Abstract : The Council of State’s General Assembly on Unification of Judgments has recently examined the decisions of the different Council of State divisons on the order of collection of limited company tax debts, and with ists decision published at the Official Gazette No. 30807 dated 20 June 2019 with no E. 2013/1; K. No. 2018/1 stated that it is not necessary to pursue the legal representative first, in order to start pursuing the shareholder in the collection of tax liability of limited liability companies.
According to Turkish law, the liability for unpaid tax debts directly belongs to the company itself. Therefore, application for collecting the unpaid tax debts of limited liability companies is first made to the company, and if it is determined that the debt cannot be collected from the company, the next application is directed to the legal representatives or to the shareholders.
While there is no dispute in high court decisions or tax administration practice that the limited company itself is primarily responsible for its unpaid debts, it has been a continuous problem whether the second in line for collection are the legal representatives, or the shareholders, or both .
According to the applicable legislation, company’s legal representatives (Company Directors) are considered to be responsible for tax debts that cannot be collected from the limited liability company with all their personal assets and shareholders of the company proportional to their company shareholding.
Up to this point, Turkish Council of State’s General Assembly and different Council of State divisions have been giving contrasting decisions on this issue. According to this, some tax divisions were resolving that for public debts that cannot be collected from the company, the legislator does not foresee any priority in collection from company shareholders or legal representatives first; whereas some tax divisions decided that for such public debts, you should first pursue legal representatives and continue with shareholders only if collection from legal representatives fails.
As is known, if different decisions are given by the courts in similar cases, Unification of Judgments decisions are made to combine these decisions into one opinion and then not only all the first degree courts but also high courts and government bodies such as tax administration have to comply with this decision.
Within this frame, Turkish Council of State’s General Assembly on Unification of Judgments (“Council of State General Assembly”) decided to unify the contradictory judgments about whether the tax debts of the limited liability company can be collected directly from the shareholders without any need to apply to the legal representatives first. With the Council of State’s General Assembly decision, dated December 11, 2018 and numbered 2013/1 E., 2018/1 K. it is stated that there is no order of priority for the collection of limited liability company’s tax debts from the shareholders in proportion to their shareholding or from the legal representatives, therefore it is not necessary to pursue the legal representative in order to start the collection procedure against a shareholder for tax debts.
What does the Decision on Unification of Judgments Mean ?
This decision can be considered as a point in favor of joint stock companies in terms of those who are undecided between the joint stock company and the establishment of a limited company.
Non-director shareholders of the joint stock companies have no responsibility for public debts; while there is also no obligation that at least one of the shareholders is to be a “member of the Board of Directors” , in other words a legal representative (and to be liable for the uncollected tax debts of the the company with personal assets). Therefore, as an investor, you can become a partner in a joint stock company and trust that you will not face any tax liabilities above your company shareholding in the future.
However, in limited liability companies, as stated above, each shareholder is responsible for uncollected tax liabilities of the limited liability company proportional to their shares in the company and furthermore, at least one of the shareholders must be a “Director” (in other words “legal representative”). This means that the said shareholder/director is responsible for the company’s tax and insurance premium debts with all his/her assets. In accordance with the final Decision on Unification of Judgments, the non-director shareholders’ defense that it is necessary to pursue the legal representative first in order to start pursuing the shareholder in the collection of tax liability of limited liability companies has collapsed and it has become easier for the tax administration to collect these tax debts.