Angel Investment in Turkey
The term of Angel Investment is used to designate those investors that contribute to the start-up phase of small companies by providing their own personal capital, their experience or a combination of both, frequently in return for a number of shares in the project concerned. They usually consist of settled businessmen who carried out executive positions at large corporations and wish to help in the consolidation of new promising projects. Despite the risk that angel investors take in financing incipient entrepreneurs, this informal source of funding has been quickly increasing in popularity, especially in the cutting-edge sector of IT technologies.
Turkey at the vanguard of legal changes
Turkey has not remained at the sidelines of this phenomenon’s expansion. In tune with the determined move towards a friendly-investment scene in the country, the Turkish legal framework has been recently updated to encourage the apparition of new angel investors. By doing so, the legislator envisages to ease the common difficulties that small enterprises and entrepreneurs find when it comes to financing their innovative projects.
The amendments introduced by the Law no. 6327, passed in June 2012, to the Turkish Income Tax Code (no. 193) have set up a substantial fiscal relief for those angel investors complying with the requirements. The Undersecretariat of the Turkish Treasury has been appointed as the qualified authority to detail, implement and apply these measures, and by such, it has approved a Regulation on Angel Investments the 15th February 2013. The measure has been conceived as a temporary expansive fiscal policy, as it applies only to the investment operations undertaken between the 29th June 2012 and the 31st December 2017, although it may be extended by the Council of Ministers for five additional years.
Angel Investors License
An Angel Investors License, issued by the Undersecretariat of the Treasury, is needed in order to profit from this fiscal stimulus. The license covers the investments made in up to twenty different Turkish companies during a validity term of five years, yet it can be lengthened for additional periods of 5 years. It is granted exclusively to real person investors, what excludes legal entities from obtaining it. The license is non-transferrable.
Succeeding in obtaining an Angel Investors License entails a reduction of 75% in the corporate tax of the capital invested, in relation to the annual income in which the operation was made. Furthermore, this relief reaches a 100% reduction if the investment is made in the fields of research, development and innovation. Whether this is the case, the projects requires the support of the Scientific and Technological Research Council of Turkey, the Small and Medium Enterprises Development Organization and the Turkish Ministry of Science, Industry and Technology. In any case, the fiscal deduction cannot exceed TRY 1.000.000 per year.
Obtaining the Angel Investors license
In order to ensure the proper functioning of this source of funding, the licensing of the investor has been made conditional on the fulfilment of one of the two following conditions: either a large personal wealth or a consolidated experience in the sector
The first condition demands a gross income of at least TRY 200.000, obtained within the previous two years, or a personal accumulated wealth of TRY 1.000.000 instead. In this regard, the investor’s residence, the rights issued from insurance contracts and pension rights do not compute.
The second condition requires conversely to prove a two-year experience as a fund or a portfolio manager in banks or finance institutions, or a two-year experience as a deputy general manager in an enterprise that had an annual turnover of at least 25 millions Turkish Lira within the last five previous years, or a two-year membership in an angel investment accredited network.
As a transitory measure, those individuals willing to obtain the Angel Investors License can address directly to the Turkish Undersecretariat of the Treasury before the 31st December 2013. After this date, application shall be made through accredited Angel Investment Networks, that is, licensed associations supervised by the Undersecretariat that gather both investors and entrepreneurs.
Innovative companies concerned
Not all start-up companies receiving an investment have been included under the scope of the new framework. The Regulation on Angel Investments demands to comply with some requirements prior to obtaining the fiscal relief:
1. They need to be established as joint stock companies, in accordance to the Commercial Code of Turkey (no. 6102).
2. Willing to ensure the incipient and fresh nature of the projects, it is necessary that the concerned companies had not accumulated a net sale larger than TRY 5.000.000 and that they do not have more than fifty employees hired before the investment.
3. Firms need to preserve their independence. It is demanded that their shares had not been offered openly to the public and that they are not controlled by the business angel or any other company.
4. It is required that the start-up company performs its activities in one of the sectors or activities determined by the Undersecretariat.
Limits to angel investments
The Turkish regulation also establishes some limits. The capital amount subscribed annually by the investor should not be inferior to TRY 200.000 nor larger than TRY 1.000.000. Only in the case of co-investments, in which at least two individuals invest together, is allowed a maximum quantity of TRY 2.000.000. Additionally, angel investors cannot own more than 50% of the total shares nor perceive any kind of salary.
In case of a failure of the conditions expressed so far, the license may be cancelled and the angel businessman compelled to return the taxes deducted together with a penalty quantity.
Yılmaz & Ciner
At Yılmaz & Ciner we take into account the opportunities that the new changes have opened to angel investors and startup companies in Turkey and we seek to provide the best legal advice possible.