In 2018, with the regulation added to Decree No. 32 in accordance with the Presidential Decree, it was generally prohibited for any payment obligation, including negotiable instruments issued due to the contract, to be agreed upon in foreign currency or indexed to foreign currency within the scope of contracts signed among resident individuals in Turkey. Therefore, the necessity arose for determining the amounts in Turkish Lira in existing contracts, which were previously concluded before September 13, 2018, and were denominated in foreign currency or indexed to foreign currency, despite being subject to the ban. Although exceptions were made for i) collected receivables, ii) overdue receivables, and iii) issued and circulated negotiable instruments, stating that there was no need to adjust the amounts for these contracts as of the aforementioned date, companies were still required to review their existing contracts due to the adjustment obligation. Consequently, many companies faced problems in their relationships with business partners, and numerous questions arose regarding the actions to be taken. Despite years passing since the implementation of this regulation, due to various updates following the initial implementation period, it still creates confusion for many practitioners as to which contracts can be denominated in foreign currency or indexed to foreign currency and which cannot. Furthermore, in order to address the problems encountered during this process, numerous exceptions have been added to the regulation, making the situation even more challenging for practitioners.
Significant exceptions to the ban were introduced by the Treasury and Finance Ministry Communiqué No. 32/34 dated October 6, 2018. This article aims to shed light on the exceptions and their impact on corporate law by addressing the related subheadings, and to answer questions that may cause confusion as much as possible.
First and foremost, it should be noted that the ban, as a rule, applies to “contracts between residents in Turkey.” Accordingly, it is clear that this ban will apply to real estate sale and lease contracts, service contracts, and employment contracts between residents in Turkey. However, under the exception introduced by the Communiqué No. 32/34, cases where both parties are resident in Turkey but one of the parties does not have citizenship ties with Turkey are exempt from this ban.
In terms of real estate sales and lease agreements, residential and commercial property sales and lease agreements located within the domestic territory have been included within the scope of prohibition. However, through an exception introduced on November 16, 2018, sales and lease agreements where companies located in free zones act as buyers or lessees regarding their activities within the free zone have been exempted from this prohibition. As a result, in practice, numerous individuals and companies with headquarters outside the free zone but with branch offices inside a free zone have promptly relocated their headquarters to free zones. Similarly, employment or service agreements in which free zone companies are involved as employers or service recipients within the scope of their activities in free zones are also within the scope of exception.
Subsidiaries of Foreign Investments in Turkey:
Moreover, it is possible to arrange certain contracts that the foreign individuals or entities established abroad as “contracting parties,” which may include their branches, representative offices, offices, or liaison offices in Turkey, or companies in which they directly or indirectly hold fifty percent or more ownership, or other companies under the joint control of these foreign individuals/companies. These contracts can be denominated in foreign currency or indexed to foreign currency. However, these types of contracts in question only encompass real estate sales and lease agreements, where these individuals act as “buyers” or “tenants,” employment contracts where they act as “employers,” and service contracts where they act as “service recipients.”
- Subject Matter Exceptions such as Tourism and Export:
Another exception related to these contracts is regulated with regards to the subject matter of the contracts. According to this regulation:
- Touristic Accommodation: As of January 30, 2021; Real estate lease agreements related to the lease of accommodation facilities certified by the Ministry of Culture and Tourism, and accommodation service agreements, as well as real estate lease agreements related to the lease of duty-free shops, can also be concluded with foreign currency/foreign currency index.
- Foreign Employment Contracts: In case the employment contract is to be performed abroad, it is possible to sign the contract denominated in foreign currency/foreign currency index. Similarly, employment contracts where seafarers are party to can also be denominated in foreign currency/foreign currency index.
- Export Contracts: In service contracts made within the scope of export, transit trade, sales and deliveries considered as export, and foreign exchange earning services and activities, the contract price can be determined in foreign currency/foreign currency index. Similarly, service contracts made within the scope of activities to be carried out abroad by individuals, even if they are resident in Turkey, are also within the scope of the exception to the ban.
- Service Contracts Starting or Ending Abroad: Service contracts that are concluded between persons resident in Turkey and that start in Turkey and end abroad, start abroad and end in Turkey, or start and end abroad are also within the exception. In other words, if the service subject to the contract is performed abroad, even partially, these contracts are exempt from the ban.
- Transportation Contracts: According to the law, it is possible to use fuel price indexing in transportation service contracts.
- Currency-Costed Work/Construction Contracts (e.g., construction): “In work contracts which involve costs in foreign currency, it is possible to determine the contract price and other payment obligations arising from these contracts in foreign currency or indexed to foreign currency.
- Foreign Source Software Contracts: It is possible for residents in Turkey to determine payment obligations in foreign currency or indexed to foreign currency in sales contracts related to software produced abroad within the scope of information technologies, as well as license and service contracts related to hardware and software produced abroad that they will conclude among themselves.
- Movable Lease and Sales Contracts: With the exception introduced by the Ministry, it was possible for contracts related to movable property sales and leases of residents in Turkey to determine their payment obligations in foreign currency/foreign currency indexed during the initial period of the decision. However, with the regulation introduced as of 19.04.2022, it has become mandatory to fulfill and accept the payment obligations in Turkish currency; but only for “movable sales contracts.” At this point, one of the issues that companies have difficulty acting on and creates a dilemma is whether all existing invoice equivalents or negotiable instruments in movable sales contracts will be paid in Turkish currency or not. For this reason, the Ministry announced on April 21, 2022, through its press release, that there is no need to perform the equivalents of invoices issued before April 19, 2022, and payments made in foreign currency for negotiable instruments in Turkish lira.
- No Turkish Lira Obligation for Movable Rental Contracts: At this point, there has been no explicit regulation regarding the performance of payment obligations in Turkish lira for movable lease contracts, unlike sales contracts. Therefore, we acknowledge that the foreign currency/foreign currency indexed amounts agreed upon in movable lease contracts can still be performed in foreign currency.
- Vehicle Lease and Sales Contracts: Additionally, we would like to remind that the exception introduced by the Ministry does not include vehicle lease and sales contracts, despite their movable nature. Therefore, it is not possible under any circumstances to determine the payment obligations in foreign currency/foreign currency indexed for these contracts.
- Leasing Contracts: Another exception is related to financial leasing agreements; as of January 2018, although it is entirely prohibited for residents of Turkey to obtain foreign currency-indexed loans, it is possible for residents of Turkey to use foreign currency loans from abroad or within Turkey in certain exceptional cases, even if they do not have foreign currency income. Within the scope of these exceptional cases, the fees for financial leasing contracts can be determined in foreign currency. Besides, in financial leasing (leasing) contracts related to ships defined in the Turkish International Ship Registry Law No. 4490 and the Law Amending the Decree Law No. 491, the contract price and other payment obligations arising from these contracts may be determined in foreign currency or indexed to foreign currency.
- Certain contracts that involve public institutions or “TSK Güçlendirme Vakfı” companies: Within the scope of the exception brought by the Ministry, regardless of the case; within the performance of tenders, contracts, and international agreements, including projects to be carried out where public institutions are involved as parties in currency/currency-indexed, it is possible to determine the contract price and other payment obligations arising from these contracts in foreign currency or indexed to foreign currency in the contracts to be concluded by the contractors or the parties who signed the contract and their third parties within the framework of these mentioned projects (except for real estate sales contracts and employment contracts).
In addition to the existing provision stating that it is possible to determine the payment obligations in foreign currency/foreign currency indexed in contracts where public institutions or TSK Güçlendirme Vakfı companies are parties, with the Regulation dated 19.04.2022, a new regulation has been introduced stating that these payments can also be accepted as foreign currency/foreign currency-indexed. Real estate sales and lease agreements, however, are excluded from this freedom. With this regulation, a debate without any basis, such as whether the payment and acceptance of contracts whose price is determined in foreign currency can be made in foreign currency, has arisen in practice, as it is not within the scope of the ban. However, unless there is a provision to the contrary in the contract or the relevant legislation between the parties, payments, and acceptances in contracts whose price is determined in foreign currency should be accepted to be possible to be made and accepted in foreign currency.
- Contracts concluded within the scope of the Law No. 4749 on Public Financing and Debt Management: In contracts related to these transactions, the contract price and other payment obligations arising from these contracts may be determined in foreign currency or indexed to foreign currency. In contracts where banks are parties to these transactions, the contract price and other payment obligations arising from these contracts may also be determined in foreign currency or indexed to foreign currency.
- Certain contracts related to capital market instruments: Within the framework of the Capital Markets Law No. 6362 and regulations based on this law, capital market instruments, including foreign capital market instruments and deposit certificates as well as shares of foreign investment funds, may be denominated in foreign currency; and obligations related to the issuance, trading and other transactions of these instruments may also be determined in foreign currency, subject to the provisions of the Decision No. 32.
- Certain contracts in the aviation sector: Commercial airline operators engaged in passenger, cargo or mail transportation activities, companies providing technical maintenance services for aircraft, engines, their components and parts, and public or private legal entities licensed or authorized to provide ground services at airports under civil aviation regulations in Turkey, as well as the companies and enterprises established by these entities or the partnerships in which they directly or indirectly hold at least fifty percent of the shares, may enter into contracts with residents of Turkey that include foreign currency or currency-indexed amounts, except for contracts related to real estate sales, leasing or employment.
Burcu Gür, Attorney At Law