A Quick Guide to Capital Increase by Internal Sources

Introduction

The capital of a company represents the shareholders’ obligation to contribute specific, monetary-valued assets to the business. It forms the financial foundation necessary for both establishment and continuity. Companies may increase capital to fund growth, improve financial credibility, or meet the minimum capital requirements under the Turkish Commercial Code (“TCC”).

Capital increases can be made through:

• External sources (e.g. new cash or in-kind contributions), or
• Internal sources (i.e. reallocating existing equity).

This guide focuses on capital increases from internal sources in Limited Liability Companies (“LLCs”).

What is an Internal Capital Increase?

An internal capital increase reallocates company resources into registered capital without requiring new contributions. Recognized internal sources include:

1. Legal and voluntary reserves (TCC Arts. 519–523)
2. Revaluation funds (TCC Art. 520/2; Tax Procedure Law “VUK” Art. 298)
3. Cost increase funds (Income Tax Law “GVK” Art. 38)
4. Profits from immovable or participation share sales
5. Retained earnings from prior fiscal years
6. Undecided profits from the most recent fiscal year (GVK Art. 94/6(b))

TCC Art. 462 notes that this list is not exhaustive. While internal capital increases are explicitly regulated for joint-stock companies, TCC Art. 590 permits their application to LLCs by analogy, as there is no legal prohibition.

This transaction is accounting-based: no new assets enter the company; capital is increased by reallocating existing equity. As a result, shareholders receive bonus shares (free of charge) in proportion to their shareholding.

What is a Bonus Issue?

In an internal capital increase, shareholders automatically receive free shares without making additional contributions. According to TCC Art. 462/3, this right is:

• Proportional
• Irrevocable and non-restrictable
• Legally protected, unlike rights that may be limited (e.g. audit or information rights)

This ensures equal treatment throughout the capital increase process.

How is It Done?

Although primarily regulated for joint-stock companies, TCC Arts. 462/3, 586, and 590 allow LLCs to follow a similar procedure.

Summary of Steps:

1. Apply via MERSİS and obtain a transaction number
2. Submit required documents to the Trade Registry Directorate

Key Documents:

• Petition (signed and sealed)
• General Assembly Resolution (TCC Arts. 456, 459, 460, 421; Trade Registry Regulation “TSY” Art. 94/1(a); Art. 93)
• Amended Articles of Association (reflecting updated capital, share count, and nominal values)
• Attendance List (unless resolution is unanimous)
• Financial Advisor Report (TSY Art. 94/1(c)), unless:
• The most recent General Assembly-approved balance sheet is submitted with a board declaration, or
• An interim balance sheet (if older than six months) is approved by the board (TSY Art. 94/2)

The process is finalized upon registration and announcement in the Turkish Trade Registry Gazette (TSY Art. 95).

Why Do LLCs Use This Method?

Internal capital increases offer several advantages:

• Strengthen equity without requiring cash contributions
• Improve debt/equity and capital adequacy ratios
• Prevent unnecessary reserve distributions
• Enable tax-exempt share allocations (e.g. revaluation fund transfers under VUK Art. 298 are not subject to tax or inflation adjustments)
• Capitalize unrealized gains and promote shareholder engagement

Consequently, this method is frequently used to enhance the company’s balance sheet and support sustainable growth.

With thanks to Derya Vural for her contribution.

References

Eriş, G. (2017). Ticari İşletme ve Şirketler/ Vol. 2, 3rd ed., (Only in Turkish).

Pulaşlı, H. (2024). Şirketler Hukuku Genel Esaslar, 9th ed. (Only in Turkish).