Turkey's Tax Exemption Shift and Its Impact on Equity-Heavy Funds

Turkey's 2025 tax reforms have triggered a seismic shift in its equity markets, reshaping risk-rebalance strategies for emerging market funds. The overhaul, which includes hiking corporate income tax (CIT) rates for non-financial firms to 25% from 20% and for financial institutions to 30% from 25%, has directly impacted corporate profitability and investor sentiment, according to the PwC corporate summary. These changes, coupled with a domestic minimum tax regime and Pillar Two global minimum tax rules, are forcing equity-heavy funds to recalibrate their exposure to Turkish assets.

Sectoral Reallocations: Real Estate Retreat, Green Energy Surge

The real estate sector, a traditional haven for foreign capital, now faces headwinds. The shift to market-based property tax valuations has increased annual liabilities for investors in metropolitan areas like Istanbul and Antalya. For example, a property previously valued at TRY 1 million for tax purposes now faces a 2.5x revaluation, pushing tax payments higher, according to a Property Turkey guide. Compounding this, new rental income tax regulations require foreign investors to register with tax authorities and file annual returns, adding compliance costs. As a result, equity funds have reduced real estate allocations, with foreign sales in Istanbul dropping to 1.9% of total transactions in May 2025, as reported in a Turkey real-estate report.

Conversely, sectors aligned with Turkey's green and digital transformation-such as renewables, e-commerce, and data centers-are attracting inflows. Tax incentives for green energy projects, including VAT exemptions and corporate tax reductions, have spurred equity fund interest. In Q1 2025, foreign portfolio inflows into Turkey included USD 248 million in equity investments, with a notable tilt toward technology and infrastructure, according to a BBVA Research analysis. This sectoral pivot mirrors global trends but is amplified by Turkey's tailored incentives - an investment incentives guide shows they offer up to 129.4% support for strategic investments exceeding TRY 50 million.

Volatility and Political Risks: A Double-Edged Sword

Turkey's equity markets remain volatile, influenced by both structural reforms and political shocks. The arrest of Istanbul Mayor Ekrem İmamoğlu in March 2025 triggered a 12% lira depreciation and a spike in bond yields, underscoring the fragility of investor confidence, the Turkey real-estate report noted. Meanwhile, interconnected financial assets-such as the BIST100 Index and gold-act as volatility transmitters, while Bitcoin and Brent crude oil absorb shocks, a volatility study found. For equity funds, this dynamic necessitates hedging strategies, such as increasing allocations to low-volatility sectors or diversifying into hard assets.

The OECD has highlighted that Turkey's reforms, while improving fiscal transparency, must address structural challenges like low female labor participation and environmental sustainability to sustain growth, according to the OECD survey. These long-term risks require funds to balance short-term gains with exposure to sectors poised for resilience.

Fund Flow Trends: A Mixed Picture

Despite volatility, Turkey's equity markets have seen net inflows. In Q1 2025, foreign investors purchased USD 305 million in government domestic debt securities (GDDS) and USD 248 million in equities, driven by higher yields from monetary tightening, according to BBVA Research. However, leverage in the economy has risen, with FX loans increasing by USD 1.6 billion in the same period, BBVA Research also noted. This duality-strong inflows amid rising debt-demands cautious rebalancing, particularly for funds prioritizing risk-adjusted returns.

Conclusion: Navigating the New Normal

Turkey's 2025 tax reforms present a paradox for equity-heavy funds: a more transparent fiscal environment coexists with sector-specific risks and political uncertainties. While real estate exposure has waned, opportunities in green energy and digital infrastructure are emerging. Investors must adopt a dual strategy-hedging against volatility in high-risk sectors while capitalizing on incentivized growth areas. As Finance Minister Mehmet Şimşek's policies continue to stabilize the economy, the key will be maintaining agility in portfolio allocations to navigate Turkey's evolving landscape.