A 15% withholding tax will be imposed on the portfolio management revenues of Free Exchange Funds pursuant to the Presidential decision of 3 June. This rate was previously 0%. The Ministry needs to make a statement to eliminate some hesitations regarding the implementation of the said withholding.

Esteemed Fortune readers,

In this article, I would like to share with you my views on the new tax regulation regarding the portfolio management revenues of free exchange funds.

There are various investment instruments on financial markets in which savers can invest. One of these is the free exchange funds, which are acquired by investing in foreign currency and thus aim to protect the investor's foreign exchange assets.

As of June 2020, the number of people investing in free exchange funds is 9,283, and the total amount of investment is USD 2,844 million.

As you know, funds are established by portfolio management companies whose principal business activity is the establishment and management of mutual funds. The founder is responsible for the distribution of the fund's risk as well as the management, representation and maintenance of the fund in a way to protect the rights of shareholders in accordance with fiduciary ownership principles. Each investor becomes a partner in the fund portfolio by purchasing the share that represents a certain proportion of the portfolio owned by the fund. The fund's revenues consist of dividends and/or interest income from the securities it owns, and the sales revenues from securities. When investors sell their participation shares, or when the shares are redeemed, they receive their share from the value increases and other revenues that have occurred until then in the portfolio of mutual funds.


In free exchange funds, at least 80% of the portfolio consists of Eurobonds issued in foreign currency at home or abroad by the Ministry of Treasury and Finance as well as Turkish companies. The remaining maximum 20% is invested in other investment instruments. 


The withholding tax on the portfolio management revenues of free exchange funds, whose participation shares were issued in foreign currency, was previously 0%. However, 10% was withheld over the revenues obtained if participation shares were disposed by participants. The said rate of withholding, which was previously 0%, was increased to 15% as of 3 June pursuant to the Presidential Decision No. 2604. It is not clear whether the withholding base will be calculated over foreign currency or TL.

If it will be calculated in TL, it means that exchange differences will be included in the withholding base. In addition, fund revenues are determined at the end of the accounting period, i.e. on 31 December. However, since the decision on the aforementioned increase will take effect as of 3 June, it is not clear whether the withholding will apply as 0% for the period between January 1, 2020 and June 3, 2020 and as 15% for the period between June 3, 2020 and December 31, 2020 or as 15% over all revenues in 2020.

The matter is pending for clarification through a communiqué to be published by the Ministry of Treasury and Finance. Since the taxes in question are a cost element for the fund and this cost is reflected on the participants, the certain extent of the decrease in participants' revenues will be determined in line with this opinion of the Ministry. I believe the free exchange funds, which are used as a low-risk investment tool that provides assurance, may lose their appeal.