Real-Estate Acquisitions in Turkey by Foreigners

IN THE LIGHT OF RECENT LEGAL AMENDMENTS ON REAL-ESTATE ACQUSITIONS IN TURKEY BY FOREIGNERS

The Law on Amendments on Land Register and Cadastral Law (Act No 6302,
dated 3.5.2012) introduced significant amendments for real-estate acquisitions
by foreigners. By this law, the 35^th  and 36^th  articles of the Land Register and Cadastral
Law (“Law”) have been amended.

Initially, some of the previous requirements had been cancelled. However,
by the amendment of the Law, some limitations regarding the neighboring countries
have been introduced. Presently, the Law enables the 183 countries’ citizens to
acquire real-estate in Turkey without “reciprocity clause”. The main reason
behind this amendment is to open Turkey’s lands to foreign investments since
interests for real estate investments are high.

The implementation principles shall be indicated by the list that is to be
determined by the Council of Ministers (Article 35, para.1). By the said list,
the number of countries which are entitled to acquire real-estate without
reciprocity clause raised from 53 to 183.

The most notable amendment in the Law is abolishment of the reciprocity
clause. As a result, a foreigner may acquire a real-estate in Turkey but it is
possible that a Turkish citizen may not acquire a real-estate in the
foreigner’s home country.

The reciprocity principle means, utilization of some rights in a foreign
country by a citizen depends on the citizen of the said foreigner country can
utilize the same rights in the country. Reciprocity may arise from treaty
between countries (diplomatic), law or de-facto implementation. According to
this principle, it is essential to entitle Turkish Republic citizens to the
same rights in that foreigner country, whose citizen are entitled to the same
rights in Turkey. For instance, if a country entitles its own citizens and
Turkish citizens to house property rights, the citizens of the said country
shall only utilize this right in Turkey and cannot acquire land property.(1)

With this amendment, a limitation related to quantity of real-estate
acquisitions by foreigners is set forth. Accordingly, total area of
real-estates and limited real rights acquired by foreign persons cannot exceed
10% of land that is subject to private ownership in commune and 30 hectare in
Turkey. On the other hand, the Council of Ministers is authorized to double
this amount. Before the amendment, the total amount of real-estate area could
not be exceeded 2.5 hectare.

Besides, if a real-estate is in the military areas, acquisition depends on
approval of the General Staff. Likewise if a real estate is in the private
security areas acquisition depends on approval of the related governorship.

The foreign successors that satisfy the following conditions may acquire
real property by the way of inheritance; (i) the successor must be a citizen of
the countries that have been announced by the Council of Ministers; (ii) the
real property shall not be within the borders of restricted zones (such as
military zones, security zones, etc.); (iii) the total size of real property
that will be inherited by a single successor shall not exceed 30,000  and %10 of the total surface area of the
relevant district.

However, if the successor is not entitled to acquire property since they
are in the scope of the mentioned restrictions, the successor is obliged to
sell the property to an eligible third party within a maximum period of one
year. Otherwise, the property will be sold by the Ministry of Finance, and sale
price will be paid to the successor.

Concerning the real-estate acquisitions by incorporated companies
established by the law of their own countries;

According to 35^th  article
para.2 of the Law, incorporated companies established by the laws of their own
countries can only acquire real-estate and limited real rights pursuant to
special laws (the Law for the Encouragement of Tourism numbered 2634, the Law
on Industrial Zones numbered 4737, the Petroleum Law numbered 6326), and
companies apart from these cannot acquire real-estate or limited real rights.

However, regarding hypothec the restrictions in this provision shall not be
implemented. In other words, incorporated companies established by the laws of
their own countries and foreign persons may institute hypothec on their behalf
in Turkey.

Concerning the foreign-capitalized companies established in Turkey;

In accordance with the 36^th article of the Law, in case a
company established in Turkey is foreign-capitalized; if foreign person,
foreign legal entity or international institution owns 50% or more of shares of
this company or holds the right to assign or dismiss majority of members of
board of directors, even if it is established in Turkey, it may only acquire
and exercise real-estate or limited real rights if the related activity had
been stipulated in the articles of association.

The said article indicates that the same conditions are valid for a company
established in Turkey but 50% or more of ultimate percentage of its shares are
held by foreign real person or legal entity that holds 50% or more shares or
the right to assign or dismiss the majority of board of directors. To obtain
50% or more of ultimate percentage of shares may occur when a foreign investor
directly or indirectly acquires shares of company which owns real-estate or in
the companies with foreign-capital which owns real-estate; ratio of the shares
held by foreign investor reaches %50 or more. It means that, these types of
companies may acquire real-estates or limited real rights in the context of
activity areas stipulated in article of associations as well. Issues reserved
from these restrictions stated in the Ministry of Environment and Urban
Planning Circular numbered 1735 are as follows;

1. Hypothec,
2. In the real-estate acquisitions arising from liquidation of hypothec
process,
3. In the real-estate or limited real right transfers arising from corporate
mergers and acquisitions,
4. In real-estate or limited real right acquisitions on special investment
zones such as organized industrial zones, industrial zones, technology development
zones, free trade zones and in acquisitions done by banks as a result of
transactions deemed as credit according to the Bank Law numbered 5411 dated
19.10.2005 on condition of continuing the obligation to dispose in a period
according to related legislation and during the process of debt this provision
shall not be implemented.(2) Transactions in this context shall be concluded by
Directorate of Land Registry since the limitations in the 35^th  and 36^th  articles are not required.
Same circular states that the principles related to authorization certificate
prepared by the Register of Commerce are re-regulated by the Ministry of
Customs and Trade General Directorate of Domestic Trade. Accordingly, a clause
must be provided in an authorization certificate stating whether a
foreign-capital company established in Turkey falls in the context of
regulation. The Directorate of Land Registry shall act in accordance with this
clause. Thus, a foreign capital company which is decided to be “out of context”
may acquire real-estate according to the same provision implemented to
domestic-capital companies, while real-estate acquisitions by companies decided
to be “in the context” shall be performed pursuant to “By-Law Related to
Real-Estate and Limited Real Right Acquisitions by Companies and Associations
in the context of 36th Article of the Land Register Law numbered 2644” (3)

The real-estate acquisitions by a foreign real person, by incorporated
companies established under the law of their own countries and by a foreign-capitalized
company that established in Turkey (i.e the foreign real person, foreign legal
entity or international institution shareholder owns %51 or more of shares of a
company that established in Turkey) may complete the sale under two main types
of purchase agreements: Purchase/Sale Agreement which is the way of direct
acquisition and Promise to Sell Agreement.

According to Turkish law, the sale of a property can only be completed
before the relevant land registry with the attendance of both the seller and
purchaser in order to complete a valid Sales Agreement. The parties must
execute a standard transfer deed prepared by the relevant land registry to
transfer the ownership and complete the Sales Agreement.

Besides that prior to the sale of property, the seller and purchaser may
enter into a preliminary “Promise to Sell Agreement” as the only preliminary
agreement that can be validly executed between the parties. This agreement
should be prepared by and signed before a notary public to become binding, and
in order to qualify it for the protection against third party claims it should
be registered with the land registry. Otherwise any subsequent purchase of the
property by a third party acting in good faith will be valid.

Either the purchasing party or his/her legal representatives can conduct
transactions regarding the acquisition of property. If the transactions are
carried out by the way of a power of attorney, such power of attorney must be
drafted and regulated by and also signed before a notary public, who, under
Turkish Law, has the power to control and certify that the authorization to act
on behalf of such person is being duly granted. The power of attorney must
include the full name and address of the legal representative(s).

Foreigners who have acquired property in Turkey are entitled to apply for “Short-term
Residency Permit” that is granted for one year for each application according
to the “Law of Foreigners” and “International Protection”. Besides, foreign
real persons are free to dispose of their property as well as Turkish citizens;
they may sell, lease or pledge their property to third parties.

There are not any different principles of a property sale by a foreign real
person and a Turkish citizen. However if the purchaser is a foreigner, the
above-mentioned procedure will apply in this circumstances.

Furthermore, every property acquisition for individuals are subject to some
transaction taxes such as “Title Deed Fee”, “Value Added Tax”, “Stamp Duty”,
and “Notary Charges”. Additionally, holding the property is also subject to a
wealth tax called “Property Tax”.

Sales of a real-estate by a foreign real person is subject to income tax
which is related to the capital gains derived from the disposal of the property
that is held for less than five years. Thus no Income Tax is calculated for the
capital gains obtained from the property sales after 5 year holding period.
Likewise the income derived from property as rental income would also subject
to “Income Tax”. However, Income Tax is only applicable if the owner of the
property obtains pecuniary advantage. Thus, if the owner holds the property
only for his/her own use, will not be subject to any Income Tax in Turkey.

The shareholders of a company holding a property in Turkey are subject to a
different taxation that called “Corporation Tax”. However, Turkish REIT’s
(Real-Estate Investment Trust) are exempt from corporate tax. (4)

Situations that the applications shall be denied without any consideration;

Situations that the Directorate of Land Registry denies the application
without any consideration are stated in the Ministry of Environment and Urban
Planning Circular numbered 1734. Consequently; legal entities apart from
foreign real persons and companies established by the laws of their own countries
(e.g. foundations, organizations, cooperatives, ensembles, communities or
companies without legal entity etc.) cannot acquire real-estate or limited real
rights on their behalf. Thus, applications in this regard shall be directly
denied by the Directorate of Land Registry.

According to the same regulation, foreigners can only acquire real-estates
and limited real rights up to 30 hectare. Any application exceeding this amount
will be denied by the Directorate of Land Registry.

Considering unconstructed real-estates;

According to the 35th article of the Law, foreigners who are willing to
construct a structure on a real-estate must submit their projects to the
related Ministry within 2 years. The Ministry of Environment and Urban Planning
Circular numbered 1734 sets forth that upon approval of the related Ministry
the statement of “… project is granted by … Municipality. Date, Number” shall
be inserted to the declaration section of the real-estate.

The said circular also states that, in case there is no such statement or
the project have not been carried out in 2 years from the acquisition, the
Directorate of Land Registry notifies the related Ministry to liquidate the
real-estate or limited real right.

General procedure to be performed by the Directorate of Land Registry for
real-estate or limited real right acquisitions by foreigners with regards to
the Ministry of Environment and Urban Planning Circular numbered 1734;

1. Examination of acquisition conditions in relation to nationality of
applicants.
2. Inquiring about whether the real-estate is in the Forbidden Military Zones,
the Military Security Zones and the strategic zones.
3. Obtaining foreigners’ undertakings about limitation of 30 hectare as
stipulated in the Circular.
In case real-estates and limited real rights are acquired contrary to the Law
or utilized contrary to purpose of acquisition, except to the extend required
by law, they will be liquidated pursuant to related the Ministry of Environment
and Urban Planning Circular.

Considering the people who are natural born Turkish citizen and ceased to
be Turkish citizenship by consent;

By the Ministry of Environment and Urban Planning Circular numbered 1734
natural born Turkish citizens who ceased their Turkish citizenship by consent
and their children processed with them are exempted from restrictions stated in
the Law. Thus, Turkish origin people who are living in foreign countries and
acquired citizenship of the foreign countries, especially in Germany, are not
subjected to abovementioned restrictions. Applications from mentioned people
are concluded by the Directorate of Land Registry.

In conclusion; reciprocity principle which has been stated in the Law since
1934 has been abolished by the Law on Amendments on Land Register and Cadastral
Law (Act No 6302, dated 3.5.2012) and Turkish lands are enabled to be acquired
by 183 country citizens without any conditions but 30 hectare limit.

PROF. DR. GÜRSEL ÖNGÖREN

_______________________________________________

(1)Eksi Nuray, Yabancıların Türkiye’deki Taşınmaz Mallar Üzerindeki Hakları,
Arıkan Yayınları 2006, p. 39, 40

(2) In that vein please see the Ministry of Environment and Urban Planning
Circular Related to Real-Estate and Limited Real Right Acquisitions by Foreign
Persons, Circular No 1734, 2012/12 dated 06.08.2012.

(3) In that vein please see the Ministry of Environment and Urban Planning
Circular Related to Real-Estate and Limited Real Right Acquisitions by
Foreign-Capital Companies, Circular No 1735, 2012/13, and dated 17.09.2012.

(4) GYODER , How to buy property in TURKEY? (A guide
for individiual investors), Eylül 2013