- 1 HOW TO INVEST IN TURKEY ?
- 1.1 How does legal framework of the FDI regulated under the Turkish Law?
- 1.2 How does “Foreign Direct Investors” and “Foreign Direct Investments” defined by Turkish Law?
- 1.3 What are the fundamental principles that Foreign Investors shall be subject in Turkey?
- 1.4 Which company types are commonly used in Turkey?
- 1.5 How do legal conditions regulated concerning mergers and acquisition under Turkish Law?
- 1.6 How does legal procedure regulated for Foreign Direct Investors to attribute the privatization process in Turkey?
- 1.7 How does working permit issue for foreigners regulated in Turkish Law?
- 1.8 What type of tax practice applicable in Turkey?
- 1.9 Which regulations on exemptions and incentives are applicable to the Foreign Direct Investors in Turkey?
- 1.10 Is Turkish FDI Law system is convenient and compatible with international standards for Foreign Direct Investors?
HOW TO INVEST IN TURKEY ?
Attorney ARZU ONGUR L.LM
Top 10 Legal questions about Foreign Direct Investments in Turkey…
How does legal framework of the FDI regulated under the Turkish Law?
The legal framework of the Foreign Direct Investments are regulated by the Law numbered 4875 and dated 17.06.2003 (hereinafter “no. and dd.”). This law is structured as a legal guideline for investors, which consists of 7 Articles and regulates general rules and principles about FDI. Additionally, the “Mutual Protection and Promotion of Investments Agreements” (hereinafter “MPPI) are applicable to the Foreign Direct Investments. Turkey has signed MPPI agreements with 80 countries and 64 of these agreements entered into force.
How does “Foreign Direct Investors” and “Foreign Direct Investments” defined by Turkish Law?
In a brief definition, foreign investment can be defined as the transfer of movable and immovable assets from one country to another for the profit of multinational companies under partial or complete supervision of asset owners by means of contributing welfare of the invested country.
The concept of foreign investors classified into two groups in the Article 2 of FDI Law. The first group consists of real persons who possess foreign nationality and Turkish nationals who are residents abroad. The second group is foreign legal entities established under the laws of foreign countries and international institutions.
In Paragraph (b) of Article 2 of Law no. 4875 regarding foreign direct investment, the concept of foreign direct investment is classified under two main topics: instruments that are transferred from abroad and instruments that are provided by domestic market.
Instruments that are transferred from abroad are defined as follows:
- Cash capital in the form of convertible money that is bought and sold by Central Bank of Republic of Turkey (hereinafter “Republic of Turkey” shall be referred as “TR”),
- Company securities (with the exception of Government bonds)
- Machinery and equipment
- Industrial and property rights.
Instruments that are provided domestically are defined as follows:
- Reinvested earnings, revenues, financial claims, or any other investment-related rights of financial value,
- Through economic values such as rights regarding the exploration and extraction of natural resources;
- Establishment of a new company or a branch,
- To participate in a current company using acquisition of shares outside securities stock markets or acquisition from securities stock markets that provides at least 10% share rate or voting rights at the same rate.
What are the fundamental principles that Foreign Investors shall be subject in Turkey?
The fundamental principles, which foreign investors shall be subject to, are regulated under the title of “Principles Regarding Foreign Direct Investments” in Article 3 of Law no. 4875.
- Freedom of investment and national treatment principle:
According to sub-paragraph (a) of Article 3 of Law no. 4875, firstly the freedom of investment and principles of equal treatment are regulated. Accordingly, unless otherwise stipulated by international agreements and provisions of specific laws, foreign investors are free to invest directly in Turkey, and they are subject to equal treatment with domestic investors.
- Expropriation and nationalization restriction:
In the regulations regarding expropriation and nationalization, it is stipulated in sub-paragraph (b) of Article 3 of Law no. 4875 that the direct foreign investments cannot be expropriated and nationalized unless required by the public interest and their considerations are paid in accordance with the current legislation. With the regulation included in the Law, it is assured that the general regulations and principles on expropriation and nationalization specified in Articles 46 and 47 of the Constitution of Republic of Turkey are also applied to foreign investments without exception.
- The principle of free transfer:
Another principle, stated in sub-paragraph (c) of Article 3 of Law no. 4875, is the principle of free transfer. In line with this principle, foreign investors can freely transfer the followings abroad through banks and special financial institutions: the considerations of net profit, dividend, sale, liquidation and indemnity; amounts arising from license, management and similar agreements; and foreign credit capital and interest payments arising from their business and activities within Turkey.
- Regulations on the principle of access to real estate:
The regulations concerning access to real estate in Turkey can classify into 3 categories.
- a) Regulation on foreign real persons:
- b) Regulation on Foreign Companies outside the Context of FDI Law no. 4875:
- c) For companies with Foreign Direct Investor status under Law no.4875;
In paragraph (d) of Article 3 of Law no. 4875, freedom of access to real estate was granted for foreign investors. Also the condition of access to real estates regulated under Deed Law no. 2644, Article 35. The legal and de facto conditions are taken as basis for the determination of the reciprocity. According to these provisions, in the context of real estate acquisition, it is essential that where land property right is not entitled to the citizens of a country, foreign state entities to the citizens of the Republic of Turkey the same rights that it entitles to its citizens. It is a fact that ; after the decision of Constitutional Court regarding the real estate access it should
- Principles to be applied for resolution of disputes:
It is stipulated that one can resort to national or international arbitration or other dispute settlement methods besides recourse to appointed and authorized courts for the regulation drawn up for the resolution of disputes of a foreign nature and disputes arising from investment contracts subject to private law as well as investment disputes arising from public service privilege stipulations and agreements between foreign investors and administration, provided that the conditions specified in the relevant legislation occur and the parties mutually agree.
- Value assessment of non-cash capital:
Another principle concerning the foreign investments is about value assessment of non-cash capital. The value assessment of non-cash capital is done within the scope of the provisions of Turkish Commercial Law. In case the stocks and bonds of companies established in foreign countries are used as investment instruments, the assessments of authorities entitled for the value assessment in accordance with the legislation of country of origin or experts assigned by courts of country of origin or international assessment institutions are taken as basis.
- Employment of foreign personnel:
In case of employment of foreign personnel, the work permits for the personnel with foreign nationalities to be employed at companies, branches or organizations that have been established within the scope of Law no. 4875 are granted by Ministry of Labor and Social Security. More information on this subject shall be addressed in the following sections.
The last principle regarding foreign investments that is included in the Law is about liaison offices. According to this principle, The Undersecretaries of Treasury is authorized to permit foreign companies that are established under the laws of foreign countries to open liaison offices, provided that they do not engage in commercial activities in Turkey.
Which company types are commonly used in Turkey?
According to Article 9 of Implementation Regulation for Foreign Direct Investments Law which has come into force by being published in Official Gazette no. 25205 and dd. 20.08.2003, the companies which can be established or affiliated to by foreign investors are the companies stipulated in TCL (Commercial Code) and unincorporated companies stipulated in Obligations Law.
The partnerships which have been established by contractual agreements under names such as incorporated partnership consortium, business partnership, joint venture and partnerships that do not bear the specific qualities of the companies stipulated in TCL are deemed as unincorporated companies as far as the application of the Law is concerned. The Joined-Stock-Company and Limited Liability Partnership are the most commonly used company types in Turkey.
A Joint-Stock-Company is a commercial company which is founded by at least five people to deal with a particular economical subject and purpose through a contract under a title and whose capital stock is stated and divided into shares, and which is liable for its debts only with its amount of assets, limited with the capital that the partners subscribed liability, has legal identity and limited capacity. Joint-Stock-Companies are stipulated by Articles 269 etc. of TCL.
A “Limited Liability Company is a company established by two or more persons, real or legal, under a commercial title, the liability of the partners of which is limited with the capital they have undertaken to provide and the capital stock of which is certain.”According to Article 504 of TCL, the number of partners in a limited liability company cannot be less than two and more than fifty.
How do legal conditions regulated concerning mergers and acquisition under Turkish Law?
According to Article 146/1 of TCL it is defined as follows: “Merger is the establishment of a new commercial company by combination of two or more commercial companies or accession of one or more companies to another commercial company.” If we are to describe merger in more detail:
“By legal means, a merger is the transfer of the assets of one or more commercial partnerships to one of the partnerships or to a newly incorporated partnership, without liquidation, either automatically or through full subrogation, and thereby merging their assets and automatic obtainment of partnership shares as the consideration of the assets past by the partners of the dissolved partnership in accordance with a calculated exchange rate.”
There are two types of mergers by using the definition of merger. The first type is merger by way of new establishment and the second type is merger by way of transfer.
How does legal procedure regulated for Foreign Direct Investors to attribute the privatization process in Turkey?
In Turkey, legal framework regarding privatizations is regulated by Law on Privatization no. 4046 and dd.24.11.1994. Within the scope of the Law, High Board of Privatization, Directorate of Privatization Administration, relevant administrative and organic structure is regulated in detail for carrying out privatization activities in Turkey. In Article 18 of Law no. 4046, methods of privatization are defined. Accordingly, privatizations should be implemented by following ways:
- Transfer of operating rights
- Establishment of in corporeal rights on property
- Revenue sharing model
In practice, it is seen that foreign investments in Turkey are mainly made by the methods of affiliate to privatization or merger and takeover. There is a regulation for foreigners to affiliate to privatization in Article 14 of the Law no. 4046. The followings are stated in this Article: “Sales and transfer of real estate to foreign real persons and legal entities, within the framework of implementation of privatization according to the provisions of this Law, are subject to the provisions of applicable legislation by taking principle of reciprocity into consideration.”
In Turkey, it is seen that eccentric regulations are made for foreign investors in implementations of privatization which have close relation with national security and strategic public service from time to time. High Board of Privatization determines the procedures and bases of privatization of establishments subject to privatization program; and decisions for this purpose are implemented by Directorate of Privatization Administration. Hence, we believe that it would be useful for foreigners, who are intending to invest in Turkey by affiliate to privatizations, to follow up decisions and announcements made by High Board of Privatization and Directorate of Privatization Administration.
How does working permit issue for foreigners regulated in Turkish Law?
With a view to the legislation in Turkey, it is seen that foreigners can have same rights and responsibilities that are enabled to its own citizens. In the same legislation, however, it is stated that these rights and responsibilities can be limited. The rights which are stipulated in TR Constitution under the title of “Fundamental Rights and Responsibilities” applied to citizens as well as foreigners equally. As it is stipulated in Article 16 of TR Constitution, however, these rights and responsibilities for foreigners can be limited in accordance with international law. In the legislation in force in Turkey, these limitations are especially stand out for the issues concerning employment of foreign personnel.
Work permits of foreigners, which were regulated by different laws and executive orders, are endeavored to be collected under the same umbrella by Law no. 4817 put into effect. Since the permissions issued by different institutions cause unsound comments about foreign employees and inability of supervision of these workers in Turkey, Law on Work Permits For Foreigners has been prepared for the purposes of preventing unfair competition and unemployment in Turkey, bringing the unrecorded earnings in our economy and because of the necessity of concentrating work permits at a single center in order to fight against employment of illegal workers in terms of economical status and labor market in Turkey as well as to fulfill our international commitments.
What type of tax practice applicable in Turkey?
- Corporate Income Tax:
- Personal Income Tax:
- Value Added Tax (VAT):
- Private Consumption Tax (PCT):
- Banking and Insurance Transactions Tax:
- Stamp Duty:
- Legacy and Inheritance Tax:
- Estate Tax:
Which regulations on exemptions and incentives are applicable to the Foreign Direct Investors in Turkey?
The incentives provided by the government have contributed greatly to the development of private sector in Turkey. There are some attractive incentives in Turkey concerning Foreign Direct Investments such as interest support, tax exemptions, investment funds, technology development scenes etc. Additionally, Turkey has bilateral prevention of double taxation agreement with 68 countries. Also various exemptions and incentives can be benefited from depending on the region to be invested in. If we are to examine these regions separately;
- Advantages of Investing in Free Zones: The legal framework of free zones in Turkey regulated by Law of Free Zones numbered 3218.
- Exemption of Corporate Tax: The companies in the free zone are exempted from the corporate tax they are obliged to pay in Turkey at the end of the period.
- Income Tax Exemption: The revenues and earnings of real and legal persons as a result of their operations conducted in free zones are not subject to Income Tax.
- Withholding Payments exemptions: Since income tax for the staff is not paid a cheaper labor at the rate of 25-40 percent can be maintained.
- VAT Exemptions: Since the goods and services provided to the free zone are deemed as exports such goods and services are exempted from value added tax.
- Customs Tax exemption: Free Zones are deemed to be outside of customs line and the goods entering the zone are exempted from the customs tax.
- Additionally the operations in the Free Zones are exempted from all kinds of duty, fee, fund, bank handling taxes.
- Supports for Technology Development Regions:
The support for technology development regions regulated by Law No. 4691.Supports for Technology Development Regions can be listed as income and corporation tax exemptions for the revenues obtained from software and R&D based production, VAT exemption for the delivery of some of the products produced in the region; income tax exemption for the salaries of the staff working in the region; exemptions regarding the revenues obtained from software and R&D based production.
- Advantages Granted to Developing Regions:
Some advantages such as income tax stoppage support, insurance premium support are provided to people who shall invest in such regions.
There are some sectoral, provisional and project based incentives to be introduced, which are in the process of preparation, soon in Turkey. That is why we recommend investors to check out relevant regulations in the actual term of investment.
Is Turkish FDI Law system is convenient and compatible with international standards for Foreign Direct Investors?
It is a fact that the process of Turkey’s accession to EU has deeply affected Turkish legal system, and crucial amendments are made since 2000. These revisions and amendments are concluded in the field of FDI Law as well. In particular, the new principles which are introduced by new FDI Law such as freedom of investment and national treatment, access to real estate, expropriation and nationalization restrictions, applicability of ADR and arbitration etc. are very effective and positive provisions to attract and protect Foreign Direct Investors in Turkey.
Moreover, newly structured public institutions are mindful and fruitful to support investors during the bureaucratic term of investment. As a result of new legal system and efforts of administrative organizations, quality and quantity of FDI has been rapidly increasing in Turkey since 2000. The actual situation and economical/statistical indicators are available at: http://www.invest.gov.tr
 This paper is prepared for the purpose of informing our web users. ONGUR ERGAN Law & Consulting Office does not recommend to users to take decisions and/or to start actions based on this study, and we do not accept any responsibility for these kinds of actions.
 PULAŞLI, H. ; Şirketler Hukuku, 6. Bası, Adana, 2007, s. 188.
 PULAŞLI, H. ; Şirketler Hukuku, 6. Basım, Adana, 2007, s. 188.
 POROY/TEKINALP/ÇAMOĞLU; Ortaklıklar ve Kooperatif Hukuku; Istanbul 2003; 9. Bası; s. 108.
 Updated regulations regarding this issue can be followed at http://www.oib.gov.tr.