Money moves between a startup and its founders in both directions long before an investor arrives: the founder pays the first cloud invoices from a personal card, the company later pays a founder’s rent “as an advance”, a parent company lends the subsidiary its payroll. Turkish law treats each direction differently and strictly. A shareholder may borrow from the company only if he has paid up his capital contribution and the company’s profits, with free reserves, cover its past losses (Article 358 of the Turkish Commercial Code No. 6102), and lending to a shareholder in breach is a criminal offence for the directors (Article 562(5)(b)). A shareholder may lend to the company freely, but the portion of shareholder debt exceeding three times the company’s equity is hidden capital under Article 12 of the Corporate Tax Law No. 5520: the interest on it is not deductible and is re-characterised as a dividend. Interest-free loans in either direction are transfer-pricing events under Article 13. And a foreign parent’s foreign-currency loan runs into the FX borrowing rules of Decree No. 32. This article explains the four regimes and the paperwork that keeps founder cash flows out of trouble.
Direction one: the company lends to a shareholder
Article 358, as amended in 2012, provides that shareholders may not borrow from the company unless they have performed their due capital contribution obligations and the company’s profit, together with its free reserves, is at a level that covers past years’ losses. For a loss-making startup the second condition is never met, so the rule is in practice an outright prohibition: no advances to founders, no company card used for personal expenses left uncleared, no “loan” to a founder to pay his tax. The prohibition extends to non-shareholder directors and their relatives under Article 395(2), which bars them from borrowing from the company in cash and bars the company from giving guarantees or assuming their debts; a breach there gives the company’s creditors a direct claim against those persons for the amount owed. Article 562(5)(b) makes lending to shareholders contrary to Article 358 punishable with a judicial fine of not less than 300 days, and Article 562(5)(c) does the same for breaches of Article 395(2); the liability falls on the directors who caused the loan.
What founders may lawfully receive from the company is salary under an employment or service contract, board remuneration fixed by the general assembly under Article 408(2)(b), reimbursement of documented business expenses, and dividends. Anything else must be structured as one of those, taxed accordingly, and paid on time; a “current account” that carries a founder debit balance across a year end is the single most common finding in Turkish startup tax audits, and after 2012 it is also a company-law breach.
Direction two: a shareholder lends to the company
Nothing in the Commercial Code prevents a shareholder from lending to the company; convertible notes, bridge loans and founder loans are all valid. Two regimes attach. First, the loan is a debt, so it counts in the over-indebtedness test of Article 376(3) unless subordinated in the form that provision requires, as we explained in the Article 376 playbook. Second, the tax rules on hidden capital and transfer pricing apply, and they are where most of the cost hides.
Hidden capital: the three-times-equity test
Article 12(1) of the Corporate Tax Law treats as hidden capital the portion of debt that a company obtains, directly or indirectly, from its shareholders or from persons related to its shareholders and uses in the business, to the extent that at any time in the financial year it exceeds three times the company’s equity. Equity for this purpose is the equity at the start of the financial year as determined under the Tax Procedure Law (Article 12(3)(b)), and “related persons” include companies in which the shareholder holds at least 10 per cent of capital, votes or dividend rights (Article 12(3)(a)). Borrowings from a shareholder-related bank acting in its ordinary business count at only 50 per cent, and third-party borrowings secured by a shareholder’s non-cash collateral or on-lent by the shareholder on the same terms as its own bank or capital-market funding are excluded altogether (Article 12(2) and (6)). The consequence is in Article 11(1)(b) and Article 12(7): interest, FX losses and similar expenses on the hidden-capital portion are not deductible, and the interest (but not the FX difference) is deemed a distributed dividend at the last day of the year, for both the borrower and the lender, with withholding tax consequences and, for a foreign lender, treaty analysis. A startup with TRY 250,000 of capital and accumulated losses has very little equity at the start of the year; a TRY 5 million founder loan is almost entirely hidden capital. The cure is to book the money as share premium in a capital increase, or to keep the debt below the threshold by converting early.
Transfer pricing: the interest must be at arm’s length
Article 13 of the Corporate Tax Law treats as a disguised profit distribution any transaction with a related person at a price not consistent with the arm’s-length principle, and lists borrowing and lending expressly among the transactions covered. An interest-free loan from the company to a shareholder is therefore a deemed interest income for the company at market rates plus VAT on the deemed interest; an interest-free loan from a shareholder to the company is generally accepted, since the company gains, but the same shareholder’s interest-bearing loan must be at a market rate or the excess is a disguised distribution. Documentation matters: related-party transactions above the thresholds must be reported in the annual transfer-pricing form and, for larger groups, in the master and local files. The transfer pricing rules and the hidden-capital rules apply cumulatively: a founder loan can be both above three times equity and mispriced.
Foreign parents and foreign currency
After a flip-up, the lender is usually a foreign parent and the currency is usually dollars. Decree No. 32 on the Protection of the Value of the Turkish Currency restricts FX-denominated borrowing from abroad by Turkish-resident companies that have no FX income, subject to exceptions such as a minimum outstanding balance and specified activities; a parent’s FX loan to a Turkish subsidiary without export or other FX revenue must be checked against those rules before it is drawn, and a TRY loan or a capital contribution may be the compliant route. Foreign loans are also reported to the Central Bank through the intermediary bank and are subject to the resource utilisation support fund (KKDF) at rates depending on maturity. On top of that sit the group-company rules in Articles 195 to 209 of the Commercial Code, discussed in the group companies article: a parent loan on non-arm’s-length terms that damages the subsidiary is a compensable loss under Article 202.
Convertible notes: debt until they are not
A convertible loan from an investor who is already a shareholder is shareholder debt for Article 12 purposes until conversion; from a new investor it is third-party debt until conversion makes the lender a shareholder, at which point the debt disappears. The interest accrued to conversion follows the rules above. On conversion, the principal and accrued interest are set off against the subscription price in a capital increase, and the set-off must be documented for the registry and the certified accountant’s (SMMM/YMM) report on the receivable, as we explain in the share premium article. Notes should be drafted with a subordination clause meeting Article 376(3) and with an interest rate that is either arm’s length or zero.
A clean-up routine
Clear founder debit balances before each year end by salary, expense reimbursement or repayment, and never carry them across 31 December. Document every shareholder loan to the company in a written agreement stating amount, currency, rate, maturity and subordination. Compute the three-times-equity test at the start of each year and convert or repay before the threshold is crossed. Charge arm’s-length interest or none, and report the transaction in the transfer-pricing form. Check Decree No. 32 before any FX loan from abroad. And where the founder’s early spending was real, capitalise it: a documented founder loan converted into share premium is clean equity, while an undocumented “the founder paid for things” is a tax and company-law problem in every future diligence.
Can the company reimburse a founder for pre-incorporation expenses?
Yes, if the expenses were incurred for the company’s formation or business and are documented, and if the company accepts the pre-incorporation commitments within three months of registration under Article 355(2); otherwise formation expenses fall on the founders (Article 355(3)). Once accepted, the reimbursement is a debt of the company to the founder, not a loan to him.
Is a founder’s guarantee for a company bank loan a shareholder loan?
No. A personal guarantee is not a loan to the company and does not create hidden capital; third-party borrowing secured by a shareholder’s non-cash collateral is expressly excluded by Article 12(6)(a). It does create personal exposure for the founder, which investors usually require the company to release at closing.
Does Article 358 apply to limited companies?
Yes. Article 644(1) of the Commercial Code applies the shareholder-borrowing prohibition of Article 358, and the Article 395(2) prohibition for managers’ relatives, to limited companies as well.
Related: transfer pricing · convertible loan agreement · bridge financing.
Sources. Turkish Commercial Code No. 6102 (Articles 355, 358, 376, 395, 408, 562, 644); Corporate Tax Law No. 5520 (Articles 11, 12, 13); Decree No. 32 on the Protection of the Value of the Turkish Currency. 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.
