In 1st of October, 2006 effective changes were made in the taxation of gains secured on the sale of shares in Mutual Funds that are subject to tax under transition article 67 of the income tax law. The new rules do not introduce a new system of taxation or calculation but rather change the way in which the calculated tax is collected.
Under The New System
The scope of the withholding of tax at source from gains are secured on investment products that was introduced on 1st of January, 2006 under transition article 67 was extended to include Mutual Funds that is effective on 1st of October, 2006.
Under This New Rule
10% is withheld as tax on the gains that an investor secures when selling shares in a Mutual Fund. In this way, the tax that used to be charged on a day-to-day basis from the gains in the value of a Mutual Fund's portfolio has been effectively shifted outside the fund itself.
Capital-Intensive Mutual Funds
As of May 2012, tax rate on the gains made from “Stock-Intensive Mutual Funds” is 0%.
• Until 22 July 2006, tax was charged at the rate of 15% of the increase in the fund's portfolio value.
• From 23 July 2006 to 30 September 2006 (inclusive), tax was charged at the rate of 10% of the increase in the fund's portfolio value.
• Effective 1 October 2006, tax is to be charged at the rate of 10% of the gains that an investor secures.
Advantages of The New System
• Better fund performance comparisons: Tax is charged not on the fund's portfolio gains but rather on the gains that the investor secures. This change in the way the tax is collected will have a positive impact on a fund's earnings and make it easier to compare the performances of different funds.
• Improved fund yields: Shifting the tax burden outside the Mutual Fund effective 1 October 2006, will have a significant impact on funds' yields.
• Easier tax reporting and calculation: The procedures involved in reporting and calculating withheld tax by business enterprises have been made much simpler than what existed prior to 1 October 2006.
• Exemption: Tax will not be withheld on gains secured from the sale of Mutual Fund shares if more than half their portfolios regularly consist of shares in companies that have been held onto for more than a year's time.
• Tax charged at the moment of sale: No tax is charged on the gains secured by an investor until the shares are actually sold.
Foreign nationals who are residing in Turkey shall submit their passport or residence permit and tax identification number to the bank in order to trade and invest in securities. Non resident individuals or legal entities, in addition to the documents mentioned above, shall also submit a notarized evidence issued by the official public institutions in their own country indicating that all their worldwide income is subject to taxation in the country where they reside.
According to new tax legislation that came into affect as of 01.01.2006, all types of resident and non-resident investors are subject to withholding tax as follows:
• 15% over repo income
• 15% over interest income earned on TRY and FX deposits
Cash dividend paying public companies are subject to 15% income withholding tax when such payments are made to resident and non-resident individuals. If cash dividends are paid to resident institutions and non-resident institutions with a permanent representative, dividend paying company is not subject to income withholding tax. (Provisions of Double Tax Treaties are reserved)
The new tax regime covers equities purchased/ government bonds and treasury bills issued after 01.01.2006 and investment funds.
Taxation of non-resident individual investors in the new tax regime
In order to be exempt from taxation on capital gains and interest income under the new tax regime; non-resident individual investors are required to provide a certificate of residence. The certificate of residence must be renewed by non-resident individual investors every year.
If non-resident individual investors do not submit certificate of residence, they will be treated as resident investors and income derived by such investors will be subject to 10% withholding tax. (except for the income derived from the sale of equities; tax for this income has been determined as 0% for all investors)
The following tax rates are applicable in the new tax legislation
• Non-resident individual investors
• That do provide a certificate of residence 0%
• That do not provide a certificate of residence 10%
Taxation of non-resident individual investors in the old tax regime
Equities purchased before 01.01.2006 and government bonds and treasury bills issued before 01.01.2006 are taxed under permanent tax rules applicable as of 31.12.2005. Gains must be filed via special tax return within 15 days of the date of the receipt of gains.
According to the old tax regime;
• Capital gains derived from disposal of equities purchased before 01.01.2006 and government bonds and treasury bills issued before 01.01.2006 are subject to progressive tax rate in range of 15% to 35% (Provisions of Double Tax Treaties are reserved).
On the other hand, if the shares are held for a period of 3 months or more, individual investors are exempt from income tax. If the shares are sold within 3 months following their acquisition and the yearly capital gains exceed TRY 17.900 (for 2009; exemption is TRY 18.000 for 2010) after the application of cost adjustment, the exceeding part must be declared via a special tax return.
• Interest income derived from government bonds and treasury bills are subject to tax at 0%
Taxation of non-resident corporate investors in the new tax regime
In order to be exempt from taxation on capital gains and interest income under the new tax regime; non-resident corporate investors are required to provide a certificate of incorporation.
If non-resident corporate investors do not submit certificate of incorporation, they will be treated as resident investors and income derived by such investors will be subject to 10% withholding tax.
• Non-resident corporate investors
• That do provide a certificate of incorporation 0%
• That do not provide a certificate of incorporation 10%
Taxation of non-resident corporate investors in the old tax regime
Non-resident corporate investors
According to the old tax regime;
• Capital gains derived from disposal of equities purchased before 01.01.2006 and government bonds and treasury bills issued before 01.01.2006 are subject to effective tax rate of 32%(Provisions of Double Tax Treaties are reserved)
• İnterest income derived from government bonds and treasury bills are subject to tax at 0%
Non-resident mutual funds
“Mutual fund” status of the existing non-resident funds will continue in future (as long as necessary) until their equities held as of 31.12.05 are completely sold and/or bonds issued before 31.12.05 are completely sold and/or redeemed. The permanent representative role and legal bookkeeping will be continued for these securities.
New purchases of the same non-resident investors are subject to new legislation.
Taxation of investment funds
The method of taxation on income arising from investment funds and investment trust portfolio management has been abandoned and the method of taxation on the basis of investor has been adopted on 01.10.2006. From the said date, regardless of being individual or institutional, all investors are subject to %10 income taxation at redemption.
In addition to these explanations, investors who keep the shares of mutual funds that invest more than 51% of their portfolio in Turkish Equities are exempt from taxation on the condition that the investors hold these shares for 1 year. Related to the calculation of taxation, the price of mutual fund shares purchased before 01.10.2006 is accepted to be equal to the price announced on 30.09.2006. Since 01.10.2006, non-resident investors that can submit certificate of residence (for individuals) or certificate of incorporation (for corporate investors), they will be exempt from taxation on income arising from mutual funds.