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  • Writer's pictureKılıç Çaylı & Partners

How To Found a VC (Venture Capital) Fund in Turkey?


(A) Venture Capitalist(s) has several options to found and execute a fund in Turkey which invests in enterprises, startups, and all kinds of companies based in Turkey. Also, it is possible for this fund to invest in companies that are not located in Turkey as well. Let us see how it works:


1. The most precise (and costly) option is establishing an official Venture Fund under Capital Markets Board (i.e. SPK – “Sermaye Piyasasi Kurulu” in Turkish-) regulations. The central legal entity must be a portfolio management company with a management board of at least 3 people (features of members are described in the SPK Law), building a fund of a minimum of 5 M TLs in size (app. 750 K USDs), with a minimum operating capital 1.5 M TLs (app. 225 K USDs). Also, a portfolio securities company is required, either to be founded or can be outsourced. Besides, legal responsibilities might be considered heavy compared to other options.


Why can such an option with relatively higher costs and heavy legal requirements be chosen then? First, this is the only option that gives the chance for the fund manager to have limited (only investor) partners on board without giving them shares and managing their money on behalf of them(1). Second, it dictates legal and operational transparency which is a prerequisite for many investors. Practically, mostly banks and insurance companies that execute funds prefer this option.


2. A regular LLC or an incorporation under Turkish Trade Legislation can be founded. Under current regulations, for an incorporation, the prerequisite is a paid capital of 50 K TLs (app 7,5 K USDs). For an LLC, it is 1/5. Both can be founded by even one person. Its simplicity and presence of lesser responsibilities make this option as the most popular option for current and to-be-VCs. However, it is not allowed to have limited (only investor) partners on board. Rather, they should be capital partners (i.e. shareholders) of the entity. SPK regulations do not allow an entity to manage the money of a third party that is not a shareholder. On the other hand, by allocating regular shares to the shareholders, their share rights can be limited.


3. A holding company is another but less known option. With the same legal responsibilities of an incorporation, it is a specialized form of an incorporation whose activity is limited to holding stocks of other companies. They bear the same responsibilities as an inc, but they do have some tax advantages. Mostly preferred by wealthy families controlling several group companies.


4. Another widely popular option is founding the fund in another country and establishing a liaison office or a subsidiary of the mother company in Turkey. Some issues arise here:


A subsidiary company and a liaison office differ. For a liaison office, there are virtually no legal responsibilities in Turkey, but most commercial activities are prohibited. A subsidiary company requires research and high lawyer fees to reveal legal responsibilities in the country of origin though.


A comparison must be made between the pros and cons here. Corporate taxes, legal fees, withholding taxes, and ease of execution are among the most important. The Turkish tax regime is approximately the same as the European averages regarding corporate and withholding taxes. However, ease of execution is higher and legal fees are lower. Also, it should be kept in mind that individual and corporate taxes and responsibilities differ as it is almost the same in every country.


Having legal entities in more than one country makes things more complicated. Avoiding double taxation, being legally compliant in two (or more?) countries, and bearing (at least) doubled expenses are a few to be considered. Luxembourg and Holland (Netherlands) are among the most popular destinations for Turkish VC funds.


In conclusion, there is more than one legal way to execute a VC fund in Turkey. It will be wise to choose the option that suits you much regarding your potential investor base, level of desired management communication, and the fund size targeted.


Kivilcim Cayli


(1)Mezzanine finance or a convertible note is an obvious exception here. Although it is possible to collect this kind of funds, it shall be ruled under “Debts Law” rather than SPK Laws and similar financial regulations.

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