Doing Business In: Turkey

KILINÇ LAW & CONSULTING

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CHANGES IN 2019 VERSUS 2018 – WHAT HAS CHANGED IN THE LAST YEAR THAT HAS IMPACTED THE WAY BUSINESS IS CONDUCTED?

As one of the worldly renowned reports on foreign investment, World Bank annually releases a “Doing Business” guide that evaluates the fundamentals of every country and assessing where the country ranks against the rest of the world concerning the investment dynamics. In the previous editions of the “Doing Business Report”; Turkey ranked 69th in 2017, 60th in 2018, and 43rd in 2019. This year, in the “Doing Business 2020” report; Turkey has jumped up 10 places from the year 2019 is now 33rd in the World Rankings. But what has changed to cause this jump for Turkey?

One of the core elements that has caused the jump is the importance that Turkey gives to the Foreign Direct Investment, increasing its benefits to the investors and many other factors. Last year, Turkey with the new regulations and reforms boost the investments. Especially, Turkey has enabled some companies to do easily their start-up procedures such us the notarization of the companies’ documents and legal books. In 2019, another regulation is made on obtaining construction permits. Turkey published new regulations for the clarity of the online application process, that leads to increase in the transparency of buildings. Also, paying taxes is now much easier by doing an online portal, and Turkey made new regulations for the enforcement of the contracts such as a new level that has been added before applying the Court. The mediation level is the pre-condition before filing a suit.

Regarding the future that awaits Turkey in the following years; Minister Berat Albayrak has pointed out that Turkey’s efforts to further enhance the investment process will continue over the years to come and the investment environment will be improved in the fields of company establishment, tax payments, and foreign trade. “In particular, by further reducing costs and increasing productivity in business life, we will raise the investment climate in Turkey to the highest level,” Moreover, it was pointed out by many government officials that Turkey is willing to get into the top 20 in the World Bank Rankings and will be willing to continue reformation processes in its legislation in order to further enhance the investment environment in the country.

WHAT ARE THE ADVANTAGES OF YOUR COUNTRY AS A BUSINESS LOCATION?

Throughout time, Turkey with its geographical location as the bridge between the continents of Asia and Europe as well as the having Bosporus being tying the Black Sea to the Mediterranean; has always been at the heart of the historical trade routes. These advantages of Turkey are also available for investors today. Turkey is located in the middle of global markets such as the European Market and the Middle East and conducting trade at both of these regions from Turkey is an extremely potent approach for an investor looking to extend its reach to two continents via a strategic trade location.

Moreover, since Turkey is surrounded by the Black Sea and the Mediterranean, it offers choices for an investor as for the decision of means of transport with ports offering great functionality to the investors with established operators and world-class technology.

WHAT ARE THE BUSINESS STRUCTURES IN YOUR COUNTRY?

In Turkey, especially for foreign investors, investments and trade should almost exclusively be conducted through companies in order to get the most of the Turkish Incentive System. As the companies offer plenty of advantages for an investor and quicken the processes through the use of representatives; the investors should direct their investments at a company established in Turkey in order to both legally protect themselves and get the most out of their investments.

As per the Turkish Commercial Code numbered 6102 (“TCC”), there are principal 5 (five) company types namely Joint Stock Company, Limited Liability Company, Collective Company, Commandite Company, and Cooperative Company.

Investors wishing to establish a company prefer two types of companies namely Joint Stock Company and Limited Liability Company, because of the reasons such as tax advantages, limited liability of the shareholders, the fact that the registration of the company before the authority.

A- JOINT STOCK COMPANY

Joint Stock Company is defined as a company that consists of a capital divided into shares and has liability for its debts as limited only to its assets. Also, the shareholders have liability only to the company as limited to the capital share they have undertaken at the established procedures. Therefore, for a shareholder, the liability is explicitly limited to the payment of the undertaken capital amount to the company.

The existence of one single founder shareholder who is a real or legal person is sufficient to establish a Joint Stock Company and there is no upper limit for the number of the shareholders.

The undertaken capital shall be TRY 50.000,00 (Fifty Thousand Turkish Lira) at least and this lower limit of the capital is TRY 100.000,00 (Hundred Thousand Turkish Lira) for the company subject to Registered Share Capital System. The registered share capital system is almost explicitly used by the Companies that are offered to the public and subject to the Capital Markets Law. Also, immovables can be transferred to the companies as capital providing a valuation of an expert report.

A Joint Stock Company can be established for any economic purpose unless prohibited by the law and for a limited or unlimited amount of time.

Establishment of the Joint Stock Company active in fields such as financial leasing companies, banks, insurance companies are subject to the approval of a ministry or other respective public

institutions. In case of that, the Joint Stock Company is desired to be established to be active in such areas, approval letter from a ministry may be required before establishment. Please note the revisions of the Articles of Association of the companies operating in the above sectors are subject to this approval process, too.

The Articles of Association must be written and signed by the founder shareholder and the signatures must be approved by the notary public. Also, the Articles of Association includes the required items such as field of activity, capital, nominal values of the shares, authorities, address, representatives of the Joint Stock Company. First members of the Board of Directors are appointed by the Articles of Association. We’d like to emphasize this point that it is only possible to insert a provision into the Articles of Association if this provision is clearly allowed by the law.

There are two mandatory organs of the Joint Stock Company. These are the General Assembly and Board of Directors. The Joint Stock Company is managed and represented by the Board of Directors under the supervision of the General Assembly. Board of Directors is authorized to decide on any kind of transaction and subjects required to realize the purpose of the company generally. A member of the Board of Directors is not required to be a shareholder of the Joint Stock Company. Real and/or legal persons may be a member of the Board of Directors.

B- LIMITED LIABILITY COMPANY

Limited Liability Company is defined as a company established by one or more real or legal persons with a definite capital. The shareholders of Limited Liability Company have liability only to the company as limited to the capital share they undertook as well as the shareholders of the Joint Stock Company and also the shareholders of Limited Liability Company may be liable for supplementary payments and additional liabilities set forth by the Article of Association. This provision for the Limited Liability Companies is sometimes used to define some additional payment liabilities for the shareholders in order to avoid the insolvency of a company.

Limited Liability Company is established with a minimum capital of TRY 10.000,00.-(Ten Thousand Turkish Liras) divided in to share with a value of TRY 25.-( Twenty Five Turkish Liras) or multiples thereof by at least 1 (one) shareholder and maximum 50 (fifty) shareholders to be active in any kind of economic purpose and subject that are not illegal.

The Limited Liability Company consists of two mandatory organs, Shareholders’ Assembly and Manager or Board of Managers. Please note that, management and representation of Limited Liability Company are carried out by a Manager and/or Board of Managers. It is important that at least one shareholder must have managing authority. Furthermore, in the case of the number of Managers is more than one, one of these Managers must be appointed as the Head of the Board of Managers. Management and representation of the Limited Liability

Company may be assigned to one or more shareholders or all shareholders or third person. Managers are authorized to decide on and conduct all subjects related to the management not vested into general assembly by law or Articles of Association.

C- INDEPENDENT AUDIT

It is crucial to explain that Companies are subject to Independent Audit pursuant to Turkish Audit Principles as per the Turkish Commercial Code and in accordance with the terms of 2018-11597 numbered Presidential Decree and the companies which subject to Independent Audit are also supposed to create a website and allocate some part of this website to the announcements required by the law.

D- COMPANY ESTABLISHMENT PROCESS

The company establishment process in Turkey is conducted through an electronic system named MERSİS and the supporting documents are delivered to the trade registry after an online application is filed to the system. For the establishment of the Joint Stock Company and Limited Liability Company (“Company”), the documentation that is pointed out in the respective regulation of the Company types shall be registered before the respective Trade Registry Office of the city that the Company will be established at.

CURRENT OPPORTUNITIES & FUTURE PROSPECTS

Considering to start investing or expanding current business in Turkey will be the right decision for all the foreign investors, due to the fact that the Republic of Turkey has one of the most growing economies in the world with its advantages of geographical location, diversified economy and investment opportunities supporting by the government. Especially the Investment Office of the Presidency of the Republic of Turkey is the official organization for promoting Turkey’s investment opportunities to the global business community and for providing assistance to investors before, during, and after their entry into Turkey. As we are a lawyer, mostly directs our Clients to the Investment Office of the Presidency of the Republic of Turkey to hear the advantages and opportunities of Turkey from the firsthand. After their meetings with the Presidency Investment Offices, all our Clients have clear answers for their queries that why should we invest in Turkey.

Actually, there are many important reasons for making an investment in Turkey, but the top reasons to invest in Turkey can be listed as follows:

Robust Economy

  • The Turkish economy is ranked 13th among the world’s largest economies, and 5th largest economy compared with the European Union in 2018 (GDP at PPP, IMF WEO)
  • Over the past 16 years, Turkey has put in a noteworthy performance by increasing the size of its overall economy from USD 236 billion in 2002 to USD 784 billion in 2018.
  • Turkey successfully generated approximately 7.5 million new jobs during the 2008-2018 period.
  • With an eye-catching 10 percent average annual growth in exports, Turkey has outpaced the world performance and increased its export volume from USD 36 billion to USD 168 billion over the past 16 years
  • Turkey successfully generated approximately 7.5 million new jobs during the 2008-2018 period.

Large Domestic and Regional Markets

  • Turkey’s performance in economic development saw its income per capita increased from USD 3,581 in 2002 to USD 9,632 in 2018.
  • Turkey is the 11th largest economy in terms of GDP per capita among countries with a population over 50 million.
  • More than 23 urban centers, each with populations of over 1 million, support Turkey’s thriving domestic market through their production of goods and services. In terms of population, Istanbul is the largest city in Europe.

Strategic Location

  • Turkey is a natural bridge between both the East-West and the North-South axes; thus, it is easy to access all customers over the world.
  • Turkish Airlines, the national flag carrier airline of Turkey, connects 255 destinations in 122 countries.

Favorable Demographics

  • Turkey offers excellent opportunities with its growing, young, and dynamic population – the driving force behind a strong labor pool and a lucrative domestic market.

Skilled and Cost-Competitive Labor Force

  • Turkey’s overall labor force is around 32.7 million people, which makes the country the 3rd largest labor force in Europe.

Sectoral Opportunities

  • The Republic of Turkey offers so many opportunities to foreign investors in a wide variety of sectors such as automotive, machinery, defense & aerospace, energy.

All of the above reasons can be just motivation for all potential investors who are thinking to make an investment in Turkey. Also, there is one more good news from our country. The Republic of Turkey official announced its first fully domestically-produced car last months, it is planning to eventually produce up to 175,000 of the electric vehicles a year in a project expected to cost 22 billion lira ($3.7bn) over 13 years. It is obvious that this investment demonstrates the country’s growing economy.

LEGAL SYSTEM

HOW DOES THE LEGAL SYSTEM OPERATE? WHAT SHOULD CLIENTS BE MINDFUL OF WHEN DOING BUSINESS IN YOUR JURISDICTION?

The legal system of Turkey is similar to the fundamentals of continental Europe. As a civil law country; Turkey has a codified set of rules that explain the processes that are to be carried out in the country. We believe codification of the rules to be an important attraction point for a foreign investor since the requirements, the repercussions and the liabilities are definitively laid out in the primary legal sources that are constitution, laws regulated by the parliament and the decrees issued by the Presidency and secondary sources that derive from these primary sources that are by-laws, regulations and communique.

Turkish Legal System based on the Turkish Constitution numbered 1982 is generally composed of Civil Law and Administrative Law and so does not adopt the precedent system. Generally, in Turkey, the judicial system is separated into three levels, one is the first instance courts, district courts, and supreme courts.

 

The scheme shows the main structure of the court system but under these courts, there are specialized courts for certain legal areas. (for example, under the courts of civil law; commercial courts, consumer courts, enforcement courts, family courts, labor courts etc.) Also, in Turkey with the new regulation for the labor cases and commercial cases, it is obligatory to apply mediation before filing a lawsuit. The mediation level is the pre-condition before filing

a lawsuit. With this regulation, Turkey has gained the investors, due to the reason that the investor can speedily enforce their contracts at this level without paying any Court costs and expenses.

Turkish Courts especially seek written pieces of evidence before deciding on any cases, therefore it is very critical to gather evidence before applying any courts. From this point of view, we advise all our Clients to not act independently on any of their operations without taking consultancy from their lawyers, because in accordance with the current codes in Turkey, most of the transactions shall have to fulfill the form requirements regulated by the related laws.

FOREIGN INVESTMENT RESTRICTIONS

The fundamental regulation that creates the foreign direct investment regime in Turkey is the Foreign Direct Investment Law Numbered 4875 (“FDI Law”) and the Regulation on the Implementation of the Foreign Direct Investment Law. According to the FDI Law, an FDI according to Turkish regulation is defined as;

Convertible cash capital in currencies that are traded by the Turkish Central Bank, Company Securities, Machinery and Equipment and Industrial and intellectual property rights that are brought to Turkey from overseas or; rights related to the profit, revenue, money receivable or investment having financial value used in the investment, Rights for exploration and extraction of natural resources, that provided domestically in order to;

i) Establish a new company in Turkey or,

ii) Acquire shares outside the stock exchanges or acquiring a shareholding in an existing company through acquisitions that provide at least 10% of the shares or equal voting rights.

An FDI that corresponds to the definition pointed out above; is regarded as equal with domestic investment. Moreover; Foreign direct investments, in accordance with the legislation in force; cannot be expropriated or nationalized unless the public interest requires and their provisions are paid.

Therefore, according to the FDI Law; investments made by foreign investment is not restricted in amounts except for certain sectors that are regulated through different regulations.

Secondly, according to Article 3c of the FDI Law; net profits, dividends, sales, liquidation and compensation, licensing, management, and similar agreements in exchange for sums to be paid by foreign loans principal and interest payments, and foreign credit principal and interest payments arising from the activities and transactions of Foreign Direct Investments in Turkey can be freely transferred abroad through banks or special financial institutions. Therefore; and

FDI that fits the definition pointed out in the FDI Law is not subject to any foreign exchange control.

INCENTIVES FOR DIRECT INVESTMENTS

The new investment incentive system has been specially designed to encourage investments that have the potential to reduce import dependency on intermediate goods, which are important for the strategic sectors of the country.

Reducing the current account deficit, expanding the investment supports provided to less developed regions, increasing the number of support elements, promoting clustering activities, supporting investments to provide technology transformation are among the main objectives of the new investment incentive system.

As of 1 January 2012, the new investment incentive system consists of four separate regimes. Domestic and foreign investors can benefit equally from the following incentives:

1- General Investment Incentive Practices

  • All projects that meet the determined capacity conditions and minimum fixed investment amount are supported within the framework of General Investment Incentive Practices, regardless of the region where the investment will be made.

2- Regional Investment Incentive Practices

  • While the sectors to be supported in each region are determined in accordance with the potential of the region and the local economic scale sizes, the intensity of the supports to be provided varies depending on the level of development of the regions.

3- Large Scale Investment Incentive Practices

  • Turkey’s potential as a technology-specific investment issues to increase R & D capacity and competitiveness is supported.

4- Strategic Investment Incentive Practices

Investments that meet the following criteria are supported within the scope of Strategic Investment Incentive Practices:

  • Local production capacity for the product to be manufactured by investment should be less than the import of the product.
  • The minimum fixed investment amount of the investment should be 50 million TL.
  • The investment should create a minimum of 40% added value. (This condition is not required for refinery and petrochemical investments)
  • The total import value of the product to be produced must be at least 50 million US as of the last 1 year. (This condition is not required for goods that do not have domestic production)

In order to these incentive practices, each practice has a different types of benefits such as VAT exemption, customs tax exemption, tax discount, social insurance premium support, income tax withholding discount, social insurance premium support, interest rate support, land allocation, VAT refund.

WHAT TO KNOW BEFORE INVESTING

The Republic of Turkey become the first destination for all foreign investors around the world due to the reason that the Republic of Turkey has one of the most growing economies in the world with its advantages of geographical location, diversified economy and investment opportunities supporting by the government. In accordance with the Doing Business Report, Turkey has jumped up 10 places to be 33rd among 190 nations. It is clearly seen that Turkey gained critical achievements in economic fields, especially by comparing all places into the index for two years, Turkey has gained improvement in 27 places. The expectation of Turkey is being ranked 20th on the next index. All of the improvements and the speed of economic growth boost investors to do direct investments within the border of Turkey.

Also, the Turkish Government continues to make new regulations and reforms in order to improve the activities of the Turkish business life such as reducing costs and accelerating the procedures.

Besides, last year can be the year of publishing new regulations and reforms for Turkey, due to the reason that Turkey aimed to boost the investments with the new regulations and reforms and truly succeeded in its aims. Especially, the new regulations for doing easily start-up, the transparency of the online application requirements for the construction buildings, paying taxes on online platforms and most important regulations and reforms on the Turkish jurisdiction such as adding mediation level before filing a suit increase the trust of the investors to Turkey.