1. The Role of Provisional Article 67 in the Taxation of Financial Income

Provisional Article 67 of the Income Tax Law (“ITL”) occupies a central position in the taxation of financial income derived by individuals from capital markets. This provision establishes a mixed taxation regime covering both investment income (capital income) and capital gains, and is fundamentally based on taxation through withholding at source.

The application period of Provisional Article 67 has been extended for an additional five years, until 31 December 2030, by a Presidential Decision published in the Official Gazette dated 11 December 2025. Although normatively classified as a “temporary” provision, the uninterrupted application of this regime since 1 January 2006 demonstrates that it has, in practice, become a permanent taxation model

2. Legal Consequences of Taxation Based on Withholding

Under Provisional Article 67 of the ITL, income subject to withholding tax is not required to be declared in an annual income tax return, and the tax withheld constitutes final taxation. Even in cases where the withholding rate is determined as zero percent, such income is still deemed to have been “subject to withholding” and therefore remains outside the scope of annual declaration.

Conversely, income falling outside the scope of withholding taxation is subject to the general income tax regime. Such income must be declared through the annual income tax return to be filed in March of the following year and is taxed under the progressive income tax tariff, with rates reaching up to forty percent.

3. Types of Income Derived from Investment Funds

Income derived from investment fund participation units may be classified into three main categories based on their legal nature:

• Income obtained through the redemption of participation units by the fund (investment income),
• Periodic income generated during the holding period of participation units (dividends – investment income),
• Gains arising from the transfer or sale of participation units to third parties (capital gains).

As a rule, all such income is subject to withholding tax pursuant to Provisional Article 67 of the ITL.

4. Closed-End Funds and the Previous Regime from a Tax Planning Perspective

In practice, families and high-net-worth individuals have extensively used closed-end investment funds that are not traded on TEFAS, whose participation units are sold exclusively to qualified investors and which are not subject to portfolio limitations, as effective tax planning instruments. Through such funds, it was possible to transfer value accumulated within the fund to individuals without triggering income tax, provided that the participation units were held for at least one year prior to disposal.

This structure offered significant advantages, particularly in terms of preserving family wealth, creating intra-family liquidity, and planning prior to inheritance.

5. The Current Taxation Regime Applicable to Real Estate Investment Funds Established by Families and the Impact of the Recent Amendment

Real estate investment funds (“REIFs”) are among the wealth management instruments frequently preferred by families, due to their exemption from corporate income tax and the fact that rental income and capital gains derived from real estate held within the portfolio are not taxed at the fund level. In this respect, it cannot be argued that the recent legislative amendment has altered the tax status of REIFs at the fund level.

However, considering that the vast majority of REIFs established by families are structured as closed-end funds, not traded on TEFAS and whose participation units are sold exclusively to qualified investors, it is evident that the primary tax impact arises not at the fund level but at the level of the individual investor. These funds are effectively used as structures in which family members are the investors and which aim at the long-term preservation of family wealth.

Under the previous regime, participation units of investment funds bearing these characteristics were not subject to withholding tax upon disposal after a one-year holding period, allowing the value accumulated within the fund—particularly through real estate investments—to be transferred to individuals without taxation. This created a powerful tax-free exit mechanism for families.

Following the amendment introduced by Law No. 7566 to Provisional Article 67 of the ITL, participation units of investment funds that are sold exclusively to qualified investors, not traded on TEFAS, and not subject to portfolio limitations are subject to withholding tax upon disposal as of 19 December 2025, even if they have been held for more than one year. The amendment applies irrespective of the acquisition date of the participation units and does not provide for any transitional protection of vested rights.

Accordingly, where family members sell, transfer, or otherwise exit the fund structure through the disposal of participation units, gains that were previously de facto tax-free will now be subject to withholding tax. By contrast, the tax treatment of the sale of real estate held within the fund portfolio and the generation of rental income remains unchanged; taxation is triggered solely at the point of exit from the fund.

6. Withholding Authority and Assessment with Respect to Equity-Intensive Funds

The authority granted to the President to determine withholding tax rates under Provisional Article 67 of the ITL remains in force. In light of the recent legislative amendment, it is considered necessary to review and update the Council of Ministers’ Decision No. 2006/10731, which currently determines the applicable withholding tax rates, in order to ensure systematic coherence.

With respect to equity-intensive funds, the practice of not applying withholding tax upon the disposal of participation units after a one-year holding period continues to apply for funds whose participation units are not sold exclusively to qualified investors, which are traded on TEFAS, and which are subject to portfolio limitations.

7. Conclusion

The recent legislative amendment has not abolished the tax exemptions applicable to real estate investment funds at the fund level; however, it has brought within the scope of withholding tax the gains arising from the disposal of participation units of closed-end funds established by families, which had long been de facto tax-free at the level of individual investors. This development signals a significant paradigm shift in family wealth planning.

While REIFs remain powerful instruments for preserving family wealth within the fund structure, it is now evident that the tax consequences arising at the stage of transferring such wealth to individuals can no longer be disregarded. Accordingly, real estate investment funds should no longer be viewed merely as investment vehicles, but rather as deferred-tax wealth management mechanisms from the perspective of families.

Best Regards,

DT Law