Banks using Islamic finance models in Turkey started their
activities as early as 1984, although the sector witnessed a
significant boost only recently, in line with the increase in
the worldwide application of Islamic finance transactions.
Since 2005, these institutions have been referred to as
participation banks, by virtue of the Turkish Bank Code (dated
October 19 2005 and numbered 5411). As of May 2012, there are
four participation banks either fully established, or operating
through a branch office, in Turkey, namely Albaraka Turk, Bank
Asya, Kuveyt Turk and Turkiye Finans (formerly the Faisal
Finance Institution). Turkish participation banks follow global
practices, using various financing models approved by the
shariah scholars, such as sukuk al ijara,
mudarabah, musharakah and murabahah. With the
recent increase in activity, their aggregate transaction volume
has multiplied over the years, reaching $700 billion as of May
2012 (according to The Participation Banks Association of
Turkey).
Among these, sukuk al ijara, a type of sukuk
where the underlying transaction is a sale and leaseback
arrangement, is gaining significant importance with the recent
legislative changes facilitating its implementation. Until
2010, Turkish legislation gave very few incentives for the
issuance and sale of sukuk. Moreover, the financial
institutions, the originators (as asset owners) and investors
(as sukuk holders) in asukuk al ijara
transaction were subject to various tax implications applicable
to a regular sale and leaseback transaction, as will be
explained below. One such setback was the value added tax
("VAT") incurred on each separate transaction constituting a
one and singleijara (Article 28 of the VAT Code
numbered 3065 and dated October 25 1984).
With the recent regulation forming the backbone of sukuk al
ijara offerings and private placements in Turkey and the
amendment to the tax regulations that took place in early 2011,
the Turkish sukuk al ijara market can now be deemed to
be functioning. A very recent development that will push
forward the progress is the omnibus bill which entered into
force on June 29 2012, that enables the issuance of Treasury
sukuk al ijara. These regulations as a package, aim to
encourage the use of Islamic finance tools and to strengthen
the sukukmarket in Turkey.
Introducing lease certificates
The first recent activity in an otherwise dormant
sukuk market was the enactment of the Capital Markets
Board’s (CMB) Communiqué on the Principles
Regarding Lease Certificates and Asset Lease Companies
("Communiqué") in April 2010. By way of this
Communiqué, lease certificates were introduced to the
Turkish market for the first time. While the term lease
certificate is used in the Communiqué, it also uses the
term lease-backed sukuk, in other words sukuk al
ijara.
The Communiqué focuses on lease certificates,
particularly the issuance and sale of ijara
certificates. It also regulates the structure of financial
institutions – special purpose vehicles ("SPV"), and
their principles of incorporation and activities. Setting out
the mechanism forsukuk al ijara and enabling the trade
of lease certificates at the exchange market, the
Communiqué is pivotal in enabling asset lease SPVs to
actively issue and sell ijara certificates in Turkey.
In that respect, the asset lease SPVs can be established by
banks, intermediaries or the originators and can only be
incorporated as a joint-stock company. The Capital Markets
Board and the Banking Regulation and Supervision Agency (BRSA)
both have supervisory authority over the SPVs. The CMB is
granted the authority to approve the Articles of Association of
an asset lease SPV with consultation to the BRSA. The main
supervisory authority remains the CMB, subject to the
provisions of the Turkish banking regulations.
The Communiqué outlines the rules for a sukuk al
ijara public offering and the content of the offering
circular. With that, the public offer can only be made through
an intermediary institution with a license to that effect and
these intermediaries are the sole participants authorised for
the payment of profits over the sukuk. Private
placement is regulated as an alternative to the public offer in
the Communiqué, in which case an offering circular is
not required. Both the private placement and the public
offering are subject to the strict scrutiny of the CMB as
outlined in the Communiqué.
The Participation Index
One of the most significant recent developments is the
establishment of trade of the Participating Index Investment
Fund on Istanbul Stock Exchange on May 16 2012. This trade is
sponsored by Albaraka Turk, Bank Asya, Kuveyt Turk and Turkiye
Finans through an intermediary. The Participation Index is a
stock market index consisting of stock certificates issued in
accordance with the principles of participation banking.
Selection of stock certificates would be made based on Index
Rules created in this direction. In addition, companies that
would operate in the Participation Index are required to comply
with certain financial ratios.
Tax exemptions
Taking into account the tax barriers in this field, an omnibus
bill was passed on February 13 2011, providing certain tax
exemptions forsukuk al ijara transactions. Among other
unrelated legislative amendments, the omnibusbill brought
changes to various taxation aspects relating to the
ijara sukuk through amendments made to
various Turkish tax regulations, as described below.
A corporate tax of 20% applies to the earnings of a company
under the Turkish Corporate Tax Code (numbered 5520 and dated
June 13 2006). Particularly, through the sukuk al
ijara process, the sale of the asset from the originator
to the sukuk SPV and sale of the asset back to the
originator by the sukuk SPV create earnings.
Ordinarily, such corporate earnings would have been subject to
the 20% corporate tax. The omnibus bill now exempts
corporations from this obligation.
Pursuant to the Turkish VAT Code, a 1% to 18% VAT is applied to
sale and/or leasing transactions. In this regard, sale of the
asset by the originator to the sukuk SPV and vice
versa, leasing of the asset by that SPV to the originator, as
well as issuing of lease certificates would have been subject
to VAT. With the amendments brought by the omnibus bill, VAT
will no longer be applicable to the sale and leaseback
transaction nor to the lease certificate issued for that
underlying transaction.
Under the Turkish Stamp Tax Code (numbered 488 and dated July
11 1964), for each document or agreement issued in relation to
the sale and leasing of assets, an 0.825% stamp tax applies on
the value indicated in the relevant document. The omnibus bill
also exempts the documents prepared for the sale transactions
of the asset between originator and the sukuk SPV,
mortgage transactions in relation to the immovable underlying
assets, the leasing of the assets and even the issuance of
sukuk from any stamp tax otherwise incurred.
Pursuant to the Turkish Income Tax Code (numbered 193 and dated
January 6 1961), income tax applies to earnings from movable
properties, including conventional bonds. Although the
amendments of the omnibus bill includes ijara
certificates among such bonds, it also amends the Turkish
Income Tax Code (Article 80 of the omnibus bill amends Article
75 of the Turkish Income Tax Code), setting a varying rate of 0
to 10% applicable on income generated from the issuance of
offshore sukuk. This range depends on the maturity of
theijara certificates. Earnings from ijara
certificates issued offshore with a maturity of five years are
exempt from income tax. Earnings fromijara
certificates issued offshore with a maturity of one year will
be subject to 10% income tax. A rate of 7% applies, if the
maturity is between one and three years. Finally, earnings from
offshore sukuk with a maturity of three to five years
will be taxed at a rate of 3%.
The amendments of the omnibus bill exempt the underlying
transactions in a sukuk al ijara (the transfer of
assets from the originator to thesukuk SPV and from
that SPV back to originator and establishment of any mortgage
in relation with these transfers) from administrative fees
ordinarily applicable to these transactions in accordance with
the provisions of the Turkish Act of Fees. For instance, real
estate registry fees, cadastral survey fees, notary public fees
will be exempt for sukuk al ijara transactions.
Treasury sukuk
On June 29 2012, an omnibus bill entered into force which,
among other things, enables the issuance of Treasury sukuk
al ijara (The Code numbered 6327 and dated June 13 2012
Amending the Individual Pension Savings and Investment System
Law and Certain Laws and Statutory Decrees and hereinafter
referred to as "Code numbered 6327 and dated June 29
2012").
The Code numbered 6327 and dated June 29 2012 added a new
article to the Turkish
Public Finance and Debt Management Lawregarding the
issuance of lease certificates, in the section setting forth
domestic and foreign debts. With this addition, Treasury
sukukcertificates can be issued onshore or offshore
where the underlying assets will be state-owned movable and/or
immovable properties. Only assets owned by state-owned,
publicly-traded companies are excluded from this scope. Another
form of assets which can be the basis of a Treasury sukuk
al ijara is the intangible assets of such institutions,
such as their usufruct rights or operational privileges. For
instance, the Treasury will be able to issue sukuk
certificates whereupon the income is generated from the
operation of state-owned bridges, dams, railways, highways,
airports and so on. The revenue generated from the issuance of
Treasury sukuk will be diverted to the Treasury
(Preamble of Article 29 of the Code).
The Code numbered 6327 and dated June 29 2012 provides that the
Minister of S
tate in charge of the Undersecretariat of Treasury will
authorise the Treasury to establish asset lease SPVs or
instruct public capital institutions to establish such SPVs,
for the sale, purchase, sell-back, lease, leaseback and
transfer (with or without payment) of state-owned movable,
immovable or intangible assets. These SPVs are exempt from
complying with the standard legislative requirements on
establishment, registration, operation and liquidation (such as
real estate registry changes and official form requirements
according to the reasons referred to in the Preamble of Article
29 of the Code). The wording relating to this exemption is very
vague and broad and, at this stage, it is hard to predict
exactly which requirements will be exempt. However it may be
assumed that further regulation detailing such general aspects
will be issued in the forthcoming days.
Any third-party transactions related to the underlying assets
of the Treasury sukuk will be prohibited for the
duration of the sukuk. This is to ensure that the
asset and any legal right attached thereto remains intact and
in compliance with the sukuk’s terms and
conditions. In that respect, even a third-party transferee in
good faith of such assets will not be protected (according to
Article 763/2 of the Turkish Civil Code numbered 4721 and dated
December 8 2001, the acquisitions of immovable properties by
third parties in good faith are protected against claims of
ownership). The maintenance, repair and construction of
underlying assets of lease certificates will be under the
responsibility of the originator public institution (Preamble
of Article 29 of the Code).
For ease of implementation, Treasury lease certificates issued
by the sukuk SPVs will be subject to same legislation
pertaining to Treasury bonds, which are regulated under the Law
on Central Bank of the Republic of Turkey (numbered 1211 and
dated June 3 1986) and the Turkish Capital Markets Law
(numbered 2499 and dated July 30 1981). For instance, Article
41 of the Law on Central Bank of the Republic of Turkey states
that financial services for government’s domestic
debt certificates are to be provided by the Turkish Central
Bank. This will apply to Treasury sukuk as well.
Pursuant to Article 4 of the Capital Markets Law, debt
certificates or securities issued by the general budget
institutions and contributory budget institutions (which
solely/partially produce public goods and services,
respectively, and are financed by public sources) and/or the
Turkish Central Bank are not required to be registered with the
Capital Markets Board. The same will apply to sukuk al
ijara issued and amortised by the Treasury’s
asset lease SPVs (Preamble of Article 29 of the Code).
An additional relief brought by the Code numbered 6327 and
dated June 29 2012 which enables the issuance of Treasury
sukuk is that the underlying transactions (the sale
and leaseback arrangement, for instance, of state-owned
assets), are outside the scope of the Turkish State Procurement
Law (numbered 2886 and dated September 10 1983) and the Turkish
Public Procurement Law (numbered 4734 and dated January 22
2002). Any sale and leaseback of the public institutions, in
that respect, need not to comply with the cumbersome public
tender procedures. Treasury sukuk can also be provided
as security/guarantee in a public tender.
The introduction of the Code numbered 6327 and dated June 29
2012 will undoubtedly lead Treasury sukuk to become a
significant tool in leveraging the financing of state-owned
projects, including infrastructure and transport. This is
expected to divest into state-sponsored (or co-sponsored)
areas, such as health, transport, energy, education,
telecommunication, public works and construction projects.
A last word
Without doubt the legislative developments (the
Communiqué and the following amendments made by the
omnibus bill regarding tax exemptions and the Code of June 29
2012 enabling the issuance of Treasury sukuk) provide
incentives to sukuk al ijara issuers and holders and
will bring further activity to this market. Reflections of
these improvements can easily be observed. For instance,
following the enforcement of the Communiqué and the tax
incentives, an offshore sukuk al ijara was issued in
2011 by one of the four participation banks in Turkey. In fact,
in August 2010, before the legislative improvements, the same
bank issued an offshore sukuk al ijara of $100 million
listed on the London Stock Exchange with a maturity of three
years through its Cayman Islands SPV. A further sukuk al
ijaraamounting to $350 million with five-year maturity was
issued and listed in London by the same bank, this time through
its Turkish asset lease SPV, benefiting from the tax exemptions
brought over the last year. Further information for both can be
obtained from the related official circulars.
Turkey expects to attract further investment through the Gulf
region and other jurisdictions where Islamic finance tools are
more commonly used in addition to the mechanism of, and
investors in, conventional finance schemes.
In addition to sukuk al ijara, the Turkish market has
been active in other forms of Islamic finance as well. For
instance, two participation banks were recently involved in
murabaha syndications amounting to $350 million and
$590 million, respectively.
With the recent legislative improvements, particularly the tax
relief and the formation of the backbone for sukuk
trade, Turkey is now paving the path for further inflow of
investment as well as a more developed financial market. The
Islamic finance market is likely to increase to grow, with new
onshore and offshore sukuk issuances, as well as
syndications. The recently enacted Code numbered 6327 and dated
June 29 2012 enabling the issuance of Treasury sukuk
will have a significant impact on the methods of finance and
leverage for state-owned projects and attract investors beyond
the conventional finance jurisdictions. As the Turkish Islamic
finance market becomes more sophisticated, the legislation will
too develop to accommodate more sophisticated mechanisms.
| Serra Basoglu
Gürkaynak |
 |
|
Mehmet Gun & Partners
Esentepe Mah. Kore Sehitleri Cad.
No:17 Sisli 34394
Istanbul
T: +90 212 354 00 00
F: +90 212 274 20 95
E: gun@gun.av.tr
W: www.gun.av.tr
Serra Basoglu Gürkaynak is a partner in Mehmet Gun
& Partners’ commercial and corporate
law department, leading the corporate and transactions
practice. She previously worked with White & Case
in New York and Istanbul, focusing on mergers and
acquisitions, bank finance transactions and capital
markets projects, and in-house at Sabanci Holding where
she enhanced her transactional expertise acting for,
and advising, the likes of Akbank, Enerjisa, Advansa
and other subsidiaries of the group in cross-border
mergers and acquisitions and bank finance deals. During
her role as the head of legal for
Coca-Cola’s international operations,
Gürkaynak led legal affairs in the Middle East and
the CIS, while continuing to focus on transactional law
through joint ventures, acquisitions and finance
packages of the beverage corporation in the region,
including Turkey. A member of the Istanbul and New York
Bars, Gürkaynak holds two LLM degrees, one in
corporate law from New York University and another in
EU law from Brussels Free University. She is fluent in
English and speaks French.
|
| Alisya Bengi
Danisman |
 |
|
Mehmet Gun & Partners
Esentepe Mah. Kore Sehitleri Cad.
No:17 Sisli 34394
Istanbul
T: +90 212 354 00 00
F: +90 212 274 20 95
W: www.gun.av.tr
Alisya Bengi Danisman has been working as an
associate in the commercial and corporate department at
Mehmet Gun & Partners since 2007, after obtaining
her LLB degree at Istanbul Bilgi University. She
specialises in corporate and commercial law with a
particular focus on insurance and reinsurance.
She has advised many reinsurers and insurers in
relation to disputes arising out of different types of
policies including but not limited to fire policies,
bankers’ blanket bond policies, and
directors’ and officers’
liability policies. She has assisted clients in first
instance and appeal proceedings before the civil and
commercial courts and administrative courts regarding
disputes arising from insurance and reinsurance matters
as well as transportation, warehousing, insolvency,
bankruptcy, debt collection and the like.
She has also advised clients on various aspects of
Turkish Banking Law and preparation and negotiation of
various types of contracts. A member of the Istanbul
Bar, she is fluent in English and a beginner in German
and French.
|
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