Contact: Att. Tuna F. Colgar; Erdem & Erdem (Turkey)
Prohibition on hidden income shifting is one of the most important issues that is broadly regulated under Capital Markets Law No. 6362 (“CML”). In conjunction with CML Article 21, which has a broader context than Article 15 of the abrogated Capital Markets Law No. 2499, another significant step has been taken regarding one of the most primary aims of the Capital Markets Board (“CMB” or “Board”), a public regulatory authority, which is to provide protection on the rights of shareholders of public companies.
By virtue of the managerial abuses of joint stock companies that are subject to the capital markets legislation, the prevention of, particularly, the potential damages of the shareholders/minority shareholders, apart from the persons or group which hold the control of the company, in other words, the account owners who are capital market investors, is the primary purpose of the CML, and one of the preeminent duties and authorities of the CMB[1].
The hidden income shifting problem has been regulated in the tax legislation in a more broad, but tax-oriented concept, at first, due to the fact that it triggers tax losses. On the other hand, the CML regulates this issue more distinctively, and within a narrower context, with regard to investing shareholders[2]. The components of the hidden income shifting prohibition are determined in the first paragraph of CML Article 21, entitled, “Prohibition of the Hidden Income Shifting.”
The first paragraph of CML Article 21 states that “It is prohibited to the shift income of public companies and collective investment schemes, and their subsidiaries and affiliates, to real persons or legal entities with whom they have a direct or indirect relationship in terms of management, audit, or share capital, through reducing their profits or their assets, or preventing the increase of their profits or their assets, by virtue of performing transactions, such as forming contracts or commercial practices comprising different prices, fees, costs or conditions, or via producing a trading volume that is in violation to market practices (the arm’s length principle[3]), according to prudence and honesty principles of commercial life.”
