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Top 10 Legal questions about Foreign Direct Investments in Turkey

I. 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.

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1. 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.

  • 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.
  • 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.

III. 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.

What are the fundamental principles that Foreign Investors shall be subject in Turkey?

  • 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.

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  • 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.

Employment of foreign personnel

1.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.

  1. 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.

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