Turkey: Foreign direct investment exemptions to foreign currency ban - Is it an advantage or a handicap?

1.   Background and Turkish President’s decision

As the value of Turkish Lira was going down, on 12 September 2018, the President of Turkey issued a decision (Decision) (published on 13 September), which prohibits residents in Turkey to agree on their payment obligations in (or indexed to) foreign currencies in the following agreements: (i) sale and purchase of movables and immovables, (ii) lease of movables and immovables including vehicle leases and financial leases, (iii) employment, (iv) service and (v) contract for works (including construction agreements) (“Prohibited Agreements”)

Decision goes further and imposes an obligation to the parties of the Prohibited Agreements (which were already in force back then) to re-agree the agreement price in Turkish Liras until 13 October 2018 (“Transition Requirement”).  

Finally, the Decision entitles the Ministry of Treasury and Finance (“Ministry”) to determine the exemptions to such ban.

Although, one may claim that Decision is against the “freedom of contract principle” under Turkish Constitution and Turkish Contracts Law (i.e. Code of Obligations), as of today, the Decision has not been overturned by a court, hence it is in effect. 

2.   Foreign direct investments exemptions, introduced by the Communique published by the Ministry on 6 October 2018

The Communique introduced, among others, an exemption in favour of the foreign direct investment for (i) service agreements and (i) employment agreements[1].

According to this exemption, (i) Turkish branches, representative offices or liaison offices of the residents outside of Turkey and (ii) Turkish companies, 50% or more shareholding of which belongs to the same (i.e. the residents outside of Turkey) (“Foreign Capital Entity”) shall be entitled to execute (i) service agreements and (i) employment agreements in foreign currencies. Moreover, Transition Requirement shall not be applicable to these companies.

On the other hand, the Communique stated that if a Foreign Capital Entity does not wish to exercise its right (exemption): (i) its service and employment agreements may be executed in Turkish Liras and (ii) the Transition Requirement shall be applicable to its already executed agreements (“Right to Not Exercise the Exemption”).

The Communique also provided a mandatory calculation method for determining the agreement price in Turkish Liras, which shall be applicable if the parties are not able to re-agree on the price of the agreement until the completion of the transition period.   

3.   Amendments to foreign direct investments exemptions made by the Amendment Communique published by the Ministry on 16 November 2018

The Amendment Communique, which was issued after the completion of the transition period, introduced some additional exemptions but also limited the previous ones:

a)           The Foreign Capital Entity definition is expanded to include Turkish companies, which are directly controlled or under common control of a resident outside of Turkey;

b)           Exemptions, applicable to the agreements, to which a Foreign Capital Entity is a party, are amended to be read as follows:

(i) Service agreements in which the Foreign Capital Entity is the customer,

(ii) Employment agreements, in which the Foreign Capital Entity is the employer,

(iii) Real estate sale/purchase agreements, in which the Foreign Capital Entity is the purchaser,

(iv) Real estate lease agreements, in which the Foreign Capital Entity is the lessee are exempted from foreign currency ban (“Exempted Agreements”)

As it is obvious from above, the exemptions to a Foreign Capital Entity are now applicable only if such Foreign Capital Entity is “paying money” to the counter party.

Moreover, the Amendment Communique also does not include the Right to Not Exercise the Exemption.

Consequently, the Amendment Communique left Foreign Capital Entities to be stuck with foreign currency agreements, according to which they are paying money, while these companies are required to provide their services in return for Turkish Liras.

For instance, in business centre or a shopping mall, a Turkish company lessee’s lease agreement price, which was initially agreed in foreign currency, must be re-agreed in Turkish Liras, but the lease price to be paid by the Foreign Capital Entity lessee, which is in the same position of such Turkish company, will continue to be in foreign currency; but both of these companies will be required to provide their services in return for Turkish Liras. 

In this context, it may be argued that the Amendment Communique is against the “equal treatment principle” under the Turkish Foreign Direct Investment Law.  On the other hand, as of today, the Amendment Communique has not been overturned by a court; hence it is currently in effect.

4.   What will happen now?

 a)           If the parties to an agreement (one of which is a Foreign Capital Entity) have not re-agreed the agreement price in Turkish Liras (voluntarily or by applying mandatory calculation method): We are of the view that prices of these agreements are not required to be re-agreed in Turkish Liras.  

 b)           If the parties to an agreement (one of which is a Foreign Capital Entity) have already re-agreed the agreement price in Turkish Liras (voluntarily or by applying mandatory calculation method): The party, who wish to return the price to foreign currency may try to rely on invalidity of the “re-agreement” or adaptation of the contract to the new situation, but it is not clear whether such arguments will be acceptable by the courts. It would not be a surprise to see several disputes before Turkish courts on this matter.

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Publication Date: 30 November 2018