With the integration of global financial markets, Turkey’s capital markets have become increasingly attractive for foreign investment funds. Both Turkey’s status as an emerging market and its strong regulatory infrastructure enable and incentivize foreign portfolio managers to operate within the country. However, such activities are subject to specific legal requirements and authorization processes under Turkish law.
1. Basic Requirements for Foreign Funds to Operate in Turkey
Portfolio management activities in Turkey are regulated under the Capital Markets Law No. 6362 and the Communiqué on Portfolio Management Companies issued based on this Law. Accordingly, a foreign investment fund or portfolio management company seeking to manage investments in Turkey must:
- Obtain authorization from the Capital Markets Board of Turkey (CMB),
- Establish a branch in Turkey or enter into cooperation with a licensed Turkish portfolio management company,
- Operate through authorized custodian institutions.
Rather than engaging in direct activities in Turkey, foreign funds typically prefer to operate through a service agreementwith a licensed Turkish portfolio management company.
2. Portfolio Management License and Authorization Process
Companies intending to provide portfolio management services must obtain a license issued by the Capital Markets Board (CMB). To be eligible for this license, they must:
- Meet the minimum paid-in capital requirement (usually over TRY 2 million),
- Employ licensed and experienced managers,
- Establish adequate internal control and risk management systems.
If a foreign fund wishes to carry out portfolio management activities directly in Turkey, it must obtain the relevant licenses through a locally incorporated company or branch.
3. Access of Foreign Investment Funds to Turkish Capital Markets
Foreign investment funds can invest in Turkish capital markets through the following channels:
- Trading securities on the secondary market,
- Purchasing instruments listed on Borsa Istanbul,
- Investing in Turkish collective investment schemes,
- Investing in Turkish government or corporate bonds.
While these capital flows are generally liberalized, exceeding certain thresholds may trigger reporting or approval requirements before the CMB or the General Directorate of Financial Markets and Foreign Exchange under the Ministry of Treasury and Finance.
4. Taxation and Double Taxation Agreements (DTAs)
Foreign funds’ investments in Turkey may be subject to withholding tax. However, Turkey has signed Double Taxation Agreements (DTAs) with many countries, allowing for reduced or even zero tax rates.
Recommendation: Prior to investing, it is essential to examine the applicable DTA between Turkey and the investor’s country of residence and obtain a certificate of tax residency.
5. Compliance and Reporting Obligations
Foreign funds or their local representatives are subject to various compliance and reporting obligations in Turkey, including:
- Know Your Customer (KYC) and anti-money laundering (AML) requirements under MASAK (the Turkish Financial Crimes Investigation Board) regulations,
- Regular reporting and disclosure to the Capital Markets Board,
- Registration and declarations with the Tax Office and the Revenue Administration,
- Periodic reporting of financial statements and portfolio structure.
Non-compliance may lead to administrative fines and even license revocation.
6. Legal Considerations in Investment Strategies
Certain legal restrictions apply to foreign funds investing in Turkey. Key considerations include:
- Limitations on indirect ownership or partnerships in specific sectors (e.g., banking, defense, energy),
- Restrictions under the definition of qualified institutional investor,
- Rules regarding transactions in Turkish Lira and foreign exchange regulations.
Therefore, the legal framework of the targeted sector must be carefully assessed before making an investment.
Conclusion
Portfolio management activities by foreign investment funds in Turkey must be planned carefully from both a legal and operational standpoint. While Turkey offers a transparent and investor-friendly capital market environment, licensing, taxation, compliance, and reporting obligations require specialized legal guidance. Foreign funds intending to invest in Turkey are strongly advised to seek assistance from experienced legal counsel to ensure full compliance with the Turkish regulatory landscape.
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