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Capital Increase with Share Premium and the Effects of Additional Tax on Startup Companies

M. Özkan Özdoğan

A. Alper Katırcı

What is Capital Increase with Share Premium and its Purpose?

In joint-stock companies, a capital increase with share premium, also known as the issuance of shares with premium, refers to the issuance of shares at a price higher than their par (nominal) value. The primary objectives of such capital increases are as follows: (i) to preserve the shareholding structure of the company during capital increases when the company’s equity exceeds its registered capital; (ii) safeguarding existing shareholders’ equity stake from unjust dilution; and (iii) to provide additional financing to the company from existing shareholders or investors. Although the capital increase with premium might appear to be an optional route that companies can consider, it essentially transforms into a necessity for enterprises harboring a substantial discrepancy between their asset valuation and registered capital. since making capital increase without any premium would violate the rights of existing shareholders and minorities.

It is noteworthy that the issuance of shares with a premium holds significance not only when a company’s equity surpasses its registered capital, but also when its valuation outpaces the registered capital. It is crucial to understand the distinction between a company’s valuation and its equity, which are not always positively correlated. This divergence is particularly evident in the context of new investment rounds for startups, where diverse valuation methodologies are employed to establish a fictitious valuation, even if the company’s equity is nearly in the negative range. This fictitious valuation then becomes the basis for determining post-money shareholding percentages. Even when a company lacks tangible present value, this method confers an anticipated present value based on its envisaged future potential. Subsequently, the post-money shareholding percentage of investors is calculated by proportioning the investment amount with the valuation amount. A capital increase is carried out by allocating the investment amount between nominal capital and share premium amounts to ensure accurate representation of shareholding percentages. This approach prevents the disproportionate dilution of existing shareholders’ shareholding percentages in start-up companies, ensuring that the newly issued shares represent a proportionate shareholding percentage in accordance with the company’s fictitious, yet current value.

The Legal Nature of Share Premiums and the Practice

According to the Commercial Code, the legal nature of premiums is that of a general legal reserve. Unless used for exceptional purposes such as issuance expenditures, redemption provisions, or charitable payments, share premiums should be added to the general legal reserve. When the general legal reserves exceed half of the registered capital, they can be utilized for different purposes with a general assembly resolution, including distribution to shareholders as dividends. However, in practice, it is commonly observed that share premiums are primarily utilized as company equity for new capital expenditures (capex) or as working capital for operational expenses (opex) rather than being disbursed as dividend payouts.

The designation of share premiums as legal reserves, with the potential for distribution among shareholders as dividends, might prompt inquiries into whether these premiums should be categorized as income. While legal scholars have engaged in debates regarding whether premiums qualify as income, the prevailing consensus leans towards viewing share premiums as distinct from income, owing to their classification as capital payments linked to share valuation. Despite tax law regulations categorizing share premiums as income, they are nonetheless exempt from corporate income tax. Similarly, these premiums receive exemption from banking and insurance transaction levies. Corporate tax legislation aligns the taxation of share premiums solely with their distribution to individual shareholders in the form of dividends.

Additional Tax Imposed by Law No. 7440

With Law No. 7440 on the Restructuring of Certain Receivables (“Law No. 7440“), an additional tax of 10% has been imposed solely on income items subject to corporate income tax that are either exempted or subject to reduced rates by tax legislation for the fiscal year 2022. As explained above, the portion exceeding the nominal value of the shares obtained by the companies due to the issuance of shares with premium is exempt from corporate income. Therefore, the additional tax introduced by Law No. 7440 will also apply to share premiums obtained in the fiscal year 2022. According to the relevant regulation, this additional tax will be calculated irrespective of the company’s income for the relevant period. Hence, this tax will still need to be paid even in cases where the company’s expenses exceed its revenues during the relevant period or even when it incurs capital losses or is in a state of insolvency.

The Impact of Additional Tax Imposed by Law No. 7440 on Start-up Companies

Start-up companies, initially established with low initial capital and subsequently funded through investment rounds, are among the most frequent users of capital increase with share premium. Consequently, these regulations will significantly impact start-up companies. Especially for start-up companies that receive investments by attributing a fictitious value based on anticipated future valuations, it is not difficult to say that the additional tax introduced by Law No. 7440 will place them in financially challenging situations. This stems from the fact that the utilization of investment funds occurs at a swifter pace than the initially projected financial runway, potentially posing challenges in realizing their growth targets. Additionally, when looking at the start-up ecosystem in Türkiye, there has been a notable 20% decrease in the investment activity during the first quarter of 2023 compared to the previous quarter, marking the lowest investment amount since the beginning of 2021[1].


It is anticipated that subjecting share premiums to additional tax, even if they are one-time occurrences for the 2022 fiscal year, will have a significant negative impact on the budgets of start-up companies. Capital increases through share premiums are primarily used to establish a shareholding structure aligning with the company’s valuation determined in capital investments. Furthermore, given the present global climate marked by a relatively subdued investor sentiment, apprehensions emerge regarding the potential for this extra tax to induce hesitation in forthcoming start-up investments within our nation, particularly concerning foreign investors.


[1] StartupCentrum. (April 10, 2023). 2023-Birinci Çeyrek Türkiye Startup Ekosistemi Yatırım Raporu. Access date 14 June 2023. URL:


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