Investing in Turkey in 14 Questions

Zeynep Erkan, LL.M.

Legal regime governing investing in Turkey and foreign direct investments explained concisely in 14 questions.

1. What does legislation regarding foreign investment contain under Turkish law?

There are four main instruments regarding foreign investment under Turkish law: Foreign Direct Investment Law (Law Numbered 4875); Law on International Labour (Law Numbered 6735) of 2016; the Code on the Protection of the Value of Turkish Currency (Law Numbered 1567); and the Law on Encouraging Foreign Investments (Law Numbered 6224). In addition, to harmonize the Turkish legal system with the European Union (EU) system, the Commercial Code, Law Numbered 6102, came into force on 1 July 2012. Thus, commercial legislation of Turkey became compatible with that of the EU.

2. Who is a “foreign investor” under Turkish legislation?

A foreign investor is a foreign national or Turkish citizen residing outside Turkey and includes those legal entities or institutions established in accordance with the regulations of a country other than Turkey.

3. What is the scope of “foreign direct investment”?

Foreign direct investment means establishing a new company or branch of a foreign company by foreign investor or share acquisitions of a company established in Turkey (any percentage of shares acquired outside the stock exchange or %10 or more of the shares or voting power of a company acquired through the stock exchange).

4. What are the differences between a foreign entity and a local entity before law in Turkey?

When it comes to investing in Turkey there are no many differences between foreign and domestic investments. Under the Foreign Direct Investment Law (FDI), companies with foreign shareholding which are established in line with the Turkish Commercial Code are treated equally to companies with local shareholding. In line with this principle, foreign investors may establish a company with 100% foreign shareholding or acquire all of the shares of an existing Turkish company.

5. What types of companies can be established in Turkey?

Joint stock companies, limited companies, collective companies, limited partnerships and cooperatives can be established under Turkish Commercial Code (TCC) and all legal and real persons can invest in Turkey through these types of business entities.

6. Is it possible to establish a Joint Venture in Turkey?

Yes. A joint venture is generally considered an ordinary partnership which is not a legal entity under Turkish law. There is no specific legislation governing joint ventures in Turkey which are governed by the laws applicable to the type of company established. Thus, it is a common practice to enter into a shareholders’ agreement to govern the relationship between the joint venture parties and the maintenance of the joint venture. The provisions of such joint venture agreements may be incorporated into the articles of association of the established company, subject to such provisions not conflicting with any applicable legislation.

7. Can a foreign company buy a Turkish company?

Yes, a foreign company can invest in Turkey M&A procedures work the same for foreign and domestic companies. Under TCC, there are two types of mergers: one being the merger of a company into another and the other being the establishment of a new company by the merger of two or more companies. A merger shall only take place if it is approved by the general assembly meetings of the concerned companies. Once the merger is finalized, the acquired company shall be automatically dissolved.

8. What are the dispute resolution mechanisms in Turkey?

The Turkish legal system is based on a codified civil law system which has two main branches; administrative courts and judicial courts. Tax courts are a separate sub-category under administrative branch. Turkish legal system has three tiers: First instance courts, courts of appeal and supreme courts. For commercial disputes, before filing a case; there is mandatory mediation stage where both parties gather and try to reach a mutual solution before a mediator assigned by the Ministry of Justice.

In addition to judicial remedies, foreign investors may benefit from domestic arbitration or international arbitration to the extent there is an arbitration clause in their investment agreement. Domestic arbitration is governed by the Code of Civil Procedure, whereas for international arbitration, the parties may freely choose any institutional rules of arbitration. If the seat of arbitration is in Turkey but the parties have not agreed on the applicability of any institutional rules of arbitration, the rules and principles set out in the Turkish International Arbitration Law Numbered 4686 shall apply, to the extent that there is a foreign element involved in the dispute.

It must be highlighted that as arbitration is becoming more popular in Turkey, national courts are becoming increasingly familiar with the recognition and enforcement of arbitral awards in Turkey.

9. How long does it take to establish a company in Turkey?

There are four main steps to establish a company in Turkey: 1) Preparation of the company contract and approval of the signatures of the founders, 2) Preparation of signature declarations of company officials, 3) Payment of Competition Authority Share and Cash Capital, 4) Application to the Trade Registry Directorate for registration. These steps approximately take 5-6 weeks in total. Thus, foreign investors can also invest in Turkey in less than 2 months.

10.  How much does it cost to establish a company in Turkey?

The capital of the limited company is at least 10,000 Turkish Liras while the minimum capital amount for joint stock companies is 50,000 Turkish Liras. (For non-public Joint stock companies accepting the registered capital system, the initial capital may be at least 100,000 Turkish Liras.) In addition to the capital of the company, there are a few expense items like fee for registry of Chamber of Commerce, notary fee, tax office fee which costs approximately 3000-3500 Turkish Liras. (Attorney fee is not included in these expenses.) In sum, a foreign investor may invest in Turkey with as little as 15,000 Turkish Liras.

11. What are the protection mechanisms of foreign investment in Turkey?

The current domestic legislation is designed to promote and protect foreign investments by setting vital principles such as the freedom to invest, valuation of non-cash capital and the employment of foreign personnel.

In Turkey, 82 Bilateral Investment Treaties (BITs) have been ratified and entered into force so far. Moreover, World Trade Organization’s Agreement on Trade Related Investment Measures, the United Nations Convention on Contracts for the International Sale of Goods and the Energy Charter Treaty are the main multilateral treaties regarding investment which Turkey is a party of.

In addition, Turkey is also a contracting state to the ICSID Convention. Consequently, for disputes arising out of or relating to an investment, between the Turkish State and a national of another contracting state, the parties may also opt in for arbitration under ICSID. In such case, issues of recognition, enforcement and annulment of the ICSID award will be subject to the provisions of the ICSID Convention instead of the New York Convention.

12. Can a foreign company in Turkey employ foreigners?

Yes. Employment of foreigners in Turkey is regulated under International Labour Force Law Numbered 6735 (ILF). However, the employment of foreigners is subject to a permit and the application for this permit can be made online by the employer or employee to the Ministry of Labor and Social Security. In order to employ a foreigner, the employer must meet certain criteria with respect to its company’s minimum paid capital, its gross sale amounts, its exportation amounts and the number of Turkish employees it employs in its company. Most importantly, the company is required to employ at least 5 Turkish nationals for every foreign employee.

Under ILF, there are exemptions/exceptions granted to persons with certain qualifications. 1) Board members of joint stock companies who do not reside in Turkey, 2) Shareholders of other types of companies who do not reside in Turkey, 3) Cross-border service providers whose activity in Turkey does not exceed 90 days within 180 days may be eligible to work in Turkey without the need for work permit the context of the exemptions.

13. Can foreigners or foreign companies buy real property in Turkey?

Real persons who citizens of those countries listed by the President may acquire real property and rights in rem in Turkey, subject to certain restrictions such as acquisition of real property by non-Turkish nationals in or nearby military zones and other security zones is not allowed. It must be highlighted that this list is quite extensive, covering almost every country in the world.

Legal entities with full local sharing don’t have any restrictions for buying real estate. The acquisition by Turkish legal entities with foreign shareholding of real property in Turkey shall require prior written consent of the relevant governorship where the real property is located, if the foreign shareholders own 50% or more of the shares, or have the privilege to appoint or dismiss the majority of the members of the board of directors of such company. If the foreign shareholder owns less than 50% of the shares or have no such privilege, no prior written consent of the relevant governorship shall be sought.

Turkish legal entities with foreign shareholding are not required to obtain the relevant governorship’s prior written consent to perfect mortgages in their favor, acquire real property through foreclosure, acquire real property in industrial zones, technological development zones and free trade zones, or/and acquire/transfer the title or easement right on real estate property, as a result of a merger or demerger.

The acquisition of real property by non-Turkish legal entities is allowed only if the purpose of such acquisition relates to petroleum exploration and extraction, touristic developments, or in industrial zones.

14. What are alternative structures for a foreign investor company?

Companies may also establish liaison offices and branches in Turkey. However, it is not possible to conduct activities in certain sectors like energy through branches. Except for regulated markets, the establishment does not require consent from a governmental authority, hence a simple resolution by the management body of the company (i.e. the board of directors for joint stock companies) is sufficient.

For the purpose of conducting market research and feasibility studies, liaison offices may also be an options since these structures are not allowed to conduct any commercial activities. In order to establish a liaison office in Turkey, an application must be made to the Ministry of Industry and Technology. If approved, permits are granted for a period of three years and may then be extended for another three years. Liaison offices must complete a form regarding their activities within the past year and submit it to the Ministry of Industry and Technology by the end of May each year.

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