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Foreign Investment

Source: Doing Business in Turkey Andersen Erdikler-Eratalar YMM A.Ş


As a developing country, Turkey has long been aware of its need for foreign currency resources. It was with this need in mind that a law governing foreign investment, Law no: 6224, was passed in 1954. At the time, it was regarded as one of the most liberal laws of its kind. In fact, the law consists essentially of a bare-bones legal framework and, because of this, current policy and its implementation becomes a matter of utmost importance. For a number of reasons, one of them being an ingrained cautiousness on the part of the majority of Turkish businessmen towards foreign investment, Turkey failed to take significant advantage of international capital flows until the 1980s.

It was with the introduction of a series of sweeping economic reforms brought by the resolutions of January 24, 1980 that fundamental changes took place in the climate governing foreign investment in Turkey. One of the innovations was the establishment of a single agency- The General Directorate of Foreign Investment or the Foreign Investment Department as it is commonly known- that was vested with the authority to process and finalize the foreign investment applications. Another innovation was to permit foreigners to invest in areas other than manufacturing, including services. Formalities as a whole were also streamlined and the rules governing foreign currency transactions were greatly liberalized.

After such changes, there was a genuine upsurge in foreign capital inflows to Turkey: in a quarter century before the January 24 reforms, only about U.S. $150 million came to Turkey in the form of foreign direct investment; the figure was quickly surpassed in the years following 1980. The following table shows the value (in million $) of foreign investment authorizations and actual inflows in the years between 1985 and 2000.

1985 1990 1995 1996 1997 1998 1999 2000

Foreign Investment

Authorizations 234 1,861 2,938 3,835 1,678 1,647 1,700 1,202 (*)

Investment realized 158 1,005 1,127 964 1,032 976 817 501 (**)

(*) As of June 2000, (**) As of March /2000 Source: Undersecreteriat of Treasury

At the end of 1999, there were more than 5000 firms operating in Turkey that were wholly or partially funded with foreign capital and more than half of these businesses were involved in services. In terms of total capital invested, France ranked first as of June 2000, followed by Germany. There has also been a considerable increase in Netherlands' direct investments in Turkey during the last few years. Meanwhile, over the last three years, foreign capital inflows have declined.

Type of Foreign Investment

Foreign investment in Turkey may be direct as well as indirect (i.e. portfolio investment).

Portfolio investment

As a rule, no formal permission is required for portfolio investment. Decree 32 concerning the protection of the value of the Turkish currency allows foreign investors to acquire and dispose of Turkish corporate securities through banks and brokerage houses.

The income (such as dividends, interests, and sales proceeds) from portfolio investment may be transferred out of the country through banks. No permission is required for such transfers: the Turkish lira proceeds may be converted to foreign currency at any bank and transferred to an account of the investor anywhere in the world.

Portfolio investment income may be subject to various taxes. For further details, please refer to the table presented in this booklet.

Direct investment

Foreign direct investment is permitted in almost all sectors of the Turkish economy with only a few (such as education) being restricted by special law. Investors may set up a company of their own for a special purpose or invest in an existing Turkish firm by purchasing its shares.

To establish a new company, the investor must first apply for permission from the General Directorate of Foreign Investment, submitting a feasibility report and other documents specified in the communiqués. Upon approval, the applicant is provided with an investment license that spells out the terms under which the investment must be carried out. One of these is usually the formation of a company, which must be completed in accordance with the requirements of Turkish Commercial Code within the period of time designated in the license. Any other requirements of special laws governing the investment (such as one in financial leasing) must also be complied with.

There are no limitations on how much of a Turkish company may be owned by foreigners. (In other words a company could be 100 percent foreign owned.) There is a lower limit (i.e. U.S.$ 50,000) on the amount of foreign capital that may be brought into the country by each foreign investor, but in practice this is often treated as an average value in cases where more than one foreign investor is involved. To give an example, suppose two foreigners wish to set up a limited liability company in Turkey. Since Turkish Law requires a minimum share capital of the company would be US$ 100,000 (2 x US 50,000). So long as this amount is brought in, however the authorities are not exact about the company's actual capital structure: it might happen that one of the shareholders puts up US$ 99,000, while the other contributes only US $ 1,000.

Investment capital brought into Turkey may be kept in foreign exchange accounts to be opened in banks in Turkey on behalf of the company. During the calculation of the Turkish Lira counterpart of the amount brought into to Turkey as the capital contribution of the foreign shareholder, the buying rate announced by the Turkish Central Bank is to be taken as the base.

Foreign investment can be brought in cash or in the form of goods (capital-in-kind). Intangible rights are also acceptable. If an investor has already invested in an ongoing concern in Turkey, he may reinvest the proceeds from that in Turkey, and it will also be treated as direct foreign investment.

It is noted that the growth in the international production that is witnessed during the last ten years has occurred as the outcome of cross border mergers and acquisitions rather than the new investments. While on global basis the share of such cross-border operations within the direct foreign capital investments was 55% in mid 1990's, this rate has presently reached 90.4%. The figures also show us that the driving force behind the direct foreign capital investments that show a growing trend throughout the world, consist of cross border mergers an acquisitions.

In order to increase the share to be derived by Turkey from the emerging new trends, the legislator has felt the need to regulate he procedures and principles to be applied during the evaluation of requests of this type.

Within this framework, it has been deemed as appropriate to treat the contribution of the shares of the companies established abroad as the capital contribution of the foreign shareholders by non-resident judicial persons.

A company in which there is a foreign capital interest must be either a joint-stock company or a limited liability company. Once established, the company may open branches in Turkey under the provisions of the Turkish Commercial Code and other governing laws.

The transfer of shares issued by company's resident in Turkey to persons and entities resident abroad is allowed without obtaining permission from general Directorate of Foreign Investment. However, a registration requirement has been introduced. The main purpose of registration is to follow up the movements in capital from a statistical viewpoint and to monitor the sales that are carried out beyond the principles of goodwill.

Foreign investors can freely repatriate the dividends from their investments in Turkey. Liquidation proceeds (as well as the proceeds from the sale of a shareholding interest) may also be repatriated.

Profits may be transferred after the fiscal year-end and as soon as a decision concerning payment of a dividend has been taken at the annual shareholders' meeting. Liquidation proceeds can be transferred as soon as liquidation procedures are finalized. All transfers must be affected through a bank.

Liaison offices

Foreign companies are allowed to set up liaison offices in Turkey for the purpose of conducting non-commercial activities such as information gathering, market research, or studying the activities of potential competitors. Liaison offices are specifically barred from engaging in any activity that directly or indirectly results in generating any form of income.

Application to set up a liaison office is submitted to the General Directorate of Foreign Investment including a feasibility report and a justification for the office. The department usually grants permission for a two-year period, which may be renewed as circumstances warrant. Since a liaison office is not allowed to engage in any profit generating business, all expenses must be paid for by means of funds (foreign currency) transferred to Turkey from abroad.

Since a liaison office has no profits, its operations are largely tax-exempt. Salaries paid to its employees (nationals as well as expatriates) for example, are exempt from the personal income tax. These exemptions are directly related to the nature and the scope of the office's activities. If the office ever becomes even indirectly involved in a profit generating activity, the office will become liable not only for all taxes but any penalties that may be involved in their non-payment.

Transfer of Payments for Intangible Rights and/or Services

Companies doing business in Turkey are allowed to acquire intangible rights (such as licenses, royalties, etc.) and purchase services (such as know-how, technical assistance, management assistance, etc.) from abroad.

Agreements concerning such rights/services are subject to registration to the General Directorate of Foreign Investment, which allows of the transfer of such fees.

Other Issues

As a statutory requirement, companies in which there is a foreign-capital interest in Turkey operate on equal terms and under the same conditions as domestic firms engaged in the same area of business. There were however two important exceptions, one of which is no longer applicable:

When such a company obtains a loan from abroad with a maturity of more than one year, the lending agreement is subject to the approval of the General Directorate of Foreign Investment (Abolish by Decree 95/6990. Such a company may obtain all types of foreign loans without any prior permission).
When such a company purchases real estate, the registrar of deeds involved may query the General Directorate of Foreign Investment as to whether or not the property being purchased is consistent with the needs of the company.

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