Portfolio Management of Foreign Investment Funds in Türkiye

Portfolio Management of Foreign Investment Funds in Türkiye: Legal Framework and Practice

    With the integration of global financial markets, the Turkish capital market is becoming increasingly attractive for foreign investment funds. Both Türkiye's developing market structure and strong regulatory infrastructure make it possible and appealing for foreign portfolio managers to operate in Türkiye. However, it is important to remember that these activities are subject to specific rules and licensing processes under Turkish law.

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1. Basic Conditions for Foreign Funds to Operate in Türkiye

In Turkish legislation, portfolio management activities are regulated under the Capital Markets Law No. 6362 and the Communiqué on Portfolio Management Companies issued based on this Law. Within this framework, a foreign fund or portfolio management company wishing to manage investment funds in Türkiye must:

• Obtaining authorization from the Capital Markets Board

• opening a branch in Türkiye or collaborating with a Turkish portfolio management company,

• It must operate through authorized storage institutions.

Foreign investment funds generally prefer to operate in Türkiye by entering into a service contract with a portfolio management company, rather than operating directly in the country.

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2. Portfolio Management Authorization Certificate and Licensing Process

Companies providing portfolio management services are required to possess an authorization certificate issued by the Capital Markets Board. This certificate requires:

• Meeting the minimum paid-in capital requirement (usually 2 million TL and above),

• Company managers should be licensed and experienced

• Appropriate internal control and risk management systems need to be established.

For a foreign fund to conduct portfolio management directly in Türkiye, it must obtain these licenses through a company or branch established in Türkiye.

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3. Access of Foreign Investment Funds to the Turkish Capital Market

Foreign investment funds can invest in the Turkish capital market through the following ways:

• Buying and selling securities in the secondary market

• Investment instruments traded on the Istanbul Stock Exchange

• Investing in Turkish collective investment institutions

• Invest in Turkish private sector or government bonds

While these transactions are free in terms of capital movements, exceeding certain thresholds may require notification or approval from the General Directorate of Banks and Financial Institutions and the Capital Markets Board.

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4. Taxation and Double Taxation Agreements

Foreign funds' investments in Türkiye may be subject to withholding tax in Türkiye. However, thanks to Double Taxation Avoidance Agreements that Türkiye has with many countries, these rates can be reduced or eliminated.

Recommendation: Before investing, Double Taxation Avoidance Agreements between the relevant country and Türkiye should be carefully examined, and a tax residency certificate should be obtained.

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5. Compliance and Reporting Obligations

Foreign investment funds or their representatives are subject to the following obligations in the course of their activities in Türkiye:

• Customer identification and anti-money laundering obligations under MASAK legislation.

• Regular reporting and providing information to the Capital Markets Board

• Records and declarations at the tax office and the Revenue Administration.

• Periodic reporting of financial statements and portfolio structure

Non-compliance may result in both administrative fines and license revocation.

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6. Legal Considerations to be Taken into Account in Investment Strategies

Some restrictions applied in Türkiye for foreign investment funds should also be taken into consideration:

• Restrictions on establishing indirect ownership or partnerships in specific sectors (e.g., banking, defense industry, energy)

• Limits within the definition of institutional investor

• Rules for conducting transactions in Turkish Lira and restrictions regarding the foreign exchange regime

Therefore, the legal framework of the area where the investment will be made should be examined beforehand.

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Conclusion

Portfolio management activities of foreign investment funds in Türkiye are a process that requires careful planning, both legally and operationally. While the Turkish capital market is open and transparent to foreign investors, it necessitates professional legal guidance regarding licensing, tax, reporting, and compliance obligations. In this context, it is strongly recommended that foreign funds planning to invest in Türkiye seek support from an expert legal advisor.