An Analysis of Article 13/i of the Value Added Tax Law No. 3065
Att. Cemil Şaar, PhD(c)
The information in this article is current as of the date of publication; however, legislation is constantly evolving and changing. It is important to verify current legislation and obtain legal advice before taking any action. In addition, not all topics are covered in this article; after providing basic information, attention has been drawn to matters that I personally consider important for personal or professional reasons, and the article in this form does not constitute legal advice.
I. INTRODUCTION
Tax legislation in Turkey offers a significant financial benefit in the acquisition of residential and commercial properties in Turkey for foreign nationals and Turkish citizens who live abroad and meet certain other conditions. Subparagraph (i), added to paragraph 1 of Article 13 of the Value Added Tax Law No. 3065 (“VATL”) by Article 7 of Law No. 6824, provides a value added tax exemption on the first delivery of buildings constructed as residential or commercial premises. This regulation, which entered into force on 1 April 2017, has two main purposes: Increasing foreign currency inflows into the country and supporting the construction sector.
The application principles of the exemption were established by the Communiqué Amending the General VAT Application Communiqué Serial No. 12 (“Communiqué No. 12”), published in Official Gazette No. 30057, dated 5 May 2017. The relevant provision of Law No. 7394, which entered into force on 1 May 2022, and the subsequently published Communiqué Amending the General VAT Application Communiqué Serial No. 42 extended the mandatory holding period for immovable properties within the scope of the exemption from one year to three years. This article discusses the legal framework, application conditions, and main problems encountered in practice regarding this exemption.
II. SCOPE OF THE EXEMPTION
A. Eligible Properties
The exemption under VATL Art. 13/i applies only to immovable properties constructed as residential or commercial premises, having a building permit, and actually delivered in a state ready for use by the buyer. In projects where floor easement can be established, it is also required that the floor easement has been established. The concept of residence is interpreted broadly and also covers structures such as timeshare units, residences, and apart-hotel units. For commercial premises, Article 156 of the Tax Procedure Law serves as a reference; stores, offices, warehouses, workshops, and similar commercial or industrial activity spaces are considered within this definition. Properties such as fields, vineyards, gardens, and land plots fall outside the scope of the exemption.
B. The “First Delivery” Condition and Its Problematic Interpretation
The exemption applies only to the first sale made by the taxpayer who has constructed said immovable property; it does not apply to subsequent transfers. VATL Art. 13/i, by using the phrase “…in the first delivery thereof…”, actually creates a provision open to interpretation. Therefore, through a teleological interpretation aligned with the purpose, one could argue that “first delivery” actually should mean the first delivery for the party wishing to benefit from the exemption. In my opinion, this would have been the appropriate regulatory approach. However, the Revenue Administration, by issuing an insufficiently considered ruling, brought all deliveries within the scope of “first delivery.” This causes serious problems in practice due to the lack of sufficient nuance in the relevant ruling and is particularly easily abused by large construction companies. Detailed observations on this point are provided in the final section of this article, where I present a real case converted into a practical exercise, after the necessary preliminary information has been conveyed in this section.
As stated in the ruling of the Revenue Administration dated 10.09.2018 and numbered 10360: “In the event that a residence or commercial premises is purchased from those who constructed it and then sold to another party, the delivery cannot be considered as the first delivery.” The area where this interpretation becomes particularly problematic is intra-group / holding structures. Property title transfers between different affiliated companies of the same holding are also considered “deliveries”; therefore, following a transfer from the company that carried out the construction to another company within the holding, a sale to the buyer wishing to obtain the first delivery loses its character as “first delivery.” This application practice is, in my view, erroneous. Because the purpose of VATL Art. 13/i is to encourage foreign currency inflows into the country and to support the construction sector through the first sale. The fact that transfers that have not previously been subject to VAT exemption cause the loss of “first delivery” character does not serve this purpose and also causes additional negative externalities to be discussed below.
In a scenario where the relevant Revenue Administration ruling did not exist or its scope was narrowed, the immovable property would still be changing hands for the first time for the buyer wishing to obtain the first delivery under such conditions and the buyer would still be receiving the immovable property for the first time. The seller party would also be benefiting from the VAT exemption for the first time with respect to that property and would therefore not cause any tax loss in its other transfers. Under these circumstances, the fact that the term “first delivery” under the relevant legislation is interpreted in this way does not serve any purpose and creates an opportunity for abuse, particularly for large-scale construction companies with affiliated companies, and also creates very significant unpredictability and risk for buyers who have signed a preliminary real estate sale agreement without proper legal support.
In short, in my opinion, it is necessary to change the interpretation of the concept of “first delivery” or to add to the legislation that certain deliveries shall not be counted as first delivery. Otherwise, the problems I will describe at the end of this article will continue to occur.
III. ELIGIBLE BUYERS
A. Foreign Natural Persons
The first group of buyers within the scope of VATL Art. 13/i consists of foreign natural persons that are not resident in Turkey. The concept of “foreign national” refers, within the framework of Article 3/1-d of Turkish Citizenship Law No. 5901, to a person who does not have a citizenship bond with the Republic of Turkey. This definition is the basis for the application of this law.
The criterion of “not being resident in Turkey” is determined based on Articles 4 and 5 of Income Tax Law No. 193 (“ITL”). Pursuant to ITL Art. 4, those whose domicile is in Turkey and those who stay continuously in Turkey for more than six months in a calendar year (temporary absences do not interrupt this period) are considered to be residents of Turkey. However, ITL Art. 5 provides an important exception: experts, civil servants, press members, those coming for education, treatment, or rest, and those detained in Turkey for reasons beyond their control such as arrest and imprisonment, who come to Turkey for a specific and temporary duty or work, are not considered residents even if they stay for more than six months.
In practice, tax offices determine this matter by examining the entry-exit records held by law enforcement for the relevant calendar year; in the absence of any specific finding that the buyer is residing in Turkey, they issue a “Letter Confirming Non-Residency in Turkey.”
B. Turkish Citizens Living Abroad
The second group consists of Turkish citizens who have been living abroad for more than six months with a work or residence permit. Turkish citizens who are employed by official departments and institutions or by organizations and enterprises headquartered in Turkey and reside abroad due to their work have been excluded from the scope of this group (pursuant to the joint reading of ITL Art. 3/1-2 and VATL Art. 13/i provisions). Due to this distinction, a Turkish citizen assigned abroad by a state institution cannot benefit from this exemption; while those who have settled abroad with a work permit on their own initiative can benefit.
Three conditions must be met simultaneously to benefit from the exemption: Having a valid foreign work or residence permit at the date of delivery; having obtained said permit at least six months before the date of delivery; and having actually been abroad for at least six months between the date of obtaining the permit and the date of delivery. The seller must obtain the official document proving the existence of these conditions, obtained from the embassy or consulate in Turkey, before the delivery.
C. Blue Card Holders
Real persons who have been issued a blue card pursuant to Article 28 of Turkish Citizenship Law No. 5901 and who are not resident in Turkey are also accepted as being able to benefit from the exemption under VATL Art. 13/i. The blue card is an official document evidencing that those who have renounced Turkish citizenship with permission to leave have the same rights as Turkish citizens with certain exceptions. A copy of the blue card is submitted instead of a passport copy; and the same conditions regarding non-residency in Turkey must be met.
D. Foreign Legal Entities
The third group consists of foreign legal entities whose registered and business headquarters are not in Turkey, and which do not earn income in Turkey through a business establishment or permanent representative. Pursuant to Article 3 of Corporate Tax Law No. 5520 (“CTL”), the registered headquarters is the place indicated in the incorporation documents, while the business headquarters is the place where the transactions are actually concentrated and managed. In multinational structures, determining the business headquarters may be challenging; for this reason, it is recommended to file for an advance tax ruling in practice.
IV. APPLICATION CONDITIONS
A. The Sale Consideration Must be Brought Into Turkey as Foreign Currency
One of the fundamental conditions for the exemption is that the sale consideration is brought to Turkey in foreign currency. Accordingly, at least 50% of the consideration must be paid by the buyer in foreign currency to Turkey before the date of the invoice related to the delivery; the remaining amount must be brought to Turkey in foreign currency and paid to the seller within one year at the latest. Foreign currency transfer can be made by international wire transfer to a bank in Turkey; if brought physically to Turkey, the documents obtained from the customs administration may serve as proof. It is also possible to pay the amount brought from abroad in foreign currency to the seller in Turkish lira; however, in this case, bank receipts documenting the exchange rate and conversion must be kept. Since the practices of banks operating in Turkey vary, especially citizens of countries subject to financial sanctions under SWIFT must obtain proper legal support before making any transfer. Otherwise, their assets may be blocked, or the transfer they made may not meet the conditions under the law, and they may need to make the transfer again (in the correct manner).
B. Foreign Exchange Purchase Certificate (FEC)
The Foreign Exchange Purchase Certificate (FEC) is an official document issued by Turkish banks evidencing that foreign currency has been converted into Turkish lira or that a transfer has been made from abroad for the purpose of a title deed transfer. Land registry offices request this document before the transaction in practice. The seller is obligated to record the collection with bank receipts and the FEC. In the event that foreign currency is brought physically to Turkey, the customs declaration takes the place of the FEC. The VAT refund can be made after the entire sale consideration has been documented as being brought to Turkey and paid to the seller.
C. Letter Confirming Non-Residency in Turkey
For foreign natural person buyers to benefit from the exemption, it is mandatory to obtain a “Letter Confirming Non-Residency in Turkey” from the Tax Office Directorate where the residential or commercial property is located, and to submit this document to the seller before the delivery. The document is prepared by local tax offices within the Revenue Administration and is issued with the signature of the Tax Office Director. The authenticity of the letter issued with a secure electronic signature can be verified at https://ivdb.gib.gov.tr.
The documents required for the application are as follows: A notarized translation of the buyer’s passport copy, a document obtained from their own country showing that the buyer resides abroad and its Turkish translation, the title deed or real estate sale agreement, and a document from the Police Directorate showing Turkey entry-exit records for the last one year. If the process is to be carried out by proxy on behalf of the buyer, it is unfortunately necessary that the power of attorney explicitly lists the authority to represent before tax offices, police directorates, immigration offices, and land registry offices, and that all specific matters such as the foreign exchange purchase certificate and entry-exit queries to be made are specifically included in the power of attorney.
It is essential that powers of attorney are carefully prepared by an attorney experienced in this matter, due to the strange, unpredictable, and unique demands of institutions, and otherwise may create an additional burden of additional power of attorney later. Since most institutions create arbitrary practices without legal basis in line with the perspective of their internal managers, and may request various, actually unnecessary, matters to be added to powers of attorney, it is necessary to consult an experienced person regarding the content of the power of attorney if there has been no prior experience dealing with these institutions.
Upon completion of the application, the tax office compares the submitted documents with its own records; in the absence of any finding that the buyer is resident in Turkey in the relevant calendar year, it issues the letter. It should be taken into account that the process can sometimes take a few days and sometimes a few weeks due to the arbitrary practices of officials or the workload of the relevant institution, and therefore the document procurement/preparation processes should be initiated at least 6 months before the planned delivery date.
D. Obligations of the Seller
The seller faces three main obligations: Document collection, notification, and declaration. Under the documentation obligation, a passport copy and the residency document obtained from the tax office must be obtained for foreign national buyers before delivery. Under the notification obligation, the Land Registry Office must be notified that the delivery is made exempt from VAT under VATL Art. 13/i; and the annotation of the three-year holding period must be placed in the declarations column of the title deed register. Regarding the declaration obligation, the sale within the scope of the exemption must be declared in the “Transactions Within Full Exemption Scope” table of the VAT return in the row “Residential or Commercial Property Deliveries” with code number 328, with the VAT-exclusive consideration and the loaded VAT amounts.
V. SANCTIONS AND VAT REFUND
A. Three-Year Holding Obligation
With Law No. 7394 and the Communiqué Amending the General VAT Application Communiqué Serial No. 42, effective 1 May 2022, the mandatory holding period for immovable properties acquired within the scope of the exemption has been extended from one year to three years. Land registry offices place an annotation in the declarations column of the title deed register of the relevant property stating, “in the event of disposal within three years, the tax that could not be collected on time will be paid with the accrued interest within the scope of Article 48 of Law No. 6183.” In order to have this annotation removed and complete the title deed transfer, it is mandatory that this tax be paid by the disposing party before the title deed transaction.
B. Joint and Several Liability
In the event it is determined that the exemption was applied despite the fact that the conditions stipulated by VATL Art. 13/i are not met, the seller and the buyer are jointly and severally liable for the tax that could not be collected on time, the tax loss penalty, and the late payment interest. Joint and several liability is a legal mechanism that creates chain-like responsibility by allowing the tax administration to apply to any of the debtors and demand the entire debt. The practical consequence of this provision is extremely significant: the seller, if it transacts with false or incomplete documents, incurs tax liability together with the buyer; and the buyer, if it benefits from the exemption despite not meeting its own conditions, shares the same legal risk as the seller. For this reason, document verification is a necessity for both the seller and the buyer.
C. VAT Refund Process
After the delivery within the scope of the exemption is declared in the VAT return, the seller may request a refund of the loaded VAT. The refund request must be submitted to the tax office by writing the loaded VAT amount in the returns for the relevant period by the end of the second calendar year following the delivery period. Taxpayers requesting offset or cash refund must submit the standard refund petition and supporting documents to the tax office. As a prerequisite for the refund, it is required to document that the entire sale consideration has been brought to Turkey and paid to the seller; partial refund requests made before full payment is received are not accepted.
VI. CASE STUDY: THE HOLDING STRUCTURE, THE “FIRST DELIVERY” TRAP, AND THE IMPORTANCE OF LEGAL COUNSEL
A case I managed recently concretely illustrates how the narrowly interpreted “first delivery” condition can corner foreign buyers and how the absence of competent legal advice before contracting can produce lasting consequences.
The client wanted to purchase a residence from a large construction group containing multiple affiliated companies. Within the group structure, there was a main holding company named S and companies A and T, which are subsidiaries of this holding. Before I became involved in the process, the client had met with the construction group’s representatives and, as a result of these meetings, signed a financial leasing and real estate sale promise agreement indicating that the property would be delivered by company A. Although company A was designated as the delivering party in the agreement, it was also stipulated that A could transfer its contractual obligations.
Since the client actually intended to purchase the relevant property by benefiting from the VAT exemption, this should have been guaranteed in the relevant agreement. This could have been achieved in many ways before signing the agreement, for instance by confirming that the property was actually registered in A’s name and adding a provision prohibiting A from transferring the property to anyone other than the client, or through various compensation provisions.
However, as the process progressed to the transfer stage, the construction group announced that the title deed registration of the property belonged not to company A but to company T within the holding. The group therefore argued that the transfer could only be made through T, and that if the client insisted on receiving the transfer from A, the client would have to pay VAT. The client, who had not obtained legal assistance at the outset, was thus left with no leverage at this stage: while a title deed transfer through T could qualify as the “first delivery” under VATL Art. 13/i, a prior transfer from T to A would not count as first delivery in terms of tax law, and a subsequent sale to the client would therefore be unable to benefit from the exemption.
The construction group attempted to resolve this impasse by having the client sign a dual set of documents. The client was told to first sign a release from the agreement signed with company A, and then to enter into a new sales agreement directly with company T. While doing so, the client was told to sign the agreement to be entered into with T with a backdated date. In theory, this structure created the appearance that T was delivering the property to the client for the first time directly. However, this solution was shaped not at the client’s initiative but entirely by the internal organizational preferences of the seller group; and the client learned that it had actually left its fate entirely to the initiative of the seller holding structure in the agreement it had signed at the outset.
This situation reveals a serious vulnerability in the current practice. The tax administration and courts determine the concept of “first delivery” according to the legal entities on the seller side; and they count each intra-group transfer as an independent delivery regardless of whether the property is being offered to the market for the first time in the real sense, or whether the exemption has been benefited from for that property. Yet in the specific case, the property was genuinely changing hands for the first time for the foreign buyer, and there had been no prior benefit from VAT exemption for that property. The interpretation that serves the purpose of the regulation and one that will not cause negative externalities is the one that would include cases like this within the scope of first delivery. However, this was not the case, and the client, having signed all documents without consulting anyone and only reaching out to me after problems began, experienced a lengthy ordeal.
The most important lesson from this dispute goes beyond mere tax law: For buyers who are foreign nationals or who, while not foreign, do not possess the necessary knowledge about tax legislation, obtaining legal counsel before signing an agreement is not a choice but a necessity. Identifying which legal entity holds the title deed of the relevant property, understanding the corporate structure of the seller group, and each company’s relationship to the exemption under VATL Art. 13/i are matters that must be clarified before a preliminary agreement is signed before a notary. In this case, it was possible to reach a result; however, the fact that the client had to sign a release and enter into a new agreement, and the extensive prolongation of the process due to the bad faith conduct of the relevant holding, along with the additional moral and financial costs these generated, made the client pay the price for deferring legal counsel to a point after the contracting stage.
VII. CONCLUSION
VATL Art. 13/i offers foreign buyers wishing to acquire real estate in Turkey a significant financial advantage ranging from ten to twenty percent of the sale price depending on the size of the property. However, the application of the exemption depends on the simultaneous fulfillment of conditions that are interlinked and each of which requires separate attention: the mandatory first-hand purchase from the constructor, the foreign currency transfer and its documentation requirement, the residency letter to be obtained from the tax office before delivery, and the three-year holding obligation.
The narrow interpretation of the “first delivery” condition in current practice constitutes a separate problem. The fact that an immovable property with an intra-group transfer history is deprived of the exemption despite being offered to the market for the first time in a genuine sense does not align with the purpose of the regulation to encourage foreign currency inflow and the construction sector and causes such unpredictable negative externalities. For this reason, the concept of “first delivery” should be applied with an interpretation focused on whether the VAT exemption has been previously benefited from, as stated above, or should be regulated to provide an exception for cases such as the one in the specific case.
The client entered this process relying solely on the construction firm being “large”; as a result of this process, the client learned the hard way that, on the contrary, large firms should not be trusted and learned the consequences of proceeding without legal support at a serious financial cost. I hope that other buyers will benefit from this experience so as not to learn these lessons through the same painful prescription. The corporate structure of the seller, which legal entity holds the title deed registration, and the foreign currency transfer processes are matters that must be clarified before a notarial agreement or any preliminary commitment document; a mistake or omission at these stages can produce consequences that are extremely difficult and sometimes impossible to remedy.
I hope that the first delivery regulation will be recognized as causing many harms and negative externalities beyond the benefits it aims to provide, and that it will be amended; and I hope that those who read this article will make the necessary preparations at the beginning rather than the end of any transaction, thus avoiding potential damages.
Att. Cemil Şaar, PhD(c)
This article was originally published on https://cemilsaar.com/tpost/vat-exemption-property-purchase-turkey-foreign-buyers-vatl-13i
cemilsaar@kstlawfirm.com | +90 535 416 9476 | linkedin.com/in/cemilsaar
Att. Cemil Şaar, PhD(c)
The information in this article is current as of the date of publication; however, legislation is constantly evolving and changing. It is important to verify current legislation and obtain legal advice before taking any action. In addition, not all topics are covered in this article; after providing basic information, attention has been drawn to matters that I personally consider important for personal or professional reasons, and the article in this form does not constitute legal advice.
I. INTRODUCTION
Tax legislation in Turkey offers a significant financial benefit in the acquisition of residential and commercial properties in Turkey for foreign nationals and Turkish citizens who live abroad and meet certain other conditions. Subparagraph (i), added to paragraph 1 of Article 13 of the Value Added Tax Law No. 3065 (“VATL”) by Article 7 of Law No. 6824, provides a value added tax exemption on the first delivery of buildings constructed as residential or commercial premises. This regulation, which entered into force on 1 April 2017, has two main purposes: Increasing foreign currency inflows into the country and supporting the construction sector.
The application principles of the exemption were established by the Communiqué Amending the General VAT Application Communiqué Serial No. 12 (“Communiqué No. 12”), published in Official Gazette No. 30057, dated 5 May 2017. The relevant provision of Law No. 7394, which entered into force on 1 May 2022, and the subsequently published Communiqué Amending the General VAT Application Communiqué Serial No. 42 extended the mandatory holding period for immovable properties within the scope of the exemption from one year to three years. This article discusses the legal framework, application conditions, and main problems encountered in practice regarding this exemption.
II. SCOPE OF THE EXEMPTION
A. Eligible Properties
The exemption under VATL Art. 13/i applies only to immovable properties constructed as residential or commercial premises, having a building permit, and actually delivered in a state ready for use by the buyer. In projects where floor easement can be established, it is also required that the floor easement has been established. The concept of residence is interpreted broadly and also covers structures such as timeshare units, residences, and apart-hotel units. For commercial premises, Article 156 of the Tax Procedure Law serves as a reference; stores, offices, warehouses, workshops, and similar commercial or industrial activity spaces are considered within this definition. Properties such as fields, vineyards, gardens, and land plots fall outside the scope of the exemption.
B. The “First Delivery” Condition and Its Problematic Interpretation
The exemption applies only to the first sale made by the taxpayer who has constructed said immovable property; it does not apply to subsequent transfers. VATL Art. 13/i, by using the phrase “…in the first delivery thereof…”, actually creates a provision open to interpretation. Therefore, through a teleological interpretation aligned with the purpose, one could argue that “first delivery” actually should mean the first delivery for the party wishing to benefit from the exemption. In my opinion, this would have been the appropriate regulatory approach. However, the Revenue Administration, by issuing an insufficiently considered ruling, brought all deliveries within the scope of “first delivery.” This causes serious problems in practice due to the lack of sufficient nuance in the relevant ruling and is particularly easily abused by large construction companies. Detailed observations on this point are provided in the final section of this article, where I present a real case converted into a practical exercise, after the necessary preliminary information has been conveyed in this section.
As stated in the ruling of the Revenue Administration dated 10.09.2018 and numbered 10360: “In the event that a residence or commercial premises is purchased from those who constructed it and then sold to another party, the delivery cannot be considered as the first delivery.” The area where this interpretation becomes particularly problematic is intra-group / holding structures. Property title transfers between different affiliated companies of the same holding are also considered “deliveries”; therefore, following a transfer from the company that carried out the construction to another company within the holding, a sale to the buyer wishing to obtain the first delivery loses its character as “first delivery.” This application practice is, in my view, erroneous. Because the purpose of VATL Art. 13/i is to encourage foreign currency inflows into the country and to support the construction sector through the first sale. The fact that transfers that have not previously been subject to VAT exemption cause the loss of “first delivery” character does not serve this purpose and also causes additional negative externalities to be discussed below.
In a scenario where the relevant Revenue Administration ruling did not exist or its scope was narrowed, the immovable property would still be changing hands for the first time for the buyer wishing to obtain the first delivery under such conditions and the buyer would still be receiving the immovable property for the first time. The seller party would also be benefiting from the VAT exemption for the first time with respect to that property and would therefore not cause any tax loss in its other transfers. Under these circumstances, the fact that the term “first delivery” under the relevant legislation is interpreted in this way does not serve any purpose and creates an opportunity for abuse, particularly for large-scale construction companies with affiliated companies, and also creates very significant unpredictability and risk for buyers who have signed a preliminary real estate sale agreement without proper legal support.
In short, in my opinion, it is necessary to change the interpretation of the concept of “first delivery” or to add to the legislation that certain deliveries shall not be counted as first delivery. Otherwise, the problems I will describe at the end of this article will continue to occur.
III. ELIGIBLE BUYERS
A. Foreign Natural Persons
The first group of buyers within the scope of VATL Art. 13/i consists of foreign natural persons that are not resident in Turkey. The concept of “foreign national” refers, within the framework of Article 3/1-d of Turkish Citizenship Law No. 5901, to a person who does not have a citizenship bond with the Republic of Turkey. This definition is the basis for the application of this law.
The criterion of “not being resident in Turkey” is determined based on Articles 4 and 5 of Income Tax Law No. 193 (“ITL”). Pursuant to ITL Art. 4, those whose domicile is in Turkey and those who stay continuously in Turkey for more than six months in a calendar year (temporary absences do not interrupt this period) are considered to be residents of Turkey. However, ITL Art. 5 provides an important exception: experts, civil servants, press members, those coming for education, treatment, or rest, and those detained in Turkey for reasons beyond their control such as arrest and imprisonment, who come to Turkey for a specific and temporary duty or work, are not considered residents even if they stay for more than six months.
In practice, tax offices determine this matter by examining the entry-exit records held by law enforcement for the relevant calendar year; in the absence of any specific finding that the buyer is residing in Turkey, they issue a “Letter Confirming Non-Residency in Turkey.”
B. Turkish Citizens Living Abroad
The second group consists of Turkish citizens who have been living abroad for more than six months with a work or residence permit. Turkish citizens who are employed by official departments and institutions or by organizations and enterprises headquartered in Turkey and reside abroad due to their work have been excluded from the scope of this group (pursuant to the joint reading of ITL Art. 3/1-2 and VATL Art. 13/i provisions). Due to this distinction, a Turkish citizen assigned abroad by a state institution cannot benefit from this exemption; while those who have settled abroad with a work permit on their own initiative can benefit.
Three conditions must be met simultaneously to benefit from the exemption: Having a valid foreign work or residence permit at the date of delivery; having obtained said permit at least six months before the date of delivery; and having actually been abroad for at least six months between the date of obtaining the permit and the date of delivery. The seller must obtain the official document proving the existence of these conditions, obtained from the embassy or consulate in Turkey, before the delivery.
C. Blue Card Holders
Real persons who have been issued a blue card pursuant to Article 28 of Turkish Citizenship Law No. 5901 and who are not resident in Turkey are also accepted as being able to benefit from the exemption under VATL Art. 13/i. The blue card is an official document evidencing that those who have renounced Turkish citizenship with permission to leave have the same rights as Turkish citizens with certain exceptions. A copy of the blue card is submitted instead of a passport copy; and the same conditions regarding non-residency in Turkey must be met.
D. Foreign Legal Entities
The third group consists of foreign legal entities whose registered and business headquarters are not in Turkey, and which do not earn income in Turkey through a business establishment or permanent representative. Pursuant to Article 3 of Corporate Tax Law No. 5520 (“CTL”), the registered headquarters is the place indicated in the incorporation documents, while the business headquarters is the place where the transactions are actually concentrated and managed. In multinational structures, determining the business headquarters may be challenging; for this reason, it is recommended to file for an advance tax ruling in practice.
IV. APPLICATION CONDITIONS
A. The Sale Consideration Must be Brought Into Turkey as Foreign Currency
One of the fundamental conditions for the exemption is that the sale consideration is brought to Turkey in foreign currency. Accordingly, at least 50% of the consideration must be paid by the buyer in foreign currency to Turkey before the date of the invoice related to the delivery; the remaining amount must be brought to Turkey in foreign currency and paid to the seller within one year at the latest. Foreign currency transfer can be made by international wire transfer to a bank in Turkey; if brought physically to Turkey, the documents obtained from the customs administration may serve as proof. It is also possible to pay the amount brought from abroad in foreign currency to the seller in Turkish lira; however, in this case, bank receipts documenting the exchange rate and conversion must be kept. Since the practices of banks operating in Turkey vary, especially citizens of countries subject to financial sanctions under SWIFT must obtain proper legal support before making any transfer. Otherwise, their assets may be blocked, or the transfer they made may not meet the conditions under the law, and they may need to make the transfer again (in the correct manner).
B. Foreign Exchange Purchase Certificate (FEC)
The Foreign Exchange Purchase Certificate (FEC) is an official document issued by Turkish banks evidencing that foreign currency has been converted into Turkish lira or that a transfer has been made from abroad for the purpose of a title deed transfer. Land registry offices request this document before the transaction in practice. The seller is obligated to record the collection with bank receipts and the FEC. In the event that foreign currency is brought physically to Turkey, the customs declaration takes the place of the FEC. The VAT refund can be made after the entire sale consideration has been documented as being brought to Turkey and paid to the seller.
C. Letter Confirming Non-Residency in Turkey
For foreign natural person buyers to benefit from the exemption, it is mandatory to obtain a “Letter Confirming Non-Residency in Turkey” from the Tax Office Directorate where the residential or commercial property is located, and to submit this document to the seller before the delivery. The document is prepared by local tax offices within the Revenue Administration and is issued with the signature of the Tax Office Director. The authenticity of the letter issued with a secure electronic signature can be verified at https://ivdb.gib.gov.tr.
The documents required for the application are as follows: A notarized translation of the buyer’s passport copy, a document obtained from their own country showing that the buyer resides abroad and its Turkish translation, the title deed or real estate sale agreement, and a document from the Police Directorate showing Turkey entry-exit records for the last one year. If the process is to be carried out by proxy on behalf of the buyer, it is unfortunately necessary that the power of attorney explicitly lists the authority to represent before tax offices, police directorates, immigration offices, and land registry offices, and that all specific matters such as the foreign exchange purchase certificate and entry-exit queries to be made are specifically included in the power of attorney.
It is essential that powers of attorney are carefully prepared by an attorney experienced in this matter, due to the strange, unpredictable, and unique demands of institutions, and otherwise may create an additional burden of additional power of attorney later. Since most institutions create arbitrary practices without legal basis in line with the perspective of their internal managers, and may request various, actually unnecessary, matters to be added to powers of attorney, it is necessary to consult an experienced person regarding the content of the power of attorney if there has been no prior experience dealing with these institutions.
Upon completion of the application, the tax office compares the submitted documents with its own records; in the absence of any finding that the buyer is resident in Turkey in the relevant calendar year, it issues the letter. It should be taken into account that the process can sometimes take a few days and sometimes a few weeks due to the arbitrary practices of officials or the workload of the relevant institution, and therefore the document procurement/preparation processes should be initiated at least 6 months before the planned delivery date.
D. Obligations of the Seller
The seller faces three main obligations: Document collection, notification, and declaration. Under the documentation obligation, a passport copy and the residency document obtained from the tax office must be obtained for foreign national buyers before delivery. Under the notification obligation, the Land Registry Office must be notified that the delivery is made exempt from VAT under VATL Art. 13/i; and the annotation of the three-year holding period must be placed in the declarations column of the title deed register. Regarding the declaration obligation, the sale within the scope of the exemption must be declared in the “Transactions Within Full Exemption Scope” table of the VAT return in the row “Residential or Commercial Property Deliveries” with code number 328, with the VAT-exclusive consideration and the loaded VAT amounts.
V. SANCTIONS AND VAT REFUND
A. Three-Year Holding Obligation
With Law No. 7394 and the Communiqué Amending the General VAT Application Communiqué Serial No. 42, effective 1 May 2022, the mandatory holding period for immovable properties acquired within the scope of the exemption has been extended from one year to three years. Land registry offices place an annotation in the declarations column of the title deed register of the relevant property stating, “in the event of disposal within three years, the tax that could not be collected on time will be paid with the accrued interest within the scope of Article 48 of Law No. 6183.” In order to have this annotation removed and complete the title deed transfer, it is mandatory that this tax be paid by the disposing party before the title deed transaction.
B. Joint and Several Liability
In the event it is determined that the exemption was applied despite the fact that the conditions stipulated by VATL Art. 13/i are not met, the seller and the buyer are jointly and severally liable for the tax that could not be collected on time, the tax loss penalty, and the late payment interest. Joint and several liability is a legal mechanism that creates chain-like responsibility by allowing the tax administration to apply to any of the debtors and demand the entire debt. The practical consequence of this provision is extremely significant: the seller, if it transacts with false or incomplete documents, incurs tax liability together with the buyer; and the buyer, if it benefits from the exemption despite not meeting its own conditions, shares the same legal risk as the seller. For this reason, document verification is a necessity for both the seller and the buyer.
C. VAT Refund Process
After the delivery within the scope of the exemption is declared in the VAT return, the seller may request a refund of the loaded VAT. The refund request must be submitted to the tax office by writing the loaded VAT amount in the returns for the relevant period by the end of the second calendar year following the delivery period. Taxpayers requesting offset or cash refund must submit the standard refund petition and supporting documents to the tax office. As a prerequisite for the refund, it is required to document that the entire sale consideration has been brought to Turkey and paid to the seller; partial refund requests made before full payment is received are not accepted.
VI. CASE STUDY: THE HOLDING STRUCTURE, THE “FIRST DELIVERY” TRAP, AND THE IMPORTANCE OF LEGAL COUNSEL
A case I managed recently concretely illustrates how the narrowly interpreted “first delivery” condition can corner foreign buyers and how the absence of competent legal advice before contracting can produce lasting consequences.
The client wanted to purchase a residence from a large construction group containing multiple affiliated companies. Within the group structure, there was a main holding company named S and companies A and T, which are subsidiaries of this holding. Before I became involved in the process, the client had met with the construction group’s representatives and, as a result of these meetings, signed a financial leasing and real estate sale promise agreement indicating that the property would be delivered by company A. Although company A was designated as the delivering party in the agreement, it was also stipulated that A could transfer its contractual obligations.
Since the client actually intended to purchase the relevant property by benefiting from the VAT exemption, this should have been guaranteed in the relevant agreement. This could have been achieved in many ways before signing the agreement, for instance by confirming that the property was actually registered in A’s name and adding a provision prohibiting A from transferring the property to anyone other than the client, or through various compensation provisions.
However, as the process progressed to the transfer stage, the construction group announced that the title deed registration of the property belonged not to company A but to company T within the holding. The group therefore argued that the transfer could only be made through T, and that if the client insisted on receiving the transfer from A, the client would have to pay VAT. The client, who had not obtained legal assistance at the outset, was thus left with no leverage at this stage: while a title deed transfer through T could qualify as the “first delivery” under VATL Art. 13/i, a prior transfer from T to A would not count as first delivery in terms of tax law, and a subsequent sale to the client would therefore be unable to benefit from the exemption.
The construction group attempted to resolve this impasse by having the client sign a dual set of documents. The client was told to first sign a release from the agreement signed with company A, and then to enter into a new sales agreement directly with company T. While doing so, the client was told to sign the agreement to be entered into with T with a backdated date. In theory, this structure created the appearance that T was delivering the property to the client for the first time directly. However, this solution was shaped not at the client’s initiative but entirely by the internal organizational preferences of the seller group; and the client learned that it had actually left its fate entirely to the initiative of the seller holding structure in the agreement it had signed at the outset.
This situation reveals a serious vulnerability in the current practice. The tax administration and courts determine the concept of “first delivery” according to the legal entities on the seller side; and they count each intra-group transfer as an independent delivery regardless of whether the property is being offered to the market for the first time in the real sense, or whether the exemption has been benefited from for that property. Yet in the specific case, the property was genuinely changing hands for the first time for the foreign buyer, and there had been no prior benefit from VAT exemption for that property. The interpretation that serves the purpose of the regulation and one that will not cause negative externalities is the one that would include cases like this within the scope of first delivery. However, this was not the case, and the client, having signed all documents without consulting anyone and only reaching out to me after problems began, experienced a lengthy ordeal.
The most important lesson from this dispute goes beyond mere tax law: For buyers who are foreign nationals or who, while not foreign, do not possess the necessary knowledge about tax legislation, obtaining legal counsel before signing an agreement is not a choice but a necessity. Identifying which legal entity holds the title deed of the relevant property, understanding the corporate structure of the seller group, and each company’s relationship to the exemption under VATL Art. 13/i are matters that must be clarified before a preliminary agreement is signed before a notary. In this case, it was possible to reach a result; however, the fact that the client had to sign a release and enter into a new agreement, and the extensive prolongation of the process due to the bad faith conduct of the relevant holding, along with the additional moral and financial costs these generated, made the client pay the price for deferring legal counsel to a point after the contracting stage.
VII. CONCLUSION
VATL Art. 13/i offers foreign buyers wishing to acquire real estate in Turkey a significant financial advantage ranging from ten to twenty percent of the sale price depending on the size of the property. However, the application of the exemption depends on the simultaneous fulfillment of conditions that are interlinked and each of which requires separate attention: the mandatory first-hand purchase from the constructor, the foreign currency transfer and its documentation requirement, the residency letter to be obtained from the tax office before delivery, and the three-year holding obligation.
The narrow interpretation of the “first delivery” condition in current practice constitutes a separate problem. The fact that an immovable property with an intra-group transfer history is deprived of the exemption despite being offered to the market for the first time in a genuine sense does not align with the purpose of the regulation to encourage foreign currency inflow and the construction sector and causes such unpredictable negative externalities. For this reason, the concept of “first delivery” should be applied with an interpretation focused on whether the VAT exemption has been previously benefited from, as stated above, or should be regulated to provide an exception for cases such as the one in the specific case.
The client entered this process relying solely on the construction firm being “large”; as a result of this process, the client learned the hard way that, on the contrary, large firms should not be trusted and learned the consequences of proceeding without legal support at a serious financial cost. I hope that other buyers will benefit from this experience so as not to learn these lessons through the same painful prescription. The corporate structure of the seller, which legal entity holds the title deed registration, and the foreign currency transfer processes are matters that must be clarified before a notarial agreement or any preliminary commitment document; a mistake or omission at these stages can produce consequences that are extremely difficult and sometimes impossible to remedy.
I hope that the first delivery regulation will be recognized as causing many harms and negative externalities beyond the benefits it aims to provide, and that it will be amended; and I hope that those who read this article will make the necessary preparations at the beginning rather than the end of any transaction, thus avoiding potential damages.
Att. Cemil Şaar, PhD(c)
This article was originally published on https://cemilsaar.com/tpost/vat-exemption-property-purchase-turkey-foreign-buyers-vatl-13i
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