The liability regime plays a key role for new investment plans for both local and foreign investors. Liability for tax debts constitutes a critical point for investors in order to decide upon the type of company through which they will perform their commercial activities.
Under Turkish tax legislation, provisions regarding liability for tax debts of both joint stock and limited liability companies ("LLC") are regulated within Tax Procedural Code No. 213 ("TPC") and Law on Procedures of Collection of Public Receivables No. 6183 ("LPCP"). According to the provisions of the above-mentioned Laws, firstly, it is regulated that the legal entity of the limited liability company is to be responsible for any unpaid tax debts of the company. If the tax debt cannot be wholly or partially collected from LLC, or it is apparent that the public debt will not be collected from the LLC, the liability of the shareholders and/or legal representative arises.
It should be noted that important analysis are made in the recent Constitutional Court and unification of judgment decisions in relation to the liability of shareholders and legal representatives for the tax debts of LLCs. Within this scope, this Newsletter article evaluates the main principles regarding the liability for tax debts of limited liability companies.
The Responsibility of a LLC as the Legal Entity
It should be noted that the legal entity of an LLC, firstly, is responsible for the unpaid public receivables, such as tax debts, of the company. The responsibility of the shareholders and the legal representatives arises for tax debts that cannot be collected from the company. Therefore, in order to start a legal proceeding against the shareholders and legal representatives of the company, firstly, the public debt should not have been, wholly or partially, collected from the LLC, or it must be apparent that the public debt will not be collected from the LLC.
Responsibility of the Shareholders in relation to the Tax Debts of LLCs
Article 35 of the LCPC is as follows:
"The shareholders of limited liability companies are directly responsible for public debts which wholly or partially cannot be collected, or apparently will not be collected, from the assets of the company, in proportion to their capital share, and shall be subject to legal proceedings in accordance with the provisions of this law."
As per the above-mentioned regulation, shareholders are responsible for the unpaid tax debts of the company, in proportion to their capital share, provided that the referred debt cannot be collected from the company, itself. On the other hand, share transfers are frequent in LLCs. Liability for tax debts during share transfer transactions are regulated under Article 35 of the LPCP, as follows:
"When a shareholder transfers his capital share, the assignee and assignor shall be jointly and severally liable for the public debt that occurred prior to assignment of the share.
When shareholders are different on the date of the debt's occurrence and maturity, they shall be jointly and severally liable for payment of the public debt in accordance with the first paragraph of this Article."
Accordingly, if the shareholders are different at the date of the debt's occurrence and maturity, they shall be jointly and severally liable for payment of the public debt.
Constitutional Court Decision
Samsun Tax Court has applied to the Constitutional Court, through concrete norm control, for the cancellation of the above-mentioned law provision regulating the joint and several liability of the shareholders of LLCs, in relation to tax debts of companies. However, the Constitutional Court held the following through its Decision No. E. 2016/14 and K. 2017/170, and published in the Official Gazette dated 24.01.2018:
- The responsibility regime of the shareholders and legal representatives cannot be evaluated to be in the same nature;
- The responsibility of the shareholders arises from its share capital and its ability to supervise on administrative operations of the company and not from their own practices;
- Therefore, the former Constitutional Court Decision that has annulled the joint and several liability of the legal representatives cannot be taken as a basis for the cancellation of the same responsibility envisaged for the shareholders.
Accordingly, the joint and several liability envisaged for the shareholders of LLCs is still applicable and in force.
Responsibility of the Legal Representatives of LLCs for Tax Debts
Pursuant to Article 10 of the TPC, if legal entities are taxpayer- or tax-responsible, their obligations shall be executed by their legal representatives. If legal representatives fail to fulfill these obligations, meaning defect liability, the amount of tax debt of a company that cannot be wholly or partially collected from the assets of the legal entity shall be collected from the personal assets of the legal representatives.
In addition to the above-mentioned provision, pursuant to Article 35 of the LCPC, it is reiterated that public claims which wholly or partially cannot be collected, or apparently will not be collected from the assets of the legal entities, shall be collected from the personal assets of the legal representatives. Therefore, within the scope of the above-mentioned provision of the LCPC, a "specific collection procedure" is envisaged for the tax debts that cannot be wholly or partially collected from the company, and in relation to the legal representatives that do not fulfill their tax obligations.
However, no specific provision is indicated within the scope of the tax legislation for an alignment between the shareholders and legal representatives of an LLC.
Unification of Judgment Decision
Through the Unification of Judgment Decision dated 11 December 2018, No E.2013/1, K.2018/1, published in the Official Gazette dated 20 June 2019 and No. 30807, important analysis are made in relation to the responsibility regarding tax liabilities of LLCs. Within the scope of the Decision, it is stated that there is no legal obligation to pursue first the legal representatives of a limited liability company in relation to the tax debts that cannot be fully or partially collected (or uncollected) from the company, in order to collect the referred tax debt amount from the shareholders.
In line with the above mentioned explanations, it may be stated the relevant provisions of the Turkish tax legislation is not truly beneficial for the shareholders of LLCs in terms of the liability for the tax debts. Therefore, we believe that it may be evaluated to establish a joint stock company instead of an LLC for new investments, and to amend the company type of the existing LLC to a joint stock company in line with the provisions of Corporate Tax Code No. 5520 and Turkish Commercial Code No. 6102. It should be noted that the recent approach of the Tax Administration in relation to the acquisition date of the shares of a company subject to the type of amendment procedure must be also taken into consideration in terms of taxation principles.
 Ender İnelli, Limited Şirket Ortaklarına Kötü Haber, Ekonomist, 17 August 2018 https://www.ekonomist.com.tr/haberler/limited-sirket-ortaklarina-kotu-haber.html.
 Bumin Doğrusöz, Aklı Olan Limited Şirkete Ortak Olmaz, Dünya Gazetesi, 27 June 2019 http://www.bumindogrusoz.com/article/akli-olan-lmted-srkete-ortak-olmaz.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.