www.pwc.

com/goingglobal

Real Estate Going Global Turkey

Tax and legal aspects of real estate investments around the globe 2012

Real Esate Going Global Turkey 1

Contents

Contents
Contents ............................................................................................................................... 2 Real Estate Tax Summary Turkey ................................................................................... 3 Contacts .............................................................................................................................. 10

All information used in this content, unless otherwise stated, is up to date as of 18 June 2012.

Real Estate Going Global Turkey 2

Real Estate Tax Summary Turkey

Real Estate Tax Summary Turkey General

According to article 35 of Land Registry Law numbered 2644 (the Law), in principle, foreign individuals may acquire immovable assets. Before 18 May 2012, such acquisition was subject to the conditions provided under the Law. The respective conditions were as follows: Existence of Reciprocity between Turkey and the respective country of the individual wishing to acquire real estate; (both de jure and de facto); The total size of the real estate acquired or in which an interest is acquired will not exceed 2.5 hectares; and The total size of real estate to be acquired in one city will comply with any restrictions on size imposed by the Council of Ministers for that particular city.

On the other hand, Law amending the Land Registry Law has been published in the Official Gazette dated 18 May 2012 and numbered 28296. (Amendment) With the Amendment; The Reciprocity principle provided under article 35 of the Law has been abolished. Therefore, foreign individuals may acquire real estates in Turkey without complying with the Reciprocity principle as of 18 May 2012. The Council of Ministers is the competent authority to determine the nations of whose citizens may acquire real estate in Turkey; and The area threshold provided under article 35 of the Law has been expanded. With the Amendment, the total size of the real estate acquired or an interest acquired by the foreign individual has been limited to 30 hectares nationwide and 10% of the district where the real estate is located.

In principle, foreign legal entities are not allowed to acquire real estate in Turkey. The only type of foreign legal entity that might acquire real estate in the country is a foreign trading company. Other foreign legal entities, such as charities, foundations, societies and funds are not allowed to obtain real estate. Furthermore, foreign legal entities incorporated under the laws of a foreign country may acquire real estates in Turkey, only if such acquisition is allowed under the specific laws, i.e. Petroleum Law, Tourism Encouragement Law. On the other hand, establishing a company that will be resident in Turkey in order to acquire real estate or limited real right is also subject to some restrictions according to article 36 of the Land Registry Law. Companies established in Turkey by foreign investors are deemed to be Turkish companies, but their acquisition of real estate and limited real rights in Turkey have been restricted by the decision of Constitutional Court on 11 March 2008 to cancel article 3(d) of the Foreign Direct Investment Law, which offered equal terms and conditions in acquiring real estate to both (i) a national

Real Esate Going Global Turkey 3

Real Estate Tax Summary Turkey

company with a domestic capital and (ii) companies established in Turkey by foreign investors. According to article 36 of the Law, companies established in Turkey by foreign investors may acquire and use real estate ownership or limited real rights, in order to achieve objectives set out in their articles of association. The same principle applies to a transfer of the real estate to another foreign capitalised company established in Turkey, or in a case where a national company with domestic capital owning a real estate becomes a foreign capitalised company by means of a share transfer transaction. Real estate acquisitions by these types of companies in military forbidden zones, security zones as well as in strategic zones are subject to the permission of the Turkish General Staff or commandership to be authorised by the General Staff, whereas such acquisitions in private security zones are subject to the permission of the relevant local governorship. Permission depends on how well the acquisition is seen to conform to the countrys safety and the companys scope of activity. The decision is therefore taken by a commission appointed within the governorship representing the relevant administrations. Article 36 also provides that any acquisition made in contravention of the Law will be liquidated by the Ministry of Finance, unless the owner liquidities the respective real estate within the given time limit by the Ministry of Finance. It is worth noting that the owner will be paying in cash after the liquidation process. Finally, a regulation has been issued by the Ministry of Public Works and Settlement, which regulates the terms and conditions of real estate acquisition by foreign capitalised companies within the framework of article 36 of the Land Registry Law.

Taxation of rental income

Corporation tax
Net rental income acquired by resident corporate entities is taxable in Turkey. Rental income acquired by corporate entities is included in the annual corporate income tax return, and is subject to 20% corporate tax.

Dividend withholding tax

Dividends when distributed to non-residents or individual shareholders are subject to withholding tax at the rate of 15%. The rate may be reduced by virtue of bilateral treaties.

Determination of tax base

Tax deduction
Property-related costs such as repair and maintenance, insurance and interest are taxdeductible. Taxpayers are free to include in the cost expenses for public notaries, court fees, assessments, commissions, and public announcements as well as for Real Estate Purchase Tax, or they can be considered as an expense in the determination of income.

Expenses included in the cost of real estate

Expenses arising from the purchase and demolition of an existing building and the levelling of its site are included in the cost, supplementary to the purchase price.

Real Estate Going Global Turkey 4

Real Estate Tax Summary Turkey

According to article 272 of the Tax Procedural Law, expenses incurred in expanding real estate or increases in commercial worth (but excluding expenses for normal maintenance, repairs, and cleaning) are added to the cost of the real estate.

Depreciation
The applicable depreciation rates are between 2% to 10% for different types of buildings. However, all companies and those real persons who are obliged to keep their statutory books and financial tables on a balance sheet basis can apply the declining balance method for depreciation. This means that the 2% to 10% depreciation rate becomes 4% to 20%. But, even with this method, the depreciation period cannot be shortened compared to the normal method. Vacant land is not depreciable.

Taxation of capital gains

Taxation of capital gains derived by resident corporations
Profits of corporate taxpayers stemming from the sale of assets are included in the corporate tax base of the company and taxed at the normal corporation tax rate at 20%. There is no separate capital gains taxation. In calculating the net capital gain by corporations, a special corporate tax exemption regulated under article 5 of Corporate Income Tax can be used to eliminate taxation. However, this tool cannot be used by companies whose main or regular activity is property trading and/or leasing. In accordance with this exemption, 75% of the capital gains derived from disposal of property are exempted from corporate tax provided that the property is held for at least two years. In order to benefit from this 75% capital gains exemption, the sales profit must be booked in a special reserve account for at least five years. The exemption will be applied in the period that the sale takes place. If the sales revenue is not collected within two years, or the related profit is withdrawn from the special reserve account, or transferred to any account apart from the paid-up capital, the taxes not accrued on time will be claimed back with penalty. Please note that distribution of that income in any way or liquidation of the company within five years will lead to full taxation. Please note that the seller is also exempt from stamp tax under the above-mentioned corporate tax exemption. VAT exemption is also applicable for the sale of properties held for at least two years according to the VAT Law. Again this VAT exemption will not be applicable if the main or regular activity of the seller company is real estate trading. (Property sales by individuals not involved in any commercial activity are exempt from VAT.)

Taxation of capital gains derived by non-resident corporations

In principle, capital gains of non-resident entities from disposal of real estate are taxable in Turkey since real estate is located in Turkey.

Real Estate Going Global Turkey 5

Real Estate Tax Summary Turkey

Capital gains are calculated as the positive difference between the sales price and the acquisition cost. Acquisition cost is indexed with monthly inflation rates for determination of net capital gains. The cost adjustment can only be made if the wholesale price index is at least 10%. Net capital gains calculated as such are subject to corporate tax and dividend withholding tax as discussed above. Note that the bilateral tax treaty provisions do not limit Turkeys right to tax capital gains from disposal of real estates.

Taxation of capital gains by individuals

Capital gains of individuals from the sale of property are exempt from income tax, provided that the related property has been owned for at least four years (for the properties acquired after 1 January 2007 five years). Capital gains are calculated as the positive difference between the sales price and the acquisition cost. Acquisition cost is indexed with monthly inflation rates for determination of net capital gains. The cost adjustment can only be made, however, if the increase in the producers price index is at least 10%. Furthermore, capital gains of individuals derived from the disposal of real estate property will not be taxed if the gross amount of such income does not exceed TRY 8,800 (approximately EUR 3,750 under the current exchange rate). Capital gains calculated as such are taxed at progressive tax rates varying between 15% and 35%.

Real estate related taxes

Value added tax (VAT)
Under the Turkish tax system, liability for VAT arises: when a person or entity performs commercial, industrial, agricultural or independent professional activities within Turkey. when goods or services are imported into Turkey. VAT is levied at each stage of the production and the distribution process. Although liability for the tax falls on the person supplying or importing the goods or services, the real VAT burden is borne by the final consumer. This result is achieved by a taxcredit method where the computation of the VAT liability is based on the difference between the VAT liability of a person on his sales (output VAT) and the amount of VAT they have already paid on their purchases (input VAT).

Buying and selling of real estate is subject to Turkish VAT at 18%. However, there are certain VAT exemptions applicable for real estates. Available exemptions are listed below: selling of real estate by resident corporations that have held the property for at least two years (Note that this exemption is not valid for companies whose main or regular activity is property trading), selling of real estate by individuals who are not estate agents,
Real Estate Going Global Turkey 6

Real Estate Tax Summary Turkey

delivery of offices and factories that are built in Organised Industrial Zones or Small Industrial Villages, selling of real estate property by the State.

Additionally, the sale of houses with a total surface area equal to or less than 150 square metres and delivery of houses to housing cooperatives are subject to VAT at the rate 1%. VAT, if incurred by non-resident companies, cannot be offset or recovered, and should be considered as part of the cost.

Title deed fee

The acquisition of legal title to Turkish property is subject to 1.65% title deed charge on the higher of property tax value or the transaction amount. The same charge will apply when the property is sold. This charge is applied separately for buyer and seller. As a result, the total title deed charge over the property that has to be paid would be 3.3%.

Stamp tax
Stamp tax is calculated over the sales price of the real estate property indicated in the asset purchase agreement (if any) at a rate of 0.825% with a ceiling of TRY 1,379,775.30 (approximately EUR 592,000 under current foreign exchange rate; subject to annual revaluation) for the year 2012. Note that each and every signed copy of an agreement is separately subject to stamp tax.

Property tax
Property tax is levied on the owner of real estate at 0.2% on buildings. If the buildings are used for residential purposes it is reduced to 0.1%. For newly constructed buildings, however, this tax cannot be lower than the property tax of the land on which it is built. In a few cases, such as retirement homes, the tax rate is 0%. Also, the property tax rate for development land is 0.1%, whereas the rate for arable land is 0.3%. Furthermore, the effective property tax rates are increased from 0.1% to 0.2% for residences and from 0.2% to 0.4% for other buildings that are within the borders of metropolitan areas.

Real estate investment companies (REICs)

Real estate investment companies (REIC) are defined by the Capital Markets Board of Turkey as capital market institutions that invest in real estates and capital market instruments based on real estates, real estate projects and rights based on real estates. REICs may be established for a limited time to undertake a certain project, for a limited or unlimited time to invest in certain areas or for a limited or unlimited time without any limitation of purpose. Furthermore, REICs may be constituted by way of establishing a new company as a REIC, or existing companies can be converted into a REIC, at least 25% of whose shares should be offered to the public upon their establishment/conversion within three months, regardless of their initial paid-in

Real Estate Going Global Turkey 7

Real Estate Tax Summary Turkey

capital as of 2012. The minimum paid-up capital requirement for a REIC is TRY 23.75m.

Taxation of a REIC
Profits generated from the activities of REIC are exempt from corporate tax and the dividend withholding tax rate is 0%. The transactions of REICs are, however, subject to VAT and most other transfer taxes.

Taxation of investors receiving dividends from a REIC

Although dividend distributions to individual and non-resident shareholders of Turkish companies are currently subject to dividend withholding tax at the rate of 15% in Turkey (double tax treaty provisions are reserved) since the withholding tax rate is determined as 0% for REICs by the Council of Ministers, dividend distributions to individual and non-resident shareholders of the REICs currently have no dividend withholding tax burden at all.

Dividends received by resident corporations

Since REICs are exempt from corporate tax participation exemption is not applicable for the dividends received from REICs. So, dividends received by corporations in Turkey from REICs are subject to corporation tax. And then, if distributed to nonresident companies or individuals, those distributions are also subject to dividend withholding tax in line with local regulations.

Dividends received by non-resident corporations

Taxation of dividends in the hands of a non-resident corporation depends on the tax treatment of the country of residence.

Dividends received by resident individuals

Resident individual shareholders of REICs are obliged to declare half of the dividends received from REICs if half of the dividends received are higher than the declaration limit (approximately EUR 10,000 for the year 2012). Declared income will be subject to income tax at the progressive rate between 15% and 35%.

Dividends received by non-resident individuals

Taxation of dividends in the hands of non-resident individuals depends on the tax treatment of the country of residence.

Taxation of capital gains from disposal of REIC shares

Capital gains received by resident corporations
The capital gains derived from the sale of REIC shares by resident legal entities is to be included in the corporate income and will be subject to corporate tax. However, the corporate tax exemption method can be used to minimise the tax burden on the sale of shares.

Real Estate Going Global Turkey 8

Real Estate Tax Summary Turkey

Capital gains received by non-resident corporations

Since REICs are public companies, capital gains derived from the sale of shares in the Istanbul Stock Exchange by non-resident legal entities that do not have a permanent establishment (PE) in Turkey will be subject to taxation via withholding tax. The current rate of 0% withholding tax is applicable for the capital gains received by non-resident corporations and that tax will be the final tax for those companies. Capital gains from the sale of non-listed Turkish company shares by non-resident corporations that do not have a PE in Turkey are to be declared after the application of cost adjustment (adjustment of the original cost with the wholesale price index except for the month in which the shares are sold if the total increase in WPI is more than 10%), within 15 days following the sale of shares, through a special corporate tax return and be taxed at standard corporation tax rate. Additionally, a dividend withholding tax will be applied on the net gains. But, since most of the double tax treaties prohibit Turkeys taxation right on these capital gains, depending on the holding period of the Turkish company shares, it is strongly advised that examination of double tax treaties be made before these transactions are made.

Capital gains received by resident individuals

Since REICs are public companies, capital gains derived from the sale of shares in the Istanbul Stock Exchange by resident individuals will be subject to taxation via withholding tax. The current rate of 0% withholding tax is applicable for the capital gains received by resident individuals and that tax will be the final tax for those individuals.

Capital gains received by non-resident individuals

Since REICs are public companies, capital gains derived from the sale of shares in the Istanbul Stock Exchange by non-resident individuals, will be subject to taxation via withholding tax. The current rate of 0% withholding tax is applicable for the capital gains received by non-resident individuals and that tax will be the final tax for those individuals.

Real Estate Going Global Turkey 9

Contacts Turkey

Contacts
Advisory Husnu Can Dncsoy Tel: +90 212 326 6054 E-mail: husnu.dncsoy@tr.pwc.com Erkam Kl Tel: +90 212 376 5314 E-mail: erkam.kilic@tr.pwc.com Assurance Haluk Yalcin Tel: +90 212 326 6065 E-mail: haluk.yalcin@tr.pwc.com Engin ubuku Tel: +90 212 326 6180 E-mail: engin.cubukcu@tr.pwc.com Tax Ersun Bayraktaroglu Tel: +90 212 326 6098 E-mail: ersun.bayraktaroglu@tr.pwc.com Baran Akan Tel: +90 212 326 6678 E-mail: baran.akan@tr.pwc.com Legal Nilgun Serdar Simsek Tel: +90 212 326 6368 E-mail: nilgun.serdar@tr.pwc.com

Real Esate Going Global Turkey 10

This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in the publication, and, to the extent permitted by law. PwC does not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it. 2012 PwC. All rights reserved. Not for further distribution without the permission of PwC. PwC refers to the network of member firms of PricewaterhouseCoopers International Limited (PwCIL), or, as the context requires, individual member firms of the PwC network. Each member firm is a separate legal entity and does not act as agent of PwCIL or any other member firm. PwCIL does not provide any services to clients. PwCIL is not responsible or liable for the acts or omissions of any of its member firms nor can it control the exercise of their professional judgment or bind them in any way. No member firm is responsible or liable for the acts or omissions of any other member firm nor can it control the exercise of another member firms professional judgment or bind another member firm or PwCIL in any way.

www.pwc.com