A SHORT-FORM TAX AND INVESTMENT GUIDE FOR FOREIGN INVESTORS IN TURKEY

with kind permission of
MOORE STEPHENS – TURKEY
YÖNET CPA & AUDITING CO.

 

 

CONTENTS

FOREIGN CAPITAL & INVESTMENT IN TURKEY
About the Foreign Direct Investment Law
What is new about the Foreign Direct Investment Law?
International Standards
Abolishing Permits

PRINCIPLES CONCERNING FOREIGN DIRECT INVESTMENT
Freedom to Invest and National Treatment
Expropriation and Nationalisation
Transfers
Access to Real Estate
Dispute Settlement
Valuation of Non-cash Capital
Employment of Expatriates
Liaison Offices

INCORPORATION OF COMPANIES OR BRANCHES IN TURKEY
Forms of Business Organisations
Joint Stock Company
Limited Liability Company
Type of Activities
Incorporation Process
Applicant
Registration
Cost of Establishment
Branches and Liaison Offices
Employing Foreign Personnel
Corporate Income Tax

 

 


FOREIGN CAPITAL & INVESTMENT IN TURKEY

About the Foreign Direct Investment Law
Law 6224 on Encouragement of Foreign Capital enacted on January 18, 1954 was a quite liberal law compared with the legislations of some OECD countries of those times. The term “encouragement” in the name of Law 6224 derived from the presence of some principles that were intended as real incentives, such as : “free transfer” and “national treatment”. However, notions, definitions and applications concerning foreign direct investments have changed so rapidly that Law 6224 lagged behind the contemporary demands of both foreign investors and Turkey. As a result the need for a new Foreign Direct Investment (FDI) Law emerged.
Law 4875 on Foreign Direct Investment enacted on June 17, 2003 emphasises the key elements of the liberal investment environment in Turkey. The objective of this Law is to encourage foreign direct investments; to protect the rights of foreign investors; to define investments and investor in line with international standards; to establish a notification-based system for foreign direct investments rather than screening and approval; and thus to regulate the principles to increase foreign direct investments through established policies. This Law establishes the treatment to be applied to foreign direct investments.

What is new about the Foreign Direct Investment Law?
Key features of the new FDI Law include:
i.Freedom to invest by dropping all former FDI-related screening, approval, share transfer and minimum capital requirements
ii.Reassurance of existing guarantees to foreign investors of their rights in one transparent and stable document
iii.Upgrading to accepted international standards of “foreign investor” (broadened to include Turkish national residents abroad and international organisations) and “foreign direct investment” (broadened to include all possible type of assets)
iv.A policy shift 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.

International Standards
“Foreign Direct Investment” and “Foreign Investor” terms are defined within international standards in order to clarify the field of application of the Foreign Direct Investment Law. Within this scope:
Foreign Investor is defined as:
1.Real persons, who possess foreign nationality, and Turkish nationality residing abroad
2.Foreign legal entities established under the laws of foreign countries and international institutions, who make foreign direct investment in Turkey.

Foreign Direct Investment is defined as:
a. Establishing a new company or branch of a foreign company
b. Share acquisitions not by means of capital markets, and share acquisitions through capital markets where the foreign investor owns 10 percent or more of the shares or voting power

by means of but not limited to the following economical assets:

1) Assets acquired from abroad by the foreign investor:
•Capital in cash in the form of convertible currency bought and sold by the Central Bank of Turkey
• Stocks and bonds of foreign companies (other than government bonds)
• Machinery and equipment
• Industrial and intellectual property rights

2) Assets procured from Turkey:
•Reinvested earnings, revenues, financial claims, or any other investment-related rights of financial value
•Commercial rights for the exploration and extraction of natural resources

Abolishing Permits
With this Law, previous pre-permits issued by the Undersecretariat of Treasury’s General Directorate of Foreign Investment (GDFI) are abolished. As a result , all transactions for establishing a company with foreign capital will be the same with local companies. Since all companies established in Turkey within the framework of Turkish Commercial Code are accepted as Turkish companies, all duties and responsibilities are equal regardless of the nature of capital formation.
Hence, all foreign companies established or to be established in Turkey are still responsible for obtaining those licences required for a comparable Turkish company.

PRINCIPLES CONCERNING FOREIGN DIRECT INVESTMENT

Freedom to Invest and National Treatment
1.Foreign investors are free to make foreign direct investments in Turkey
2.Foreign investors shall be subject to equal treatment with domestic investors

Expropriation and Nationalisation
Foreign direct investments shall not be expropriated or nationalised, except for a public purpose and upon compensation in accordance with due process of law.

Transfers
Foreign investors can freely transfer abroad, through banks or special financial institutions: profits, dividends, proceeds from the sale or liquidation of all or any part of an investment, amounts arising from license, management or similar agreements and reimbursements and interest payments arising from foreign loans.

Access to Real Estate
Companies may freely acquire real estate or limited rights through a legal entity in Turkey established or with participation by foreign investors, provided such acquisitions are permitted for Turkish citizens.

Dispute Settlement
For the settlement of disputes arising from investment agreements subject to private law and disputes arising from conditions and contracts made with the administration and under which concessions concerning public services are granted, foreign investors can apply either to the authorised local courts, or to national/international arbitration or other means of dispute settlement, provided that the conditions in the related regulations are fulfilled and the parties agree thereon.

Valuation of Non-cash Capital
Non-cash capital is valued within the regulations of Turkish Commercial Law. Stocks and bonds of companies residing abroad will be accepted as foreign capital share of foreign investors and the values determined by the courts of the home country, or other relevant authorities in the home country, or any other international institutions performing valuations will be accepted.

Employment of Expatriates
Foreign personnel working permits are issued by the Ministry of Labour and Social Security for foreign personnel to be employed in the companies, branches and entities established within the scope of this Law.

Liaison Offices
The Undersecretariat of Treasury is authorised to permit foreign companies established under the laws of foreign countries to open liaison offices, provided that they do not engage in commercial activities in Turkey.

INCORPORATION OF COMPANIES OR BRANCHES IN TURKEY

Forms of Business Organisations
The Turkish Commercial Code recognises two distinct types of business enterprise:
1. Partnerships
2. Corporations
The legal differences between the two concern the allocation of liability and the legal identity of the entity. Corporations established by foreign joint venture partners with or without a Turkish partner are treated as Turkish corporations and are entitled to all rights available to Turkish companies under the Turkish commercial code.
Foreign investors may establish a corporation in either of these two forms:

1. Limited Liability Company (Limited Sirket – Ltd. Sti.)
2. Joint Stock Company (Anonim Şirket – A.S.)

These business types exist as separate legal entities and offer their shareholders limited liability. The most common type of business entity in Turkey is the joint stock company and generally foreign investors establish such corporations for doing business in Turkey.
There is no approval/permission requirement from the Directorate of the Turkish Treasury. No additional minimum capital requirement for foreign investors is regulated under the FDI Legislation. However, according to the local regulations, there is a minimum capital requirement for different type of companies irrespective of whether the shareholders are foreigners or Turkish residents.

Joint Stock Company
A joint stock company is defined as a corporation having its own trade name and a predetermined amount of capital divided by shares. The liability of the shareholder is limited to their capital.
The structure and organisation of joint stock companies are subject to regulation by the Turkish Commercial Code. However, the founders of joint stock companies are afforded significant flexibility in drafting the articles of association, thereby serving the needs of the specific venture. Capital Market Board regulations also apply to joint stock companies whose shareholders’ number at least 250, or who have issued bonds or whose shares are quoted on the Istanbul Stock Exchange.
A minimum of five shareholders, who may be either real persons or legal entities, are required for the formation of a joint stock company. The minimum capital contribution by each foreign shareholder must be the foreign exchange equivalent to TL 50 billion.
The capital of a joint stock company is divided into shares of equal value which are treated as negotiable commercial paper. The shares may be issued in either registered or bearer form. Registered shares are freely transferable subject to approval by the board of the company, unless prohibited by the company’s articles of association. Bearer shares are freely transferable under the Code of Obligations, unless otherwise agreed by the parties.
Decision making in a joint stock company is by majority vote; but the Turkish Commercial Code includes certain provisions to protect minority interests. Minority shareholders may also request the appointment of a special auditor on their behalf.

Limited Liability Company
Limited liability companies may be composed of real persons or legal entities and must consist of at least 2 and no more than 50 partners. The overall share capital must be a minimum of the foreign exchange equivalent of TL 5 billion. All partners are personally liable for the debts of the company up to a maximum of their contribution, however, partners are not held liable for the unpaid portions of others’ contributions. They are also more directly exposed to the tax liabilities of the company, limited however to their own shares.
Shares held in a limited liability company are non-negotiable and may be transferred only with the approval of the other partners. Transfers must be approved by at least a 75% majority vote, with at least 75% of the total capital represented. Limited liability companies are also prohibited from engaging in banking or insurance business. A limited liability company differs from the joint stock company in that its capital is not divided into shares of stock nor represented by share certificates. There is no board of directors for a limited company. Instead, the appointed manager has authority to run the company.

Type of Activities
There is no restriction on the activities of joint stock or limited companies as long as they are in line with the company’s Articles of Association. In principle, there is no limitation with respect to the percentage of shareholding by foreigners. However, there are a few cases where foreign companies are not allowed to hold majority of shares (for example, under the Telecom regulations, for a company to obtain license, the shareholding ratio of the foreigners cannot exceed 49%).

Incorporation Process
The authorised approval agency for foreign investments, including capital increases, is the Undersecretariat for Treasury (UT), General Directorate of Foreign Investment, (GDFI) located in Ankara.
Real persons and legal entities residing abroad, shall apply to GDFI, UT with the following documents for establishing a joint-stock or limited company and branch office in compliance with the Turkish Commercial Code for the purpose of making investments and carrying out commercial activities in Turkey.

1. For legal entities residing abroad:
a.Certificate of activity,
b.Activity Report for previous year (including balance sheet and field of activity for the previous year.)

2. For real persons residing abroad:
a.Copy of passport,
b.Detailed commercial and industrial background and verifying documents.

Certificate of Activity and a copy of passport shall be certified by either the related Turkish Consulate or in accordance with the provisions of the Convention on the Abolishing the Requirement of legalisation for Foreign Official Documents Approval Obligation, prepared on the basis of the Hague Conference on International Private Law.

3. Letter of Intend by the real person or legal entity residing abroad stating that the required capital for the desired field of activity to be realised in Turkey shall be transferred into the country.

4. Application forms

5. There is no need for a permission to establish a company except special circumstances, and is to be registrated in 15 days after the draft Articles of association of the company is certified by a Notary Public.

6. Proforma invoices, prospectuses and catalogues of machinery, equipment and material to be imported together with three copies of global lists which include FOB (Currency of the Country of Origin), FOB (US Dollars), CIF (Turkish Liras) values and Customs Duties and Charges.

7. Documents required by the Incentive Legislation if investment is considered to benefit from the incentive measures.

8. Power of attorney given by shareholders to the person who will be the contact person in the course of application procedure (power of attorney should be certified by a notary public or in the manner mentioned above)

9. Other documents and information considered to be of value.

Applicant
The investing foreign company can apply through the following:
• Company’s representative if registered under Turkish law
• Independent chartered accountants, auditors or consultants
• Direct by mail.

Registration
Upon obtaining approval, the establishing company can register at the Turkish Ministry of Industry and Trade.

Documents to be presented at the Ministry of Industry and Trade are:
i. Articles of Association certified by a notary
ii. Certificate of deposit of the foreign currency
iii. Investment approval of UT
iv. Memorandum of Understanding, where the applicant is a legal entity

After confirmation of the establishment of the company by the Ministry of Industry and Trade, further procedures are as follows:
1. Registration with the city authority. This requires the presentation of:
a. Rent contract for office premises
b. Articles of Association as approved by the Ministry of Industry and Trade
c. Certified sample of signature.

2. Registration in the trade register
3. Registration with the Chamber of Commerce or Chamber of Industry
4. Unblocking of the paid-up capital upon submission of documentation for registration in the trade register
5. Confirming completion of the establishment of the company with UT.
6. Registration with the local tax and social insurance authority.

Cost of Establishment
During the incorporation stage of a company, the following expenses would mainly arise.
1.0.1% paid-in capital should be paid to the Central Bank of Turkey as Consumer Protection Fund Levy.
2.Stamp duty is payable on the initial capital contribution at the rate of 0.5%. However, the stamp tax calculated as such shall not exceed the limit that is determined by the Ministry of Finance for each year. Please note that no stamp duty is levied for subsequent capital increases.

Some notary charges and translation fees will also be payable during the incorporation and registration of a company, but these are quite insignificant.

Branches and Liaison Offices
Foreign companies may also operate through liaison offices or branches providing they are established in accordance with the relevant legislation. The income of a branch derived in Turkey is taxed in the same way as resident corporations.
Liaison offices may be used to establish a presence in Turkey, but may not carry on any commercial activity and must be funded by the parent company outside Turkey.

Employing Foreign Personnel
Work permit shall be issued to foreign nationals to be employed in Turkey and for the foreign representatives of branch offices which are being established. Work permits are issued for a specific fixed-term and can be extended accordingly.
If a foreigner resided at least 8 years legally and uninterruptedly in Turkey or worked legally at least 6 years in Turkey the permanent work permission can be obtained by the foreigner.
There is no difference on tax applications pertaining to a Turkish and foreign national who is employed by an enterprise with foreign capital, operating in Turkey. Employer is required to collect taxes on employee’s salary and salary equivalents, and then to pay that collected amount to the Turkish Tax Offices. Income tax is levied at progressive rate after certain deductions and allowance and ranges from a 15 % to a 40 %.
Apart from the foreign nationals who remains covered under the compulsory social security system of his/her home country, all foreign nationals working for an employer in Turkey must belong to a social security scheme which includes insurance for work related accident and illness, sickness, pregnancy, disability, old age and death.

Corporate Income Tax
The mainstream corporate income tax rate is 30%. Furthermore, dividend withholding tax at the rate of 10% is applicable to dividends distributed to individual and foreign corporate shareholders (dividend distributions to the resident entities and branches of non-resident entities are not subject to withholding tax.)
For non-resident entities operating in Turkey (i.e. branches, permanent establishments) withholding tax will only be applicable on the portion of the branch profit that is transferred to the headquarter.
Corporations are required to pay advance corporate income tax based on their quarterly profits at the rate of 30%. Advance corporate income taxes paid during the tax year are offset against the ultimate income tax liability of the company, which is determined in the related year’s corporate tax return.