Comparison of the Financial Burdens Arising from the Transfer of Real Estate to Real Estate Investment Funds as Capital in Kind
1. Status of REIFs vis-à-vis Corporate Tax
Article 2 of the Corporate Tax Law No. 5520 stipulates that funds subject to the regulation and supervision of the Capital Markets Board and foreign funds similar to these funds shall be considered as capital companies.
In this respect, funds are corporate taxpayers. However, Article 5/1-d-4 of the aforementioned Law exempts the earnings of real estate investment funds from corporate tax.
However, with the amendment made by Law No. 7524, the exemption is subject to the condition that at least 50% of the earnings of the funds from immovable properties are distributed as dividends.
Accordingly, if the REIFs do not distribute at least 50% of their earnings from immovable properties, all of their earnings will be subject to tax. If this distribution is realized, the exemption will continue to be applied within the fund.
On the other hand, according to the domestic minimum corporate tax practice introduced by the aforementioned Law, earnings derived from immovable properties will be taken into account in the calculation of the minimum tax. Therefore, even though the earnings of REIFs are exempt from corporate tax, the earnings derived from immovable properties will be subject to minimum corporate tax (10%).
2. Taxation of Real Persons Holding GYF Participation Certificates
Real persons may trade or receive dividends from the participation certificates of the GYF.
According to the Decree No. 2006/10731, within the scope of the provisional article 67 of the Income Tax Law, a withholding tax of 10% is applied on the earnings derived from the participation certificates held by the holders of GYF participation certificates.
However, this rate is applied as 7.5% for the participation certificates acquired until 31.10.2024.
For shares held for more than two years, this rate is applied as 0%.
It is possible for a real person to transfer the real estate owned by him/her to a GIF to be established as capital in kind and to acquire fund units in return. In such a case, we can explain the total financial burden related to the earnings to be obtained in return for participation shares as follows:
| Total Size of Real Estate Transferred to the Fund | 500,000,000.00-TL |
| Total Estimated Annual Income of the Fund (based on an average 20-year rental return period) | 25,000,000.00-TL |
| Fund Management Fee (Estimated) | 1.50% |
| Real Estate Weight in the Portfolio | 100% |
- Distribution of All Fund Earnings and Holding Shares for Less Than 2 Years
| Fund Size (A) | Management Fee (B = A * 1.5%) | Rent and Other Real Estate Revenues C = A / 20 | Profit After Management Fee D = C – B | Minimum Corporate Tax (E = D * 10%) | Distributable Profit (F = D – E) | Profit Distribution Withholding Tax (G = F * 10%) | Remaining After Tax (H = F – G) | Total Load (TL) (I = B + E + G) | Total Load (I = I / C) |
| 500,000,000 | 7,500,000 | 25,000,000 | 17,500,000 | 1,750,000 | 15,750,000 | 1,575,000 | 14,175,000 | 10,825,000 | 0.433 |
As seen in the table above, after deducting the management fee, minimum corporate tax and dividend withholding tax from the fund’s income of TL 25,000,000.00, TL 14,175,000.00 remains. The total financial burden is 43.3%.
- Distribution of All Fund Earnings and Retention of Shares for More Than 2 Years
If there is no change in the current regulation, if the shares are held for more than 2 years, the withholding tax will be 0% during dividend distribution. In this case, the financial burden calculation for the same portfolio will be as follows:
| Fund Size (A) | Management Fee (B = A * 1.5%) | Rent and Other Real Estate Revenues C = A / 20 | Profit After Management Fee D = C – B | Minimum Corporate Tax (E = D * 10%) | Distributable Profit (F = D – E) | Profit Distribution Withholding Tax (G = F * 10%) | Remaining After Tax (H = F – G) | Total Load (TL) (I = B + E + G) | Total Load (I = I / C) |
| 500,000,000 | 7,500,000 | 25,000,000 | 17,500,000 | 1,750,000 | 15,750,000 | 1,575,000 | 14,175,000 | 10,825,000 | 0.433 |
When withholding tax is applied at 0%, the total burden drops to 37%.
- Distribution of 50% of Fund Earnings and Holding Shares for Less than 2 Years
| Fund Size (A) | Management Fee (B = A * 1.5%) | Rent and Other Real Estate Revenues (C = A / 20) | Profit After Management Fee (D = C – B) | Minimum Corporate Tax (E = D * 10%) | Distributable Profit (F = D – E) | Profit Distribution Withholding Tax (G = F * 10%) | Remaining After Tax (H = F – G) | Total Load (TL) (I = B + E + G) | Total Load (I = I / C) |
| 500,000,000 | 7,500,000 | 25,000,000 | 17,500,000 | 1,750,000 | 15,750,000 | 787,500 | 14,962,500 | 10,037,500 | 0.4015 |
If the compulsory 50% of the profit is distributed, the total burden is reduced by half of the withholding tax. However, in this case, the net profit to be distributed will be ((15.750.000/2)-(15.750.000/2)*10%))=7.087.500,00-TL. The remaining amount will be left in the fund.
3. Title Deed Fee
Finally, Article 123 of the Law on Fees stipulates that exemption from fees applies to transactions to be carried out due to the establishment, transfer of shares, capital increase, merger, transfer, division and change of type of joint stock, limited partnership, limited liability companies and cooperatives. However, since GYFs are not included in this scope, they are liable for fees.
The total amount of fees for the existing portfolio will be 500,000,000.00*2%=10,000,000.00-TL. If the same person establishes the fund under a portfolio management company, the same amount will be paid as the receiving party. Fee amounts should also be taken into consideration when making an investment decision.
Note: In the study, it is assumed that the REIF has only a portfolio of immovable properties and earns income only from them. Reserves are neglected. Dividend withholding tax is applied at the normal rate and the 2.5% withholding tax deduction applied to acquisitions until the end of October is not taken into account. If the estimated amounts and rates are changed, the earnings and total burden will also change.
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