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Advantages of Real Estate Investment Funds

Under Turkish Law, real estate investment funds are regarded as asset clusters without separate legal entity. These funds are managed by real estate investment fund companies on a fiduciary basis after acquiring the relevant approvals from the Securities Market Board (“SMB”). Utilising real estate investment funds for real estate investments in Turkey offer quite a few advantages to the investors, mainly on tax-related aspects, which are briefly outlined as follows:  

1. Tax-Related Advantages

1.1 Corporate Tax

According to the Corporate Tax Act numbered 5520, profits made by real estate investment funds are exempt from corporate tax. Likewise, according to the Cabinet Decree 2009/14594, no withholding tax applies to the profits made by real estate investment funds. Therefore, as long as the earnings stay within the fund, tax load relating to them is zero.

1.2 Stamp Tax

According to the Stamp Tax Act numbered 488, no stamp tax applies to real estate purchases or sales (including undertaking to sell at a later date) provided that these transactions are exclusively related to the fund’s real estate portfolio. Stamp tax applies as a percentage over the value of the transaction. Therefore, depending on the value of the relevant real estate, a considerable amount of stamp may become due during the transactions. By exempting above transactions from stamp tax, the law substantially reduces the transaction costs for real estate investment funds.   

1.3 Increment Value Tax

Profits arising out of selling the participation shares of the funds are subject to withholding tax. If the profit earner is a real person the withholding tax percentage is set as 10%. However, if it is a judicial person who made the profit, the withholding tax percentage is set as 0%—that is to say, no withholding tax applies.

1.4 Withholding Tax over Dividends

The issue of whether withholding tax applies over the dividends distributed by a real estate investment fund is not settled under the law. The main reason of this is that, at the time of enactment of the relevant tax legislation and secondary legislation, it was not legally possible for a real estate investment fund to distribute dividends. It is made possible with the section 27 of the SMB Communique numbered III-52.3, dated 01.07.2014. Hence, the relevant tax legislation and regulations do not provide a clear rule for or against with respect to this issue. Although the Revenue Tax Act numbered 193 section 75 classifies dividends paid over the participation documents to investment funds are classified as “security income” under the said section. However, in practice, there has been consensus that the term “dividend” in that section refers to the earnings acquired by returning the participation share to the fund or selling it to a third party and the tax practice was in line with this understanding. Therefore, there is an ambiguity as to the approach to be taken regarding such dividends. Some tax practitioners argue that these dividends shall be treated as if they are distributed by an ordinary company in which case withholding tax would apply. Others contend that no withholding tax should be applied over such dividends. The Revenue Administration’s draft guidance states that periodic incomes earned during the time when the participation shares are held are to be subject to withholding tax pursuant to provisional s. 67 of Income Tax Act. Indeed, there should be no reason to discriminate the revenue generated by selling/returning the participation shares or acquiring dividends from the investment funds as the former was the only way to acquire “dividend” (so to speak) out of the fund. Therefore, over dividends distributed to real persons, 10% withholding tax and over dividends distributed to commercial companies incorporated in Turkey and foreign companies of a similar nature 0% withholding tax (provisional s. 67/1) should apply.

2. Immunity from Seizures for Real Estates within the Fund

Pursuant to the section 5(2) of the Communique numbered III.52-3, including for the purposes of collection of public debts, assets in real estate funds cannot be seized, cannot be subject to interim injunctions and they cannot be included in bankruptcy estate. In this sense, the fund’s assets are separated from the founder and the manager of the fund. Likewise, the manager is obliged to act for the best interests of each of the funds that it manages. This understanding of the law serves the purpose of protecting the investments made by the investors participated to the fund.

Likewise, when multiple persons have proprietary rights over a real estate according to the rules on shared ownership, there is a possibility that the real estate commonly owned may be subject to a seizure because of an unpaid debt of one of the co-owners. However, when the investment is made through a real estate fund, and as a result the owner in the title deed of the relevant real estates is the fund itself, such a seizure risk will not exist.

3. Audit by the SMB

Establishment and management of real estate investment funds is an activity which is subject to the SMB’s approval. The fund managers are under the SMB’s scrutiny during the time that they continue managing the fund(s). For example, as per the section 25 of the Communique numbered III.52-3, funds need to submit regular reports to the SMB and the investors.

4. Ease of Transaction for Foreign Investors

On occasions, foreigners who wish to buy real estates in Turkey may encounter with legal barriers. For example, as per the Title Deed Act numbered 2644, only foreigners having the citizenship of one of the countries designated by the Presidency of Turkey can acquire real estates. Furthermore, within this list, some foreigners would require a residence permit for being able to acquire a real estate. Moreover, in order to carry out the transaction for taking over the real estate can only be executed before the relevant title deed office. The buyer and the seller should either appear personally, or give someone a power of attorney so that such person can carry out the transaction. Hence, for foreigners wanting to remotely acquire a land, the second option appears to be the only option and this, rightfully, raises concerns for such foreigners. By making the investment through a real estate investment fund, these formalities can be circumvented. 

5. Ease of Heritage Management

As mentioned above, the owner of the record of properties in the fund is the fund itself in the relevant title deed offices. This makes it easier to partition the assets to the heirs as it only includes the transfer of the participation document.

@Kesikli Law Firm

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