Exemption from withholding tax in portfolio investments and some of our fallacy based hypothetical illusions and mistakes

Çiğdem Yorgancıoğlu

Are you a person who follows the markets closely,? Are you familiar with certain concepts and practices in the Debt Securities Market, Are you sufficiently knowledgeable about various investment instruments at different risk levels?, Are you acquainted with the issues stated in the prospectuses, regulations and practices  where the final terms and conditions of investment funds are stated? Should your lifestyle lead you to investments with high liquidity? There cannot be a single answer to these questions because internal and external conditions constantly changes and transform. In fact, it is not a situation that one of us can choose and recommend to the other. This brings with it the uniqueness of different decisions for everyone, specific to their own situation..

This “fallacy” topic is one of the strong issues I underline, especially when I do lecturing  Risk Management and Political Sciences Language CLC 360 trainings, In this article, while touching on some risky areas regarding withholding tax on investments funds  I actually focus on how the human mind becomes open to making mistakes with flawed logical inferences and faulty reasoning.

In my article, the name of Alev Alatlı, one of the newly deceased values of our country, will also be mentioned. Because She was a person who was interested in the subject of Fallacies as Invalid Reasonings: which I drew attention to in the article, and She also had a compilation work called A Guide to Fallacies on the subject of the article. That’s why I remember him. May her soul rest in peace.. Our condolences.

Let’s say you are doing Portfolio Diversification. In addition to your current deposits at the bank, you also want to engage in some activities on the investment side. You may have portfolio managers; you have already talked to them about your time deposits. Portfolio managers will may advice you the options either by phone call or face to face. Besides you may see that your banks give you suggestions on this subject via e-mail messages. Along with the suggestions, you sometimes also see messages like this: which starts with …Dear our Valuable customer…

“With the Debt Instruments Fund, you can invest in public and private sector debt instruments.
Taxation ∫ With the update in the withholding rates for Investment Funds included in the temporary article 67 of the Income Tax Law No. 193, the tax received (variable, mixed, Eurobond, foreign debt, foreign, The withholding tax rate for income and gains obtained in investment funds (except hedge funds and investment funds containing the expression “foreign exchange” in their title) is 0%. In this context, the withholding tax rate on Debt Instruments Fund shares purchased until 30.04.2024 will be 0%. ∫ Withholding tax is not collected on investment fund returns from all foreign institutional investors such as capital companies and similar foreign institutions, funds subject to the regulation and supervision of the Capital Markets Board, foreign funds similar to these funds, limited liability partnerships, country funds, institution and organization funds and investment firms.

Sometimes, when we see a phrase such as “exemption” – zero tax – zero withholding tax without fully reading or comprehending  the meaning of the messages coming from them, we may have a tendency to spread it to the general and whole unconditionally as a game of the human mind, which is the point  make us ready to commit an  error. We deduct that there is no tax … We can call this situation (Wishful thinking). In other words, it is the state of being to be inclined towards the positive thought/conclusion we have in our minds about any issue. However, this is not the case. There is no exemption for “all “funds. Let’s say the fund is appropriate but the timing is wrong. Again, we fall far from our expectations. We make mistakes, and then we think that others misled us. This would  may lead us to commit another mistake. Human Error. Based on fallacy .

The ought-is fallacy occurs when you assume that the way you want things to be is the way they are. This is also called wishful thinking. Wishful thinking believes (accept as true) what you want to be true no matter the evidence or without evidence at all, or assuming something is not true, because you do not want it to be so.  A Proof-less reasoning and deduction.

There is another fallacy here as well. Hasty Generalization. I also remember the treasured academician and writer Alev Alatlı with full respect , who  focuses on the subject: Fallacies as Invalid Reasoning.She was  one of the valuable names of Turkey’s intellectual and artistic life, and  passed away at the beginning of February 2024 . May her soul rest in peace.

The reason why I am talking about her here is because She is also the author of the “Guide to Fallacies!” Safsatalar Kılavuzu in Turkish

In the meantime You may come across statements or declarations such as Fund risk value; It is calculated based on the weekly returns of the fund, taking into account its volatility. The risk value ranges from 1 to 7, with 1 being the least risky and 7 being the most risky.we skip those details for now being in this article .

As this point is out of subject here Let’s elucidate the focused subject matter a little more;

First, let’s ask ourselves “why should we read this article? “. Actually, there are three main reasons for it .Each for  different situations .

1. Trustworthy, precise-accurate, authentic Professionals   we/you  may need !  If you are going to invest in different instruments, your job will be easier if you work with expert, professional portfolio managers that you trust. However, if we know what the issues to be paid attention to / the possibilities of making mistakes are, it will be easier for us to make necessary follow up.
2. If we don’t know the funds and practices ; you may start to know what you  don’t know, and we may  try to learn, and understand the importance of getting professional support from an expert.
3. If we do not know, and if we enter into the business of buying and selling funds with certain assumptions as our investment choice, so to speak, and if we do not learn it in the process, then when our assumptions turn out to be wrong, we can talk to the interlocutors who hold this portfolio (making us feel as if they are misleading us). Instead of tiring ourselves and the other person with unnecessary peace by arguing (like “it was exempt from taxes”), we put on the brakes. We press the brakes so that we can start  to think “what happened exactly” We can recall our memory . Then we say Hmm! Indeed, there was such a thing! Instead of getting angry, we maintain our peace.

Some funds have exemptions and some do not. It is about how the exceptions and exemptions issued in accordance with the current regulations created for the purpose of strengthening the Turkish Lira, in line with the country’s macroeconomic policies, will be applied, considering the date on which the purchase / sale will be made, based on the date when the regulation comes into force / is in force.

Leaving the details of the issues that create confusion, to your own further research, there are 3main issues that I would like to point out that would be useful to consider in order to avoid making mistakes.

Just keep in mind the following Checkpoints out of the many details need to be controlled.

1.Some funds have exemptions and exceptions, some do not.

2. Selling the fund purchased by a person before 23.12.2020, which is the period when the exception starts, does not make him exempt. It means .The person pays 10% of the earnings withholding tax .It means tax is applicable..10 % rate applies on income and gains from the  relevant funds. That is “Stopaj” in Turkish .The word came from French and means “advance deduction/payment.”

3-How long you have been holding the fund, equity funds and earnings obtained from holding mutual funds consisting of stocks traded on the stock exchange in Turkey for more than one year in an amount exceeding 51 percent of their portfolios are not subject to withholding tax. So it’s exempt.In the meantime. You have to keep in mind the fact that ;Buying/selling orders for funds submitted until 13.30 will be implemented and executed  1 business day later at the 1st business day price. – Buying/selling orders submitted after 13.30 will be executed 2 business days later at the 2nd business day price.

These three  points; It will provide a better understanding of the explanation made with CLC 360 fuzzy logic in the remaining part of the article. Because, my decision to make a complete clarity on the subject, steal the scene as if I know more than the experts who have deepened their experience and focus on the subject with a ready-made and rote perspective, and not to put any information directly to the human mind as “this” without being in my place. I can say that it is a conscious choice out of respect for me. Here, apart from the 2 points I drew attention to above, another of the main points aims to show where a person can make a “mistake” on a certain issue while taking certain risks with certain expectations.

If we clarify and expand the meaning of the word exception here, the “zero tax” deduction, means the withholding tax exemption.

First of all, we should know that variable, mixed, Eurobond, foreign debt, foreign, free funds and investment funds with the word ‘foreign exchange’ in their title are subject to 10% withholding tax.

Money Market funds are low-risk instruments compared to other investment instruments, that is, funds that invest in low-risk products such as repos, private and public sector bonds, bills (government bonds, treasury bills). These are investment instruments with high liquidity. Some funds have exemptions and exceptions. For example, in stock-intensive funds, the withholding tax rate is 0%, so the exemption is applicable here.

Debt instruments, except Eurobonds and foreign funds, are exempt. If you bought a Eurobond, the earnings are subject to 10% tax withholding. Except for those with the word Foreign in their title, the Fund Basket is also exempt and even Precious Metal funds are exempt from withholding tax. .For example Gold is subject to zero withholding tax. In fact, precious metal funds were subject to 10% withholding tax, before. Then the withholding tax exemption was initiated for precious metal funds under the scope of the efforts to strengthen the Turkish Lira.

In summary, there are many details that are uncovered concerning the  relevant subject, and if we raise our awareness of what we can look for, we can obtain the data from official reliable sources in search engines and look at their updates. In this way, instead of making wrong decisions, while making conscious and rational economic steps and investments, we can be more conscious of issues such as our risks and exemptions, and sometimes we can have unintended consequences. We can realize that; its source of our sufferings does not come from outside, or from other  people . This allows us to focus more on our areas that need to be improved.. Surely the information provided in this article is general and does not constitute financial, tax or legal advice.

Çiğdem Yorgancıoğlu

yorgancioglu@turcomoney.com