Pursuant to a decision of the Capital Markets Board of Turkey (“CMB“) (“Board Decision“), the CMB has paved the way for investments in restructured and distressed loans (“Distressed Loans“), and share capital of the companies that are the debtors of such Distressed Loans (together, “Distressed Assets“) through hedge funds. In other words, investors wishing to invest in Distressed Assets are now entitled to invest in these assets by simply purchasing fund interests.
What is a hedge fund?
A hedge fund is a type of mutual fund that only qualified investors are entitled to invest in, and that is not subject to restrictions in terms of the investment instruments and transactions that can be included within the portfolio, except for the restrictions that the CMB may introduce. Hedge funds, which are classified as high-risk mutual funds, can freely make investments in accordance with their investment strategies and limits stipulated under their bylaws.
Distressed companies private hedge fund as a type of hedge fund
A distressed companies private hedge fund is a type of fund that at least 80% of the net value of the fund permanently consists of Distressed Assets.
The founder of a distressed companies private hedge fund must establish a special investment committee that is responsible for the activities of the fund. The board of directors of the founder will represent the fund for all of its operations. This authority can be delegated to one or more members of the board of directors or personnel of the founder with first degree signing authority. In addition, the representation of the fund’s portfolio can be delegated to the investment committee.
The value of the assets within the fund’s portfolio are determined in accordance with the CMB’s regulations. Before investing in these Distressed Assets, at least two valuation firms must value the assets to invest in. The lower of the values determined by these firms is the maximum value for the investment.
Collective investment institutions (investment funds and investment corporations) and private pension funds cannot invest in these funds.
Taxation of the Fund
As per the Turkish corporate income tax regime, distressed companies private hedge funds are considered corporate income taxpayers under the scope of corporations. However, their income is exempted from corporate income tax and the rate of withholding tax applicable to their profit is reduced to 0%. There is no value-added tax exemption provided to them whereas certain documents entered into by a fund are exempted from stamp tax.
Taxation of income derived from the Fund
In principle resident corporations are subject to corporate income tax for the income derived from the fund. Notwithstanding that dividend income derived by corporate income taxpayers from the investment funds (excluding income from mutual funds with assets in foreign currency, gold and other precious metals, and capital market instruments based on them) and income arising from the return of the participation shares to the mutual funds are exempt from corporate income tax. In addition, 75% of the income derived from the sale of the participation shares held for more than two years is also exempt from corporate tax if the conditions set forth in the Corporate Tax Law is fulfilled.
Income derived by legal persons from the fund interests is subject to 0% withholding tax while income derived by real persons from the fund interests is subject to 10% withholding tax.
In terms of withholding tax applied to the income derived by resident real persons and nonresident real and legal persons, withholding tax is the final tax and no further declaration is required.
With the Board Decision, the distressed companies private hedge fund has been defined as a new type of hedge fund and it became possible for Distressed Assets to be included within the fund portfolios.
This is the most important step the CMB has taken in terms of resolving the NPL issue through capital markets following its regulation allowing the securitization of NPLs. You may review our legal alert describing the NPL securitization here.