Presidency of the Republic of Turkey issued a new Presidential Decree (Decree No: 85) in the Official Gazette dated 13 September 2018 and numbered 30534, which prohibits the usage of foreign currencies in contracts between Turkish residents (the “Amendment”).
According to the Amendment, Turkish residents acting as a party to the contracts listed below, with other Turkish residents are prohibited to use foreign currency (including Turkish Lira indexed to foreign currency) in determining the contractual value and payment liabilities:
1) Contracts on purchase and sale of any movables and immovables
2) Contracts on the rental of any movables and immovables including car rentals and financial leasing contracts,
3) Leasing contracts,
4) Employment contracts,
5) Service contracts,
6) Contracts of work and labor.
The Amendment also states that, save for the exceptional cases to be determined by the Ministry of Treasury and Finance, existing contracts between Turkish residents with foreign currency liabilities shall be revised as to define the liabilities in Turkish Liras within 30 days following the issuance of the Amendment (13 Sep 2018). In light of the Amendment, the following issues must be noted:
As noted above, 6 kinds of contracts come within the scope of the amendment. These 6 kinds of contracts include some of the most important types of contracts defined by the Turkish code of obligations. Therefore, only a few kinds of contracts (retainer agreements, donation agreements, and atypical agreements) do not fall within the scope of the amendment. In this respect, the determination of the scope of this amendment has the utmost importance. In addition, as noted above; considering that the Ministry of Treasury and Finance was given the right to determine the scope of the amendment, further regulations on the subject are to be expected.
The media reporting on the amendment, have dubbed it as the “Amendment on the Shopping Mall Lease Contracts”. This expression misleadingly gives the impression that the amendment covers the lease contracts only. A brief study reveals, however, the broad effect the amendment is going to have, as construction contracts with the government, consultancy agreements, labor contacts between workers and diplomatic missions or international corporations are usually signed with foreign currency liabilities, just to name a few.
The second important point concerning the amendment is the requirement of the revision of the monetary values in existing contacts to be in Turkish Liras. As the Turkish markets for foreign exchange are very volatile, the determination of the currency value based on which the contacts are to be revised is very important. The amendment does not contain any regulation as to this issue but only the time frame, that is 30 days following the issuance of the amendment, bringing the deadline to the 13th of October. Further regulations are also expected in this respect.
As a final but significant point, the prohibition is applicable to contractual liabilities between Turkish residents only. Thus, contracts between Turkish residents and foreign persons or foreign entities shall not be subject to the prohibition. Within the scope of the Amendment, Turkish residents refer to all real persons and legal entities residing or incorporated in Turkey. It is unclear, however, whether international organizations or diplomatic missions fall within this scope. Therefore, further regulations by the ministry are to be expected, for the clarification of the term: “Resident in Turkey”
The amendment discussed in this note will surely be an important milestone in the way of business deals that are made in Turkey. If the scope of the amendment is kept too broad, its effects will be felt throughout all fields of the economy by making it harder to conduct business.