Turkish law aspects of doing business in Turkey

Gönenç Gürkaynak, Nazlı Nil Yukaruç and Gözde Kitapcı of ELIG, Attorneys-at-Law in Istanbul look at doing business in Turkey

David Gardner of Financial Times once said that “Turkey, geographically and culturally, is the east of the west and the west of the east” and that this was, “historically and now, its irresistible selling point”. Very concise, very true. A natural gateway connecting Europe and Asia, Turkey is at a geographical proximity to Europe, the Middle East, North Africa, Russia and the Turkic states. The geographic location, among other elements, also had an impact on the cultural exchange, thus on the ties developed with certain countries in the neighboring regions. Turkey enjoys established economic and political ties with many countries of the Western Europe, along with the strong cultural ties it shares with the Balkans and the Turkic states. The population is dynamic and well-connected and the workforce is generally skilled. The workforce is also accessible to the foreign investor due to the weaker standing of Turkish Lira against the euro and US dollar. The year 2015 saw two elections and the year 2016 followed with a failed coup attempt and a post-coup purge of state officials, who are claimed to be linked to the cult behind the coup attempt. Despite the turbulence, Turkey is still stable, especially in comparison with its neighbors. That said, the very turbulence caused a deep drop in the number of incoming tourists and this had a negative impact on the foreign exchange reserves.

For the foreign investor considering investing in Turkey, the most relevant regulations would be the Foreign Direct Investments Law numbered 4875 and its secondary legislation, the Regulation on Implementation of the Foreign Direct Investments Law, published in the Official Gazette of August 20 2003. The law sets out the main principles, and accordingly, unless international treaties and specific provisions of law stipulate otherwise, (i) foreign investors are free to engage in foreign direct investment in Turkey and (ii) foreign investors are subject to equal treatment as their Turkish counterparts. This law could be said to have transformed the previous ‘obtaining permission’ system into merely a ‘submission of information’ system. While previously the foreign investors had to obtain permission to engage in activities, they now merely inform the relevant authorities of their activities, with the exception of liaison offices, the incorporation of which is still subject to permission. According to the aforementioned regulation, all companies and branch offices, that are within scope of the law, shall submit (i) information on their capital and operations, in accordance with the ‘foreign direct investment operations data form’ given as Annex I of the regulation, on an annual basis, at the latest until the end of May each year and (ii) information on the payments made to their capital accounts, in accordance with the ‘foreign direct investment capital data form’ given as Annex II of the regulation, within one month following such payment. Liaison offices are also under obligation to submit certain information.

Another piece of legislation that may attract the interest of the foreign investors may be regarding exchange controls. The main regulation relating to exchange controls is the Council of Ministers’ Decision numbered 32 on the Protection of the Value of Turkish Currency (the ‘Decision’). Pursuant to the Decision, considerations regarding net profits, dividends, proceeds, liquidation and indemnification, as well as royalty, any of which arises from the activities and operations of foreign investors in Turkey, can be transferred abroad through banks without any restrictions. Banks hereof shall mean deposit banks, participation banks and development and investment banks operating in Turkey. It should also be noted that banking services is highly-developed and widely-spread all throughout the country. The national banking authority’s rules and regulations and practice are well-established.

Some of the significant rules set forth with respect to foreign exchange in the Decision are as follows:

a) Foreign exchange can be imported and exported without any restrictions;

b) Residents in Turkey, which shall mean all legal and natural persons who reside in Turkey, may freely possess and purchase foreign exchange, hold foreign exchange in their foreign exchange accounts with banks and dispose foreign exchange in and outside Turkey through banks;

c) Residents in Turkey can accept payment in foreign currency from non-residents, for the transactions to be conducted in Turkey in favor of such non-residents;

d) Non-residents can purchase foreign exchange;

e) Residents in Turkey and non-residents may freely transfer foreign exchange abroad through banks. The relevant ministry is authorised to determine other entities that would be allowed to transfer foreign exchange abroad;

f) In case an amount exceeding EUR 10,000, or its equivalent, is to be transferred abroad, such transfer should be carried out in compliance with the rules set out by the relevant ministry.

In regard to real property, the Decision also enables non-residents to transfer freely through the banks the revenues and sale consideration of properties purchased or owned by them. As for acquisition of real property, favorable amendments regarding acquisition of real property by foreign legal and natural persons and Turkish legal persons with foreign capital investment were introduced through the amendments to the Land Registry Law numbered 2644 in the year 2012.

Finally, the legislation on incentives should also be touched upon. The Turkish government introduced a thorough investment incentive scheme through the Board of Ministers’ Decision on State Incentives on Investments, published in the Official Gazette of June 19 2012. The relevant decision classifies the types of investments according to the region and the sector within which the investment is going to take place, for example, and rules that the investors should apply to get an incentive certificate to benefit from the incentives stipulated within the decision. The incentives to be benefited from, once such certificate is obtained, could be (i) customs duty exemption, (ii) exception for and refund of the value added tax (VAT), (iii) interest support on financing, (iv) contribution to the social security employer premium, (v) contribution to the social security employee premium, (vi) support related to income withholding tax, (vii) reduction in corporate tax and (viii) allocation of land.

Gönenç Gürkaynak
ELIG, Attorneys-at-Law
Partner

Nazlı Nil Yukaruç
ELIG, Attorneys-at-Law
Partner

Gözde Kitapcı
ELIG, Attorneys-at-Law