Advantages of Venture Capital Investment Fund Participation Shares and Inflation Adjustment of Shares

Advantages of Venture Capital Investment Fund Participation Shares and Inflation Adjustment of Shares

There has been a special interest in venture capital investment funds (VCIFs) in recent years. This is not only related to the search for alternative investments in an inflationary environment, but also to certain incentives and obligations in our legislation. For this reason, it is important to determine the incentive regulations regarding these investments and their status in the face of inflation adjustment.

A. Incentives and Liabilities for GDP Investment

There are many incentives or obligations in our legislation regarding venture capital investments. We can briefly list them as follows:

1. Venture Capital Investment Fund

According to Article 325/A of the Tax Procedure Law, 10% of earnings can be set aside as a fund for venture capital investment. In addition, the fund amount should not exceed 20% of the equity capital.

The fund amounts set aside in accordance with these criteria may be subject to deduction on the declaration in accordance with Article 10/1-g and Article 10/1-g of the Corporate Tax Law.

In other words, it is possible to make a venture capital investment on the one hand and deduct the investment amount on the other hand.

2. Exemption for Participation Gains

According to Article 5/1-a.4 of the Corporate Tax Law, subject to full taxationfrom venture capital investment fund participation shares and shares of venture capital investment trusts;

• Dividends
• Income arising from the return of participation shares to the fund,
• Value increase gains arising from the valuation of fund units within the scope of Article 279 of the Tax Procedure Law No. 213

is exempt from corporate income.

Accordingly, earnings from venture capital investments made by corporations can be considered as exempt.

This exemption applies to all venture capital investments, whether or not within the scope of Article 325/A. In other words, a taxpayer may make venture capital investment outside the scope of VUK 325/A and KVK 10/1-g articles. However, in this case, the advantage of the above-mentioned deduction cannot be utilized. This does not prevent the application of the exceptions listed above.

3. GDPR Investment Obligation of Taxpayers with TDZ Earnings Exemption or R&D Discount

Pursuant to Law No. 5746 on Supporting Research, Development and Design Activities and Law No. 4691 on Technology Development Zones, taxpayers who benefit from R&D discount or technopolis earnings exemption amounting to TL 2,000,000.00 and above shall be entitled to an amount equal to 3% of the amounts they benefit from.set aside funds, is a requirement for the application of the deduction and exemption.

This fund amount Established to invest in entrepreneurs based in Turkey The amount required to be taken into the fund on an annual basis is limited to TRY 20,000,000 and must be used for the purchase of venture capital investment fund shares or for the capitalization of other entrepreneurs operating in venture capital investment trusts or incubation centers within the scope of this Law.

There is no obstacle to the above-mentioned deductions and exemptions for the GDP investments made within the scope of the obligation. In other words, it is also possible to apply a discount on the declaration, provided that the conditions are complied with regarding the venture capital fund participation certificate acquired within the scope of the obligation.

In addition, in the event that dividends are obtained from the participation shares of the GCF or gains are obtained from the return of the shares to the fund, these gains may also be subject to exemption within the scope of Article 5/1-a of the KVK.

B. Inflation Adjustment of GDP Fund Participation Shares

Venture capital investments are assets recognized in the balance sheet under 240- Subsidiary Securities Account or 242 – Subsidiaries Account. These accounts are among the assets that should be subject to inflation adjustment.

However, when making the correction, the valuation provisions of the TPL should also be consulted in order to correctly determine the value to be corrected and the correction differences. This is because the end-of-period valuation of GDP fund units differs according to the composition of the fund portfolio. The difference in valuation may also create a difference in inflation adjustment.

1. Mutual Fund Participation Certificates of which at least 51% of the Fund Portfolio consists of Equity Shares of Companies Established in Turkey

Article 279 of the TPL, “with stocks and shares at least 51% of the fund portfolio consisting of equity securities of companies incorporated in Turkey investment fund participation certificates All other securities shall be valued at their purchase price and all other securities shall be valued at their fair market value. If there is no stock market price or if it is understood that the stock market price is formed in a fraudulent manner, the price based on the valuation is calculated by adding the income to be obtained at maturity (including exchange rate differences) to the purchase price of the security from the date of acquisition until the valuation day. However, securities that do not have a market value, whose return is dependent on the profit and loss of the issuer and which cannot be calculated as of the valuation day are valued at the purchase price..” provision is included.

As understood from the text of the article, in the valuation of securities,

• Purchase price,
• Stock market price
• Fixed income

The three procedures can be summarized as follows.

If at least 51% of the fund’s portfolio consists of shares of companies incorporated in Turkey, GDP fund units will be valued at their purchase price.

According to Article 298/A-3.a of TPL, the date of purchase is taken as basis in the valuation of securities valued at purchase price. Accordingly, venture capital participation shares will be brought from the date of purchase to 31.12.2023.

For example, (A) A.Ş. made an investment of TL 1,500,000.00 on 06.06.2023 in a GSYF, where at least 51% of the fund portfolio consists of equity shares of companies established in Turkey.

Due to the structure of the fund portfolio, shares will be valued at their purchase price and adjustments will be made accordingly.

Information regarding the correction to be made is given below:

2. Mutual Fund Participation Certificates of which at least 51% of the Fund Portfolio does NOT consist of shares of companies established in Turkey

At least 51% of the fund portfolio consists of equities of companies established in Turkey not formed valuation of venture capital participation shares at the purchase price will not be possible. The valuation of such funds shall be based on the valuation principles set out in Article 279. “The purchase price of the security is calculated by adding to the purchase price of the security the portion of the income (including exchange differences) to be obtained at maturity corresponding to the period from the date of acquisition until the valuation date.” Based on the statement, as of the valuation day the value announced by the fund that it should be done by taking into consideration the

We believe that the wording in the Article refers to securities with periodic returns and does not cover securities with uncertain returns, such as funds. However, we can say that the Administration’s view on this issue is consistent.

There is no explanation in the Communiqué and the Circular regarding the correction process related to the securities in question. It would be appropriate to make a regulation in order to avoid controversy. However, since the aforementioned participation shares are not among the economic assets valued with their purchase price and their current values are determined and reflected in the records, inflation adjustment should not be applied after the period-end valuation.

For example, let us assume that at least 60% of the fund portfolio of the aforementioned fund units consists of equity securities of companies that are not incorporated in Turkey. Accordingly, firstly, the value announced by the fund will be taken into consideration according to TPL 279.

Assume that the current value of the participation share has increased from TL 1,500,000.00 to TL 2,000,000.00 as a result of the valuation. In this case, the valuation difference will be reflected in the income accounts, but inflation adjustment will not be applied.

3. Status of R&D and Technopolis Companies

As stated in section A.3. of our letter, the investment obligation of R&D and Technopolis companies Established to invest in entrepreneurs based in Turkey to purchase venture capital investment fund units.

For this reason, it is an obligation that at least 51% of the fund portfolio related to the participation share must consist of shares of companies established in Turkey. Therefore, the purchase price will be the basis for the valuation of the shares acquired by R&D and Technopolis companies within the scope of investment obligation. Inflation adjustment of these securities will also be made on the basis of the purchase date.