| Ecem Yağmur EROĞLU Lawyer | Berru Ceren ZİYAGİL Lawyer |
ABSTRACT
This study examines significant recent changes in Council of State precedents concerning taxation in the real estate sector. The evaluation of sales of independent units subject to condominium ownership as commercial activities, the determination of the value-added tax (“VAT”) rate applicable to the sale of properties with office characteristics as residential properties, and the extension of the lawsuit filing period against valuation commission decisions forming the basis of property tax until the end of the year constitute the primary areas of examination in this study.
Keywords: VAT, Title Deed Record, Actual Use, Property Tax, Legal Nature of Immovable Property, Commercial Income.
INTRODUCTION
The real estate sector holds strategic importance both in terms of economic growth and public revenues, and changes in the taxation regime produce direct consequences for taxpayers, investors, and the administration. The determination of the legal nature of immovable properties and the tax rates applicable according to these natures have long been among the controversial areas both in practice and in jurisprudence. Recent decisions rendered by the Council of State indicate a fundamental change in precedent particularly concerning the commercial income nature of sales of independent units subject to condominium ownership, the VAT rate applicable to the sale of properties with office characteristics as residential properties, and the periods for filing lawsuits against valuation commission decisions forming the basis of property tax. These changes not only reshape the administration’s practices but also create direct impacts on taxpayers’ tax obligations.
1. DEFINITION AND CHARACTERISTICS OF IMMOVABLE PROPERTY
Immovable property refers to goods that cannot be physically transported from their location to another place. Legally, the concept of “immovable property” is regulated in Article 704 of the Turkish Civil Code No. 4721 (“TCC”). Although the concept of immovable property is not explained in the law, the elements constituting the subject of immovable ownership are enumerated in a limited manner in Article 704 of the TCC. Among the most common types of immovable property are plots, land, buildings, and apartments. Such properties carry elements that are legally transferable and give rise to ownership rights.¹ According to this article, land, independent and continuous rights registered on a separate page in the title deed registry, and independent units registered in the condominium ownership registry constitute the subject of immovable ownership. Article 998 of the TCC also stipulates that the aforementioned shall be registered in the land registry as immovable property.²
Since the principle of numerus clausus applies to immovable properties, the acceptance of any property other than the goods and rights enumerated above as immovable property is not possible even with the consent of both parties.
2. CHANGE IN THE COUNCIL OF STATE’S POSITION REGARDING PROPERTIES SUBJECT TO CONDOMINIUM OWNERSHIP
It is stipulated in the TCC that independent units subject to condominium ownership are accepted as immovable property. However, provisions regarding condominium ownership are regulated in detail in the Condominium Ownership Law No. 634 (“COL”). How the landowner evaluates the independent units acquired in exchange for their land share is entirely at their discretion; it is possible for them to use these independent units as residences, lease them, sell them, or donate them. However, there is no explicit regulation in the legislation regarding the tax nature of income arising from the disposal of independent units acquired in exchange for land shares. Again for this reason, differences of opinion exist between the Tax Administration and the Council of State, which causes difficulties for taxpayers.³ The Ministry of Finance has adopted a consistent view that such sales should be evaluated as commercial activities due to the high number of transactions and the nature of the acquisition purpose, and therefore the income obtained by the landowner should be deemed commercial income and the transactions should be subject to VAT. The fundamental issue here is whether the flats obtained by the landowner constitute a new acquisition.⁴ Until recent years, the Council of State viewed a person’s transfer of their land to a contractor in exchange for flats and becoming a flat owner in the constructed building as the evaluation and transformation of wealth. Within this scope, it held the view that the sale of independent units acquired pursuant to the contract could not be evaluated as a commercial organization, the income obtained could not be accepted as commercial income, and could not be subject to VAT.⁵ However, with decisions rendered in recent years, the Council of State has distinctly departed from this established approach and has begun to accept the disposal of multiple independent units in the same or consecutive years as an indicator of commercial activity; within this scope, it has made a clear change of position indicating that commercial income and VAT liability may arise for landowners. In its decision dated 26.02.2025 and numbered 2024/399 E., 2025/70 K., the Council of State Tax Dispute Resolution Board stated: “In the dispute, the sale of thirteen immovable properties acquired pursuant to the construction agreement in exchange for flats to different persons on different dates since 2009 demonstrates the continuity of sales and therefore bears commercial character. Consequently, there is no illegality in taxing the income obtained from the sale of the aforementioned immovable properties as commercial income.” Thus, it was emphasized that the sale of a large number of independent units acquired through construction agreements in exchange for flats on different dates demonstrates continuity and should be taxed as commercial income. Furthermore, the rationale of the Council of State Tax Dispute Resolution Board’s decision dated 19.03.2025 and numbered E.2025/63, K. 2025/234 is as follows: “The construction of a building consisting of multiple independent units on a plot of land changes the character of the land and enables the division of the ownership right thereon into shares that become independent from one another, allowing these shares to be disposed of separately. Each immovable property sale registered as separate independent units in the title deed constitutes separate and independent transactions. In the case, considering that the testator of the plaintiffs, who was the owner of the land, sold one of the fifteen independent units obtained by transferring the land to the contractor pursuant to the construction agreement in exchange for flats in 2007, two units in 2008, three units in 2009, three units in 2010, two units in 2011, one unit in 2012, three units in 2013, and additionally sold a property with the character of agricultural land in 2013, it has been concluded that the condition of continuity element has been realized in the case and the activity conducted constitutes commercial activity. In this situation, since deliveries and services made within the framework of commercial activity are subject to value-added tax, no legal correctness has been found in the provision of the persistent judgment clause rendered by the court in the opposite direction.” When the Council of State’s aforementioned recent decisions are examined, it is now clearly established in judicial precedents that the sale by landowners of independent units remaining beyond personal needs and wealth preservation within the scope of construction agreements in exchange for flats is accepted as commercial activity, and the income obtained from these sales is subject to income tax and VAT with the character of commercial income.
3. CHANGE IN THE COUNCIL OF STATE’S POSITION REGARDING THE SALE OF PROPERTIES WITH OFFICE CHARACTERISTICS AS RESIDENTIAL PROPERTIES
As is known, the residential or commercial property nature of immovable properties bears direct importance in determining the applicable VAT rate. In this regard, conflicting approaches have existed between the Ministry of Finance and the Council of State for years on the point of whether the nature stated in the building permit or the actual purpose of use should be taken as basis in determining the VAT rate of an immovable property. Since 1985, when VAT entered into force, the rates applicable to residential and commercial property deliveries have been consistently determined according to the purpose of use in the permit and title deed records; the administration’s established practice has also developed in this direction. However, the Ministry of Finance changed this view, which had continued for many years, in the Value Added Tax Circular No. 60 dated 8 August 2011 and numbered 60 published by the Revenue Administration Presidency⁶; it announced that in determining the VAT rate on immovable properties, the matter of how the immovable property is actually used/will be used would be taken as basis rather than the permit and title deed records.⁷ In the section titled “8.2.-VAT Practice in Immovable Property Deliveries” of the VAT Circular No. 60 (08.08.2011, Number KDVK-60/2011-1), the following expression is stated: “Example 2: It has been announced by a court that an immovable property registered in the title deed registry as a 120 m² masonry house in an unusable condition will be sold by public auction. In immovable property deliveries, the actual situation of the immovable property subject to delivery valid as of the transaction date must be taken into consideration. In the above example, although the immovable property appears as a ‘masonry house’ in the title deed, since the house is in an unusable condition as of the delivery date, this sale made through auction will be accepted as a land delivery rather than a residential property delivery and will be subject to tax at the general rate.” In line with this approach, numerous private rulings have been published by the Revenue Administration; particularly in private rulings dated 23.08.2013 and numbered 1259⁸, and dated 03.07.2013 and numbered 20361, the view that actual use is determinative was reiterated⁹: “If it is determined that immovable properties constructed for use as residences and sold as residences, but registered as offices in the building permit and title deed, are actually used as residences, VAT will be applied at the rate of 1%, whereas in deliveries other than residences, the rate of 18% will be applied.” Following the aforementioned change of view, it became possible to subject independent units with a net area not exceeding 150 m², which are shown as workplace/office/shop/office in the building permit or title deed records but are sold for actual use as residences, to VAT at the rate of 1%. Within this scope, the refund of the VAT incurred due to sales made in cash or by offsetting also came to the agenda in practice. Although tax courts have rendered various decisions on the subject, a significant portion of the precedents has been shaped in line with the administration’s view. The dispute was ultimately brought before the Council of State. The Council of State has ruled that title deed records are determinative in establishing whether an immovable property is a commercial property or a residence; accordingly, the applicable VAT rate must also be determined based on the nature in the title deed.¹⁰ In October 2025, the Council of State VDDK, through two consecutive decisions, has ruled clearly and leaving no room for doubt that the building permit, building occupancy permit, and title deed records will be taken as basis in determining whether the immovable property sold is a residence or a commercial property. Thus, differences of opinion that had continued in practice and judicial decisions for approximately 14 years have been definitively resolved by the Board. The evaluation of properties with office characteristics as residential properties directly affects not only the VAT rate but also property tax. Pursuant to Articles 8 and 18 of the Property Tax Law No. 1319 (“PTL”)¹¹, the building tax rate is applied as 2 per thousand in municipalities, 4 per thousand in metropolitan municipalities; and in residences, 1 per thousand and 2 per thousand respectively. According to the Council of State’s current precedent, since the legal nature of the immovable property must be determined according to the title deed and building permit, the legal path has also been closed for properties registered in the title deed as office/workplace to be considered as residences on the grounds of actual use and thus subjected to property tax at a lower rate.
4. CHANGE IN THE COUNCIL OF STATE’S POSITION REGARDING THE RIGHT AND PERIOD FOR FILING LAWSUITS AGAINST VALUATION COMMISSION DECISIONS IN PROPERTY TAX
The individual right to file lawsuits against property tax valuation commission decisions has shown significant development in Turkish tax law history. Historically, the third subparagraph of paragraph (b) of Article 49 bis of the Tax Procedure Law (“TPL”) limited the authority to file lawsuits against valuation commission decisions only to offices, institutions, organizations to whom the decision was notified, and relevant neighborhood and village headmen. This restrictive regulation was annulled by the Constitutional Court’s decision dated 31.05.2012 and numbered E.2011/38, K.2012/89. The Court found the provision contrary to the Constitution by determining that depriving taxpayers of the opportunity to file lawsuits directly against valuation commission decisions individually was not compatible with the principle of rule of law guaranteed in Article 2 of the Constitution and the freedom to seek rights regulated in Article 36. This decision is of a turning point nature for taxpayers. Although the path for taxpayers to file lawsuits directly and individually against valuation commission decisions was opened by the Constitutional Court’s annulment decision, in practice the fact that most of these decisions were not notified on behalf of taxpayers brought along period disputes; therefore, while the 30-day lawsuit period runs from the notification in cases where the decision is notified, in cases where it is not notified, the period begins to run from the “date of learning.” The Council of State Tax Dispute Resolution Board’s decision dated 15.02.2023 and numbered 2022/14 E., 2023/2 K. is a decision that provides unity of precedent on this subject, revealing that the lawsuit filing period can be used within 30 days from the date of learning and at the latest until the last day of the year in which the decision was taken. In the decision, stating that “In this situation, considering that no procedure has been adopted in the Law regarding the notification of valuation commission decisions to taxpayers, it must be accepted that taxpayers can file lawsuits within the general 30-day lawsuit filing period from the date of learning of the valuation commission decisions regarding the determination of the minimum unit value of land and plots forming the basis of property tax and at the latest until the last day of the year in which the aforementioned decision was taken, and there is no possibility of filing a lawsuit after this date,” it is clearly expressed that the period is limited to the end of the year. Within this framework, it is understood that the period for filing lawsuits against valuation commission decisions for the year 2025 will continue at the latest until 31 December 2025.
CONCLUSION
Current Council of State precedents have created a significant transformation in tax practices in the real estate sector. In construction operations in exchange for flats, the sale of multiple independent units in different years has been accepted as commercial activity, thus creating a new framework in terms of income tax and VAT. In the sale of properties with office characteristics as residential properties, it has been clearly established that records in the title deed and building permit, rather than actual use, will be taken as basis in determining the applicable VAT rate. The extension of the period for filing lawsuits against valuation commission decisions regarding property tax until the end of the year has also strengthened legal predictability for taxpayers.
¹ Fikret Eren, Property Law, Revised 4th Edition, Yetkin, Ankara 2016, p. 200.
² Pursuant to Article 998 of the TCC No. 4721, “The following shall be registered in the land registry as immovable property: 1. Land, 2. Independent and continuous rights on immovable properties, 3. Independent units subject to condominium ownership. The registration of land in the land registry is subject to the provisions of special laws.”
³ S. Çeçen, “VAT Practice in Construction Works in Exchange for Land,” Vergi Dünyası, Issue: 86, 1998, p. 48.
⁴ Gökhan Tozoğlu, “The Situation of Construction Contracts in Exchange for Flats Before Taxation,” Gazi University Institute of Social Sciences, 2015, Access Date: 25.11.2025, https://tez.yok.gov.tr/UlusalTezMerkezi/tezDetay.jsp?id=aMQiijYTy8mbGXpKq-fgNw&no=LDC3ZNb9y9qwxA5zjdInVw
⁵ Yıldırım Y., (2010), op. cit., p. 254
⁶ Ministry of Finance Revenue Administration Presidency, Value Added Tax Circular/60, 08.08.2011, Number: KDVK-60/2011-1.
⁷ Ministry of Finance Revenue Administration Presidency, “Value Added Tax Circular No. KDVK-60/2011-1 (08.08.2011)”
⁸ Private ruling of the Revenue Administration Presidency dated 22.08.2013 and numbered 64597866-180[29-2013]-140
⁹ Ministry of Treasury and Finance Revenue Administration Presidency Ankara Tax Office Presidency, Private Ruling dated 03.07.2013 and numbered 84974990-130(28-2013/32)/20361
¹⁰ Decision of the Council of State 3rd Chamber dated 15.02.2024 and numbered E.2020/4155, K.2024/539
¹¹ Article 8 of the Property Tax Law No. 1319 (as amended by Article 65 of Law No. 4369 dated 22.07.1998 and by Article 4 of Law No. 4736 dated 08.01.2002)