Turkey: Interest Under Turkish Law-The New Legislation Brings Changes

Turkey has recently enacted two pieces of major legislation, namely the Code of Obligations (the "TCO") and the Commercial Code (the "TCC") both of which became effective on July 1, 2012. Both the TCO and the TCC along with the long existing "Law on the Legal Interest and Default Interest" (the "Interest Law") regulate the enforceability of and the rates related to interest. This article shall review the provisions of the aforementioned laws with a view to relay the limits on the implementation of interest¹.

i. The TCC:

The TCC, in principle, regulates commercial affairs. Therefore the evaluations below are applicable for transactions with a commercial nature.

1. Contractual Interest:

a. If contractually undetermined by the parties:

Pursuant to Article 8 of the TCC, parties are free to determine the rate of contractual interest that will be applicable to the contract. However, in the event that such rate is not contractually determined, then pursuant to Article 9 of the TCC, interest rate under the legislation currently in effect shall be applicable. The legislation currently in effect refers to the TCO and the Interest Law. Pursuant to Article 88 of the TCO, "in the event that the contractual interest rate is not determined by the parties, then the interest rate shall be determined by the legislation currently in effect". Such rate is specifically determined under Article 1 of the Interest Law as 9 %.

b. If contractually determined by the Parties:

Pursuant to Article 8 of the TCC, in commercial affairs, parties are free to determine the rate of contractual interest that will be applicable to the contract. Pursuant to Article 19/2 of the TCC, "contractual relations qualifying as a commercial contract for one of the parties involved, shall also qualify as a commercial contract for the other unless explicitly stated otherwise in the TCC". Therefore, as long as one of the parties do not enjoy specific advantages under the TCC (i.e. qualifying as a consumer etc.), the contractual liberty in determining the interest rate shall prevail.

2. Default Interest

Currently, due to the recent enactment of the TCC and the TCO and the absence of clear cut precedent, there are two different opinions in the legal doctrine regarding the application of default interest. These are as below:

i. Pursuant to Article 8 of the TCC, parties are free to determine the rate of default interest

that will be applicable to the contract Thus, there will be no limitations on the contractually determined default interest rate.

ii. Pursuant to Article 9 of the TCC, "in commercial affairs, interest rate under the legislation currently in effect shall be applicable regarding contractual interest and default interest." To this end, it is argued that Article 8 of the TCC only covers contractual interest and excludes default interest. Therefore, the specifics regarding default interest rate would be regulated under Article 120/2 of the TCO. Pursuant to Article 120/2 of the TCO, "the contractually determined default interest rate shall not exceed two fold of the rate determined under Article 120/1". Article 120/1 refers to the legislation currently in effect which would be the rate under the Interest Law: 9 % as indicated under Article 1 and Article 2 of the Interest Law. Furthermore, pursuant to Article 2 of the Interest Law, in the event that the interest rate in advance transactions determined by the Turkish Central Bank is higher than 9 % indicated under Article 1 of the Interest Law, then such higher amount shall become applicable and govern the contract between the parties (And if such amount was lower than 9 %, then the 9 % rate would be applicable). Such interest rate in advance transactions has been determined to be 13.75 % as of December 20, 2012. Since the upper limit for contractual interest is twofold the rate referred to under Article 120/1, then following the upper limit for default interest is 27.5 % (13.75*2). Thus, this opinion, if accepted, would cover both the cases where the parties have contractually determined the default interest rate in which case any rate above 27.5 % would be considered void and cases where default interest is not contractually determined in which case the interest rate would be automatically 27.5 %.

Applying the criteria set out above, the following should be deducted regarding the application of default interest:

a. If undetermined by the parties:

In the event that the default interest rate is not contractually determined by the parties, then Article 120/1 of the TCO would become applicable. Article 120/1 refers to the legislation currently in effect which would be the Interest Law and the rate under the same; that is 9 % as indicated under Article 1 and Article 2 of the Interest Law. Furthermore, pursuant to Article 2 of the Interest Law, in the event that the interest rate in advance transactions determined by the Turkish Central Bank is higher than 9 % indicated under Article 1 of the Interest Law, then such higher amount shall become applicable and govern the contract between the parties (And if such amount was lower than 9 %, then the 9 % rate would be applicable). Such interest rate in advance transactions has been determined to be 13.75 % as of December 20, 2012.

b. If determined by the parties:

In the event that the rate of default interest is contractually determined by the parties, then the debate set out in 2.i and 2.ii above will kick-in. Therefore, if a complete liberty in determining the contractual default interest rate is accepted, then the rate indicated in the contract shall prevail. In the event that a stricter interpretation is followed as set out in 2.ii above, then the default interest may only go up to 27.5 % and any interest rate determined by the parties exceeding the 27.5 % rate shall be void and the 27.5 % rate shall govern the contract between the parties.

3. Compound Interest under the TCC:

In principle, interest on the accrued interest (i.e. compound interest) is prohibited under Turkish law. However, there are exceptions to this rule, and the following rules will apply when interest is accrued on interest:

i. Pursuant to Article 8/2 of the TCC, in loan facilities and current account, accrual of capital interest on principal payment plus previous terms' capital interest is allowed in three month intervals provided that the legal relation between the parties qualifies as a commercial affair for both parties. Accordingly, compound interest would be added to principal in three month intervals

ii. Pursuant to Article 121/1 of the TCO, accrual of default interest on the principal payment plus capital interest is allowed only if legal procedures are initiated. As this rule is not mandatory, parties can agree otherwise and the contractual arrangements will prevail.

iii. Pursuant to Article 121/3 of the TCO, accrual of interest on default interest is not allowed and this is mandatory. Parties cannot agree otherwise contractually.

ii. The TCO:

In principle, the terms of the TCO shall apply to transactions that are non-commercial in nature. Therefore the evaluations below shall be applicable for non-commercial transactions.

1. Contractual Interest

a. If undetermined by the parties

Pursuant to Article 88 of the TCO, in the event that the annual rate of contractual interest is not determined by the parties, then such contractual interest rate under the legislation currently in effect shall be applicable. Such contractual interest rate, currently in effect, is determined under the Interest Law and pursuant to Article 1 and Article 2 of the Interest Law, such rate is 9 %.

b. If determined by the parties

Article 88 of the TCO explicitly regulates that the annual rate of contractual interest may not exceed 50 % more of the interest rate determined by the legislation currently in effect. Such contractual interest rate, currently in effect, is determined under the Interest Law. Pursuant to Article 1 and Article 2 of the Interest Law such rate is 9 % and therefore the contractual interest rate to be determined by the parties may only go up to 13.5 % (9+[9/2]).

2. Default Interest

a. If contractually undetermined by the parties:

Pursuant to Article 120/1 of the TCO, the default interest rate shall not exceed the two fold of the interest rate determined by the legislation currently in effect. Such default interest rate, currently in effect, is determined under the Interest Law. Pursuant to Article 1 and Article 2 of the Interest Law, such rate shall be 9 %. Furthermore, in the event that contractual interest rate is determined by the parties while the default interest is not and the annual contractual interest rate is higher than the 9 % determined under Article 120/1 of the TCO, then such higher rate determined among the parties shall also apply as the default interest rate.

b. If contractually determined by the parties

On the other hand, the TCO also regulates certain limitations on the contractual freedom of parties in determining the rate of default interest. In this regard, pursuant to Article 120 of the TCO, the default interest rate referred to in Article 120 of the TCO may only go up to 18 %; the two fold of 9 % as determined by Article 1 and Article 2 of the Interest Law.

3. Compound Interest under the TCO:

In principle, interest on the accrued interest (i.e. compound interest) is prohibited under Turkish law. However, there are exceptions to this rule, and the following rules will apply when interest is accrued on interest:

i. Pursuant to Article 121/1 of the TCO, accrual of default interest on the principal payment plus capital interest is allowed only if legal procedures are initiated. As this rule is not mandatory, parties can agree otherwise and the contractual arrangements will prevail.

ii. Pursuant to Article 121/3 of the TCO, accrual of interest on default interest is not allowed and this is mandatory. Parties cannot agree otherwise contractually.

Footnotes

1. Please note that the interest rates indicated below are current as of the date hereof for Turkish Lira based transactions and the rates for Turkish Lira based transactions and foreign currency based transactions may differ and be subject to change at any time.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.