Business in Turkey

1. General information

2. Regulations of foreign investment

3. Government incentives

4. Business organizations available to foreigners

5. Setting up and running business organizations

6. Double taxation agreements

7.Custom Duties

8. Practical information

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1. General information

Located at the Eurasian cross-roads between Eastern European, Mediterranean, Black Sea and the Caspian Sea regions, Turkey has had geographical, political and economic ties with Europe for many centuries.

With its network of developed infrastructure and a globally competitive work force, Turkey has become a geo-strategic base for international business... A rapidly growing emerging market of 70 million people makes the country today one of the key trading partners of the European Union (EU).

Turkey ’s economic legislation is progressively aligning with the main policies and standards of the EU, as a consequence of the 1995 customs union and the EU pre-accession process.

Current economic policy in Turkey envisages increasing the role of the private sector in the economy. The public sector reform aims to decrease borrowing requirement and channel excess funds to the more efficient private sector.

Turkey ’s network industries and natural monopolies are being introduced to competition by the removal of entry barriers as the state withdraws to a supervisory role in a functioning market economy. Significant number of privatizations, including the network industries and natural monopolies will be finalized in the medium term.

On the other hand, the current level of foreign direct investment in Turkey does not affect its qualified labor force, favorable market positioning, high absorption capacity, tourism potentials and strong entrepreneurial spirit.

Turkey also has intense economic relations with the neighboring countries in the Middle East, North Africa and Eurasia.

The investment environment will evolve rapidly within the context of a developing macroeconomic framework where sufficient human and physical capital will be deployed as a result of the demographic, social and financial changes taking place.

With a services sector constituting almost 60 % of its GDP and a public procurement market of over € 30 billion, Turkey offers immense opportunities for European companies in development projects from which they should get higher than usual rates of return.

The elimination of political interference in the economy, public sector reform and the consolidation of the financial sector together pave the way to better functioning market economy and sustainable high growth.

Again, with a population of more than 70 million and of € 316 billion GNP at current prices, Turkey is among the 20 biggest economies in the world. Furthermore, it is an unsaturated market in almost every category of consumption goods ranging from fast moving consumer goods to high technology products.

Attaining an average GDP growth of 5.1 % between 2004 and 2006, it follows that total exports and imports will be € 61 billion and € 85 billion respectively by 2006. The strong demand will lead to higher levels of imports from EU countries.

Being major trade partners (the EU is Turkey’s 1st and Turkey is EU’s 7th partner) both will benefit from Turkey’s stable growth pattern.

Foreign investment is welcomed to participate in all kinds of businesses. Imports and exports are unrestricted and exchange control is limited to certain formalities. Foreign investors may invest through authorized banks, investment funds and organizations in Turkey. Real property can be bought by foreign investment companies and, within municipal limits, by individuals. In both cases, a simple permission may be required.

The monetary unit Lira has been replaced by YTL (New Turkish Lira) by leaving six zeros (‘000.000 ) out of the Turkish Lira. Over 50 banks operate in Turkey, including 15 foreign banks. Within the banking system there is a wide range of very large full service banks, active in both the wholesale and retail banking.

2. Regulations of foreign investment

2.1. Share capital and loans and remittance of interest

Formation of a company by a foreign investor does not require any permission from the Foreign Investment General Directorate of The State Treasury (“The Treasury”) any more.

Only;

- Articles of association;

- Certificate of activity,

- Previous year’s annual report, and

- Board decision with respect to the formation of the foreign company are required.

The articles of association are notarized and the share capital is undertaken by the founders . Application is then made to the Ministry of Trade. Upon the approval of the articles of association, they are submitted to the Trade Registry and registration is published in the Trade Registry Gazette.

The articles of association must cover:

- Name of the company;

- Its aim and scope;

- Authorized capital in Turkish Lira, the number of shares and their nominal values of the founders;

- First members of the board and the auditor.

The time needed to complete these procedures varies, mainly depending on the time for the preparation of above requirements. Generally 2 weeks should be allowed.

There is no requirement for more capital from foreign shareholders than domestic shareholders.

Capital may be increased only when the existing capital is fully paid.

Foreign loans can be obtained by simply informing the authorities (The Treasury) and can also be paid back together with its interest as agreed between the parties.

2.2. Remittance of Dividends, Profits, Royalties, Fees and Repatriation of Capital

In general, exchange controls and transfers of all foreign currencies have been relaxed and simplified in recent years. The commercial banks arrange foreign currency payments, without any permission:

- Profits, interest, dividends and royalty payments;

- Proceeds from the sale of all or any part of the investment;

- Salaries, wages and other remunerations received by foreign national employees of the company,

at the relevant daily rates.

2.3. Restriction of Foreign Investments

Only the petroleum and oil industry related activities are restricted for foreign investment. Some industries need special permission (i.e. education and military). Others need simple and easy permission from the Treasury (Foreign Investment Department) as explained above.

3. Government incentives

Tax incentives

The government encourages investment in manufacturing with higher incentives for underdeveloped regions. Incentives are available equally to Turkish and foreign investors.

Current Tax Incentives are:

- Customs duty exemption for investment in imported machinery and equipment and associated expenses.
- Other tax exemptions apply to stamp duty and other charges, to encourage investment and exports.
- Exemption of VAT on investment in machinery and equipment on import and purchased locally.

Non-tax incentives may be given, such as loans with lower interest rates.

Free trade zones (FTZs) are designed to encourage trade to and from Turkey. The FTZs are treated as outside Turkey for taxation and customs duty purposes. As a result, no corporation tax for the companies and no income tax on employees salaries, no VAT and customs duties apply in FTZs.

4. Business organizations available to foreigners

Company structures, commonly used by foreign investors in Turkey, and business organizations available to foreigners, are:

4.1. Limited Liability Companies (and anonym companies)

There are two main types of legal entities:” Limited Sirket” (limited company) and “Anonim Sirket”(anonymous company). They have the same establishment procedures such as registration with the trade registry and publication in the Trade Registry Gazette.

The directors of the company and any changes in the by-laws are also published.

Anonymous companies are the widely preferred types of legal entity. For banks, financial leasing companies and some other specific fields of activity, this type is required. It is also used to place capital with the public through the stock exchange or otherwise.

4.2. Branches of Foreign Companies

Branches are treated as fully established companies. Their commercial transactions, all routine matters and returns, expenses, salary payments etc., are subject to commercial, social and tax procedures similar to an independent legal entity.

4.3. Representative offices

Representative offices should not have any commercial activities. The salaries of the employees should be paid from abroad.

A simple permission from the Treasury is required to set up a Rep. Office.

4.4. Joint Ventures or Consortia

A joint venture or a consortium may be set up for international contracts to be carried out in Turkey. It is a simple formation of a special contract. It can be freely established based only on the international contract signed. Without any obligation to establish a company, the joint venture or the consortium can carry out the business activities. The only requirement would be registration with the tax office and the Social Security Institution. When the contract is completed, the Turkish joint venture dissolves.

5. Setting up and running business organizations

5.1. Time required for establishment

- Limited: app. 15 days

- Anonym: app. 15-20 days

5.2. Incorporation fees

Cost of formation of such companies varies depending on the capital involved and the number of the shareholders. These costs are mainly:

Notary charges 0.4% of the capital which cannot exceed a certain amount,
Other small and negligible charges for registration and announcements,
Plus fees of consulting and establishing firm.

5.3. Minimum number of founders required

- For limited company: 2 shareholders.

- For anonym company: 5 shareholders.

5.4. Permissible types of shareholders

- Limited and anonym company shareholders may be individuals or companies, either resident or non-resident. Shareholders are liable for the nominal value shares.

- An anonym company is managed by the board of directors. A manager can be appointed either from among the shareholders or from outside. Each share has one voting right. Preference shares which provide a preferred fixed dividend or the right to exercise control over aspects of management may be established in the articles of association.

- Bearer shares may be issued when the capital is fully paid. Bearer shares can be transferred freely, while the others must be recorded in the shareholders’ register.

5.5. Directors

5.5.1. Number of Directors

Limited : Minimum one. Individual shareholders and the representatives of company shareholders are accepted as Directors. Directors who are not shareholders can be appointed.

2. Anonym: Minimum 3.

5.5.2. Nationality and Responsibilities

The first board members are appointed by the founders and afterwards by the annual general meeting of shareholders. The board members need not to be Turkish nationals.

Directors’ powers and responsibilities are laid down in the articles of association including the day-to-day management of the company and preparation of the annual report. Approval of the balance sheet and income statement ratifies the performance over the preceding financial year.

(Directors) Board members may be appointed for up to three years and may be re-elected.

5.6. Initial capital requirements

- For a limited company: minimum YTL 5.000 (minimum nominal value per share, YTL 25 ).

- For an anonym company: minimum YTL 50.000.

5.7. Annual requirements

5.7.1. Financial Statements

Annual balance sheet, income statement and the other financial tables, showing the results of the year and the situation of the company at the end of the accounting year.

Financial statements are presented to the shareholders for approval in the annual meeting.

5.7.2. Meetings

Board meetings should be held at least once every 3 months and an annual shareholders’ meeting must be held once a year before the end of the third month of the following year.

An extraordinary shareholders’ meeting can be held at any time. The shareholders may be represented by proxies.

Only a general meeting of shareholders may amend the articles of association. The quorum and the majority needed, for important changes such as the name and capital increases, may need higher majorities.

5.7.3. Audit requirements

At least one auditor is appointed with the power to check on the accounts and transactions of the company. The auditor’s report to and if they find it necessary, call for, a shareholders’ meeting.

Several transactions and the financial reports of the company are subject to ratification by authorized external auditing bodies.

5.7.4. Other

1. Accounting requirements

All business enterprises must have an accounting system with a general, standard, and chart of accounts, adapted to the needs of the business in accordance with Turkish Standard of Accounting Plan.

Books and related documents must be kept for a minimum of five years for taxation purposes, and for ten years under the Commercial Code and Social Security legislation.

2. Reporting requirements

Annual reports prepared by the board and ratified by the shareholders’ meeting are submitted to the Ministry of Trade. Companies with foreign investment also prepare an additional financial report to the Treasury summarizing the activities of the previous year.

5.8. Technology transfer

5.8.1. Technology transfer

All kinds of technology transfers into Turkey are welcomed. Imports and exports are unrestricted and exchange control is limited to certain formalities. Proceeds are freely transferred from Turkey.

5.8.2. Royalty payment

After the approval of such agreements by Treasury all kinds of royalty payments can easily and freely be transferred outside Turkey by simply proving the reason and the source.

5.8.3. For both above and in general

The commercial banks arrange payments for all imports and exports, and currency transfers almost freely.

There is no restriction on importing bank notes, coins and other means of payment in Turkish Lira and foreign currencies.

In Turkey, non-residents may pay, receive and deposit freely with Turkish currency.

Residents may hold foreign currency, open foreign exchange accounts in banks, make payments and cash withdrawals (in foreign bank notes) from these accounts and accept foreign exchange for transactions held in Turkey.

Non-residents may invest, engage in commercial activities, purchase shares and engage in partnerships without any permission. To open branch offices, representative offices and agencies permission is required to be obtained from Treasury. These provisions also apply to intangible rights such as patent rights, production licenses and know-how.

Transfer requests of proceeds and repatriation of foreign capital are met immediately by the banks.

All kinds of securities may be imported or exported. Foreign currency denominated securities issued in Turkey may be sold to non-residents. Proceeds of domestic securities purchased by converting foreign exchange may be transferred through banks.

Non-residents may purchase real estate and related real rights in Turkey by converting foreign exchange and transfer all proceeds through a bank.

6. Double Taxation Agreements

Double taxation agreements have been made so far with many countries including USA, UK, nearly all European countries and Israel.

The latest list of such countries is as follows;

1. Austria 21.Emirates 41.Russian Fed.

2. Norway 22.Hungary 42.Indoesia

3. South Korea 23.Kazakhstan 43.Litvania

4. Jordan 24.Macedonia 44.Croatia

5. Saudi Arabia 25.Albania 45.Moldovia

6. Tunisia 26.Algaria 46.Singapore

7. Romania 27.Mongolia Republic of 47.Kyrgyzstan

8. Nederland 28.China 48.Tajikistan

9. Pakistan 29.India 49.Sudan

10. United Kingdom 30.Malaysia 50.Czech Republic

11. Finland 31.Egypt 51.Bangladesh

12. Northern Cyprus 32.Turkmenistan 52.Letonia

13. France 33.Azerbaijan 53.Spain

14. Germany 34.Bulgaria 54.Slovenia

15. Sweden 35.Uzbekistan 55.Syria

16. Belgium 36.U.S.A. 56. Greece

17. Denmark 37.Belarus 57.Luxembourg

18 .Italy 38.Ukraine 58.Estonia

19. Japan 39.Israel 59.Thailand

20. United Arab 40.Quwait 60.Iran

7. Customs duties

Any entity or individual, who wants to export or import anything not prohibited, can obtain a simple import or export license.

Being a member of the European Customs Unity there is no customs duty for import from the European countries and export to the one of them.

Import from other countries is subject to customs duty at various rates.

All procedures are followed and fulfilled by customs experts firms on behalf of the importers or exporters.