Limitations on distribution of profits due to Covid-19

Back to Corporate and M&A Law Committee publications

V. Resat Moral
Moral & Partners, Istanbul

Karaca Kacar
Moral & Partners, Istanbul

Nur Duygu Bozkurt
Moral & Partners, Istanbul

Burak Bati
Moral & Partners, Istanbul


In an announcement of 31 March 2020 and a letter from the Union of Chambers and Commodity Exchanges of Turkey (UCCE) of 1 April 2020, the Ministry of Trade (MoT) has shared an advisory declaration pointing out the cruciality of maintenance of shareholder equity in stock companies other than state-owned enterprises due to Coronavirus (Covid-19). It states the necessity for restricting the distribution of profits in order to avoid capital loss and insolvency situation, which is sent to all chambers and stock markets.

The announcement has been enacted within the scope of the provisional article brought to the Turkish Commercial Code (the TCC), regulated under The Law on Commuting the Effects of New Coronavirus on Economic and Social Life and Amending Some Certain Laws (the 'Omnibus Bill') and published in the Official Gazette on 17 April 2020. This took into consideration the potential uncertainty triggered by the announcement regarding taking the particular precautions in order to ‘bypass’ the period of Covid-19 with the least amount of loss as possible. This was because the announcement had the characteristics of an advisory declaration, and therefore solely a ministerial act and either not constituting a force of law or bearing any power of sanction.

Following the Omnibus Bill, the Communiqué on the Procedures and Principles Regarding the Implementation of Limitations on Distribution of Profits was published in the Official Gazette dated 17 May 2020. The Communiqué entered into force as of its publication date and constitutes a part of the set of guidelines providing further details regarding the implementation of this new limitation.

Accordingly, by the precautionary policy, pursuant to Provisional Article 13 introduced by the Omnibus Bill to the TCC and the Communiqué both having the purpose of not lowering the company resources by means of cash distributions, providing the companies’ current capital maintenance and not arising additional financial needs:

• from 17 April 2020 until 30 September 2020, companies may resolve to distribute only 25 per cent of the net profit gained in the 2019 fiscal year. In other words, the amount of the cash dividends to be resolved for distribution shall not exceed 25 per cent of net profit of the financial year of 2019, until the date of 30 September 2020;

• companies cannot resolve on distribution of the previous years’ profits and voluntary reserves;

• capital increase through internal resources are excluded from the scope of the limitation. It is not limited by law to keep the dividends within the company and converting dividends into shares through capital increase and distributed to shareholders;

• companies’ General Assemblies (GA) cannot grant board of directors the right to distribute advance dividends;

• in case a resolution regarding the distribution of dividends of 2019 financial year was already taken by the GA, but a payment has not been carried out or partial payment has been made, the payments corresponding to the exceeding part of 25 per cent are to be postponed until the date of 30 September 2020;

• the President is authorised to extend or reduce the mentioned periods by three months.

Exemptions to the limitation

Some companies resolving to distribute the profit are exempted from the limitation provided that:

• the profit resolved on to be distributed does not exceed TRY 120,000;

• the company is one of the following:

– a company employing employees benefiting from short-term working allowance on the grounds of compelling reason arising from Covid-19 and/or wage support who were sent on unpaid leave; or

– a company benefitting from Treasury-backed credit warranty and having credit outstanding balance due pursuant to the Provisional Article 20 of the Law on the Regulation of Public Financing and Debt Management No 4749 and relevant Decrees;

• more than half of the profit resolved on to be distributed is exclusively used for fulfilling the company’s capital commitments payable in cash and at once to another stock company within the scope of the TCC; or

• the profit resolved on to be distributed is used for fulfilling in cash the obligations becoming payable until the date of 30 September 2020 in accordance with signed loan agreements or project finance agreements.

However, the payments regarding the exceeding amounts of the obligations within the scope of this provision are postponed to 30 September 2020. Importantly, in order for distribution of profits to be put on the agenda in GA, an opinion on convenience of the MoT must be obtained through the application with necessary documentation before the General Directorate of Domestic Trade.

For the application, GA documentation and some relevant information has to be submitted to the General Directorate of Domestic Trade. Therefore, the application should be made before the GA.

Base of the financial statements

For determination of the dividend, the following financial statements are based on;

• financial statements prepared in compliance with TCC by those under the obligation of preparing statements conforming to the standards set out by the Public Oversight Accounting and Auditing Standards Authority; and

• statements prepared according to the Tax Procedure Law No 213.

In addition, the profit resolved on to be distributed cannot exceed the total amount of the resources being subject to distribution involved in the records kept according to Law No 213.

Comments and explanations

Registration requirements      

The TCC governs that dividend distribution can only be resolved via GA of shareholders authorising the board (or managers in limited liability companies) for the application and distribution of the dividends. In any case, such GA resolution requires the Trade Registry registration and subsequent Trade Registry Gazette publication to validly enter into effect.

There exists a probability that the trade registries may reject or refuse the registration of any GA resolutions that include any number or ratio exceeding the amount permitted by Provisional Article 13, even though such distribution is postponed to a date later than 30 September 2020. Since GA resolutions (agenda subjects) are executed as a single procedure, it is probable that the whole procedure may be rejected/refused for registration by the Trade Registry.

In this regard, any GA resolution rendered before 30 September 2020 in which a dividend distribution resolution is present should defer to the 25 per cent limit set by Provisional Article 13. Otherwise, the procedure may be refused by the Trade Registry.

Miscellaneous aspects

The distribution of dividends/profits essentially holds separate aspects and procedures in financial and accounting activities of a company. While the procedure and background process of constructing the basis of distribution is of legal concern, realisation and execution of the distribution is a matter of financial and accounting processes. While there are multiple options and methods preferred or used by various capital depending on corporate structures, regulations and practices, this paper has only considered the legal basis and aspects of the process in light of the Omnibus Bill and Provisional Article 13.

Sanctions or penalties

The course of proceedings to be conducted on detecting violations, or any sanctions to be imposed on the actors, have not been set forth under the regulations regarding the limitation.


It should be noted that distribution of profits is not prohibited, only the amount of the profit distribution is limited.In other words, Provisional Article 13 limits the distribution of distributable profits/dividends from the 2019 financial term of stock companies by 25 per cent until 30 September 2020. Further amendment of the deadline is subject to the decision of the President.

Capital increase through internal resources are out of the scope of the limitation.

Any resolution obtained before 30 September 2020 containing a point of order or specific resolution that may be interpreted, especially by administrative authorities and offices, as exceeding the limit of 25 per cent may be considered in breach of the Omnibus Bill and Provisional Article 13.

If a profit distribution is in question under the 2019 year-end financial statements, it is advised to issue an interim balance sheet before the GA so that the financial standing of the company could be ascertained. Whether a net profit distribution of 25 per cent will have an adverse impact on the company is to be assessed.

The board of directors and shareholders hold the liability of adopting resolutions complying with the legislation, regardless of Trade Registry practices, as profit distribution resolutions are not subject to registration.

If a resolution on profit distribution has been adopted for the 2019 fiscal year before the enforcement of the limitation, but the payment has not yet been made or merely partially made, a new resolution ought to be resolved to postpone the payments regarding any profit exceeding 25 per cent of net profit for the 2019 fiscal year until after 30 September 2020.