I. General

The Central Bank of the Republic of Turkey ("Central Bank") adopted a new Capital Movements Circular ("Circular") on May 2, 2018, as per the Decree No. 32 and the Communiqué No. 2008-32/34. This Circular introduces general rules and principles regarding foreign capital imports into Turkey, capital exports from Turkey, as well as the utilization of foreign exchange loans. In this regard, the Circular discusses in specific detail, and thereby clarifies, the general requirements that are set forth in the Turkish Commercial Code No. 6102 ("TCC") and which are applicable to foreign investors, regarding company incorporation, capital increases and share purchases, as well as capital export procedures.

This article aims to explain and illuminate the general requirements regarding the import of foreign capital into Turkey and the export of capital from Turkey.

II. Foreign Capital in Turkey and Capital Exports

Foreign investors are free to invest in Turkey by incorporating companies, by opening branches of existing companies, and through capital increases or share purchases, unless otherwise stipulated or prohibited by the Foreign Direct Investment Law No. 4875, international agreements or other relevant laws.

Under the TCC, before registration of a joint- stock company, 25% of the capital must be paid into a special account opened at a Turkish bank on behalf of the company to be incorporated, while the remaining 75% must be paid within two years as of the registration date of the company with the relevant trade registry. Upon submission of a letter issued by the relevant trade registry stating that the company has been duly registered, the bank shall return the amount paid by the shareholders to the company. Moreover, in case the registration process is not completed within three months following approval of the Articles of Association before a notary public or the signing of the same before the relevant trade registry, the bank must pay back the relevant capital amount to the shareholders. It should also be noted that the amount to be paid to the foreign shareholders) within this scope is not deemed to be a loan.

In joint-stock companies, capital increases may be carried out either through capital commitments or by using internal resources. Either current shareholders or other real persons or legal entities may participate in a capital increase. The rules that are in place regarding the payment of capital during the incorporation of a company are also applicable to any capital increases.

According to Article 6 of the Circular, the contribution of foreign exchange currencies to a company's capital and the capital increase process must all be completed within three months at the latest. Otherwise, such foreign exchange amounts are deemed to be contributions of receivables to the company's capital by foreign shareholder(s) and treated as loans obtained from abroad by the company itself. In such cases, foreign exchange amount(s) will be deemed as loans obtained from abroad and the relevant intermediary bank will be obliged to monitor whether they are in compliance with the general rules stipulated for foreign exchange loans under the Circular.

It is also possible for foreign investors to purchase, partly or wholly, the shares of current shareholders. In this case, the payment procedure will not be subject to the requirements stated above, and the purchase price paid by the foreign investor(s) will not be paid to the company's bank account.

However, share prices to be paid by foreign shareholders who reside outside Turkey must still be paid to Turkish banks, and such amounts may be paid either in Turkish Lira or in a foreign currency convertible to Turkish Lira Share prices paid from free zones are also considered (and treated) as foreign capital.

In order to incorporate companies abroad or in Turkish free zones, or to open new branches or purchase shares, Turkish residents may export capital in cash through banks and may also contribute capital to such companies in kind in accordance with applicable customs laws. Turkish residents are also able to establish liaison offices, representative offices, etc., outside of Turkey.

III. Conclusion

Foreign investors may invest in Turkey by incorporating a company, opening a new branch, or engaging in a capital increase or share purchase, unless otherwise stipulated in the applicable laws. It is important to note that foreign investors are not subject to special conditions or requirements in terms of share price payments. However, such amounts paid by foreign shareholders who reside outside Turkey may be deemed (and treated as) loans under certain circumstances, as specified in the Circular.

This article was first published in Legal Insights Quarterly by ELIG Gürkaynak Attorneys-at-Law in September 2018. A link to the full Legal Insight Quarterly may be found here.

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.