Real estate development and construction are considered the flagships of the Turkish economy. They support nearly 200 other sectors. Yet Turkish real estate finance has traditionally been carried out through simple lending operations of financial markets and banks. This was mainly because of the lack of large institutional players in real estate development. Institutional players were reluctant to enter the market in the presence of economic and political risks, and the lack of an organised legal infrastructure.
As a result of the efforts of the Turkish Capital Markets Board, and inspiration that the US real estate investment trust model provided, real estate investment partnerships (Reips) were introduced to Turkish legislation more than a decade ago. But Reips were not popular in Turkey until recently because of high inflation rates and political instability.
With the help of structural developments in the Turkish economy and legislation, and a steady inflation rate of about 10%, Turkey has become one of the most attractive markets in Europe for foreign real estate investors. It is worth mentioning that direct real property acquisitions by non-resident corporations are limited in Turkey. But indirect acquisitions through special-purpose vehicles incorporated in Turkey are virtually unrestricted.
Under Turkish law, Reips are special joint-stock corporations, which can only invest in real estate portfolio investments, in a tax-exempted manner. In return for the large benefits that Reips and their non-resident investors receive, the government limits the scope of their activity to real estate portfolio investment and diversification. Reips are prohibited from carrying out construction and/or facility management activities. In addition, they are subject to a mandatory public offering process for a minimum of 49% of their shares, the term of which depends on their share capital. This requirement is summarised as follows:
- Reips with share capital of less than TL50 million (about €28 million) must apply for a public offering within one year of becoming a Reip.
- Reips with share capital between TL50 million and TL100 million (about €56 million) must apply for a public offering within three years of becoming a Reip.
- Reips with share capital of more than TL100 million (about €56 million) must apply for a public offering within three years of becoming a Reip.
It is noteworthy that common standards such as disclosures and audits applicable to listed or publicly traded companies are also applicable to Reips, mostly after their public offering.
Turkey has a uniform 20% tax rate on all types of corporate gains. Article 5/1-d of the new Turkish Corporate Tax Law entails a full corporate tax exemption (instead of the 20% general flat rate) for all types of income generated by Reips. The only pre-requisite to benefit from this exemption is that existing companies gain Reip status, and companies newly receiving Reip status register it with the Capital Markets Board of Turkey.
Under the Turkish dividend distribution regime, a 15% withholding applies to the dividends distributed by resident companies to non-resident shareholders. There are certain advantageous jurisdictions under the double tax-treaty network of Turkey, in which 10% (or, rarely, 5%) withholding rates are applicable for shareholders incorporated in such jurisdictions. But the dividend withholding rate is determined as 0% in the dividend distributions of Reips to their non-resident shareholders, regardless of the foreign jurisdiction in which the relevant shareholder resides, except for tax havens to be determined by the Council of Ministers.
Even though a specific exemption is not provided exclusively for the sales of Reip shares, the general benefits under the Turkish taxation system also cover the sales of Reip shares. Accordingly, the sale of public shares traded through the Istanbul Stock Exchange is exempted from capital gains tax for one year from the date of acquisition. Further, in most cases, the sales of non-publicly traded shares of Reips between non-resident investors are not taxed in Turkey. Bearing in mind that most Reip share transfers take place between non-residents, this exemption provides a preferable exit mechanism to non-resident investors.
A promise-to-sell agreement is a commonly used agreement provided under Turkish legislation for securing a prospective real estate investment. It is generally subject to the fulfilment of conditions precedent, such as the due construction of a development. A separate stamp tax exemption concerning the general 0.75% stamp tax applicable in promise-to-sell agreements is also available exclusively for the promise-to-sell and purchase agreements relating to the portfolios of Reips.