OUR ASSESSMENT IN 7 QUESTIONS CONCERNING THE COMMUNİQUÉ WHICH REGULATES THE EXCEPTIONS AS TO THE FOREIGN CURRENCY PROHIBITION

Oct 23, 2018

Pursuant to the Decree on the Alteration of the Decree on the Protection of the Value of Turkish Lira (“Decree”) numbered 32 published on the official gazette numbered 30534 on 13.09.2018; concerning the (i)  purchase and sale contracts concerning both the movable and immovable properties, (ii) all lease contracts including but not limited to financial leasing concerning both the movable and immovable properties, (iii) leasing contracts, (iv) employment contracts, (v) service contracts and (vi) contracts of construction between persons based in Turkey; the contract value and other payment obligations arising from said contract cannot be agreed upon in foreign currency or foreign currency indexed and the prices which were agreed upon before the date of 13.09.2018 and are in force as of the effective date of the Decree will be converted to Turkish Lira within 30 days at the latest. In addition, it was also stated that the Ministry of Finance and Treasury will introduce detailed regulations concerning exceptions to aforementioned Decree.

Pursuant to the Communiqué (“Alteration Communiqué”) on the Alteration of the Communiqué (2018-32-34) (“Communiqué”) on the Protection of the Value of Turkish Lira numbered 32 published on the official gazette numbered 30557 on 06.10.2018; the provisions laid out in the Decree were explained and matters having the nature of an exception were regulated. These regulations, in the form of question and answer, are submitted for your consideration in this memorandum.

1. What are the regulations and exceptions set forth in the Alteration Communiqué concerning the real estate sale and lease contracts? 

Regulations concerning real estate sale and lease contracts are set forth in the first and second paragraphs of the Article 8 of the Communiqué and it is understood that the relevant regulations do not introduce any exceptions to the provisions of the Decree and they only explain the provisions set forth in the Decree:

Pursuant to the Article 8 Paragraph 1 of the Communiqué, all real estate prices and payment obligations such as penal clause and compensation arising from sale contracts (including the house and workplace sale contracts) regarding real estates in Turkey including the ones in the free zones signed by and between persons based in Turkey cannot be agreed upon in foreign currency or indexed in foreign currency.

Pursuant to the Article 8 Paragraph 2 of the Communiqué, the rental fee, auxiliary expenses and other payment obligations arising from all real estate  lease contracts regarding real estates in Turkey including the ones in the free zones (including the house and workplace lease contracts) cannot be agreed upon in foreign currency or foreign currency indexed. It should be noted in this context that, in the event that at least one of the parties is not based in Turkey, property sale and lease contracts can be agreed upon in foreign policy or indexed in foreign policy.

In this context, we would like to point out that regarding the property lease contracts executed between the Lessees and the Shopping Malls who take out loans in foreign currency, there is no exceptional regulation under the Alteration Communiqué and all property lease contracts are subject to foreign currency prohibition. 

2. What are the regulations and exceptions set forth in the Alteration Communiqué regarding the employment, service, software and license contracts? 

2.1 Employment Contracts

Pursuant to Article 8 Paragraph 3 of the Communiqué and the Decree, employment contracts concluded between persons based in Turkey cannot be agreed upon in foreign currency or indexed in foreign currency. However, in the event that the employee, while based in Turkey, is performing his/her contractual duties arising from employment contract abroad, the payment to be made to the employee and other payment obligations arising from the employment contract can be agreed upon in foreign currency or indexed in foreign currency. For example, in the event that an employment contract executed between an employee based in Turkey and a corporate company, and the said employee departures to work abroad, the fee and the auxiliary rights to be paid to the employee can be determined in foreign currency or indexed in foreign currency.

Pursuant to the Article 8 Paragraph 11 of the Communiqué, in the event that  the employee is based in Turkey but not a Turkish citizen, the contract value can be determined in foreign currency or indexed in foreign currency In other words, an exception is set forth in the Alteration Communiqué concerning the determination of the contract fee in foreign currency or indexed in foreign currency arising from employment contracts (for example contracts concerning “expat”s) regarding foreign employees who  have a legal settlement in Turkey.

2.2 Service Contracts

Article 8 Paragraph 4 of the Alteration Communiqué states that, as a rule, the service contracts (including consultancy, intermediation and transportation contracts) are subject to the foreign exchange prohibition regarding the price to be paid to the service provider in return for the services performed. However,  the service contracts which (a)  the contracting party (parties) is not a Turkish citizen (b) consist of sales and deliveries deemed as exportation, transit trade, importation and service contracts within the scope of foreign currency earning services and activities, (c) are as  to services  that  will be carried out abroad by persons based in Turkey (d) are about electronic communication which either starts in Turkey and conclude abroad or starts abroad and conclude in Turkey, executed between persons based in Turkey  have been exempted from the foreign currency prohibition. Although the employment contract is a special type of service contract, it is understood that the provisions of this paragraph have been regulated in terms of service contracts rather than employment contracts, since there is a separate provision regarding employment contracts in the paragraph 11 of the relevant article. 

As an example to the Article 8 Paragraph 4 clause (a); Payments regarding to the contracts executed between foreigners who provide consultancy services to the legal entities that are based in Turkey can be determined in foreign currency or indexed in foreign currency.

In addition, pursuant to the Article 16 of the Communiqué, the employment and service contracts executed by (i) companies in which there is directly or indirectly 50% or over shareholding of persons that reside outside of Turkey, (ii) branches, (iii) representation offices, (iv) offices and (v) liaison offices of the said companies and (vi) companies located in the free zone, the contract value and the other payment obligations arising from the contract can be determined in foreign currency.

For instance, an employment contract signed by a company in Turkey, in which a person that reside outside of Turkey has shares over 50% and a contract between such company and a consultant are exempted from the foreign currency prohibition.

2.3. Software Sale Contracts, License and Service Contracts as to Hardware and Software

As per the Article 8 Paragraph 8 of the Communique license and sales contracts as to hardware and software are exempted from the foreign currency prohibition and the value and other payment obligations under such agreements can be determined or indexed in foreign currency, under the following conditions; 

i) Said contract shall be executed by and between Turkey based parties.

ii) The hardware and software subject to the contract shall be manufactured in a foreign country.

Therefore in the event that a Turkey based company buys a   software that is manufactured abroad (such as Office programs) from a person based in Turkey, the contract value as to such sale can be determined in foreign currency.  We believe that this provision is added so that possible loss making of the suppliers that buy software which are manufactured abroad in foreign currency is prevented. 

For instance; value of the license contract between Turkey based parties, as to the usage license permit supply of anti-virus program that is manufactured abroad, can be determined or indexed in foreign currency.

3. What are the regulations and exceptions introduced by the Alteration Communique regarding the lease and sales contracts as to movable properties?

In comparison with the Decree, paragraphs 6 and 7 of the Article 8 of the Communiqué introduce broad exceptions as to sales and lease contracts regarding movable properties. Accordingly, all sales and lease contracts regarding movable properties, except for the ones as to vehicles and construction equipment, are exempted from the foreign currency prohibition and all the payment liabilities under the said agreements can be agreed or indexed in foreign currency.  Since movable property sale is defined as the “sales of the things that are not defined as immovable and defined as movable under other laws” under the Article 209 of the Turkish Law of Obligations, payment obligations under the sales and lease agreements as to properties that are not immovable, accept for vehicles and construction equipment, can be determined or indexed in foreign currency. 

As per the Article 8 Paragraph 22 of the Communiqué, the payment obligations under the lease contracts as to movable properties, including construction equipment, that are not within the scope of the exception, which  have been executed before 13.09.2018, are not required to be converted to Turkish Lira. However, in the event that the aforementioned contracts are concluded after 13.09.2018, the payment obligations under such contracts shall be converted to Turkish Lira.

4. Is it possible to be excluded from the foreign currency prohibition by establishing a company abroad?

Pursuant to the Article 8 Paragraph 20 of the Communique, (i) Turkey based company’s branches, (ii) representative offices, (iii) offices, (iv) liaison offices and (v) funds operated or managed abroad and (vi) companies of which fifty percent or more of the shares are owned by a Turkey based company and companies which are directly or indirectly owned by a Turkey based company are deemed as Turkey based persons.  By this regulation, the term of Turkey based person has been enlarged. In other words, companies that has been established abroad are going to be deemed as a Turkey based person, in the event that fifty percent or more of their shares are owned by Turkey based real or legal persons and therefore they are going to be subject to the foreign currency prohibition. Within this scope, the payment obligations under the contracts that are not listed as an exception, which are signed by companies that are established abroad by Turkey based persons cannot be determined in foreign currency, just because the said companies are established abroad. 

5. What is the impact of the Decree and the Communique on the financial leasing contracts? Are there any exceptions available?

Although the financial leasing and leasing contracts are subject to the foreign currency prohibition as per the Decree, it is observed that there are 2 exceptions as to such agreements under the Communique: (i) financial leasing contracts regarding ships, (ii) contracts regarding the loans obtained from financial leasing companies.

Exception 1: Pursuant to the Article 8 Paragraph 9 of the Communique; ‘’Contract value and other payment obligations under financial leasing and leasing contracts regarding to the ships which are identified in The Turkish International Ship Registry Law numbered 4490 and the  can be determined or indexed in foreign currency.’’ Within this context, it is understood that when a financial lease contract of which the subject is a ship is executed, the prohibition under the Decree will not apply and the parties will be able to determinate the contractual value in foreign currency.

Exception 2: Pursuant to the Article 8 Paragraph 10 of the Communique; “Contract values of financial leasing contracts as per the Article 17 and 17/A of the Decree numbered 32 can be determined in foreign currency.”

Within this context it should be stated that, as per the Article 17 and 17/A of the Decree, the institutions and organizations which are entitled to take out loans in foreign currency are included in the scope of the exception.

6. What are the regulations introduced by the Communiqué on Capital Market Legislation?

Pursuant to the Article 8 Paragraph 15 of the Communique which has been regulated by the Article 2 of the Alteration Communique,, forming capital market instruments and certain transactions as per the Capital Market Law (CapML) numbered 6362 are included in the scope of the exception.

According to the said provision, obligations as to;

(i) Forming in foreign currency

(ii) Issuance,

(iii) Purchase and sale

of the capital market instruments that will be established as per CapML and the transactions that will be carried out within this scope, can be determined in foreign currency. It has been stated in the provision that, foreign capital market instruments and warehouse certificates as well as foreign investment fund shares are included in the scope of the exception. Pursuant to the Communique, stated exceptions are going to be applied subjected to the relevant provisions of the Decree, since  the Decree describes immovable securities  and other capital market instruments and sets forth regulations as  to the entry and exit and  sale (both within Turkey and abroad) of capital market instruments.

In accordance with the exception, provided that issuance, purchase and sale of capital market instruments and other relevant transactions are carried out as per the Decree, transactions that are listed above, as to capital market instruments can be carried out in foreign currency.  For example, it is possible to issue debt instruments to be sold both domestically and abroad according to CapML and secondary regulations and it is stated that the issuance and sale of capital market instruments such as bonds and financing bills in foreign currency is within the scope of the exception.

7. What method will be applied in the event that the parties cannot reach an agreement within 30 days as of 13.09.2018, regarding the contracts subjected to the foreign currency prohibition?

7.1. The Method Applicable to the Determination of the Payment Obligations in Turkish Lira Regarding All Contracts Subject to the Foreign Currency Prohibition

There was no clear provision in the Decree as to the results that may be born, in the event that the parties fail to reach an agreement. However, pursuant to the first sub-paragraph of the Article 8 Paragraph 24 of the Communiqué, the contract value determination method is regulated, in the event of failure to reach an agreement within 30 days as of the effective date of the Communiqué, which corresponds to 13.10.2018.

Within this context, considerations and other payment obligations stipulated in the contracts which are determined or indexed in foreign currency will be calculated by increasing the Turkish Lira equivalent starting from 02.01.2018 until the re-determination date, based on monthly exchange rates of consumer price index (CPE), that is monthly determined by the Turkish Statistical Institute, which are calculated using the effective selling rate of the Central Bank of the Turkish Republic valid on 02.01.2018.

7.2. The Increase Rate to be Applied to the Rental Fees 

The rental fees determined in foreign currency or that are foreign currency-indexed shall be re-determined for a period of two years in Turkish Lira by the method specified in the first paragraph of the article, which is explained above. Regarding the lease contracts as to houses and work places, executed before 13.09.2018, the second sub-paragraph of the Article 8 Paragraph 24 of the Communiqué stipulates further regulations as to  the increase rates to be applied to the rental fees determined in foreign currency or that are foreign currency-indexed. 

In the event that the parties do not reach an agreement for the following rental year at the end of the rental year for which the determination in Turkish Lira has been made, the rental fee to be paid in the new rental year shall be determined in accordance with CPE from the date of determination until the end of the rental year for which the re-determination is made. The re-determined rental fee shall be valid for one year as from the end of the rental period as to which the re-determination is made.

The same method shall be applied for the determination of the rental fee for the following rental period. However, such amount will be applicable for two years as of the re-determination of the rental fee in Turkish Lira. 

7.3. The Legal Status of the Collected or Deferred Debts in the Contracts that are Subject to the Foreign Currency Prohibition 

It is observed that, the Article 8 Paragraph 24 of the Communiqué regarding the re-determination shall not be applicable to the collected or deferred debts as of the effective date of the Alteration Communiqué, which is 06.10.2018. For instance, since additional time is granted by the Decree, to the parties in order to re-determinate a payment obligation in foreign currency, under a contract that is signed before the effective date of the Decree, which became due on 15.09.2018, the calculation should be made in accordance with the method specified in the Decree, meaning by increasing the Turkish Lira equivalent starting from 02.01.2018 until the re-determination date, based on monthly exchange rates of CPE. 

We would like to submit our assessment regarding the subject for your attention.

Kind Regards,

Özay Law Firm

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