limitations on dividend distribution of capital companies

01 June 2020

Limitations On Dividend Distribution Of Capital Companies

Upon the issuance of the letter by the Ministry of Commerce of Turkey (“Ministry”), as part of Turkish government’s COVID-19 outbreak measures, the Union of Chambers and Commodity Exchanges of Turkey (“TOBB”) published an announcement on 1 April 2020, highlighting the importance of the protection of company equity (“Announcement”. The announcement indicated that dividend distribution limitations are required to be included in the agendas of general assembly meetings. Subsequent to the announcement, the respective issues have been enacted by way inclusion within the scope of the Law on Mitigating the Effects of the New Coronavirus (Covid-19) Outbreak on Economic and Social Life and the Law Amending Certain Laws (“Omnibus Law”) dated 16th April 2020.

What was in the Content of the TOBB Announcement?

TOBB requested that all companies, except state-owned enterprises, include the below items in the agenda for their general assembly meetings pertaining to the 2019 accounting year:
  • Not to distribute dividend relating to profit of previous accounting years;
  • Not to distribute more than 25% of the net profit of the 2019 accounting year; and
  • Not to authorize the Board of Directors to distribute advance dividends.
The tone of the announcement suggests that these limitations are mandatory, and such an interpretation has been adopted by the general public.

In accordance with the legislation, companies are required to include issues requested by the Ministry in their general assembly meeting agendas; however, the authority of the Ministry is limited with ensuring that these items are discussed. The items to be added in to the agenda may be accepted or declined, in part or in whole, by the general assembly, at the discretion of the shareholders.


What is Regulated under the Omnibus Law?

The Turkish Commercial Law ("TCL") includes provisions on general assembly decisions regarding the distribution of dividends. As a matter of fact, the legal compliance of the general assembly decisions regarding dividend distribution can only be analyzed within the framework of the TCL, articles of association, and the good faith principle. In this regard, it is clear that limitations cannot be imposed on the respective issues through announcements.

In this context, the dividend distribution limitations of companies have been included in the Omnibus Law which has just enacted by the Turkish Parliament and came into force on the date of 16th April 2020. According to the Provisional Article 13, which will be included in the TCL, all equity companies except for companies with more than 50 % share ownership by the state, special provincial administrations, municipalities, villages and other public legal entities:
  • Only up to 25 % of the net profit for the period of 2019 accounting year may be distributed as dividend until 30 September 2020;
  • The Board of Directors cannot be authorized to distribute advance dividends,
  • Dividend relating to previous accounting year profits and statutory retained earnings cannot be distributed;
And for all equity companies;
  • If payments relating to a decision to distribute dividends (taken before the Law comes into force) have not yet been realized or have been partially realized, the payment of dividends exceeding 25% of net profit will be postponed until 30 September 2020.

Thereby, the respective limitations for dividend distributions will be mandatory for all equity companies excluding the exceptions mentioned below.

However, the Presidential Decree, published in the Official Gazette on 18 September 2020, has extended the term which the limitation on dividend distribution until 31 December 2020.


Exemptions, Procedures, and Principles of the Limitations

With the Notification on Procedures and Principles for the Implementation of Provisional Article 13 of the Turkish Commercial Code ("Notification") published in the Official Gazette dated 17 May 2020 and numbered 31130; the exemptions, procedures, and principles of the limitations have been specified. Under the Notification, it has been decided that:

  • The limitations do not apply to capital increases carried out from internal resources,
  • Despite having incurred a loss in the accounting period, payments for the unpaid part of the discretionary reserves that have been decided to be distributed before 17 April 2020 will also be postponed until 30 September 2020,
  • No interest can be accrued for the postponed amounts.

Moreover, the Notification stipulates certain exemptions of the limitations. Accordingly Companies that have decided to distribute dividends:

  • equal to or less than TRY 120,000; except for companies that:
  • employ individuals who have been granted financial support in the form of short time work or unpaid leave allowance on the grounds of a compelling reason due to COVID-19; and
  • have benefited from the credit guarantees supported by the Treasury and currently have an unpaid credit debt balance;
  • provided that more than half of the distributed dividend decided shall be utilized to pay their capital subscription debts to another company in cash and at once; or
  • provided that the dividend decided to be distributed shall be used in cash for the fulfillment of liabilities within the scope of credit and project finance agreements which will mature until 30 September 2020;

shall be exempt from the limitation regarding dividend distribution.


The right of dividend arises is a fundamental right of shareholders. As a matter of fact, according to the precedents of the High Court of Appeals, decisions regarding the dividend distribution limitations are also required to have a reasonable balance between allocated dividends and distribution. Therefore, we evaluate that the content of the Announcement shall not be deemed as binding and the relevant limitations will only be valid within the period prescribed under the Omnibus Law.
However, it should be noted that distributing dividends before the enactment of the relevant limitations, that are contrary to the ordinary practices of the company, may constitute a breach of the good faith principle. Therefore, each company requires a case by case basis evaluation with respect to compliance in their dividend distribution practices.

Content: Av. Şafak Varol, Av. Merve Ömeroğlu

1- Please click here for the announcement of The Union of Chambers and Commodity Exchanges of Turkey dated 1st April 2020.
2- Article 445 of Turkish Commercial Law No. 6102
3- Tekinalp, Poroy, Çamoğlu, Corporations-I 624; The right to dividend arises as an inevitable and inalienable right.
4- 11.HD.13.12.2011, E.5898/K.16593

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