Foreign Investment Directorate (FID) was established in 1986 and constitutes as a part of the Undersecretariat of Treasury (UT). The FID is authorized to:
• guide and assist foreign investors in exploring investment opportunities in Turkey,
• negotiate bilateral investment protection and promotion agreements
In 1987, Turkey signed and ratified the Convention on ICSID (International Center for Settlement of Investment Disputes) and MIGA (Multinational Investment Guarantee Agency).
New Foreign Direct Investment (“FDI”) Law was launched on 17 June 2003. The objective of the New FDI Law is to regulate the principles to encourage foreign direct investments; to protect the rights of foreign investors; to define investment and investor in line with international standards; to establish a notification-based system for foreign direct investments rather than screening and approval; and to increase foreign direct investments through established policies.
New Foreign Direct Investment (“FDI”) Law is based on a policy that shifts from ex-ante control to a promotion and facilitation approach with minimal ex- post monitoring to continuously improve an investor-friendly climate for growth and development. Turkish Foreign Investment Regulations encourage real persons and legal entities resident abroad to invest in Turkey, to engage in commercial activities, to participate in partnerships, to purchase shares, to open branch offices and to establish liaison offices.
With the new Law, all permits granted by the General Directorate of Foreign Investment have been abolished. As a result, all transactions for establishing a company with foreign capital will be the same as local companies. Foreign investors are entitled to establish or participate in any of the company types designated by Turkish Commercial Code and Code of Obligations. Thus, foreign investors have the same rights as the Turkish nationals have. The national treatment principle is applicable by all means. With respect to this principle, no additional approvals and authorizations are required for the establishment of the foreign companies, branches and participation to the existing companies. However establishment of liaison offices is subject to the approval of the Undersecretariat of Treasury.
The foreign investors are no longer required to bring a minimum capital of USD 50,000 since this obligation was abolished as a result of the introduction of the new Foreign Direct Investment Law. Foreign investors are now required to bring those capital amounts which are required by the Turkish Commercial Code. As per the Turkish Commercial Code, limited liability companies require a minimum capital amount of TRL 5,000 and joint stock companies (corporations) require a minimum capital of TRL 50,000 for the purpose of establishment.
Any form of company as defined and included in the Turkish Commercial Code is acceptable.
All rights, exemptions and privileges granted to local capital and business will be available under the same conditions to foreign capital and businesses working in the same field.
Companies having a legal entity with foreign capital in Turkey have the same rights to own or use land as domestic investors. The new Law reassures these rights. However, the principle of reciprocity is still valid for foreign individuals.
1) Purpose and Scope of FDI Law: The objective of the new FDI Law is to encourage foreign direct investments; to protect the rights of foreign investors; to define investment and investor in line with international standards; to transform the current screening and approval system into a notification based system for foreign direct investments; and thus regulate the principles to increase foreign direct investments through established policies.
2) Freedom to invest and national treatment: Unless there are no international agreements or special legal provisions to the contrary;
a) Foreign investors are free to make direct investments in Turkey
b) Foreign and Turkish investors are subject to equal treatment
3) Expropriation and Nationalization: Foreign direct investments shall not be expropriated or nationalized except for expropriating or nationalizing ensures a public interest and a compensation is paid.
4) Transfers Abroad: Foreign investors can freely transfer net profits, dividends, proceeds from the sale or liquidation of all or any part of an investment, compensation payments, amounts arising from license, management and similar agreements, reimbursements and interest payments arising from foreign loans through banks. Accordingly, it is no longer necessary to register royalty, cost sharing, management service and similar types of agreements with the Foreign Investment Directorate of the Treasury.
5) Acquisition of Immovable Property by Foreign Investors: According to the FDI Law, Foreign investors may freely acquire immovable property or have limited rights on real estate through a legal entity incorporated under the Turkish Commercial Code. According to Article 36 of the Title Deed Law, the companies in Turkey established by foreign investors are entitled to acquire real estate to carry out their activities set forth under their Articles of Incorporation. However, the real estate acquisitions by companies in Turkey with foreign investors at the military zones, security zones and strategic zones are subject to the permission of the Turkish General Staff.
6) Settlement of Disputes (based on the new FDI Law): For the settlement of disputes arising from investment agreements subject to private law and investment disputes arising from public service concessions contracts and conditions which are concluded with foreign investors, foreign investors can apply either to the authorised local courts, or to national or international arbitration or other means of dispute settlement, provided that the conditions in the related regulations are fulfilled and the parties agree thereon.
7) Assessment of Capital in-kind To Be Contributed By Foreign Investors: Capital inkind is valued according to the regulations of the Turkish Commercial Code. However, in case the shares of a company resident abroad are contributed as capital in-kind by foreign investors into a Company in Turkey, the values to be determined by the courts or other relevant authorities in the home country of the foreign investor or international institutions performing valuations will be acceptable.
8) Employment of Foreign Personnel: Work permits for foreign personnel to be employed in companies, branch offices and organizations to be established within the scope of the FDI Law are granted by the Ministry of Labor and Social Security.
9) Liaison Offices: The General Directorate of Foreign Investment may grant permission to foreign legal entities in order to open a liaison office in Turkey provided that they are not engaged in any commercial activities in Turkey. Please refer to section 7.8 (Liaison Offices) for further information regarding establishment and tax status of liaison offices.
After the economic liberalization program was adopted in 1980s, Turkey decided to liberalize its import and export regulations, which has led to a dramatic increase in foreign trade. The most significant phenomenon in Turkey’s foreign trade policy is the Customs Union established between the EU and Turkey as of 1 January 1996. This development initiated the period needed for the legal infrastructural consistency of foreign trade strategy with the EU’s norms, and thus both import and export regimes have been made consistent with the regulations of the EU.
General Principles of Turkish Customs and Foreign Trade Regulations
Turkish Customs Code is generally in line with the Customs rules of the EU.
The relevant authorities that regulate foreign trade are as follows:
a) The Undersecretariat for Foreign Trade (UFT): It regulates all aspects of foreign trade.
b) The Undersecretariat for Customs: It is responsible for the implementation of foreign trade regulations at the customs borders
Turkish Customs Tariff: Customs duties are levied at the time of importation on the customs duty base determined based on the customs valuation principles and according to the Customs Tariff Position Numbers.
Determination of Customs Duty Base: Customs duty base is determined in accordance with the principles of Agreement on Implementation of Article VII of the GATT.
Determination of VAT Base for Imported Goods: The VAT base is the sum of the following items:
• The value of the imported goods which is base to the customs duty assessment, in case of duty base is not available, the CIF value of the goods, in cases where the CIF value is unknown, the value which is determined by the Customs Administration
. • All kinds of taxes, duties and fees paid in importation.
• Other costs and expenses incurred until the registration of the customs return as well as any price and exchange differences to be computed upon the value of the goods.
Major Customs Regimes Applied:
- Bonded Warehouse Regime (*)
- Inward Processing Regime (*)
- Outward Processing Regime (*)
- Temporary Importation Regime (*)
- Processing Under Customs Control Regime (*)
- Transit Regime
- Export Regime
Customs Duty Penalties: There are 2 types of penalties which are defined in the Customs Legislation;
• Penalties to be charged on operations that result in tax loss
• Fines relating to irregularities (procedural non- compliance) Fines shall be applicable regardless of whether the action of the taxpayer is deliberate or not.
(*) These are refferred to as “Customs Regimes with Economic Impact.”
Importing into Turkey remains subject to various regulations and laws governed by the import regime decree. These laws and regulations define a system of import tariffs, modified by special agreements between nations and customs tax exemption and/or allowances provided for some products. In accordance with the rules of the Turkish import regime, imports can be classified into three groups:
1) Imports which are subject to permission: Permission may be required from different authorities such as the Ministry of Agriculture and Rural Affairs, Ministry of Health, Ministry of Defence, Ministry of Environment and Forestry, Turkish Atomic Agency etc. Furthermore, some goods can only be imported by authorized institutions such as weapons (to be imported by the Army), money paper (to be imported by the Central Bank of Turkey) etc.
2) Imports which are prohibited: The import of certain items is completely prohibited.
3) Goods which can be freely imported: Most goods can be freely imported subject to the payment of customs duties and certain funds (if any) at the varying rates. With the exception of imports subject to permission, all imports may be realized through the intermediation of any bank authorized to operate a foreign exchange position.
Documentation for Imports: Turkey is in the Customs Union since 1 January 1996. The import documentation procedures are generally in line with the European Union System. The original copy of the invoice must accompany the goods to be imported. Import permission (if required) is to be presented to the Customs for the purpose of Customs clearance of the goods.
All the documents and information must be kept for a period of 5 years for the purposes of control by the Customs Authorities.
Import Duties: As a result of the Customs Union between Turkey and EC; Turkey eliminated all customs duties applied to imports of industrial products from the EC and started to apply Community’s Common Customs Tariff for imports from the third countries
Customs duty exemption is provided within the framework of an investment incentive certificate. Customs duty relief is also available to the companies in Turkey which import goods that will be used in manufacturing of the goods to be exported.
Value Added Tax (VAT) is levied on imports at the applicable rates (1%, 8%, 18%). The VAT paid on goods imported is recoverable as “input VAT” against the output VAT calculated on sales of goods and services. Effective from 1 August 2002, the standard VAT rate of 18% has started to be applied instead of the higher VAT rates. The difference between the standard VAT rate and higher rates (26% and 40% which were applicable prior to 1 August 2002) is now compensated through “Special Consumption Tax” (SCT) which started to be applied with effect from 1 August 2002.
Imports under Incentives: Imports of machinery and equipment within the framework of an investment incentive certificate are regulated by the Incentive Legislation and such imports benefit from VAT and customs duty exemptions.
Conditions Required To Qualify as “Importer”: Every natural or legal person that has tax registration number can qualify as an importer. However according to the Customs legislation, importers must submit an information file that includes registration certificate from the Chamber of Commerce or Industry, copy of Trade Registry Gazette, list of authorized signatures and power of attorney to the related Customs Administration.
Export procedures have been relaxed by an export regime intended to increase Turkey's export volume. All goods can be freely exported, except for those subject to license by the UFT. Such exports include rice, oilseeds, vegetable oils, animal feed, fertilizers, and live animals. Certain items require the approval of other Ministries, and there are a few items whose export is forbidden.
Rules Governing the Protection of Turkish Currency in the case of exports prior to 8 February 2008:
Foreign currency revenues for the goods exported for commercial purposes must be brought into Turkey by exporters within 180 days. There are certain exceptions to this general rule. If 70% of the foreign exchange from exports is brought into Turkey and sold to a bank for conversion to Turkish Lira within 90 days from the export transaction, then the exporter can freely use the remaining 30%; he may either bring it to Turkey or use it outside Turkey.
Rules governing the Protection of Turkish Currency with effect from 8 February 2008:
Exporters are free whether to bring to Turkey the foreign currency revenues with respect to the goods exported for commercial purposes, (this new rule is effective from 8 February 2008).
Conditions Required To Qualify As “Exporter”:
Every legal person, natural person or joint-venture that has a tax registration number and is a member of related exporters’ association can be an exporter. In addition, according to the Customs legislation, exporters must submit an information file that includes registration certificate for the Chamber of Commerce or Industry, copy of Trade Registry Gazette, list of authorized signatures and power of attorney to the related Customs Administration.
The following formalities apply to the establishment of all business entities:
• Registration of trademarks is to be made in accordance with the regulation governing protection of trademarks.
• Registration of trade name is to be made with the Ministry of Industry and Commerce.
• All trading entities are required to register with the Chamber of Commerce or Chamber of Industry in the location of their operations
• Permits to start operations must be obtained from the municipal authorities.
• Registration with the provincial office of the Ministry of Labor and Social Security is required.
• Real estate contributed as capital (if any) must be registered with the Title Deed Office. Prior to establishment, registration with the local tax office is required.
In general, Turkey has no price controls. However, the government does set prices for some items. Furthermore, prices of medicines are under the control of the Ministry of Health.
Turkish Legislation prohibits unfair competition through the relevant rules of the Code of Obligations, the Turkish Commercial Code and specific laws enacted exclusively for the purpose of protection of competition, namely Anti- Dumping Law and Law related to Protection of Competition.
Mergers and Take-over of those companies with a total market share of more than 25% or a total sales volume of more than TRL 25 million are subject to the permission of the Competition Protection Council.
In case of failure to apply to the Competition Protection Council within the required period for notifications of mergers or take-over or failure to obtain the permission for the merger/takeover transaction, penalties are applied.
Relevant Legislation
Monetary transfers from Turkey are regulated by Law No. 1567 governing the Protection of the Value of Turkish Currency and Decree on Protection of the Value of Turkish Currency which includes further regulations with respect to transfers of foreign currency and capital, loan transactions and monetary transfers for various transactions.
Inward Direct Investment
Companies and individuals can freely invest in Turkey without any restriction on the amount or form of the investment. The most widespread investment vehicle is the Turkish subsidiary company. There are no local shareholding or directorship requirements. Foreign investors may also invest in the shares of any local companies through portfolio investment.
Repatriation of Funds
The regulations relating to the remittance of foreign capital and dividends out of the country are set out in Law No. 1567 governing the Protection of the Value of the Turkish Currency. According to these regulations, foreign investors have the same rights and obligations as Turkish investors. The regulations also guarantee the transfer of profits, fees, and royalties and the repatriation of capital in the case of a liquidation or sale.
There are no restrictions on the remittance of dividends, interest, and royalties to foreign countries based on the new Foreign Direct Investment (FDI) Law. However, on certain types of income payable to non-residents, income tax or corporate income tax is to be withheld at source.
a) Dividends: Foreign investors/shareholders that hold a certain portion of the share capital of a company resident in Turkey can receive their dividends through banks without any restriction. At the request of the foreign investor company, transfer of such profits is made, and the Foreign Investment Directorate (FID) of the Undersecretariat of Treasury (UT) is to be informed of the details of the transaction.
Following the completion of its accounting period, a company may transfer abroad dividends that were declared at the annual general meeting of its shareholders provided that the dividend withholding tax is properly calculated, declared and paid to tax office. According to the Directive governing the application of the FDI Law, companies with foreign capital are required to fill in annually a form whereby they are required to report to the FID of the UT the following information by the end of May of the following year together with balance sheet and income statement with respect to the year reported:
• Information about the company
• Information about the capital structure (percentage of shares by shareholders)
• Information about foreign shareholders
• Information about dividend transfers (amount transferred in terms of both TRL and its USD equivalent, the country to which transfer was made, date of transfer)
• Information about payments of license, know- how, technical assistance and franchise fees
• Information about foreign trade (import/export)
• Information about number of personnel
• Information about production volume
• Information about the investments realized in the year concerned
Based on the new FDI Law, companies with foreign capital are only required to provide information as to the transfers realized abroad through a form (Annex 1 attached to the Directive governing the application of the FDI Law).
b) Interim Dividend Distributions: According to the Turkish Commercial Code, companies can distribute dividends from the earnings derived in previous accounting years. According to the new Corporate Income Tax Law, companies are now allowed to distribute interim dividends subject to certain limits as specified in the Corporate Income Tax Law General Communiqué No. 1 provided that the necessary provisions are also included in their Articles of Association with respect to interim dividend distribution. (However, this application is now suspended due to a High Court Decision) Public companies which are listed in the Istanbul Stock Exchange can also distribute interim dividends according to the relevant provisions of the Turkish Capital Market Law. Interim dividend distribution is subject to dividend withholding tax depending on the taxation status of the shareholder receiving the interim dividend.
c) Management, License, Know-How, Technical Assistance Fees, Royalties and Franchising Agreements: All management fees and royalties can be transferred by companies resident in Turkey in terms of the foreign currency of the recipient country. If the payments are based on annual turnover or on similar allocation basis, an agreement should be concluded between the foreign investor (the beneficiary/licensor) and the company in Turkey (the user of the license/licensee). Based on the new FDI Law, there is no longer an obligation for such agreements to be registered with and approved by the FID.
d) Cost Sharing Agreements: Costs incurred by headquarters located abroad may be allocated to Turkish branches (to the extent that the charges are relevant to the income generating activities of the Turkish branch and calculated through distribution keys to be determined in accordance with the arm’s length principle. Please refer to section “8.11. Cost Sharing/Cost Allocations” for further details.
e) Earnings of Foreign Employees (Expatriates): Foreigners employed in Turkey are allowed to transfer their wages in foreign currency after the deduction of relevant taxes.
f) Other Monetary Transfers: In general, any amount of foreign currency may be transferred out of the country regardless of the underlying reason for the transfer. However, transfers of US$50,000 or more are to be reported by the transferring bank to the Central Bank of Turkey within 30 days from the date of transfer.
g) Utilization of Dividends: Dividends not distributed and kept as extraordinary reserves may be added to the share capital. Addition of extraordinary reserves to share capital is not regarded as dividend distribution and therefore they are not subject to dividend withholding tax. Transfers of Shares in a Turkish Company with Foreign Capital Share transfers from foreign shareholders to domestic shareholders or other persons or entities resident in Turkey no longer require permission from the FID. The sales value of the shares can be determined by the parties.
Information on share transfers made between current domestic or foreign shareholders or to any domestic or foreign investor outside the company is to be submitted via “FDI Share Transfer Data Form” to the FID within one month following the realization of the share transfer.
Additionally, companies with domestic share capital are also required to inform the FID within one month from the date of share transfer through submission of the form related to share transfers (Annex III of the Directive) in case;
a) a foreign shareholder participates in the capital of the company, or
b) share capital increase in the company is financed through participation of a foreign shareholder
Based on the rules of the new FDI Law, share transfers in companies with foreign shareholders and foreign capital do not require any permission from the FID.
Outward Direct Investment (Capital Transfers)
The Treasury allows Turkish residents to realize outward direct investments through transfers of capital in cash via banks or in terms of capital inkind in accordance with the Customs Legislation (the permission requirement for capital transfers of more than USD 5,000,000 is abolished with effect from 30 December 2006).
As per the Turkish Tax Procedures Code, all resident companies and Turkish branches of foreign entities are required to keep statutory books based on the Uniform Chart of Accounts and in accordance with the accounting principles explained in Accounting System Application Communiqués (“Turkish GAAP”). Statutory books must be kept for a period 5 years. There are initiatives for harmonization with the International Financial Reporting Standards (IFRS) through the Capital Market Law as well as the Draft Turkish Commercial Code (DTCC).
DTCC prescribes that all the accounting systems of Turkish enterprises shall be arranged in conformity with Turkish Accounting Standards, which will be further enforced according to the internationally accepted financial standards.