Since the new Turkish Commercial Code has entered into force on July 01, 2012, limited liability companies can now be incorporated with a sole shareholder provided at least one shareholder is among the managers of the company. Therefore, if a limited liability company has one shareholder, then that shareholder will automatically be a manager.
In this respect, the Turkish Revenue Administration (“Administration”) has issued a ruling (“Ruling”) on July 31, 2013 to clarify on whether a manager of a sole shareholder limited liability company can receive a salary from the company.
In the Ruling, the Administration mainly focused on two issues, first being the principles and procedures regarding the amount of the fees paid to the manager and second whether such fees will be subject to income tax.
Pursuant to the Ruling, if the manager of the limited liability company is to receive a fee, then the amount of that fee has to be determined based on the “Arm’s Length Principle” which in this context will be the price or remuneration that would have been payable for those services as if there was no existing relationship between the parties.
In the Ruling, the Administration further provides that if a company determines a fee for its manager in defiance of the Arm’s Length Principle, this will constitute a distribution of concealed earnings through transfer pricing, by virtue of the General Communiqué on Distribution of Concealed Earnings through Transfer Pricing Serial No: 1. These concealed earnings transferred in this manner are not tax deductible.
The Ruling also addresses whether these fees of the managers will be subject to income tax. The Income Tax Law defines fee as “benefits which can be represented by cash and are provided to the employees in a certain workplace either in cash or in kind in return for their services”. Moreover, it does not make any difference whether such fees are granted as a wage, bonus, advance payment, premium payment, remuneration etc”. Pursuant to Income Tax Law, these fees shall be subject to income tax.
Therefore, in light of the information above, the Administration provided that the manager of a sole shareholder limited liability company can indeed receive a fee but such fee will be subject to income tax. However, if the fee is determined in defiance of the Arm’s Length Principle, then the fee of the manager will not be tax deductible within the context of Corporate Tax Law.