Individual Participation Capital

26 February 2019

I. Introduction

It is of utmost importance to support promising projects by laying a solid foundation for investments involving high risk for entrepreneurs[1] and investors and to enable entrepreneurs to carry out entrepreneurship activities in a reliable atmosphere by institutionalizing the individual participation capital system. It was for the very reason that the “Regulation on Individual Participation Capital (“Regulation”) was published on 15.02.2013 with a view to meeting the funding requirements of ventures at start-up or growth stage.

In relation to the individual participation investors who are generally known as “angel investors”, the Regulation introduces arrangements for (i) licensing activities, (ii) angel investor networks that function as a bridge between investors and entrepreneurs, (iii) the control of the government over these.

The Regulation aims to offer the investors the opportunity to carry out their activities safely by minimizing the high risks encountered in personal investments and creating a solid infrastructure where investment activities are carried out through accredited networks in Turkey.

II. Which Tax Benefits Does The Regulation Contain?

Individual participation investors[2] covered by the Regulation can benefit from the tax support specified by the government if they meet certain conditions. These investors;

deduct 75% of the value of the shares from the income they indicate in their annual statements provided that they hold the shares of joint stock companies for two full years minimum.
If they provide finance to venture companies whose project has been supported within the last five years within the scope of research, development and innovation programs determined by the Ministry of Science, Industry and Technology, The Scientific and Technological Research Council of Turkey (TUBİTAK) and Small and Medium Enterprises Development Organization, they can deduct 100% of the investment amount from the income they indicate in their annual statements.[3]

III. What Are The Conditions to Benefit From Tax Support?

The conditions to benefit from the tax support available to individual participation investors are set forth in the Regulation. Accordingly, in order to benefit from the support, individual participation investors must;

be a real person who is a resident taxpayer.
have obtained an Individual Participation Investor License.[4]
According to the Regulation on Individual Participation Capital, the investment should be made in any of the areas specified by the Undersecretariat, and this investment must be found by the Undersecretariat to be compliant with the legislation.
hold the shares of resident-taxpayer joint stock companies they have acquired for two full years minimum.[5]

IV. What Are The Conditions For Obtaining Individual Participation Investor License?

In order to acquire an individual participation investor license, the person must first have a (i) high income/wealth or (ii) be an experienced investor.

In order to be an investor having high income or wealth;
The annual gross income which is expressed as the sum of income items shown in the annual income tax return or the gross amounts of annual wages of the waged employees for the two years preceding the acquisition of the license must be minimum TL 200,000.-, or
The total value of the personal wealth consisting of all movable and immovable assets owned at the time of application must be minimum TL 1,000,000.-
In order to be an experienced investor;
The person must have minimum two years of working experience as a fund and/or portfolio manager at banks and financial institutions or as a manager or in a similar or superior position in finance, project finance or corporate finance department of a small and medium scale business of a bank or financial institution, or a venture capital company, including venture capital investment trusts,
The person must be a shareholder as a IPI in one or more than one company with a high revenue, or
The person must have minimum two years of experience in domestic business incubators or technology development centers and must have invested minimum TL 20,000.- as capital in one or more companies at start-up or growth phase.

People meeting the above mentioned conditions must not have been convicted of a crime set out in article 6 of the regulation on Individual Participation Capital.

Investors who meet these requirements can file a license application to the Ministry of Treasury and Finance through the IPI networks.

V. How Long Is The License Valid For?

The non-transferrable licenses given to individual participation investors are valid for 5 years. The licenses can be extended subject to submission of current information and documents as set out in article 7 of the Regulation through the accredited IPI networks at the end of the 5-year period.

VI.What Are The Conditions That The Company Should Meet In Order To Benefit From The Incentive?

In order to benefit from the incentive, the company in which an individual participation investor will invest funds has to meet the following conditions:

The company to be invested must have been incorporated as a joint stock company.
The company to be invested must not have net annual sales exceeding TL 5,000,000 in the last two fiscal years prior to participation of IPI.
The company to be invested must have maximum fifty employees.
The administration, control or capital of the company to be invested must not be directly or indirectly connected with or be under the influence of, the IPI, his/her spouse, the persons with lineal kinship with IPI or his/her spouse, and persons with collateral kinship, or kinship by marriage, including the third degree.
The company to be invested must not be under the control of another company.
The company to be invested must be operating in a sector or operation which is specified is the list regarding sectors determined by the Ministry which will be provided with governmental support.[6]
The shares of the company to be invested must not have been offered to public.

VII. What Are The Limitations Imposed On The Individual Participation Investor With The Regulation?

Investment Limit and Fields of Activity

With the IPI license, an individual Participation Investor can benefit from governmental support for investments in maximum 20 different joint stock companies within the 5 year validity period of the license.

Minimum and Maximum Investment Amounts

In order for the individual participation investor to benefit from the tax support, the value of the company shares acquired from the invested company must be no less than TL 20,000 and no more than 1,000,000.- on an annual basis, including the emission premium. However, if investments are made in different venture companies, the sum of investments can exceed this amount.

Provided that a notice is given, the maximum amount that can be allocated to joint investments[7] shall be applied as TL 2,000,000.-. However, in case that the requirements for a joint investment are not met, the maximum amount shall be TL 1,000,000.- (including emission premium).

Minimum and Maximum Shareholding Amounts

Individual participation investors or their affiliates cannot be a controlling shareholder in venture companies, or may not, directly or indirectly, control a venture company individually or jointly.

Moreover, individual participation investors may not own more than 50% of the shares representing the capital, or of the total voting rights representing the shares, individually or jointly or together with their spouse or persons with lineal kinship with themselves or their spouses, or persons with collateral kinship or kinship by marriage, including the third degree, and may not assign more than 50% of the members of the board of directors.

Participation of the Individual Participation Investor in the Company’s Management

In venture companies, the participation of individual participation investors in management is limited to participation in the official management body. Apart from that, they cannot assume administrative duties or work as an employee of the company.

VIII. Conclusion

Although it is widely practiced in the world, individual participation investment is new to our country, however, is continuing to grow every day with new ventures and individual participation investors who place their funds in such ventures. In this framework, since the first investment in IPC system which occurred in 2013, added value has been created by providing finance to entrepreneurs, and at the same time, the financial expectations have been met with investments made on safe and solid foundations.

Footnotes

[1]Entrepreneur: refers to real or legal persons who wish to start/start their own business based on a business idea.

[2]Individual participation investor (IPI): Refers to real persons who invest their personal funds and/or experience to venture companies at start-up or growth phase

[3] Such support covers IPIs, and is not relevant for the venture company in which the investment is made.

[4]Having a license is not alone sufficient to benefit from the tax support, but is a prerequisite of benefiting from tax support.

[5]The two year period starts on the date the IPI transfers the cash fund to the venture company’s account. It is obligatory to transfer the promised cash fund to the venture company’s bank account so that the two-year period can start and the government support can be benefited from.

[6] Agriculture, Hunting and Forestry, Manufacturing Industry, Transport, Communication and Storage Services, Business Activities, Other Public, Social and Personal Service Activities

[7] In the event that minimum two IPIs who have a license invest in a venture company, these investments are called joint investments. All these shareholders are subject to the provisions imposed on the shareholders of joint stock companies in the Turkish Commercial Code.