Operation of Economic Enterprises by Foundations
Introduction
Pursuant to Art. 101 of the Turkish Civil Code (“CC”) No. 4721, foundations are an ensemble of assets that have legal personality, which comprises of sufficient assets and rights that are allocated by real and legal persons for a determined and perpetual objective. Foundations are legal persons that have “ideal objective”. In other words, the foundations do not have a purpose to derive a profit.[1] However, as stated in Art. 26 of the Law of Foundations No. 5737, foundations may establish economic enterprises and become a partner of an established company in order to accomplish their objectives and provide income to the foundation. In this regard this article succinctly elaborates the principles regarding the operation of economic enterprises by foundations and its legal consequences.
Situations in which Foundations Manage Economic Enterprises
The fact that foundations are legal persons with ideal objective doesn’t pose an obstacle for them to operate an economic enterprise in order to actualize their objective.[2] It is particularly worthy of note the fact that, foundations’ operating economic enterprises does not open the way for establishing foundations based on economic objectives. Although there is not any explicit provision regarding this matter in the relevant codes, it is stated in the doctrine that establishment of foundations with economic objectives would not be compatible with the nature of foundations. [3]
Foundations may operate economic enterprises by way of establishment or of assignment of an economic enterprise to the foundation.[4]
Establishment of an Economic Enterprise by Foundations
In the event that a foundation establishes an economic enterprise, it is required to be registered to the Trade Registry pursuant to Art. 55 and 56 of the Trade Registry Regulation.[5] Accordingly, the necessary documents that are required to be submitted to the Trade Registry Office are as follows: (i) the title of the foundation, tax identity number; the letter of application including the name and surname, the place of residence, identity number of the persons that are authorized to represent the enterprise, (ii) the statement of signature of the persons that are authorized to represent the enterprise, which is issued before public notary (iii) the official document indicating that the legal personality of the foundation maintains, (iv) a copy of the articles of foundation or a notarized copy of the articles of foundation, (v) a copy of the decision of the authorized body regarding the designation of the directors of the foundation to this assignment, in case it is not specified in the application form or in the letter of undertaking, (vi) the notarized copy of the authorized body decision regarding the establishment and registration of the enterprise, (vii) the certificate of approval when the establishment of an economic enterprise by the foundation is subject to the approval or permission of a public authority. [6]
The Assignment of an Economic Enterprise to the Foundation
As specified above, another method for foundations to operate an economic enterprise in order to actualize their objectives is the assignment of an economic enterprise to the foundation during the establishment phase of the latter.[7] Pursuant to Art. 101/2 of the CC, the entire assets or any kind of income, the rights with economic value that are eventuated or that are expected to be eventuated may be devoted to the foundation. Considering this inclusionary content of this provision, one may also infer that assignment of an economic enterprise is possible during the establishment phase of a foundation. In this case, as the asset in question is an assigned value which is not in cash, the founders are required to have identified such asset before the courts. [8]
The Elements of Economic Enterprises that belong to Foundations
It is crucial to state that although the terms “economic enterprise” and “commercial enterprise” are utilized interchangeably, these two terms may signify different meanings. [9] In this regard, in the doctrine it is stated that the term “economic enterprise” has a more inclusive context as to include the concept of commercial enterprise. [10] For instance; the concept of economic enterprise includes the enterprises that do not exceed the threshold stipulated for craftsmen enterprises.[11] In this respect, the condition that requires commercial enterprises to exceed the threshold stipulated for craftsmen enterprises is not applicable for economic enterprises. Nevertheless, the factors that are stipulated under Art. 11 of the Turkish Commercial Code (“TCC”) No. 6102, which are; aiming for obtaining income, continuity and independence are the essential elements of economic enterprises.[12] Therefore, an economic enterprise of a foundation, aiming to obtain an income is required to maintain its operations continuously and independently. Otherwise, it would not be possible to make reference to an economic enterprise that belongs to the foundation.
The Legal Consequences of Operating Economic Enterprises by Foundations
Merchant Status of the Foundations
Pursuant to Art. 16 of the TCC the foundations that operate an economic enterprise in order to actualize their objectives are considered as merchant. However, it is important to note that, as per the same provision, the foundation that uses more than half of its income to the tasks that are qualified as public service are not deemed as merchants whether they operate the enterprise directly or through a legal person who is operated and directed according to public law provisions. This issue is crucial as it constitutes a determinant point on deciding whether the legal consequences of being a merchant are applied to the foundations or not. Whereas foundations may be considered as merchant by way of operating economic enterprises that have legal personality; they can also be a shareholder in a corporation and generate income for their objectives. [13]
The Economic Enterprises of Foundations’ Being Subject to Corporation Tax
As per Art. 1 of the Corporation Tax Law No. 5520, the economic enterprises of foundations are specified as the institutions being subject to corporation tax as well. In this respect, it is beneficial to note that it is the economic enterprise which is the tax payer and not the foundation. Accordingly, the legislator has prevented foundations to generate income without paying any taxes and the tax equity has been ensured with regard to other enterprises. This issue has also been elaborated considering the status of the associations that manage economic enterprises, in the decision of joint chambers of the Council of State, numbered E. 1992/2 K. 1994/2 and dated 16.6.1994. This decision is important as it enlightens the reasoning underlies the fact that economic enterprises of foundations are subject to corporation tax:
“Although the associations are excluded from the scope of the corporation tax as they do not have an economic character, their economic enterprises are subject to the corporation tax pursuant to economic public enterprise taxation provisions. In the event that the economic enterprises of the associations are excluded from the scope of the taxation, they obtain an advantage in proportion of the tax amount vis-a-vis the profit-oriented enterprises. In this case the competition equity will be deteriorated. Moreover the development of individual enterprises and the enterprises that belongs to private persons will be precluded. In this respect, in order to eliminate the abovementioned inconveniency and protect the competition equity, in the preamble of the Draft Corporation Tax Law it is stated that, the economic enterprises of associations are subjected to taxation.”[14]
In this regard, one of the points to pay attention is that; the fact that foundations benefit from the tax exemption by the Council of Ministers in accordance with Art. 20 of the Law on the Amendment to Certain Laws and Recognition of Tax Exemptions to Foundations No. 4962 does not mean that the economic enterprise of the foundation can also benefit from the tax exemption.[15]
The Economic Enterprises of Foundations’ Being Subject to Audit
Pursuant to Art. 111 of the CC, General Directorate for Foundations shall audit whether foundations manage their assets in accordance with their objective and whether they expend their incomes in conformity with latter. In addition, pursuant to Art. 33 of the Law of Foundations and Art. 39 of the Regulation on Foundations the compatibility of foundations to their objectives and to the legislation and the compatibility of their economic enterprises to the legislation shall be audited by the General Directorate. In the event that foundations operate an economic enterprise to accomplish their objective, this enterprise shall be operated in conformity with the economic and commercial principles. With these audits, the balance sheets and financial statements of enterprises shall be examined and the productivity of the enterprise shall be audited. In case the productivity of enterprises is determined in a low degree in these audits, the required measures shall be taken into account. [16]
Conclusion
Although the foundations are not established with the purpose of deriving a profit, they may operate economic enterprises in order to actualize their objectives pursuant to Art. 101 of the CC and they can obtain income accordingly. In such case, the economic enterprise shall be registered to the Trade Registry in compliance with Art. 55 and 56 of the Trade Registry Regulation. Moreover, an economic enterprise can also be assigned to a foundation during the establishment phase of the latter pursuant to Art. 101/2 of the CC. For the existence of an economic enterprise of a foundation, the conditions required by Art. 11 of the TCC must be available, which are continuity, independence and a aiming for obtaining income. The foundations that operate an economic enterprise meeting the abovementioned requirements shall be deemed as merchant pursuant to Art. 16 of the TCC. It is important to note that, the foundation that use more than half of its income to the tasks that are qualified as public service are not considered as merchants whether they operate the enterprise directly or through a legal person who is operated and directed according to public law provisions. As per Art. 1 of the Corporation Tax Law, the economic enterprises of foundations are subject to corporation tax. Furthermore, pursuant to Art. 111 of the CC and Art. 33 of the Law of Foundations, the economic enterprises are also subject to audit that is conducted by the General Directorate of Foundations.
- Dural, Mustafa; Öğüz, Tufan, Türk Özel Hukuku Kişiler Hukuku Cilt II, İstanbul 2013, p. 359.
- Demir, İlhan, Yeni Vakıfların Temel Kitabı, Ankara 2005, p. 77.
- Doğan, Murat; Narbay, Şafak, “İktisadi Amaçla Vakıf Kurulamaması Prensibi ve Vakfın İktisadi İşletme İşletmesi”, Erzincan Hukuk Fakültesi Dergisi, 2000, p. 442; Dural; Tufan, p. 360.
- Doğan; Narbay, p. 448.
- Ballar, Suat: Yeni Vakıflar Hukuku, İstanbul 2015, p. 583.
- See as an example : http://www.ito.org.tr/wps/portal/tescil-ilan kurulus?WCM_GLOBAL_CONTEXT=dernek_vakif (Access Date: 09.11.2017).
- Doğan; Narbay, p. 442.
- Demir, İlhan, p. 78.
- Ballar, Suat: “Medeni, Ticari ve Mali Hukuk Yönünden Dernek ve Vakıfların İktisadi İşletmeleri”, Journal of Banka ve Ticaret Hukuku Dergisi, June 1990, Issue 3, p. 105.
- Aydın, Erkan: Gelir Vergisi ve Kurumlar Vergisi Açısından Vakıfların Vergilendirilmesi, İstanbul 2016, p. 37.
- İmregün, Oğuz: Kara Ticareti Hukuku Dersleri, İstanbul 1987, p. 10-13.
- Aydın, Erkan, p. 37-41.
- Aydın, Erkan, p. 45.
- Council of State Joint Chambers Decision, E. 1992/2 K. 1994/2, 16.06.1994
- Aydın, Erkan, p. 59.
- Ballar, Suat, p. 621.
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