims of partners against the company that they have left to be added to capital or paid after creditors' claims can be taken into account.
Tax aspects
- Bonus shares given to partners in an increase from internal resources are, as a rule, not treated as a profit distribution.
- In a capital reduction, which part of the repayments to partners counts as a return of capital and which part as a profit distribution depends on the source of the reduced capital. Repaying amounts previously added from internal resources may be taxed as dividends: Dividend distribution
Our related service: Trade registry procedures
Legal basis: Turkish Commercial Code No. 6102 arts. 343, 376, 456–475, 580 and 590–592.