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Understanding Nominee Shareholder Risks in Turkey

When establishing a company in Turkey, some foreign investors consider using nominee shareholders – Turkish citizens who hold shares on behalf of the actual foreign owner. While this practice exists, it carries significant legal, financial, and operational risks that every foreign investor must understand before making this decision. This article examines why nominee arrangements are risky and what legitimate alternatives are available.

What Is a Nominee Shareholder?

A nominee shareholder is a person who holds company shares in their name on behalf of another person (the beneficial owner). In Turkey, this typically involves a foreign investor asking a Turkish citizen to register as the official shareholder while the foreign investor maintains actual control and ownership through a private side agreement.

Common reasons foreign investors consider nominee arrangements include:

• Perceived faster company formation process
• Avoidance of foreign ownership registration requirements
• Desire to appear as a local company for government tenders or sector restrictions
• Tax planning assumptions (often misguided)
• Avoiding work permit requirements for foreign shareholders

Major Risks of Using Nominee Shareholders

1. Loss of Control and Assets

The most critical risk: the nominee is the legal owner of the shares. In Turkey’s legal system:

• The trade registry reflects the nominee as the official shareholder
• Private side agreements (nominee agreements) have limited enforceability in Turkish courts
• The nominee can legally sell, transfer, or encumber the shares without the beneficial owner’s knowledge
• The nominee can vote against the beneficial owner’s interests at shareholder meetings
• If the relationship deteriorates, recovering control can be extremely difficult and costly

2. Legal Gray Area

Turkey does not have specific legislation regulating nominee shareholder arrangements. This creates uncertainty:

• Turkish courts may or may not enforce nominee agreements depending on the circumstances
• If the arrangement is designed to circumvent a legal restriction, courts are more likely to invalidate it
• The beneficial owner has no standing as a shareholder in disputes before the trade registry or courts

3. Tax and Financial Risks

• Double taxation: Dividends are paid to the nominee, who must declare them as personal income and pay taxes. Transferring the dividend to the beneficial owner creates another taxable event
• Tax evasion allegations: If discovered, authorities may view the arrangement as tax evasion, leading to penalties and criminal liability
• Nominee’s personal debts: If the nominee has personal debts or faces bankruptcy, the company shares can be seized by their creditors
• Inheritance risk: If the nominee passes away, the shares become part of their estate and are distributed to their legal heirs under Turkish inheritance law

4. Criminal Liability Exposure

Using nominee shareholders to circumvent certain regulations can constitute criminal offenses:

• Tax fraud: If the arrangement is used to evade taxes
• Anti-money laundering violations: Turkey’s AML regulations require disclosure of beneficial ownership
• Violation of sector-specific regulations: Some sectors restrict foreign ownership. Using nominees to bypass these restrictions is illegal
• Commercial fraud: If third parties are misled about the true ownership of the company

5. Banking and Financial Operations

• Banks may freeze accounts if they suspect nominee arrangements in violation of AML/KYC requirements
• The beneficial owner may not have signatory authority on company bank accounts
• International fund transfers to the beneficial owner may trigger AML investigations

Real-World Scenarios: What Can Go Wrong

Scenario 1: The “Ransom” Situation

A foreign investor uses a local employee as a nominee shareholder. After a disagreement, the nominee refuses to transfer shares back unless paid a large sum. The foreign investor has no legal standing to force the transfer because the nominee is the registered owner.

Scenario 2: The Inheritance Problem

A nominee shareholder passes away unexpectedly. The shares enter the probate process and are distributed among 5 heirs under Turkish inheritance law. The beneficial owner must negotiate with all heirs simultaneously to regain control of their own company.

Scenario 3: The Tax Audit

During a tax audit, authorities discover the nominee arrangement. The company faces back taxes, penalties, and interest for undeclared beneficial ownership. Both the nominee and the beneficial owner face potential criminal charges for tax fraud.

Legitimate Alternatives to Nominee Shareholders

Foreign investors have several legal and safe alternatives in Turkey:

1. Direct Foreign Ownership

Turkey allows 100% foreign ownership in most sectors. A foreign individual or company can directly own a Turkish LLC (Ltd. Şti.) or Joint Stock Company (A.Ş.) without any Turkish partner.

• Fully legal and protected
• The foreign owner is the registered shareholder with full legal rights
• FDI registration provides additional protections including free profit transfer

2. Branch Office

Foreign companies can open a branch office (Şube) in Turkey. The branch is legally an extension of the parent company:

• No separate legal entity needed
• The parent company maintains full control
• Suitable for companies wanting to test the Turkish market

3. Liaison Office (İrtibat Bürosu)

For non-commercial activities like market research and coordination:

• Cannot generate revenue in Turkey
• Low-cost presence for market exploration
• Fully controlled by the foreign parent company

4. Joint Venture with Proper Legal Structure

If you want a local partner, structure it as a legitimate joint venture:

• Formalized through the Articles of Association
• Registered at the Trade Registry
• Clear shareholder agreement defining rights, obligations, and exit mechanisms
• Fully transparent and legally enforceable

Turkey’s Beneficial Ownership Registry (TUBOS)

Turkey has implemented a Beneficial Ownership Registration System (TUBOS) as part of its compliance with international AML/CFT standards. Companies must declare their ultimate beneficial owners to the Revenue Administration. This system makes it increasingly difficult and risky to maintain hidden ownership structures through nominees.

How Celikel CPA Protects Your Interests

At Celikel CPA, we strongly advise against nominee shareholder arrangements and instead help foreign investors structure their Turkish presence safely and legally:

• 100% foreign-owned company formation with full shareholder protection
• FDI registration with the Ministry of Industry and Technology for maximum legal protection
• Proper shareholder agreements for joint ventures with Turkish partners
• Tax-efficient structures that comply with Turkish and international regulations
• Ongoing corporate governance to ensure your ownership rights are always protected
• TUBOS compliance – beneficial ownership registration management

Contact Celikel CPA today to discuss the safest and most efficient way to structure your investment in Turkey. Don’t risk your entire investment on an unenforceable nominee arrangement.