Sponsored briefing: Turkey: A paradise for startups and angel investors

New and bold ideas often come from young people. We see the effect the new generations have on innovative technologies, especially due to the increase in digitalisation and the adaptation of the older generation to digital life being slower than the younger generation. Startups are on the minds of most of the young business people who think that their creative ideas cannot grow within the huge bureaucratic and cumbersome holdings and joint stock companies.

The startup, in words of famous entrepreneur Neil Blumenthal, is a term used for companies working to solve a problem where the solution is not obvious and success is not guaranteed. Since a not-so-distant past, we have often heard this term and have seen entrepreneurs’ success and failure stories. The number of entrepreneurs who do not want to be a part of corporate culture, who have new and extraordinary ideas and who adopt a flexible working culture is rapidly increasing. When it comes to startups, success, investment, growth and earnings are on one side of the coin; whereas the other side holds the problems of the crawling period, financial difficulties and the difficulty of finding investment. Perhaps even those of you who are reading this article have or have had a successful or unfortunate startup adventure. Not everyone who touches, nurtures and feeds on the startup ecosystem is immune to the difficulties experienced in that painful birth and crawling process of a startup. Perhaps one of the most challenging of these difficulties is the problem of financing. While some entrepreneurs in Turkey benefit from sources such as KOSGEB or TÜBİTAK funds or micro-loans, some of them are knocking on venture capital companies’ and angel investors’ doors to solve the financing problem that can determine the fate of a startup. Apart from these, another source of financing frequently used is the savings that the entrepreneur has made up to that day or the financial support they received from family, relatives and friends.

Turkey is a paradise for young entrepreneurs and sole proprietorship businesses in the early stages of their businesses. When factors such as widespread internet access, special incentives for young entrepreneurs, cost reduction opportunities on simplified bureaucratic procedures such as company establishment, and ease of access to the world market from Turkey are considered, the most logical way for new ideas seems to be startups. Startups in Turkey generally start their journey as sole proprietorship businesses and after they start profiting from their business, legal entities are incorporated by the entrepreneurs; as opportunities on receiving investments surface.

Young entrepreneurs who want to be in full control while developing their innovative idea generally prefer sole proprietorship establishment. With the regulation made in 2018, the procedure for establishing a company has been considerably reduced, and it has been brought to the point where a company can be established with a single procedure without the need for any intermediaries, without the need for institutions such as notary public, bank, Social Security Institution, and only by going to the Trade Registry Offices.

Of course, the state provides many incentives in order not to leave the young entrepreneurs, who establish the company for very small prices, alone without any special accounting knowledge. Persons under the age of 29 who establish their own sole proprietorship or ordinary partnership (those establishing a joint stock company or limited liability company cannot benefit from this exemption) are exempt from tax for their earnings up to 75,000.-TRY for three years. These young entrepreneurs, who are income taxpayers for the first time, are exempted from monthly social security premium payments for one year within the scope of young entrepreneur support. In addition, technology companies that set up their ventures in the technoparks do not pay corporate tax.

In addition, there are many different investment programmes not only for young entrepreneurs, but also for startups under the Small and Medium Enterprises Development and Support Administration (KOSGEB).

• Within the scope of the ‘Traditional Entrepreneur Support Program’, establishment support up to 10,000.-TRY and performance support up to 40,000.-TRY are provided.
• Within the scope of the ‘Advanced Entrepreneur Support Program’, establishment support up to 10,000.-TRY, machinery, equipment and software support up to 300,000.-TRY, mentoring support of 10,000.-TRY and performance support for up to 40,000.-TRY are provided.
• Within the scope of the ‘Business Plan Award Support Program’, projects with higher education institutions, projects with institutions and organisations, projects developed within the scope of national/international competitions and KOSGEB projects are supported for up to 300,000.-TRY in total if they receive any awards.

Of course, simplifying and supporting company incorporation is not enough. Startups operating as sole proprietorships should also have the necessary legal protection and guidance. Although startups do not have a separate legislation in Turkey as of yet, legislation on commercial law, law of obligations, intellectual property law, labour law and tax law are used to draw a legal framework for sole proprietorship businesses and startups. In addition to these general legal regulations, personal data protection law, banking and finance law, capital markets law, investment law, competition law, IT law, and consumer law are used within the scope of the activities of startups. Along with sole proprietorship businesses and startup companies, new legislations are introduced to applicable law such as e-commerce law, e-sports law, Blockchain law and artificial intelligence law to regulate the areas to catch up with the current technologies which have exceed the framework of previously applicable legal regulations. In the light of all these general and special legal regulations, the processes such as the official studies and applications of the startups before the venture, the necessary legal protections, the protection of the project after the start of the initiative, the realisation of the project activities in accordance with the law are of great importance to try to comply with the applicable law for startups.

After all these protections and referrals are provided and businesses start to expand; it is time for sole proprietorship businesses and startups to increase the volume of business with third-party investments. Of course, the benefits of the incentives are undeniable, but when a sole proprietorship reaches the investment stage, it is an absolute necessity to incorporate a company. In this sense, it is of vital importance to assess records and accounts of the sole proprietorship businesses and transfer them to capital companies by consulting to a team of experts. It is of experience that mistakes in this transition can sometimes result in the company not being able to attract the investors and not to receive the investments it can receive due to poor bookkeeping and more importantly lose its business for a mistake that was made in this transition period.

After the incorporation of a company; it is time for the start-ups that have matured with incentives to meet angel investors. Angel investors are individual investors who want to invest in new ventures with high risk and return potential and have sufficient financial background, network and experience to carry a startup to new heights. Just like the sole proprietorship businesses and startups; angel investors are also provided with many incentives in Turkey to encourage investments to startups.

In practice, Turkish Treasury licenses business angels who want to benefit from tax incentives for their investments. Accordingly, 75% of the participation shares of qualifying Turkish resident joint stock companies (private venture companies) held by ‘business angels’ can be deducted from the angel investor’s annual income tax base in the calendar year for the shares held for at least two years. The maximum annual deductible amount is 1 million TRY.

Deduction ratio is applied as 100% for those angel investors investing into the companies whose projects are supported by Ministry of Science, Industry and Technology and The Scientific and Technological Research Council of Turkey and Small and Medium Enterprises Development Organisation in the last five years. In order to get a deduction from their taxable income, investors have to meet the following conditions:

• Acquired stocks are required to be held at least for two years.
• Angel investors cannot directly or indirectly be controlling shareholders of the qualifying private venture company in which they invest, either mutually or personally.
• Moreover, licensed angel investors cannot be shareholders of qualifying private venture companies which are under their own or their relatives’ control or supervision or the companies that they are directly or indirectly related to in terms of capital before their investments.

However, investment incentives for startups in Turkey are not only for angel investors. There are many general and specific incentives for foreign direct investment and strategic investments. In this respect:

• General investment incentives scheme: Tax exemption for procurement of machinery and equipment, regardless of the investment region:

– VAT exemption
– Customs duty exemption

• Regional investment incentives scheme: Higher incentives for investments to be made in less developed regions. (including priority investment incentives that offer incentives regardless of the investment region for manufacturing of medium-high tech and high-tech products):

– VAT exemption
– Customs duty exemption
– Corporate tax reduction
– Social security premium support (employee’s share)
– Income tax withholding support
– Interest rate support
– Land allocation
– VAT refund
– Property tax exemption

• Strategic investment incentives scheme: High incentives in areas with high importation:

– VAT exemption
– Customs duty exemption
– Corporate tax reduction
– Social security premium support (employee’s share)
– Income tax withholding support
– Interest rate support
– Land allocation
– VAT refund
– Property tax exemption

• Project-based investment incentives: Tailor-made incentives for areas with critical importance for Turkey:

– VAT exemption
– Customs duty exemption
– Corporate tax reduction
– Social security premium support (employee’s share)
– Income tax withholding support
– Interest rate support
– Land allocation
– VAT refund
– Infrastructure support
– Energy support
– Capital contribution support
– Purchasing guarantee
– Facilitation of authorisation/permit/licence procedures
– Qualified personnel support
– Cash support
– Property tax exemption

• Other state support (including KOSGEB): Grant and loan opportunities for SMEs:

– Interest rate support
– Cash support

• Other than those, there are lots of incentives such as R&D law and benefits, regional management centre incentives and export incentives.

The structure described above is specifically tailored to attract FDI to the jurisdiction and to further improve the startup ecosystem with foreign financial and experience support in order to make sure the startups that have been successful in the region can carry its success to the international level with the help of local and foreign investors.

In conclusion, the system that is being structured in Turkey is aimed towards ensuring the innovative ideas are supported in a more competitive environment and sole proprietorship businesses are kept financially stable and supported at the start of their business with incentives, and on the other hand, incentives are given in angel investors and FDIs, thereby reducing the investment barriers in front of these startups to enable them to reach to the unicorn level. In this sense, Turkey is restructuring its legislation with the aims of being a safe incubator for startups and a competitive and profitable safe zone for investors. This vision for Turkey becoming a startup hub is starting to reap its fruits as of February the fifth startup that was established in Turkey has reached the ‘unicorn’ level.