Do companies have to set aside reserve funds from profit?
Yes, legal reserve funds must be set aside from company profit.
Legal provisions regarding the setting aside of reserve funds;
Is the profit to be taken as basis in the calculation of the 1st series reserve fund commercial profit or profit after corporate tax?
The amount to be taken as basis in the calculation of distributable profit is the commercial balance sheet profit of the period.
This amount is the profit before taxes and legal liabilities in the income statement.
The sum of the accounts “net profit for the period” and “profit for the period and provision for other legal liabilities” in the balance sheet naturally gives the same amount.
The taxes and other legal liabilities to be paid before the profit for the period are deducted. Thus, the net profit for the period is reached.
If there are any commercial balance sheet losses from previous periods, they are covered from the net profit for the period.
The 1st Series legal reserve fund must be set aside following the closure of past period losses.
The first legal reserve fund is allocated at the rate of one-twentieth of the net profit in each period until it reaches one-fifth of the paid-in capital. (T.C.K. Art. 466)
It would be appropriate to state that the “net profit” to be taken as the basis in calculating the first legal reserve fund should be accepted as “profit after tax”.
(Circular No. 621 dated 04/09/1991 of the General Directorate of Banking and Exchange of the Undersecretariat of Treasury and Foreign Trade) The last procedure to be performed in order to determine the distributable profit is to deduct the legal funds that are required to be kept in the enterprise and saved from the remaining net profit.
The amount remaining after the above procedures are performed, in principle, represents the gross amount of the distributable profit. The procedure to be performed after this stage is the calculation of the 1st Dividend.
The first dividend should be allocated at least at the rate of 5% of the paid-in capital. (T.C.K. Art. 466/3)
It is possible to determine the I. Dividend at a rate higher than 5%. However, in this case, 10% of the difference between the amount corresponding to the determined higher rate and the amount corresponding to the legal rate should not be distributed as dividend but should be set aside as II. Order legal reserve fund.
If the profit amount at the end of the period is less than 5% of the capital amount, it is possible to distribute the current amount in question in accordance with the decision taken by the company management.
II. Order legal reserve fund cannot be set aside unless I. Dividend is set aside at a rate of 5% of the paid capital from the profit of the period.
After these transactions, the remaining amount shall continue to be distributed within the framework of the provisions of the Law and the articles of association. However, it is mandatory to set aside 10% of the dividends or profit shares to be calculated after this stage as II. Order legal reserve fund.
When making the calculation; the profit share shall be divided by 10 and 9/10 shall be the profit share and 1/10 shall be the II. Order legal reserve fund. It is necessary to set aside a reserve fund.
After determining the distributable profit, tax withholding is made at the rate corresponding to each partner and the remaining amount is distributed.
Some of the TCC Provisions Regarding Reserve Fund Separation
Profit shares to the board members can be given only from the net profit and only after a certain distinction is made for the legal reserve fund and a dividend distribution of five percent of the paid-in capital or a higher rate stipulated in the articles of association is made to the shareholders.
General legal reserve fund
Five percent of the annual profit is allocated to the general legal reserve fund until it reaches twenty percent of the paid-in capital.
(2) After the limit in the first paragraph is reached;
a) The part of the premium provided due to the issuance of new shares that has not been used for issuance expenses, redemption provisions and charitable payments,
b) The part remaining after the deduction of the expenses of issuing new shares to be given in their place from the amount paid for the price of the shares cancelled due to cancellation,
c) Ten percent of the total amount to be distributed to the persons who will receive a share of the profit after the five percent dividend is paid to the shareholders,
(3) If the general legal reserve fund does not exceed half of the capital or issued capital, it may only be used to cover losses, to continue the business when business is not going well, or to prevent unemployment and to take measures to alleviate its consequences.
(4) The provisions of subparagraph (c) of the second paragraph and the third paragraph shall not apply to holding companies whose main purpose is to participate in other businesses.
(5) The provisions regarding the reserve funds of joint stock companies subject to special laws are reserved. (TTK-519)
Reserve funds allocated at the company’s request
– (1) A provision may be included in the articles of association stating that an amount exceeding five percent of the annual profit will be allocated to the reserve fund and that the reserve fund may exceed twenty percent of the paid-in capital. The articles of association may also provide for the allocation of other reserve funds and the methods and conditions for their allocation may be specified. (TTK-521)
Aid funds in favor of employees and workers
(1) In the articles of association, a reserve fund may be set aside for the purpose of establishing or sustaining aid organizations for the company’s managers, employees and workers or to be given to public legal entities with this purpose.
(2) It is mandatory to establish a foundation or cooperative by separating the reserve funds and other assets allocated for the purpose of aid from the company. The foundation deed may also stipulate that the foundation assets will consist of a receivable against the company.
(3) If, in addition to the reserve funds allocated by the company for this purpose, membership fees are received from managers, employees and workers, at least the amounts paid by the employees and workers shall be returned with legal interest as of the payment date, if they cannot benefit from the distinction made according to the foundation deed at the end of the employment relationship. (TTK-522)
Relation between dividend and reserve funds
(1) Unless the optional reserve funds stipulated in the legal and articles of association are set aside, the dividend to be distributed to the shareholders cannot be determined.
(2) The general assembly may decide to set aside reserve funds other than those stipulated in the Law and the articles of association;
a) If it is necessary for the restoration of assets,
b) If it is justified in terms of the continuous development of the company and the most stable distribution of dividends, considering the interests of all shareholders.
(3) Even if there is no provision in the articles of association, the general assembly may set aside reserve funds from the balance sheet profit for the establishment or maintenance of aid funds and other aid organizations for the company’s employees or for serving other aid and charitable purposes. (TTK-523)
Source: Turkish Commercial Code
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