How is the Income of Foreign Real Persons Obtain from Real Estate Taxed?
Opinion Piece, View Aug 03, 2021
When foreign real person investors constantly trade real estate in Turkey, they are considered as merchants and pay income tax as trading profit recipients regardless of how many years they have held the real estate in question. Investors who do not constantly trade real estate, that is, who are deemed to be increment value income recipients are not taxed if they sell the real estate they have purchased after 5 years, regardless of how much they earn. PwC Turkey Real Estate Sector Leader Ersun Bayraktaroğlu explained to Explore Turkish Realty how foreign investors’ real estate income is taxed.
Despite the real estate market shrinking globally due to the pandemic, the latest figures show that foreign investors continue to be interested especially in property sales in our country. The sale of real estate to foreigners is an investment tool that mediates the arrival of the new titleholder who owns it into the country, not the loss of an asset from the country… In this respect, foreigners who purchase real estate in Turkey have to be subject to the requirements of the local legislation regarding this asset in the country. Tax emerges as an important element in this legislation.
Foreign real estate purchasers, who are subject to title deed fees, value-added tax and stamp duty during the real estate commerce process (during the deed transfer), pay Income Tax from the income they earn by selling the real estate they own, or from the rental income they earn by renting it out.
The income tax to be paid by real persons trading real estate for what they earn from this transaction is calculated on a progressive tariff that starts with 15% and goes up to 40% of the total net income in given a calendar year. The income tax application in real estate commerce differs according to the income type (trading profit or increment value income).
The difference between merchants and non-merchant investors is important
Those who constantly trade real estate (for real persons, more than one sale per year or one sale in successive years is accepted as an indication that this business is being carried out continuously) are considered as merchants and become liable for income tax as a commercial income taxpayer. In addition to many other obligations, the merchant has to issue invoices and calculate VAT in real estate commerce.
The income obtained from the commerce of those who do not “continuously” trade in real estate is considered as increment value income. Real persons who sell the real estate they have purchased within 5 years, starting from the year of purchase, have to declare their income as “increment value income”. In other words, there is no income tax for real persons who sell the real estate after keeping it for 5 full years – whether they are citizens or foreigners – provided that it is not included in the scope of commercial profit. In sales made within 5 years, the annual income tax calculated according to the net income (sale value – cost of purchase – selling expenses) is declared in March of the following year and paid in two equal instalments in March and June.
The most important difference between trading profit and increment value income in real estate commerce earnings apart from invoice issuance and VAT calculation is related to the exception related to the holding period mentioned above. Real persons who are deemed to be merchants due to trading real estate continuously (i.e. more than one real estate sale in a given year or one real estate sale in consecutive years) pay income tax regardless of how many years they hold the real estate in question, while the real persons who do not trade real estate continuously and who obtain increment value income are not taxed whatever their earnings may be if they sell the real estate they have purchased after holding it for 5 years. Another important difference between merchants and non-merchants is that, as I mentioned above, increment value income owners are not issued invoices or subjected to VAT for their sales.
What do investors who earn rental income pay?
Real persons who obtain rental income from real estate have to pay income tax on their annual rental income as real property income regardless of whether they are citizens or foreigners. The total rental income actually collected within a calendar year must be declared with an annual income tax return in March of the following year, and the tax calculated over the income tax tariff starting with 15% and up to 40% must be paid in two equal instalments in March and June. Although we will not go into detail in this article, it is useful to remind one that the taxation of the statement of rental income is different in terms of whether it has a residential or workplace status and there are different procedures regarding the expenses to be deducted for the declaration of net income.
The taxation of real persons who have the equity share of a real estate company or the participation share in the real estate investment fund who owns the real estate is different from that of those who have the title deed, which I tried to explain above. Equity share or participation share in the investment fund can earn two types of income for its owner: the right to receive “dividends” over the income of the company / fund in which the shares or fund are owned, and the ability to sell these shares / fund and earn “commercial income” from it.
Avoidance of double taxation treaties are also consulted
Stock or share commerce transactions are also subject to income tax. However, taxation is much easier. Among the real persons holding company shares, those residing in Turkey (those who stay in Turkey for more than 6 months in a 12-month uninterrupted period) do not pay any income tax if they sell their shares after holding them for 2 full years. If a sale is made within two years, in this case they have to pay income tax on the tariff starting with 15% and up to 40% over the positive difference between the sales value and the cost of purchase. The tax is paid in two instalments in March and June. The 2-year period I mentioned for real persons who are not resident in Turkey varies depending on whether there is an avoidance of double taxation treaty between the country where the relevant persons are resident in and the Republic of Turkey. If there is no treaty, the 2-year period also applies to them. If there is a treaty, the period specified in the treaty for taxation is considered and this period is in most cases 1 year.
If the real person does not sell his/her company shares but wants to take the profit generated by the company, then the company that pays the dividend has to withhold 15% over the dividend it will pay to real persons residing in Turkey. The real person residing in Turkey who receives the dividend must declare half of the said gross (before withholding) dividend in the following year and pay income tax on the tariff starting with 15% and up to 40%. From the income tax calculated in accordance to the declared dividend, the tax previously deducted by withholding in payment is deducted and the balance is paid to the relevant tax office in two equal instalments in March and June.
If the shareholder is a real person who is not resident in Turkey, then it is necessary to look at the avoidance of double taxation treaties, just like in commerce earnings. The profit-distributing institution or fund looks at the treaties for the rate of withholding and implements the rate stated therein. Since many treaties have a lower rate (10% or 5%) than the domestic rate of 15%, foreigners residing in Turkey are more advantageous in this respect. In addition to the fact that there are no other tax obligations in Turkey other than this withholding tax, the advantage for foreign real persons who are not resident in Turkey increases.
The tax advantage increases even more if the foreign real person owns a participation share in the real estate investment fund that owns the real estate, rather than the real estate title: When the aforementioned participation share certificates are handed off (without any time limit) or when the profit share is received from the fund, these revenues are taxed with 10% withholding tax and this is the final tax they will pay in Turkey.