After a flip-up, the Turkish company that used to be the whole business becomes a wholly owned subsidiary of a Delaware or Dutch parent, run from abroad by the same founders. Turkish law notices. Articles 195 to 209 of the Turkish Commercial Code No. 6102 (TCC) contain a group-company regime, and Article 195(5) applies it whenever the controlling enterprise is seated in Türkiye or abroad, as long as one company in the group is Turkish. From the moment the parent holds the majority of votes, the parent is a “controlling enterprise” and is deemed a merchant; the Turkish subsidiary must report the relationship, the parent must not use its control to the subsidiary’s loss without compensating it within the year, and if it does, the subsidiary’s creditors and any minority shareholder can sue the parent and its directors in the Turkish commercial court. Groups that are 100 per cent owned get a wider licence to give instructions, but not a licence to endanger the subsidiary. This article sets out the notifications, the annual report, the loss-compensation rule, the full-control regime and the four things a flipped startup should put in place in its first year as a group.
When a group exists
Article 195(1) defines control: one commercial company controls another if, directly or indirectly, it holds the majority of the voting rights, has the right under the articles to elect the majority of the management body, or commands the majority of votes alone or with others under an agreement; or if it otherwise holds the other under its control by contract or another means. Holding the majority of the shares is a presumption of control (Article 195(2)). Control through intermediate companies is indirect control (Article 195(3)). The controlling and controlled companies together form the group (Article 195(4)), and Article 195(5) extends the whole regime to a controlling enterprise (teşebbüs) whether its seat is in Türkiye or abroad, deeming that enterprise a merchant. A Delaware C-corp holding 100 per cent of a Turkish A.Ş. is therefore a controlling enterprise under Turkish law, and a founder who personally holds control through the parent may, in the Code’s terms, be an enterprise as well (Article 195(6) reads “board of directors” as the natural person himself where the controller is a natural person).
Notifications and the annual dependency report
Article 198(1) requires an enterprise that acquires or disposes of shares in a company so that its holding crosses 5, 10, 20, 25, 33, 50, 67 or 100 per cent to notify the company and the competent authorities within ten days, to disclose the fact in the annual report under a separate heading and to publish it on the company’s website. The flip-up itself is a 100 per cent crossing and triggers the notification; the notification is made in writing and registered and published in the trade registry, and until it is, the voting and other rights attached to the shares are frozen (Article 198(1)-(2)). Article 199 then imposes the annual duty that most flipped startups miss: within the first three months of each financial year, the subsidiary’s board must prepare a report on its relations with the controlling and affiliated companies, describing every legal transaction made in the past year with or for the benefit of the parent or its affiliates and every other measure taken or omitted for their benefit, stating performance and counter-performance, the reason for each measure and its benefit or harm to the subsidiary, and whether and how any loss was compensated. The board must state at the end of the report whether, to its knowledge, the subsidiary suffered a loss in each transaction and whether it was compensated, and that conclusion, and only that conclusion, is disclosed in the annual activity report. Intercompany service agreements, IP licences to the parent, cost-plus development arrangements and cash pooling are exactly the transactions the report must cover, and a report that says “none” in a flipped group is not credible.
The loss-compensation rule
Article 202(1)(a) prohibits the controlling company from using its control in a way that causes the subsidiary a loss: in particular by directing it to transfer business, assets, funds, personnel, receivables or debts, to reduce or shift profits, to encumber its assets, to give guarantees, to make payments, or to take or omit measures that harm its productivity or development, unless the loss is actually compensated within the financial year or the subsidiary is granted, by the end of that year, an equivalent claim specifying how and when it will be compensated. If compensation is not made or the claim not granted, every shareholder of the subsidiary may sue the controlling company and its responsible directors for the subsidiary’s loss, and the court may instead order the parent to buy out the plaintiff shareholders (Article 202(1)(b)); creditors may sue for payment to the subsidiary even if it is not bankrupt (Article 202(1)(c)). The defence is Article 202(1)(d): no damages if the transaction could have been made or omitted by the directors of an independent company acting with due care and in good faith. Articles 553, 555 to 557, 560 and 561 apply by analogy, and where the controlling enterprise is abroad the claim is brought before the commercial court at the subsidiary’s seat (Article 202(1)(e)). For a flipped startup this means that transferring the IP to the parent at an undervalue, moving customers to the parent’s contracts, or having the subsidiary bear costs the parent should bear are not internal housekeeping; each is a compensable loss with a Turkish forum and a one-year compensation clock.
Article 202(2) adds a second protection for minority shareholders in mergers, divisions, conversions, dissolutions, securities issues and material articles amendments carried out through control without a clear justification for the subsidiary: shareholders who voted against and recorded dissent may demand damages or a buy-out at real value, within two years. In a wholly owned subsidiary there is no minority, so this branch is dormant; it wakes up the moment a Turkish employee exercises an option or a Turkish angel keeps a stake below the parent.
Full control: the right to instruct, and its limit
Where the parent holds 100 per cent of the shares and votes, Article 203 lets the parent’s board give the subsidiary instructions on its direction and management, even instructions that may cause a loss, provided they are required by the group’s defined and concrete policies; the subsidiary’s organs must comply. Article 204 sets the limit: no instruction may be given that clearly exceeds the subsidiary’s ability to pay, endangers its existence or causes it to lose material assets. Article 205 relieves the subsidiary’s directors of liability towards the company and its shareholders for complying with instructions within Articles 203–204, and Article 206 lets the subsidiary’s creditors sue the parent and its responsible directors if a loss caused by instructions is not compensated within the financial year. In practice this is the regime under which most flipped startups operate, and it has two consequences the parent’s US counsel rarely appreciates: the parent’s board owes a Turkish-law duty not to run the subsidiary into the ground, and the subsidiary’s directors are protected only if the instructions are documented as instructions, which argues for a written group policy and minuted instructions rather than Slack messages from the CEO.
Squeeze-out, trust liability and the tax overlay
Article 208 allows a parent holding at least 90 per cent to buy out a minority that obstructs the company, acts in bad faith or recklessly, at stock-exchange value or the value determined under Article 202(2); it is the Turkish counterpart of the squeeze-out and matters when a small Turkish holder refuses to flip. Article 209 makes the parent liable for the trust created when the group’s reputation reaches a level that inspires public or consumer confidence and that reputation is used; a startup group rarely reaches that level, but a fintech or health group can. Alongside the Code sits the tax regime: intercompany transactions must be at arm’s length under Article 13 of the Corporate Tax Law No. 5520, and loans from the parent above three times the subsidiary’s equity are hidden capital under Article 12, points we take up in the article on shareholder loans. The Article 199 report and the transfer-pricing documentation cover the same transactions from two angles and should be prepared together.
First-year checklist for a flipped group
Register the group relationship and make the Article 198 notification. Put intercompany agreements in writing at arm’s length: a services or development agreement between subsidiary and parent, an IP licence or assignment on documented terms, and a cash-management arrangement that respects Article 202. Adopt a short group policy at parent level so that instructions under Article 203 have a documented basis, and have the subsidiary’s board minute the instructions it receives. Diarise the Article 199 dependency report for the first quarter of each year and align it with the transfer-pricing file. Give the subsidiary’s directors a parent indemnity for Article 202 and 206 exposure. And if any Turkish shareholder or option holder remains below the parent, treat the minority-protection branches of Articles 202(2) and 208 as live. The ten mistakes after the flip article lists the practical failures; this one gives the statutory reasons behind them.
Does the regime apply if the parent is a holding company with no operations?
Yes. Control, not activity, triggers Articles 195 to 209. A pure holding parent is a controlling enterprise and is deemed a merchant under Article 195(5).
Is the founder personally a “controlling enterprise”?
Potentially. Article 195(5)–(6) contemplate a natural person as controller. A founder who controls the parent, which controls the subsidiary, is an indirect controller; the practical exposure is under Article 202 for losses caused by his instructions, alongside his liability as a director of either company.
Are consolidated financial statements required?
Article 195(5) preserves the rules on consolidated statements; whether the Turkish subsidiary or the group must consolidate depends on the applicable financial reporting framework and thresholds, not on the group regime itself.
Related: flip-up · subsidiary · holding company · life after the flip-up.
Sources. Turkish Commercial Code No. 6102 (Articles 195–209, 553, 555–557, 560–561); Corporate Tax Law No. 5520 (Articles 12–13). Statute links open the official Turkish texts on mevzuat.gov.tr.
This article is provided for general information only and does not constitute legal advice. Please seek legal support for an assessment of any specific matter.
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