In recent years, to promote investments in Turkish lira assets in Türkiye, very encouraging incentives have been introduced regarding different investment instruments. The most striking of these incentives are the tax incentives for investment funds. These tax incentives encourage corporations and natural persons to invest in investment funds when making equity investments. In fact, the tax incentives provided to both individual investors (natural persons) and corporations in terms of investment funds have led to a significant increase in the number of new investment funds, the sizes of investment funds and the number of fund investors. The number of fund investors increased by more than one million in the last year, while the size of investment funds nearly doubled.

Making investments through these private funds has also become easier due to the ability of portfolio management companies (the "PMCs") to establish private funds for particular corporations or natural persons.

In particular, the transfer of the shares of a holding or an umbrella company, incorporating a group of companies in which more than one company operates, or the shares of each company in the relevant group, to funds established as venture capital investment funds (the "VCIFs") under a portfolio management company, is a very advantageous tax planning tool, considering the income generated by the fund and the tax exemptions granted to the income generated from the participation shares to be issued in this way.

In this article, we will, first, discuss the legal structure and taxation of PMC's, and then elaborate on the legal and tax issues regarding the practice of VCIFs, which envisage an advantageous structure in terms of the taxation of the income derived from the shares of companies established in Türkiye.

  1. PMC's

PMCs are capital market institutions established as joint-stock companies whose main activity is to establish and manage investment funds.

  1. Establishment and Operation Licenses

PMCs need the approval of the Capital Markets Board (the "Board") both for their establishment and for them to become operational. The requirements for obtaining these approvals are set forth in the Communiqué on Principles Regarding Portfolio Management Companies and Their Activities (the "PMC Communiqué").

First, the PMCs must apply to the Board in order to obtain their establishment approval. Establishment applications are decided by the Board within six months following the submission of the required documents.

If the application is deemed appropriate by the Board, the PMCs then must apply to the Ministry of Trade to complete their establishment procedures. Afterward, to become operational, the PMCs must apply to the Board for an operation license within three months starting from the date of notification of the establishment approval.

  1. Corporate Governance

Pursuant to the PMC Communiqué, there are several standards that PMCs must consider while establishing their corporate structure.

  1. Capital requirements: PMCs must have a minimum capital of TRY 30,000,000 to obtain an establishment license. In addition, depending on the size of the portfolios they manage, PMCs are required to meet the following minimum shareholders' equity amounts:

    Portfolio Under Management Minimum Equit
    Up to TRY 1,000,000,000 TRY 30,000,000
    From TRY 1,000,000,001 to TRY 4,000,000,000 TRY 40,000,000
    From TRY 4,000,000,001 to TRY 36,000,000,000 TRY 50,000,000
    Above TRY 36,000,000,000 TRY 100,000,000

In addition, PMCs that are managing a portfolio of over TRY 72,000,000,000 will also be required to have additional shareholders' equity equal to 0.02% of the amount that exceeds TRY 72,000,000,000. However, PMCs whose shareholders' equity exceeds TRY 200,000,000 will not be required to have additional shareholders'.

  1. Board of directors and general manager: The board of directors of PMCs must consist of at least three members who meet the required qualifications. PMCs must also employ a full-time general manager who is employed exclusively and meets the required qualifications. However, the general manager may also serve as a portfolio manager for the PMC, or as a director in entities with which the PMC has a management, audit or capital relationship, or other entities in which the foregoing entities have direct or indirect management, capital or audit control, or stock exchanges and other organized marketplaces, clearing houses and portfolio custodians, and other financial institutions deemed appropriate by the Board; provided that they do not have executive responsibilities in the foregoing entities and these additional roles do not weaken their performance as the general manager of the PMC.
  2. Internal control system: PMCs must establish an internal control system and adopt written policies and procedures in order to ensure that their services and transactions are carried out in an orderly, efficient and effective manner and in compliance with their strategy and related legislation, to ensure the integrity and reliability of their accounting practices, the timely and accurate availability of information in their data systems, and to prevent and detect errors, fraud and irregularities. In this regard, the PMCs are obliged to designate one of the nonexecutive members of the board as the director responsible for internal control system and, as a rule, to employ at least one internal control staff member to fulfill the foregoing tasks.
  3. Risk management system: PMCs are required to establish a risk management system, to adopt written policies and establish a risk management unit within their organization. The risk management system must aim to identify and control the main risks to which the managed portfolio may be exposed. In this context, PMCs are obliged to employ risk management personnel who meet the required qualifications to perform risk management tasks.
  4. Inspection units: PMCs are also obliged to establish inspection units to inspect and supervise all activities of the PMC, particularly the internal control and risk management systems. As a rule, PMCs must employ enough inspectors to work exclusively in the inspection unit.
  5. Fund service unit: Fund service units perform tasks such as keeping accounting records, performing cash reconciliations, controlling participation share purchase and sale orders, and preparing fund reports, the balance sheet and the income statements, and must be staffed by a fund manager and enough personnel.
  6. Research unit: To become operational, PMCs must establish research units consisting of enough research experts that will carry out research activities.
  7. Portfolio managers: The PMCs are required to employ enough portfolio managers (portföy yöneticisi) depending on the size of the portfolio under management. The portfolio managers must be employed full time and exclusively to fulfill these duties.

    Portfolio under management Minimum number of portfolio manager
    Up to TRY 1,000,000,000 3
    From TRY 1,000,000,001 to TRY 4,000,000,000 4
    From TRY 4,000,000,001 to TRY 36,000,000,000 5
    Above TRY 36,000,000,000 6

  8. Book and record-keeping and independent audit obligation: PMCs must comply with the regulations of the Board on financial reporting and independent audit, and publish their financial reports on the Public Disclosure Platform. To become operational, PMCs must establish an adequate organizational structure that ensures the integrity of their accounting, recording, information and document systems, the orderly functioning of their regular work flow and internal communication methods, and employ personnel exclusively tasked to operate this organizational structure, and establish the necessary IT infrastructure.
  9. Custody of assets: The assets in the client portfolios managed by the PMCs must be kept under custody pursuant to the Board's regulations on portfolio custody services and by institutions authorized to provide such services. Istanbul Takas ve Saklama Bankasi A.S. ("Takasbank"), banks and brokers authorized by the Board may provide portfolio custody services, if the conditions in the regulation are met. An agreement must be signed between the custodian and the PMC, which will include the rights and obligations.

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