Export of Financial Services Within İstanbul Financial Center

Summary

The provisions governing the management and operation of İstanbul Financial Center, as well as the activities conducted within and the incentives, discounts, exemptions, and exceptions related to these activities, are regulated by İstanbul Financial Center Law numbered 7412, and the İstanbul Financial Center Regulation, which outlines the procedures and principles for implementing the law. İstanbul Financial Center Law defines financial institutions and financial service exports, and establishes exemptions, discounts on taxes and other financial obligations applicable to financial institutions engaged in activities classified as financial service exports. The details of these matters, as regulated by the law and the regulation, constitute the subject of our study.

Key Words: Finance, İstanbul Financial Center, Export of Financial Services, Exemption, Exception, Financial Activities

I.       INTRODUCTION

With İstanbul Financial Center (“IFC”), it is aimed to increase financial competitiveness on the international stage, contribute to the development and deepening of financial markets, products, and services, strengthen its integration with international financial and capital markets, and thus make IFC one of the leading global financial centers.

IFC aims to bring together a wide range of financial institutions and organizations, including banks, capital market institutions, participation finance companies, financial investment and portfolio management companies, and insurance companies, under a single platform. It seeks to promote sustainable and participatory approaches to all financial services, particularly in the field of international trade. IFC aims to enhance financial development by uniting local and global financial institutions. In this context, advantages such as tax reductions, exemptions and transaction facilities granted to institutions exporting financial services make IFC an attractive option on the international stage.

II.      OVERVIEW OF IFC

İstanbul Financial Center Law numbered 7412[1] ("Law") and the İstanbul Financial Center Regulation[2] ("Regulation") mainly regulate the procedures and principles regarding the management and operation of IFC, application for certificate of participation ("Certificate"), issuance and cancellation of Certificate, leasing of the properties in IFC and various exemptions and advantages.

To benefit from the exemptions and other tax advantages outlined in Law, participants must obtain Certificate and operate within IFC office area. The Finance Office of the Presidency of the Republic of Türkiye ("Finance Office") is authorized and responsible for evaluating Certificate applications, issuing Certificates to eligible applicants, rejecting ineligible applications, and suspending or canceling Certificates. Participants wishing to operate within IFC office area must apply to Finance Office. The application process is conducted electronically via IFC portal, which is established and managed by Finance Office.

Law stipulates that a “One-stop Bureau” shall be established to involve relevant departments of public organizations and institutions. This bureau aims to facilitate applications such as permits, licenses, approvals related to participants’ activities, as well as permits and approvals for their employees and dependents[3]. Once the participants complete the application process and obtain Certificate, they will be eligible to benefit from discounts, exemptions, and other tax advantages stipulated by Law and Regulation.

III.    FINANCIAL INSTITUTIONS AND THE EXPORT OF FINANCIAL SERVICES IN IFC

According to Law, financial institutions eligible to operate within IFC include legal entities engaged in financial activities, their branches, liaison offices, representative offices and sovereign wealth funds[4]. Central Bank of the Republic of Türkiye, regulatory and supervisory institutions, banking and non-banking finance institutions, capital market institutions, financial investment firms and portfolio management companies operate within IFC[5].

Financial services offered by organizations holding Certificate, provided that the services are ultimately utilized abroad by non-residents, are considered as financial service export[6]. Additionally, it is stipulated that derivative transactions conducted on their own behalf and account, acquisition or disposal of assets in their portfolios, and activities, services, and transactions transferring domestic residents’ savings abroad by financial institutions, shall not be considered as financial service exports.

Article 2 of Law defines the transactions eligible for financial services exports as "financial activities" and specifies these activities, services and transactions by reference to the relevant legislation:

• Purchase and sale of foreign exchange, coins, stocks, bonds, precious metals, precious stones and all kinds of goods and assets containing these materials, as well as commercial bills and payment instruments within the scope of Protection of the Value of Turkish Currency Law numbered 1567[7],

• Activities of pension companies, transactions of pension mutual funds and brokerage services under the Private Pension Savings and Investment System Law numbered 4632[8],

• Activities of deposit banks, participation banks, development and investment banks, banks established under special laws, and financial holding companies regulated by the Banking Law numbered 5411[9],

• Operations of entities establishing card systems, issuing cards and entering into merchant agreements under the Bank Cards and Credit Cards Law numbered 5464[10],

• Activities of insurance and reinsurance companies, intermediaries, actuaries and insurance experts operating in Türkiye in line with the Insurance Law numbered 5684[11],

• Activities of financial leasing, factoring, financing, and savings finance companies under the Financial Leasing, Factoring, Financing, and Savings Finance Companies Law numbered 6361[12],

• Issuance and public offering of capital market instruments, capital market activities, stock exchange transactions under the Capital Markets Law numbered 6362[13],

• Activities of payment institutions, electronic money institutions, and operations of payment services, payment, and securities settlement systems under the Payment and Securities Settlement Systems, Payment Services, and Electronic Money Institutions Law numbered 6493[14].

IV.   ADVANTAGES PROVIDED TO FINANCIAL INSTITUTIONS EXPORTING FINANCIAL SERVICES

IFC participants benefit from various exemptions and advantages under Law. Many of these benefits are exclusive to financial institutions engaged in the export of financial services as defined by the Law.

A. Tax and Financial Liability Exemptions and Discounts

1. Corporate Tax Base Reduction

Provided that they are separately reported on the corporate tax return, 75% of the earnings obtained within the scope of financial service export activities will be deducted from the corporate income when determining the corporate tax base[15]. To encourage financial institutions to relocate to the IFC, this deduction rate will be applied at 100% for corporate earnings during the taxation periods from 2022 to 2031[16].

Additionally, pursuant to Article 10 of the Corporate Tax Law numbered 5520[17], institutions operating in IFC area and holding Certificate are entitled to deduct 50% of the income generated from the sale of goods purchased abroad without bringing them into Türkiye, or from intermediating in transactions involving the purchase and sale of goods abroad[18]. This deduction applies to the determination of the corporate tax base, provided that such income is separately reported in the corporate tax return. To benefit from this deduction, the income must be transferred to Türkiye by the deadline for filing the annual corporate tax return for the relevant fiscal period, and neither the seller nor the buyer involved in the intermediary transactions may be based in Türkiye.

2. Banking and Insurance Transactions Tax Exemption

Financial institutions that have obtained Certificate are exempt from bank and insurance transaction tax in terms of financial service export transactions and the profits derived from these transactions[19].

3. Stamp Duty and Fee Exemption

Transactions related to financial service export activities conducted in IFC by financial institutions that have obtained Certificate are exempt from all kinds of fees, and the papers issued in relation to these transactions are exempt from stamp duty[20].

Additionally, transactions concerning the leasing of immovable properties in IFC are also exempt from all kinds of fees, and the papers issued in relation to these transactions are exempt from stamp duty[21].

Furthermore, financial activity fees, which collected from the headquarters and branches of financial institutions holding Certificate in IFC in accordance with the Fees Law numbered 492[22], will not be collected for a period of five years starting from 28.06.2022, the effective date of Law[23].

4. Income Tax Exemption on Employee Salaries

The net monthly salary paid to personnel employed by financial institutions holding Certificate is exempt from income tax as follows: %60 for personnel with a minimum of five years of professional experience abroad, and 80% for personnel with a minimum of ten years of professional experience abroad. This exemption is applicable to the salary income of personnel who have not worked in Türkiye during the three years preceding their employment at IFC[24].

B. Choice of Law

Within the scope of the activities conducted at IFC, participants at IFC have the freedom to select the governing law for any transactions and contracts subject to private law, provided that such activities do not violate the legislation applicable to the participants[25].

C. Bookkeeping in Foreign Currency and Language

Notwithstanding the provisions of the Turkish Commercial Code numbered 6102[26] and Tax Procedure Law numbered 213[27], the Ministry of Treasury and Finance is authorized to regulate the participants to keep and issue their books and documents in foreign currency[28].

Participants are not obliged to keep their transactions, contracts, letters of undertaking and account books in Turkish[29].

Furthermore, Law stipulates that exceptions concerning bookkeeping in foreign currencies and languages, as well as the choice of law, shall also apply to regional treasury and financial management centers of participants operating actively in at least three countries[30].

D. Employment of Foreign Personnel

Participants operating in IFC are permitted to employ foreign nationals who hold work permits issued by the Ministry of Labor and Social Security. The work permit applications for these individuals will be considered exceptional under Article 16 of the International Labor Law numbered 6735[31]. During the application and evaluation process, certain exceptions under the mentioned law may be granted for the foreign employee[32] such as exception from five to one rule.

V.  CONCLUSION

IFC offers a range of advantages and exemptions that make it highly attractive for financial institutions to operate within the center. These benefits include tax incentives such as discounts on the corporate tax base, exemptions from banking and insurance transaction taxes, and exemptions from stamp duty and fees. Additionally, regulations provide further conveniences, such as income tax exemptions on employee salaries, the option to choose applicable law, and the ability to maintain bookkeeping in foreign currencies and languages. These comprehensive facilities position IFC as a global hub for financial institutions and represent a significant step towards enhancing Türkiye's competitiveness in the international financial arena.