Category: Turkiye

Former Gunduz Legal Services Partner Okan Gunduz has joined Kolcuoglu Demirkan Kocakli as an Of Counsel.

According to Kolcuoglu Demirkan Kocakli, “with over 20 years of experience, Okan represents clients in a wide range of litigation matters, including commercial disputes, employment law disputes, and real estate disputes.”

Before joining Kolcuoglu Demirkan Kocakli, Gunduz helmed Gunduz Legal Services for almost 13 years. He had previously spent 11 years with the Herguner Bilgen Ozeke Attorney Partnership.

Paksoy, working with Fieldfisher, has advised Samsun Yurt Savunma on its acquisition of an 80% stake in UK-based military defense equipment manufacturer AEI Systems. UK-based Field Law reportedly advised the sellers.

According to Paksoy, Samsun Yurt Savunma is “a leading Turkish company in the defense sector that designs and manufactures service pistols under the ‘Canik’ brand for the law enforcement and military market around the world.”

AEI Systems is a UK-based specialist in the design, manufacture, and test of military defense equipment for land, naval and air platforms, the firm informed. 

“This is one of the first outbound deals of a Turkish manufacturer in the defense sector acquiring a target in the UK,” Paksoy announced.

Paksoy’s team included Partners Elvan Aziz and Sansal Erbacioglu, Senior Associate Simge Sengun, and Associate Beritan Arik.

Commercial companies need capital to execute its business activities. Thus, paying the capital is regarded as the fundamental obligation of partners. In accordance with this, partners who do not pay their capital share on due date will be held liable accordingly to the private law in the context of TCC.
In addition to this, it is seen that this breach is sometimes interpreted as distribution of disguised profit through transfer pricing in the context of Corporate Tax Code (“CTC”).

Summary

Capital is one of the most important elements of a corporation and is essential for a company to carry on its activities and business operation. Turkish Commercial Code (“TCC”) regulates sanctions for partners in the event of failure to pay the capital that they had committed to in the Articles of Association (“AOA”) on the due date.

In this article, firstly the definition of the capital commitment of the partners will be examined, then the consequences of failure to pay the capital on the due date will be analysed in line with regulations and case law.

I. Definition of capital commitment

Capital can be allocated either in kind or in cash by partners to the company for the purpose of the continuity of the company and to provide the company with sufficient resources to attain the objectives agreed on in the AOA. This promise to pay the capital in cash or in kind by the partners is called ‘capital commitment’. The TCC Article 344, states that 25% of the capital must be paid before the establishment and the remaining 75% must be paid within 24 months of the establishment. Otherwise, in accordance with Articles 128, 129, 482 and 483 of the TCC, the optional rights that can be exercised by the company are stipulated by the legislator, aiming to protect the capital of the company. According to the articles herein mentioned, there is a private law debt relationship between the partner and the legal entity company where TCC law is applied. Payment of overdue debts arising from capital commitment comes to the fore in different situations, such as the prerequisite for borrowing to the company regulated in Article 358 of the TCC.

The mechanism/sanctions regulated under the TCC in case partners fail to pay the capital they committed are:

– paying compensation,
– interim injunction,
– default interest, and
– annulment.

In accordance with the TCC Article 128 Paragraph 7, a company can demand the payment of the capital commitment and file a lawsuit. This article also states that compensation can be requested from the partner who failed to make the payment. The TCC Article 129 further states that default interest can be demanded as long as the rights on compensation are protected. Although notification is not required to demand default interest, a notification to the said partner is deemed to be a prerequisite by law in order to make a claim for compensation for the loss. Furthermore, the TCC Article 482 states that the company is authorized to exclude the said partner, sell that partner’s shares, replace the partner by selling shares, and annul the shares given.

Annulment process is outlined in Article 483 of the TCC, and it is stipulated that a notice shall be issued through a notification to be published in the Registry Gazette and on the company’s website through an announcement as mentioned by the AOA, and that this notice shall state that if the shareholder fails to pay the delayed amount within one month, they shall be deprived of their rights arising from the relevant shares and the contractual penalty shall be requested.

II. Tax-related consequences of failure to pay the capital in due date

It might be possible to consider the non-fulfilment of the capital commitment as a disguised profit distribution because capital is used free of charge. This argument will be evaluated below by taking the characteristics of the capital commitment into consideration.
Article 13 of the CTC states that if corporations purchase or sell goods or services with related people by breaching the arm’s length principle, the profit will be deemed to be distributed by the transfer pricing, wholly or partially. Additionally, “Distribution of Disguised Profit Through Transfer Pricing Communique No.1” (“Communique”) states three conditions that are required to define distribution of disguised profit through transfer pricing. Accordingly, it is stated that there will be no disguised profit distribution through transfer pricing if a good or service purchase or sale is made with a related person and the price or price determination conditions that are contrary to the arm’s length principle are not met.

In this context, the following arguments have been made:

– In order the capital commitment to be evaluated within the scope of the CTC Article 13, there must be an advantage taken from this breach, but it is not possible to benefit from something that does not exist yet.
– Since default interest is not the only consequence that can arise from the regulation, it is not possible to consider failure to comply with the capital commitment in the context of distribution of disguised profit through transfer pricing.
In addition to these opinions, legal precedent also offers different views on whether distribution of disguised profit through transfer pricing does or does not occur in the event of failure to pay the capital agreed.

•  As it cannot be accepted that the capital shown in the balance sheet, which could not be collected from the shareholders of the plaintiff company, is considered to be a lending transaction to the shareholders of the company, and that a disguised profit is obtained within the interest that is not applied, 4th Chamber of the Council of State decision dated 24.12.1998 and numbered E.1997/4274, K.1998/5542, upholds the decision of the First Instance Court for the abolition of the assessment.
• In the decision of the 4th Chamber of the Council of State dated 16.02.2022 and numbered E.2018/1135, K.2022/828, it was emphasized that the failure to calculate the default interest on behalf of the shareholder in debt by the company is not related to the purchase or sale of any goods or services, and that transactions such as capital, dividends, etc. regulated within the framework of partnership law are not considered within the scope of disguised profit according to the CTC Article 13 regarding disguised profit distribution even though it constitutes a violation of the provisions of the TCC. Therefore, it is decided that in case of default in capital commitment, there is no compliance with the Law in the penalty assessment made on the grounds that the company has given interest-free money to its shareholders from its own assets.

As seen in aforesaid Council of State decisions, there is a tendency to interpret that unpaid capital commitments cannot be evaluated in the context of disguised profits.

• The decision of the 4th Chamber of the Council of State dated 29.06.2021 and numbered E.2018/3677 K.2021/3633, states that in the tax inspection report issued about the plaintiff company, it was seen that the interest was not calculated on the capital share amount and that the shareholders failed to make payment even though they had committed themselves to do so. Thus, the Council accepted the appeal request since there was no contradiction to the Law in terms of penalizing the tax base difference found by calculating interest over the Central Bank rediscount interest rate to the capital not paid on due date by the shareholders.

On the other hand, the above-mentioned decision of the Council of State overturned the Regional Administrative Court Decision that states: “In order to be able to talk about disguised profit distribution through transfer pricing in case of unpaid capital commitment, the existence of the purchase or sale of goods and services, or one of the transactions that can be evaluated within this scope, is mandatory and the fact that no default interest has been charged by the company cannot constitute this profit transfer.

As explained above, the Council of State does not have consistent jurisprudence on whether or not the failure to pay the capital commitment constitutes disguised profit distribution through transfer pricing. In some of its decisions, the Council only rules for the payment of the default interest if the capital commitment is not paid within the legal period; it cannot be inferred from the provision that the shareholder, who fails to fulfil the capital commitment on due date, will be obliged to pay default interest without the need for a notice since that default interest is directed towards the interest benefited by the defaulting shareholder.
As a matter of fact, it is impossible to think that the shareholder, who did not pay the capital on due date, can benefit from an asset that does not exist in the company. However, as mentioned above, there are decisions of the Council of State to the contrary; it concludes that in case the capital contribution obligation is not paid on due date, a disguised profit transfer is made in accordance with the Article 12 of the CTC.

Conclusion

As we mentioned above, capital, provided by company shareholders, is one of the essential elements in terms of both the establishment and the continuity of companies. . In this context, if the capital commitment, a commercial debt between the partners and the company’s legal entity, is not fulfilled in due time, certain mechanisms such as payment of compensation, application of an interim injunction, interest in default and application for annulment have been envisaged in line with the relevant articles of the TCC to protect the capital.
In line with the opinions stated in this article and a number of decisions made by the Council of State, it is argued that the CTC Article 13 should be applied, and it should be concluded that the distribution of disguised profit through transfer pricing occurs in the event of not fulfilling the capital commitment on due date. On the other hand, there are also some contrary opinions and decisions of the Council of State that argues that it is not possible to benefit from an asset that does not exist yet and the conditions stated in the Communique on the Distribution of Disguised Profit Through Transfer Pricing are not met. In our opinion, this topic being open to interpretation harms the legal certainty principle, and this inconsistency should be ceased by deciding that there is no distribution of disguised profit through transfer pricing from our standpoint. In that respect, the Council of State should clarify the issue and provide consistency regarding the consequences that may arise in cases where the capital commitment is not paid due date.

By Mine Beyazhancer, Lawyer and Ahmet Hakan Mirza, Legal Intern, Nazali Tax & Legal

 

Bagzibagli Erdem & Sahin has advised South Korea’s Genoray Co on its acquisition of medical X-ray device supplier Ultra Medikal.

Genoray Co is a Korean company that specializes in researching, developing, manufacturing, and selling X-ray medical devices. Established in 1983, Ultra Medikal is a Turkish X-ray medical device supplier operating in the Turkish market.

The Bagzibagli Erdem & Sahin team was led by Partner Orhan Erdem and included Attorney-at-Law Ilayda Goktas.

The Aksan Law Firm has advised portfolio manager Maxis and venture capital fund Founder One on their investment in UnoMoi.

UnoMoi is an online platform for renting designer apparel and accessories with a monthly subscription service. The company aims to reduce textile consumption-related carbon emissions.

Founder One is an Istanbul-headquartered venture capital fund that specializes in early-stage technology-focused investments. Maxis is an Istanbul-headquartered venture capital, private equity, and portfolio management company.

“The textile industry is the second largest polluter in the world,” UnoMoi Co-Founder Ayse Kefli commented. “With our business model, which is based on sustainability, we aim to say ‘stop’ to this fast production while extending the life of clothes. This is exactly why it is very important for us to get the support of Founder One, a new generation impact fund established by Turkey’s leading institutions and investors, which set out with the motto of supporting initiatives that aim to solve social and environmental problems.”

Earlier this year, Aksan also advised Maxis on its investment in education platform MentalUP (as reported by CEE Legal Matters on January 12, 2023). 

The Aksan team was led by Partner Alper Onar and included Managing Associate Emre Subasi and Associate Betul Colak.

Aksan did not respond to our inquiry on the matter.

Would you ever want to see digitally, Istanbul waking up to a rainy and gloomy day, an alien race that came to visit our species from a galaxy billion light year away, New York City under the post-apocalyptic acid rain, a peanut with a micro-scale civilization on it, the realistic portraits of people who actually never existed and no matter how far you go in the horizons of your imagination, a concrete and visual reflection of all your ideas?

In fact, we are talking about images that is successful enough to make you want to congratulate the artist deep down inside. Some of these images were even featured on the covers of prestigious magazines and prints such as The Economist and Cosmopolitan and one of them even won an award in the fine art competition of the Colorado State Fair in the USA. However, we need to point out that, contrary to all your expectations, the creators of these images are not humans but artificial intelligence programs!

When we talk about the existence of artificial intelligence algorithms that can create a visual response to every meaningful or absurd idea that sparks in your mind, we can easily guess that you will find it scary and fascinating at the same time. From a visual arts perspective, these artificial intelligence programs represent a very important reflection of the point reached by machine learning systems designed on artificial neural networks. Furthermore, all you have to do is insert the idea of “a little girl watching the world from above the clouds” into an artificial intelligence program such as DALL-E, Stable Diffusion, Craiyon, Midjourney, which create images from textual descriptions, and then sit back and wait for the visual results that will be produced by the AI in seconds.

Although we think that these artificial intelligence algorithms, which create interesting images by using only words and word lists that you entered as a prompt, will help you to have a wonderful time, this is not their only function. Because such artificial intelligence programs offer very useful and inspiring opportunities for artists, illustrators, designers and many more. In this context, as in every situation where artificial intelligence touches our lives, creates benefits, and carries a risk of material or moral damage, all eyes are on the matter regarding the legal personality of AI. Therefore, debates on whether artificial intelligence can be an owner of the intellectual and artistic works and whether these images created by AI can be qualified as an “intellectual and artistic work” come to the fore. Therefore, it will be useful to examine some of the matters that may come to mind from the perspective of positive law.

Is it possible to qualify an image created by AI as an “intellectual and artistic work” and make this image benefit from the legal protection provided for the “works”?

In order for an intellectual product to benefit from the legal protection provided to works, it must carry the qualification of a “work”. In this regard, certain conditions for being considered as a “work” are stipulated in Law on Intellectual and Artistic Works No. 5846 (referred to as “FSEK” or “Law”) and all of these conditions must be fulfilled.

First of all, the created intellectual product must fall into one of the categories of “works”, which are counted as a limited number (“numerus clausus”) in the Law. This condition is referred to as the “objective condition” in the doctrine. FSEK lists the categories of work as “literary and scientific works”, “musical works”, “works of fine arts” and “cinematographic works”. In addition to these four categories, works created by benefiting from another existing work, which are not completely independent from the original work, but also carry the originality of its artist, are described as “adaptations”. There is no hesitation that the images created by artificial intelligence will be considered in the category of “works of fine arts”. Intellectual productions that can be counted in the category of works of fine art in accordance with Article 4 of the FSEK are specified as examples, and pursuant to this article “all kinds of paintings and graphic works that have aesthetic value are works of fine art”.

Another condition in order for being counted as a work is the “forming condition” and it means that the intellectual product must take shape, come into existence and become perceptible by people. In this context, for the formation, it is enough for a work to take place only once and this formation does not have to be continuous. With this condition, it is meant to be explained that a mere thought and idea that has not actually been eventualized cannot benefit from the legal protection envisaged under the FSEK. It is seen that the forming condition has been fulfilled in terms of AI-created images. The aforementioned digital images produced with AI programs are seen and perceived by people, uploaded to their computers, even used as paintings and magazine covers and gain existence with these ways.

The last condition for being counted as a work is “having the characteristics of the author,” and this condition is expressed as “subjective condition” in the doctrine. As a matter of fact, in paragraph “a” of Article 1/B of FSEK, the work is defined as “the intellectual product that carries the characteristics of its author”. Although “carrying the characteristics of its author” sounds indefinite and subjective, it means that the relevant product must reflect its author’s creative side, originality, innovation, style and expression. Therefore, it becomes an essential condition for product to reflect the characteristics of the author to be considered as “work”. However, the subjective condition does not mean that the work should be completely unique and one of a kind and not have any reflections from other author’s works. Because, while creating their artistic identities and styles, there is huge a possibility that the authors to be influenced by other works they have seen, read and listened to before, and they unconsciously carry parts of them. The important thing is that this influence should not be an imitation, duplication or copying.

The condition regarding the “characteristics” needs to be evaluated separately for each concrete event and the type of work. In a possible dispute brought before the court, expert examination is often required for the analysis of whether the relevant intellectual product carries the characteristics of the author.

In this context, whether the subjective condition is fulfilled in terms of images created by artificial intelligence is the main point to be examined. If we accept that the subjective condition is fulfilled because it has the characteristics of its owner, we will conclude that the aforementioned type of images created with artificial intelligence can be considered as “works” and in this context, they will benefit from the legal protection given to the works. For now, we leave aside the debate whether artificial intelligence can be the author of a work and focus on whether people fulfill the condition of “carrying the characteristics of the author” in terms of images created AI.

In the doctrine, a dual distinction is made between “computer-generated” and “computer-aided products” in terms of evaluating intellectual products created by computer as works. In this context, intellectual products that are purely computer-generated are not accepted as works because they lack human effort and creativity, while those that are computer-aided can be qualified as works on the condition that they carry the characteristics of the author. However, although this dual distinction made in the doctrine is meaningful for classical computers, unfortunately it becomes dysfunctional for artificial intelligence, which becomes more autonomous day by day, develops itself with new data and whose visual outputs cannot be predicted beforehand.

As a matter of fact, with a simple example, when we give the idea of “a little girl watching the world from above the clouds” for the second time to the AI bot named Midjourney, the image it creates is different from the first one. It is seen that in the course of time, the visual outputs in Midjourney’s database have increased with each command given by the users and Midjourney started to interpret the same commands differently since it changed and developed itself with the new data it pulls over the internet. In this regard, no matter how detailed the command is written, the image that will be generated by Midjourney cannot be fully predicted by the user. With each passing second, Midjourney can perceive the words “cloud” and “little girl” differently and associate them with each other in different ways.

Therefore, we can say that the condition of “carrying the characteristics of the author” is not fulfilled in the images created with this kind of AI which transforms words and sentences into images, and therefore they cannot be qualified as works. It is not possible to fully predict or control the visual that will be created with artificial intelligence, neither by the programmer nor the user, and in this respect, it cannot be said that it reflects the unique style, creativity, and innovation of the author. In this direction, we can say that these images that do not meet the conditions of being a “work” cannot benefit from the legal protection provided to the works within the scope of FSEK.

So who can be the “author” of a visual output created by artificial intelligence programs?

First of all, we should state that, according to FSEK article 8/1, “the author of a work is the one who created it”. In the doctrine and Supreme Court decisions, it is accepted that the author of a work can only be a real person and legal persons cannot be the author of a work. In this respect, legal persons can only have financial rights related to the work.
From the moment the work is created, the person who created the work gains the title of “author” without the need for any additional legal action and he/she becomes the owner of the financial and moral rights granted to the owner of the work under the FSEK. However, as it can be understood, before evaluating who is the author of a work, there must be a “work” that has fulfilled all the conditions of its legal definition. In other words, it is not possible to discuss the authorship of a work without an actual work.

We have said that images created by AI programs such as Midjourney, DALL-E, Stable Diffusion, and Craiyon cannot be qualified as works because they are not capable of fulfilling the subjective condition. However, even if we produce works that have the characteristics of its author by using a hypothetical AI program with different qualifications from those counted above, the issue of how to determine the authorship of the intellectual product is still quite complicated. Many actors, such as those who develop artificial intelligence software, those who invest in artificial intelligence technology, and users, play a role in the creation of the intellectual product. But which of these people should be recognized as the author of the intellectual product?

In this context, first of all, it can be argued that the products created with artificial intelligence should belong to the public. However, this suggestion comes with important certain disadvantages. Because in the doctrine, it is accepted that the main purpose of providing legal protection to intellectual property products is to support the development of science and art. Within the scope of this argument, companies that produce and develop artificial intelligence technologies will not be able to profit from the intellectual property products created by AI and therefore they will not want to invest in these technologies. However, in recent years, so many successful images created with AI programs and it has been paid so much for these images. For instance, the portrait of Edmond Belamy, created by using an artificial intelligence technology known as GAN (Generative Adversarial Networks), was sold at Christie’s auction house for 432,000 dollars. In the event that the ideas and works created by AI belong to the public, it seems that it will not be possible for humans to compete with artificial intelligence technology, since everyone can use it without making a payment.

As another suggestion, it can be argued that the software developer of the AI should be entitled. Since the AI is actually a software in its essence, it is possible to protect AI as a work within the scope of the relevant law by placing it in the “computer program” category stipulated in Article 2/1 of the FSEK. However we should point out that, protecting the AI itself and protecting the intellectual products created by that AI are two different things. If we consider AI as a computer program and consider it in the category of literary and scientific works, the author will be those who develop artificial intelligence software. However, we cannot say that those who have rights on artificial intelligence as its author also have rights on the intellectual products created by AI. Because unlike traditional software, artificial intelligence can renew and develop itself without the intervention of the software developer, and can produce unpredictable intellectual products.

In addition to these suggestions, the discussion of granting legal personality to artificial intelligences, which show a completely autonomous structure and can create visual outputs without the intervention of anyone else, may come to the fore. If we give legal personality to fully autonomous artificial intelligence, even the artificial intelligence itself can claim authorship on the images that is qualified as work. However, if we give AI a legal personality and make it the subject of rights and obligations, some problems related to the authorship of AI inevitably come with it. In case of violation of intellectual rights, it is necessary to clarify how the AI will be a party to a possible lawsuit and how the demands will be met. On the other hand, the matters such as how AI will be able to transfer its rights arising from authorship and how it will be able to conclude contracts regarding the transfer of rights needs to be clarified. Because if we accept that AI is the author of the work, we will conclude that the relevant intellectual product cannot be used unless the AI transfers its rights regarding the work.

With the technological developments of our age, the issue of the legal status of artificial intelligence will inevitably be on the agenda and will confront us with the necessity of answering relevant questions.

For now, we will witness with great curiosity how artificial intelligence technology can affect people’s perception regarding the concept of art, and how it will change art’s definition.
As stated by Richard Lloyd: “There will be human art, there will be artificial intelligence art, but there will also be a hybrid. I think human artists will be working side by side with this algorithm and creating hybrid art. It’s just the beginning and it’s so fascinating what is going to be created“.

If you are wondering how the idea of “a little girl watching the world from above the clouds” is interpreted by the AI bot named Midjourney after you complete reading this article, you can see her below. She continues to watch the world of humans as if saying that in the near future designed by technology, artificial intelligence will take its place in the art market as a very inspiring actor.

By Onur Kucuk, Managing Partner, KP Law

Metaverse emerges as an “other universe” that invites the masses to live, interact, and trade in it. The parts of this universe are virtual reality, the internet, and advanced technologies. Users are no longer in front of the screen, they can enter this world in person. This can be possible in two ways for now; This world we call avatar requires a digital twin and virtual reality glasses. Users may think that they are chatting with their avatars, but can they feel like they are drinking coffee in a real environment? Are the two similar things?

Perhaps it would have never crossed his mind that technology giants would invest billions of dollars in the alternative digital world, referred to as the “metaverse” in Neal Stephenson’s 1992 novel “Snow Crash”. Although Mark Zuckerberg is mentioned as the pioneer in metaverse investments, the concept of metaverse does not consist of a single platform or “Meta” company.

Other companies such as The Sandbox, Decentraland, or Otherside also have their metaverses. Therefore, instead of looking at the subject as a dystopian or fantasy world of an author, it is necessary to approach positively what science fiction will offer us in the future.

NFT, as a word, means Non-Fungible Token, that is, token (money) that cannot be changed. However, NFTs, which are currency, can also be represented as digital asset that has value and can be collected. The difference from digital currencies is that NFTs have a different and unique structure. Digital assets such as artwork, images, and videos are the most well-known examples. NFTs, on the other hand, is essentially electronic document that allows digital products to be registered and sold. In other words, NFT shows ownership of a product and provides its digital registration. While talking about selling and changing hands on a single copy of a digital product with NFT, we see that the sales of these digital products sometimes reach millions of dollars. The land sold for 2.43 million dollars on the Decentraland platform, the virtual yacht sold for 650 thousand dollars on the Sandbox platform, the purchase of Üsküdar Municipality on the Metaverse, the Dutchman who sold his soul, the first tweet of Twiter CEO Jack Dorsey, which was sold for 2.9 million dollars, are surprising examples.

Buying Land from Metaverse Platform

Several transactions are required to purchase parceled lands on Metaverse platforms. Firstly, it is necessary to have a valid cryptocurrency and digital wallet on the relevant platform. Each currency is listed on cryptocurrency exchanges. For example, while the current coin on the Decentraland platform is MANA, it appears as SAND in The Sandbox. By opening an account in one of these exchanges, the digital wallet of the exchange site is loaded. Afterward, from which metaverse platform the land will be purchased, it is necessary to carry out the prescribed procedures and transfer to a decentralized wallet that integrates with these sites, such as MetaMask. Land purchases can also be made through auctions from platforms such as OpenSea, which are NFT marketplaces.

Trading transactions on digital lands are managed by smart contracts, and recorded on a blockchain, making the transaction indestructible and immutable. Essentially, ownership is also on this NFT, the purchased NFT is stored in the user’s digital crypto wallet. Since these transactions are public, they can be viewed by anyone. NFTs are conceptually equivalent to the real-world deed. In April 2022, the Presidency of the Republic of Turkey Digital Transformation Office cited the expression “Qualified Intellectual Deed” as an example of the Turkish equivalent of NFT.

Essentially, title deeds are documents that show legal entitlement to a property we’ve purchased, while NFTs contain metadata that describes the asset they represent.

It is also necessary to mention smart contracts for the purchase of real estate on Metaverse platforms. Smart contracts are programs in which predetermined rules are automated and coded into the blockchain network. Smart contract codes currently available on Decentraland enable users to buy, sell and lease their land with MANA tokens. After the payment is made, the platform automatically transfers control of the NFT to the seller. Transactions with MANA tokens only can be done on the Decantraland platform, each platform has its different cryptocurrency or token for purchases.

The parameters according to which the land values on Metaverse platforms are determined are also an important issue. Virtual real estate owners differ in their land valuations. Like a digital “monopoly”, land values have prices that vary according to their location. For example, in the Decentraland platform, the lands are divided into various zones, although the size of each parcel is different. There are districts divided into themes such as Vegas City (Gambling District), Fashion Street (Shopping District), and University (Education District). The value of each land also varies according to the proximity to these regions. For example, one of the biggest purchases was the $2.4 million purchase of a land of 116 parcels near the Fashion Street district in Decentraland. Again, it is seen that the prices in the real estate market are quite high in the areas near the lands owned by celebrities. An NFT collector has purchased a large virtual estate in Snoopverse (The Sandbox area owned by Snoop Dogg) for $450,000 worth of ETH (Ethereum). Apart from the location of the land, the buildings and structures built on the land are also one of the reasons that increase the value of the land. However, a separate payment must be made through MANA for the buildings and additions built on the land.

What is the legal infrastructure in virtual property?

In Metaverse, the land owner can build a house, concert venue, theater, shopping mall, museum, exhibition area, office, or any other structure and building, limited only to the area he/she has purchased. The land owner’s purchase is recorded in the blockchain network, which is not under anyone’s control. In this way, third parties other than the land owner cannot make changes to the land ownership or delete the processed records. After the purchase, the landlords only acquire ownership of a unique bit string NFT and store this NFT in their crypto wallet. Because NFT is in a crypto wallet, no one can pass on NFT-supported virtual apartments, clothes, or other digital goods without accessing the wallet’s password.
Despite the immutable and uncontrollable protection procedures in the blockchain network, the legal status of virtual property owners is complex. Essentially, the ownership of all assets purchased from metaverse platforms is governed by the platform’s user license agreement, not property law. Hence,the validity of the regulations regarding immovable properties such as land and houses purchased in the real world are not valid in the metaverse. Users have limited rights with the terms of use and terms of service of the relevant platform after the land purchase, and these rules are considered legally binding documents. For example, it reserves the right to limit and terminate the right to use and access land and other digital assets purchased on Sandbox and most other metaverse platforms. In other words, platforms can only access digital assets for a certain period. In such a case, a user with a $100,000 digital painting can be banned from the platform the next day, and his NFT has no value and no function.

Legal Risks

First, metaverse investors need to meticulously review each platform’s terms of service, and terms and conditions, and learn about potential risks through attorneys. In the service policy of many metaverse platforms, the platform owner gives the company unilateral control. Therefore, when an NFT is purchased, the user does not have full ownership of that digital asset. This purchase means that the user will have access to the digital asset in question for the period determined by the platform.
In the real estate sector, some regulatory steps are needed by the regulatory authorities in the field of smart contracts. Because today, smart contracts created for the sale and lease of land envisage regulations in limited areas such as monetary obligations and term limitations. For areas other than these regulations, no legal protection model is foreseen in most platforms. In one of these gray areas, if the property owners lease their land; An example would be what happens if the lessee establishes a business or takes action that reduces the value of the land. In such a case, it is expected that the provisions that automatically eliminate the activities or actions of the tenant will be provided by smart contracts or additional contracts. In addition, the establishment of contractual relations with property owners who are adjacent to each other to manage the use of property in similar areas will also be on the agenda. Again, the case of lenders offering cryptocurrency loans for virtual real estate also needs to be considered. If the borrower defaults by not being able to pay his debt, some actions should be taken. For example, it is envisaged that smart contracts will be coded so that the metaverse user who receives the loan is unable to make payments in the stipulated terms and that the rights and authorizations arising from the ownership of the NFT can be automatically transferred to the company extending the loan, with the execution of the warning procedures. Experiencing such a situation will raise the issue of foreclosure in the areas parceled out in the metaverse. With the emergence of such legal problems and the increase in the number of users of each platform, some measures will have to be taken.

Investing in real estate in Metaverse brings with it various risks that must be taken into account. One of the biggest concerns is that prices fluctuate due to fluctuations in the cryptocurrency market. This can also greatly affect virtual real estate prices. What we usually see in changes in real estate prices over a decade can happen overnight in the virtual world. Another growing concern is that if the platform fails financially, the metaverse platform may disappear altogether. Members may have voting rights on the termination of the platform, but no regulations are preventing the platform owners from deciding to shut down if there is no money left to keep the platform running. Moving retail, offices and other daily activities to virtual platforms will create similar problems encountered in the physical world, requiring expertise in real estate, finance, employment and intellectual property, among all other types of law.

By Onur Kucuk, Managing Partner, KP Law

The issue of how to ensure the longevity of family businesses remains as topical all over the world as it is in Turkey. When we look at the statistics, we see that family businesses have an extremely high percentage in Turkey as well as all over the world.

The adoption of corporate governance principles by family businesses enables them to become an independent structure and ensures their longevity and paving the way for the next generations to continue successfully by preserving the company’s legacy.
As per the datas from the Borsa Istanbul Public Disclosure Platform Central Registry Agency, we observe that the average lifespan of publicly traded companies is longer than that of other companies.

One of the most important steps to be taken for the institutionalization of family businesses and to protect the independence and transparency of the company beyond the personal interests of family members is the appointment of independent and competent non-family senior managers.
Furthermore, it is observed that family-owned companies are also adopting the public offering method as they take steps towards institutionalization.

In recent years, the question “Can venture capital investment funds, which are on the agenda with their tax advantages and transparent structure, be a solution for the structuring and institutionalization of family businesses?” has been frequently raised.

A Venture Capital Investment Fund (“VCIF”) can be defined as an unincorporated asset established for a period of time by portfolio management companies and venture capital portfolio management companies for the purpose of managing a portfolio of assets and transactions determined by the Capital Market Board (“CMB”) in accordance with the principles of fiduciary ownership for the account of shareholders with the money collected from qualified investors in return for participation shares.
VCIF may only be established by portfolio management companies and venture capital portfolio management companies. As the founder, the portfolio management companies are responsible for the representation, management and supervision of the management of the VCIF. Briefly, the VCIF is professionally managed by portfolio management companies subject to CMB rules.

Berna Sema Yiğit Sevindi, General Manager of Gri Portföy Yönetimi Anonim Şirketi, lists the advantages of the VCIF as follows;

• Fund assets are separate from the assets of portfolio management companies, custodian institution and portfolio manager.
• Fund assets cannot be seized, injunction cannot be placed on them and fund assets cannot be included in the bankruptcy estate, even in cases where the PMC or the custodian goes bankrupt or their management and supervision are taken over by public institutions.
• The assets of the fund are held by custodian institutions and transactions on behalf of the fund are carried out under the supervision of the custodian institution (the bank). In addition, expenditures from the fund are also approved by the custodian institution (signed by a senior authorized person).
• They operate under the supervision of the CMB and in the light of rules governed by legal regulations. Fund shares held by investors are tracked at the Central Registry Agency.

The main activity of a VCIF is to operate a portfolio of venture capital investments, and at least 80% of its total value must be composed of one or more venture capital investments. VCIF may also be established on a closed basis as private or company-specific; they may sell their participation shares only to qualified investors.

What are Venture Capital Investments?
• Partnerships made through capital transfer or share transfer to venture capital companies or the establishment of a venture capital company itself,
• Financing support provided as a mix of investment in debt instruments issued by venture capital firms, debt and equity financing,
• Direct investments or partnerships in joint companies especially established in Turkey and abroad to make capital investments in venture companies defined in the Communiqué,
• Investment in capital market instruments issued by venture capital investment trusts

Purchase of shares of other venture capital investment funds.

How is the Organizational Structure?

Firstly, the governance of the VCIF is strictly regulated under the legislation. VCIF may be managed by the Founder’s board of directors, or an Investment Committee may be established within the VCIF. The Investment Committee shall include members who have the qualifications specified in the relevant legislation, but external members may also be appointed.

In addition to the members appointed by the founder, the Investment Committee may also include members appointed by family companies. Thus, family members can also be on the Investment Committee and have a say in the fund’s investments. This prevents the founder from having sole control in closed-loop VCIF that invest in family businesses.

The members appointed to the Investment Committee together with family members by the portfolio management company shall be responsible for the control and management of the VCIF and the companies in which the VCIF invests.

In this way, the qualified investor of the relevant VCIF will consist of family members, the relevant VCIF will become the shareholder of the family business, and the family business will be managed in a transparent and institutionalized structure, as the Investment Committee of the VCIF includes both family members and members appointed by the Founder.
In short, professionals indirectly have a say in the family business and the “appointment of professional members to the board of directors” recommended for family businesses is automatically achieved.

The family-owned company in which the VCIF holds a stake continues its operations by adopting corporate governance principles. Family members become qualified investors in the VCIF and may also have a say in the investments to be made by serving on the investment committee.
What happens when the VCIF expires?
Considering the continuity and sustainability of family businesses, the assets in the fund and the venture firms may be offered to the public when the VCIF expires. In fact, it can be said that the establishment of a VCIF may be a preparatory stage for the IPO (initial public offering) of family businesses. For companies that do not want to be offered to the public, the fund may be liquidated.

It should be emphasized that during the VCIF, the first steps are taken to establish a corporate identity in family businesses, and at the end of the day, family businesses complete their transformation from a company “managed by family members” to a company managed in a “corporate manner”.

Tax Advantages

The relationship between family businesses and VCIF not only contributes to family businesses in terms of corporate governance, but also provides family members with attractive tax advantages that cannot be ignored. While full taxpayer real persons pay an effective income tax of nearly 20% on dividends from companies in which they are direct shareholders, they pay 0% withholding tax on dividends from VCIF, 0% withholding tax on earnings from venture capital investment funds held for more than two years, and 10% withholding tax if the investment period is shorter than two years.

According to Article 325/A of the Tax Procedure Law, Full Taxpayer Corporate Taxpayers, Income Taxpayers and Corporate Taxpayers can deduct the amount of their investments in VCIF from their corporate income, not exceeding 10% of their income / corporate earnings and 20% of their equity. The conditions are; (i) investing in venture capital funds established or to be established in Turkey and subject to the CMB and (ii) the amount of funds allocated in the relevant year should not exceed 10% of the declared income and the total fund amount should not exceed 20% of the equity. The allocated fund amount should be shown separately in the corporate tax return of the relevant year.

VCIF investments of firms in Technology Development Zones and R&D (research and development) Design Centers;

Pursuant to the “Law No. 7263 on the Amendment of the Technology Development Zones Law and Certain Laws” published in the Official Gazette No. 31384 on 03/02/2021; taxpayers in Technology Development Zones / R&D Design Centers have been required to invest in venture capital investment funds as of 01/01/2022.

For corporate taxpayers with a deduction amount of TRY 1.000.000 or more, 2% of this amount is monitored in a temporary account in liabilities and this amount is required to be transferred as capital to entrepreneurs operating in venture capital investment trusts or incubation centers or to purchase venture capital investment fund shares established to invest in entrepreneurs residing in Turkey until the end of the year in which the temporary account is established. The amount obligation to be transferred within this scope is limited to TRY 20.000.000 on an annual basis.
If the amount is not transferred until the end of the relevant year, twenty percent of the amount deducted from the annual declaration under this Law will be subject to tax.
In light of all this information and justifications, it cannot be ignored that VCIF offer an effective structure for the institutionalization of family businesses. While the process of preparing for a direct public offering may be more challenging, especially for family members who do not favor an IPO, in some companies, corporate governance principles are not put on the agenda in the short term by family members who are far from the idea of an IPO.
Why shouldn’t it be attractive to simplify the process, to institutionalize the company, to benefit from tax advantages and simultaneously make other lucrative investments by being guided by professionals?

By Onur Kucuk, Managing Partner, KP Law

Turunc has advised Bogazici Ventures on its USD 200,000 investment in Nureply. Vircon Legal advised Nureply.

Nureply provides an artificial intelligence-based email marketing tool.

Bogazici Ventures is a Turkish Capital Markets Board-regulated venture capital fund focusing on financial technology, health technology, retail technology, and gaming.

The Turunc team included Managing Partner Kerem Turunc, Partner Yasemin Erden, and Associates Beste Yildizili Ergul, Selay Berfin Turgut, Elif Eryilmaz, and Baran Ezeli.

The Vircon Legal team was led by Managing Partner Erdem Mumtaz Hacipasaoglu and included Counsel  Okan Sencan and Associate Irem Cengiz.

New thresholds triggering independent audit requirements for Turkish companies became applicable as of 1 January 2023. Below is a general overview of the applicable criteria.

A. Companies Always Subject to Independent Audit

The following types of companies, among others, must at all times engage an independent auditor on an ongoing basis:

– Publicly traded companies (including companies whose listing applications have been approved)
– Private companies with outstanding securities (including issuers whose applications have been approved)
– Subject to limited exceptions, companies subject to the regulation of the Turkish Capital Markets Board
– Subject to limited exceptions, companies subject to the regulation of the Turkish Banking Regulation and Supervision Agency
– Insurance companies
– Licensed television networks

B. Companies Subject to Independent Audit Depending on Certain Criteria

1. Companies that are not traded on an exchange but are deemed to be public companies by statute, if the company exceeds at least two of the following three thresholds for two consecutive financial years:

– Total Assets: TRY 30 million
– Net Sales: TRY 40 million
– Number of Employees: 50

2. Companies that are at least 25% owned by professional organizations, unions, associations, foundations, cooperatives deemed to be public institutions; national daily newspapers; certain companies subject to the regulation of the Turkish Information and Communication Technologies Authority; certain companies subject to the regulation of the Turkish Energy Market Regulatory Authority; certain companies owned by the Savings Deposit Insurance Fund of Turkey; and certain state-owned enterprises and municipal enterprises, if the company exceeds at least two of the following three thresholds for two consecutive financial years:

– Total Assets: TRY 60 million
– Net Sales: TRY 80 million
– Number of Employees: 100

3. All other companies (i.e., companies other than the ones described under (1) and (2) above), if the company exceeds at least two of the following three thresholds for two consecutive financial years:

– Total Assets: TRY 75 million
– Net Sales: TRY 150 million
– Number of Employees: 150

C. Exemptions

Certain companies that are at least %50 state-owned, certain state-owned enterprises subject to privatization and certain companies in the process of liquidation by the Savings Deposit Insurance Fund of Turkey, among others, are exempt from independent audit requirements.
A company subject to independent audit by virtue of triggering the thresholds described under (B) above will become exempt if (i) it falls below at least two of the three thresholds for two consecutive financial years or (ii) it falls 20% or more below at least two of the three thresholds for one financial year. Such exemption begins in the following financial year.

Other exceptions or exemptions may be applicable depending on the specific entity.

By Esin Camlibel, Partner and Naz Esen, Associate, Turunc