Istanbul Financial Center Goes Live with the Publication of Secondary Legislation

The Istanbul Financial Center (IFC) was opened by President Erdoğan on April 17. According to the official statement, the IFC, which has been built from scratch, contains the world’s largest and most advanced infrastructure facilities. This includes 1.3 million square meters of office space, a shopping mall comprising 100 thousand square meters, a congress center hosting up to 2,100 people, and a 5-star hotel.

The IFC will bring together public and private sector banks, asset management companies, brokerage firms, insurance companies and professional service companies, along with both Turkish and international financial institutions.

The Turkish Government has also published the Law Introducing Tax Benefit for Transit Trade Companies in Türkiye. Through the recently ratified Law No. 7421, a new paragraph has been added to Corporate Income Tax Law No. 5520 Article 10 paragraph 1, regulating other deductions.

According to the article in question, pursuant to the provisions of the Istanbul Financial Center Law dated 22/6/2022 No. 7412, corporates operating in the Istanbul Financial Center through obtaining a participant certificate are allowed to sell goods purchased from abroad exclusively within the scope of this activity without bringing them to Türkiye, or to act as an intermediary in the purchase and sale of goods abroad. In this respect, 50% of their earnings from the corporate income tax base will be subject to deduction on the tax return.

However, secondary legislation had not been published and there were unclear issues about participation in the IFC. Long-awaited legislation has finally appeared and «the Istanbul Financial Center Regulation» (the IFC Regulation) was published in the Official Gazette dated July 7, 2023. It concerns the implementation of the Istanbul Financial Center Law No. 7412 dated 22/6/2022. This regulation focuses on the management and operation of the Istanbul Financial Center, the issuance of participant certificates, and the functioning of the one-stop office.

1. What Kind of Advantages Are Available at the IFC?

The IFC provides a one-stop office to streamline the application processes for permits, licenses, and other approvals required by participants. Officials from several public institutions and organizations, including the Ministry of Labor and Social Security, Ministry of Environment, Urbanization and Climate Change, Ministry of Treasury and Finance, Ministry of Interior, and Ministry of Commerce, as well as relevant district municipality officials, staff the one-stop office.

Financial services to non-residents provided by financial institutions which have obtained a participant certificate are considered "financial service exports", provided that the service is ultimately utilized abroad. In this respect, financial service exports provided at the IFC by financial institutions that have received participant certificates will have the below advantages:

• 75% of the earnings obtained within the scope of these activities are deducted from corporate income, provided that they are separately shown on the corporate income tax return, in determining the corporate tax base.
• Transactions and money received in favor of these transactions are exempt from the Banking and Insurance Transactions Tax (BSMV).
• Transactions related to activities are exempt from all kinds of fees, and documents issued regarding these transactions are exempt from stamp duty.
• The monthly salary paid to some personnel employed by financial institutions that have obtained a participant certificate at the IFC is exempt from income tax. The exemption is applied to the salary of personnel who had not worked Türkiye in the preceding three years before starting to work at the IFC. In this respect, 60% of the salary paid to people with at least five years of professional experience abroad and 80% of the salary paid to people with at least ten years of professional experience abroad will be exempt from individual income tax in Türkiye.
• Transactions to lease immovables at the IFC are exempt from all kinds of government fees, and the documents issued in respect of these transactions are exempt from stamp duty.
• These incentives also apply to the regional treasury and financial management centers of participants who are active in at least three countries.

2. Additional Exemption for Corporate Income Taxes

There is an important tax exemption for financial services export activities. Thus:

• The corporate tax discount will be applied at a rate of 100% to the earnings obtained between 2022 and 2031 from financial services export activities.
• Financial activity fees of financial institutions that have obtained a participant certificate at the IFC are not collected for five years from the effective date of the Law.

3. What Does the IFC Regulation Bring?

According to the new legislation, the IFC will be managed by a management company, TVF İFM Gayrimenkul İnşaat ve Yönetim Anonim Şirketi. Some of the duties of this company are as follows:

• To take the necessary measures and decisions to ensure the functioning of the IFC in accordance with its founding purpose.
• To prepare the management plan and operating project, which encompasses the procedures and principles covering all activities and practices to be carried out in the IFC, including the liquidation and evacuation of those operating in the office area and outside the scope of the IFC, and with which all real and legal persons in the IFC are obliged to comply.
• To register the IFC offices with the land registry, to ensure they are operating and to introduce changes to them when necessary. To operate and manage all the infrastructure and superstructure in the IFC and to carry out all kinds of works and transactions within the scope of services.

In order to operate at the IFC, it is mandatory to obtain a participant certificate. Individuals and legal entities interested in operating at the IFC must apply as participant candidates to the Finance Office of the Presidency to obtain a participant certificate.

All application procedures for participant certificates are conducted electronically through the IFC portal (https://ifm.gov.tr/home). Participant certificate applications can be submitted in person or through a representative. The applicant must provide all the required information and documents in full. Incomplete applications will be considered as such, and the applicant will be notified and asked to rectify any deficiencies within thirty days of the notification.

4. Which Industry and Business Areas Have Priority under the IFC Regulation?

Subject to obtaining the necessary permits and approvals according to the relevant Turkish legislation, the below industry and business areas have priority under the IFC Regulation:

• Services and transactions related to financial activities,
• Transportation by sea, air, land, and rail, customs and logistics services related to all kinds of commodities that may be subject to international trade, especially precious metals and minerals, commodity trading and storage services on organized markets, and financial advisory services related to these commodities,
• Support and ancillary services related to financial activities, such as auditing, accounting, rating, valuation, electronic infrastructure and software, telecommunications, media, intellectual and industrial property, legal consultancy, and similar services,
• High-value-added sectors, primarily energy and infrastructure, and any one or more of their divisions, health and healthcare technologies, agriculture and agricultural technologies, artificial intelligence, and similar fields, as well as investment and financing services related to these areas,
• Financial services supporting green finance, sustainable finance, and international trade,
• Financial services that are in line with the strategic priorities of the IFC or other activities supporting the financial sector.

This means that applicants working in those areas or industries will be given priority, can benefit from this advantaged position under the new IFC legislation, and are highly likely to obtain a participant certificate from the management company.

5. Other Important Insights about the New IFC Regulation

One important question is whether incorporated companies can operate at the IFC. The newly published secondary legislation does not give details, but it states that participants can operate there with their company, branch, and rep offices.

This means that existing companies can work at the IFC by simply moving there and transferring their business addresses. It is also understood that a company not residing at the IFC can establish a branch there and can thus benefit from the available incentives. Non-resident companies can even establish rep offices at the IFC. Please also note that the regulations still apply to that group of entities, and, for instance, in order to establish a rep office, they are still required to receive approval from the Ministry of Economy. Nevertheless, the one-stop office will make those processes shorter and more efficient.

Participants that will operate at the IFC and participants who are active in at least three countries can employ foreign personnel in their regional treasury and financial management centers with a work permit issued by the Ministry of Labor and Social Security in accordance with International Labor Law No. 6735 dated 28/7/2016. The work permit application is made through the e-Government portal by the real or legal person whose participant certificate is to be issued. The technical and administrative support required for the application is provided within the one-stop office. For work permit applications to be made from within the country, the foreigner must have a valid visa, visa exemption or residence permit in accordance with the Foreigners and International Protection Law No. 6458 dated 4/4/2013.

Based on the above, participants can relocate their employees to work for their offices at the IFC. We understand from the IFC Regulation that foreigners will not be subject to the 5:1 rule (which requires companies to hire at least 5 local people per foreigner) and exemption rules will be applicable for those who meet the criteria and are approved by the Ministry of Labor and Social Security.

Further, it is permitted to acquire office space at the IFC. Owners of immovables at the IFC may allocate office space to their subsidiaries and partners or rent office space directly at the price determined by the management company, provided that they apply for a participant certificate with public institutions and organizations. In this case, the owners are obliged to inform the management company of the office space rentals and allocations of places they will make to public institutions and organizations and their affiliates and partners.

In addition to the above, according to the IFC Regulation participants will pay management fees. The amount of those fees is not defined in the Regulation but it is stated that the fees will be determined by the management company. We expect that management fees will be paid on an annual basis and most likely a single payment will be required.

6. Take Away

By establishing the IFC with the participation of many financial institutions, the government hopes that the number of highly-qualified employees will grow. The aim is to accelerate economic growth by improving financial mobility, financing and investment opportunities in Türkiye.

It is obvious that the IFC will attract investors active in the following areas: asset management, capital markets, digital banking, family offices, financial leasing, factoring and financing, fintech, fund management, green finance, insurance and reinsurance, investment banking, open banking, participation finance, portfolio management, private banking, private equity, regional management centers, retail banking, tax, law and consulting.

We also believe that the IFC is the right place for transit trade companies, given the important tax incentives for such activities. In this respect, we have observed high demand for the IFC, and many foreign investors are already in the process of establishing entities there.

Given the vibrant Turkish economy, the IFC is expected to become a leading financial services ecosystem bringing together organizations from across the sector — from major financial institutions to innovative start-ups.

Please contact us for our newsletter and your queries about the IFC, and we can guide you during the entire application process, including renting office space.