The Definition of the Commerce of Immovable Property Under Tax Law

Value Added Tax Exemption

The former and current versions of the VAT exemption applicable to the sale of immovable property as set forth under Article 17/4-r of the VATL may be summarized in general terms within the scope of the table below:

Sales Before 15.07.2023

Under the previous regulation, the sale of immovable property that had been held in the assets of corporations for at least two full years was exempt from VAT. This exemption provided a significant tax advantage by reducing the VAT burden on immovable property sales carried out outside the scope of commercial activity. Under the current regime as well, the sale of immovable property that was included in the assets of corporations prior to 15.07.2023, provided that the relevant conditions are met, is exempt from VAT.

Sales After 15.07.2023

With Article 7 of Law No. 7456 on the Introduction of an Additional Motor Vehicle Tax for the Compensation of Economic Losses Caused by the Earthquakes Occurring on 06.02.2023 and on the Amendment of Certain Laws and Decree Law No. 375 (“Law No. 7456”), the exemption set forth under Article 17/4-r of the VAT Law has been abolished. Accordingly, the VAT exemption provision does not apply to the sale of immovable property recorded in the assets of corporations after 15.07.2023.

This exemption is available only to taxpayers who are not engaged in the commerce of immovable property. For the exemption to apply:

• The immovable property should have been recorded in the company's assets before 15.07.2023.
• The immovable property should have been held in the company’s assets for at least two years.
• The taxpayer should not be engaged in the commerce of immovable property.

The Council of State Decisions on the Commerce of Immovable Property

Although no detailed definition of the commerce of immovable property is provided in the legislation, the criteria of this concept have been delineated through the decisions of the Council of State. Accordingly, in practice, it is considered beneficial for taxpayers to determine whether they may benefit from the exemptions in line with these criteria and to follow the current views of the Council of State.

1- The Decision of the 9th Chamber of the Council of State dated 15.09.2022 and numbered Case No: 2020/909 Decision No: 2022/3926

In the case subject to this Decision[1] , the Plaintiff Company sold 17 shops and 1 restaurant located in the arcade beneath the hotel building, which had been recorded in its assets for many years and constituted integral parts of the hotel; the Plaintiff argued that these sales were within the scope of the exemption set forth under the VATL. The relevant shops and restaurants were, following the disposal of the hotel through enforcement proceedings, first leased and subsequently sold to the purchaser of the hotel. The tax administration claimed that the company was engaged in the commerce of immovable property. The court of first instance concluded that the immovable properties were continuously leased for the purpose of generating rental income and thus that the Plaintiff Company was engaged in immovable property trading; accordingly, it held that the sales were not within the scope of the VAT exemption.

The regional administrative court ruled to set aside the decision of the court of first instance, to uphold the action, and to annul the penalty-assessed tax assessment.

The Council of State found the decision of the regional administrative court to be following procedural and substantive law and, in favor of the taxpayer, rejected the appeal. The evaluation criteria stated in the reasoning of the regional administrative court decision, which the Council of State also found to be in accordance with the substantive and procedure law, are as follows:

• Purpose of Acquisition: The immovable properties were acquired not for commercial sale but as part of the hotel business.
• Nature of Leasing: The properties were leased out due to financial necessity following the hotel’s sale. Leasing was not part of the company’s core business.
• Continuity and Independence: Considering the definition of commercial enterprise in Article 11 of the Turkish Commercial Code, it has been determined that the plaintiff does not carry out continuous and independent activities in the field of immovable property rental or commerce.
• Nature of the Acquirer: The transfer of the immovable properties to the purchaser of the hotel building further demonstrated that no commercial trading purpose existed.

Thus, the company was not considered to be engaged in the commerce of immovable property.

2- The Decision of the 4th Chamber of the Council of State dated 20.06.2022 and numbered Case No: 2018/2938, Decision No: 2022/4208

In the case subject to this Decision[2] , the activity of “commerce of immovable property” was again examined by the Council of State when conducting an assessment specifically regarding the exception under Article 5/1-e of the CITL.

The Council of State considered the following criteria when evaluating the specific case:

• Existence of a Commercial Organization: If immovable property purchases and sales are conducted within a commercial structure, they constitute commercial activity.
• Continuity: The continued nature of transactions is decisive even if the organization is not clearly structured.
• Number of Transactions: The purchase and sale of more than one immovable property within the same year or in successive years, as well as the sale of many separate independent units registered at the land registry, indicate continuity in immovable property sales and demonstrate the existence of an intention to engage in immovable property trading. Indeed, in the concrete case, 240 immovable property sale invoices were issued.
• Intention to Generate Profit: The intention to profit is presumed; the burden of proof lies with the taxpayer. Here, 97.68% of the company’s revenue originated from immovable property sales. The Plaintiff Company has not presented any evidence to the contrary.
• Articles of Association and Trade Registry Records: The company’s incorporation documents indicated that its activities included construction and immovable property-related operations.

Thus, the company was engaged in the commerce of immovable property.

Conclusion

The Council of State adopts a multifaceted approach in assessing whether taxpayers are engaged in the commerce of immovable property. Therefore, the applicability of the exemption provisions is determined by considering the property's connection to the activity, the number of the transactions, commercial organization, and other factors together. This approach supports both the proper use of tax incentives and legal certainty for taxpayers.