On 6 October 2018, the Communique, Numbered 2018 – 32/51 (the "Amendment Communique") Relating to the Amendment of the Communique, Numbered 2008 – 32/34 on the Decision Numbered 32 on the Protection of the Value of Turkish Currency (the "Decision No. 32") has been published by the Ministry of Treasury and Finance (the "Ministry") to determine the scope of the restrictions applicable to the contracts executed in or indexed to foreign currency.
The Amendment Communique has been published in the Official Gazette dated 6 October 2018 and numbered 30557 and entered into force on its publication date.
Recently, the Presidential Order numbered 85 on the Amendment (the "Amendment Order") of the Decision No. 32 (i) been published in Official Gazette dated 13 September 2018 and numbered 30534 and entered into force on the same date; (ii) brought a very broad restriction relating to the determination of the contract prices and payment obligations arising out of certain types of contracts, in or indexed to foreign currency, by and among the persons residing in Turkey; and (iii) authorized the Ministry for setting forth the exceptions, to which the restriction will not be applicable.
By virtue of the scope of the Amendment Order being quite broad, in a way affecting an extensive amount of commercial relationships in the domestic market of Turkey as well as many of the actors engaged thereof, it triggered various concerns to occur. The Ministry, having perceived the concerns occurred in the market due to the broadness of the scope of the Amendment, released a press statement on 17 September 2018, revealing that the exceptions will soon be set forth by the Ministry in a way favoring the wealth of the economic activities in the market. Eventually, the Amendment Communique has been drafted to determine the exceptions, thereof.
The Content of the Amendment Communique
The Amendment Communique envisages set of rules determining (i) the contracts that may be concluded in or indexed to foreign currency; (ii) the contracts that may not be concluded in or indexed to foreign currency as a rule, and the exceptions brought thereof; (iii) the currency exchange and the increase rates that will be applicable for re-determining -in Turkish currency- the prices and/or the payment obligations that are determined in foreign currency by the contracts which are executed before the entry into force of the Amendment Order and may not be concluded in or indexed to foreign currency as per the Amendment Communique ("Previous Contracts").
Accordingly, first of all, it shall be noted that,
- The adaptation period of thirty (30) days, which has been set in the Amendment Order for re-determining the prices and/or the payment obligations of the Previous Contracts in Turkish currency is not prolonged with the Amendment Communique and therefore, such re-determination shall be completed until 13 October 2018 for those contracts that are not exempted from the scope with the Amendment Communique1.
- If the parties of the Previous Contracts may not reach an agreement while re-determining the prices and/or the payment obligations in Turkish currency, the re-determination shall be made by (i) converting the amount in foreign currency to Turkish currency as per the current currency exchange rate, announced by the Central Bank of the Turkish Republic's on 2 January 2018, and (ii) increasing the Turkish currency equivalent to be calculated thereof, based on consumer price index's monthly exchange rate, determined by the Turkish Statistical Institute, every month until the re-determination date2; and
- Yet, the paid and the delayed receivables arising out of the Previous Contracts shall not be subject to the re-determination as described above.
Nevertheless, the very last clause of the Communique sets forth that, the parties of the contracts that are exempted from the Amendment Order may also set or re-determine the contractual prices -that are originally in foreign currency- in Turkish currency. Given that, this result may be achieved by the parties anytime, as per the liberty of contracts principle, without being required to be codified in such a clause, the reason for which this clause is inserted to the Communique may not be understood. Therefore, the affected parties shall pay attention to the possible misinterpretations and abuses to result out of this clause.
The Contracts That May Be Concluded In or Indexed To Foreign Currency
Pursuant to the Amendment Communique, the prices and/or the payment obligations of the -following contracts / contracts on following transactions- may be agreed in or indexed to foreign currency among the persons residing in Turkey3:
- Sale of movable properties other than the vehicles including without limitation the working machines;
- Lease of movable properties other than the vehicles including without limitation the working machines;
Sale contracts concerning the software and the license and service contracts concerning the hardware and software, all of which are produced abroad4;
- Employment and service contracts, concluded by (i) the branches, representative offices and liaison offices -located in Turkey- of the persons residing abroad, (ii) the entities -located in Turkey- participated directly or indirectly by the persons residing abroad, with a minimum shareholding of 50%, and (iii) companies located in the free zone, concerning their activities within the context of free zone;
- Employment contracts concluded by the persons that do not have a Turkish citizenship;
- Employment contracts that will be performed abroad;
- Service contracts concluded by the by the persons that do not have a Turkish citizenship;
- Service contracts, executed within the context of export, transit trade, sales and deliveries deemed as export and foreign currency gaining services and activities;
- Service contracts concluded within the context of the activities to be conducted abroad;
- Service contracts concerning the electronic communication that start in Turkey and end abroad or vice versa;
- Contracts -other than those relating to sale and lease of immovable property and employment contracts- concluded by the contractors within the context of performance of the public procurements, contracts and international treaties, in or indexed to foreign currency and awarded / engaged by the public institutions;
- Contracts -other than those relating to sale and lease of immovable property- concluded by the public institutions and the companies of Turkish Armed Forces Foundation;
- Issuance, sale and purchase of capital market instruments, under the Capital Market Law, numbered 6362 and any obligations pertaining thereto;
- Contracts -other than those relating to sale and lease of immovable property and employment contracts- concluded by (i) the commercial airline businesses conducting passenger, cargo and mail transport activities, (ii) the companies providing technical care services for the airline transport vehicles and their motors, parts and components, (iii) public or private entities who are authorized or licensed to render ground services at the airports as well as the entities established or participated with a minimum shareholding of 50% by the foregoing;
- Certain contracts executed by the banks under the Law on Public Finance and Debt Management, numbered 47495;
- Certain financial leasing contracts executed under the articles 17 and 17/A of the Decision No. 326;
- Financial leasing of ships; and
- Construction, repair and maintenance of ships.
The Contracts That May Not Be Concluded In or Indexed To Foreign Currency
Pursuant to the Amendment Communique, the prices and/or the payment obligations of the -following contracts / contracts on following transactions- may not be agreed in or indexed to7 foreign currency among the persons residing in Turkey8:
- Sale of immovable properties;
- Lease of immovable properties;
- Employment contracts, other than those stated under the above section;
- Service contracts, including the consultancy, brokerage and transportation contracts and excluding those stated under the above section;
- Construction and work contracts, other than those stated under the above section;
The Existing Situation
As may be conceived from the above, the Amendment Communique brought about a great deal of exceptions to the restriction introduced with the Amendment Order on the determination of the contractual prices and/or the payment obligations in or indexed to foreign currency. Although these exceptions may be perceived to resolve certain major problems in practice, especially with respect to foreign investments, still, a wide range of transactions are subject to the restriction.
Nevertheless, despite the Amendment Communique's casuistic style, in terms of bringing clarity by tackling the contract types one by one, the vagueness for certain major transaction types could not be eliminated. For instance, the applicability of the exception brought for the software license and service contracts is yet to be assessed on a case by case basis by considering the features of the individual contract and even so it is not clear whether the merchants that use the foreign originated products to develop and sell technologies, domestically will be able to benefit from the exception or not.
Apart from that, the application period of 2 years set in the Communique, relating to the determination of the prices for immovable leases may be quite significant, in terms of construing that the whole restriction on the use of foreign currency is meant to be brought temporarily, until the settlement of the fluctuation of the foreign currency rates.
In a nutshell, the Amendment Communique requires delicate consideration and analysis for the determination of its concrete implications on individual contracts. Besides, given the strict deadline of 13 October 2018 is not extended for adapting the Previous Contracts and the principles brought for enabling adaptation may not fit the competitive market conditions, it is suggested that the affected parties formulate and follow their optimized strategies for adaptation as soon as possible.
Finally, it is worthy to remind that the Ministry is authorized to take any measures to provide compliance with the Amendment Order and the Amendment Communique (which includes exercise of search and seizure measures) and yet, the Public Prosecutor may impose the administrative fines changing from TL 3,000 (three thousand Turkish Liras) to TL 25,000 (twenty five thousand Turkish Liras) (which may be doubled in certain cases) in case of not compliance.
1. The contracts relating to the lease of vehicles, including without limitation the working machines, which have been concluded before the entry into force of the Amendment Order (e.g. before 13 September 2018), are exempted from the adaptation obligation; and in this regard the prices and /or the payment obligations arising out of these contracts are not required to be re-determined in Turkish currency. Contrary to the other movable leases, the vehicle leases are not exempted with the Communique. However, the obligation to re-determine the prices in Turkish currency for the previously executed vehicle leases in foreign currency, is eliminated.
2. For the lease contracts on residential and roofed workplaces, the re-determination shall be made to be applicable for two (2) years' time and the consumer price index's monthly change of rate, which is determined by the Turkish Statistical Institute, for every month shall be considered for the increases to be affected within such two 2 years' time, in case the parties may not reach an agreement for such.
3. The persons residing in Turkey, have been defined in the Decision No. 32, as the legal entities and natural persons who have a legal residence in Turkey, including the Turkish citizens that are employed, has a professional occupation or operates an enterprise, abroad. Nevertheless with the Amendment Communique, it is designated that the entities, branches, representative offices, liaison offices, funds, which are abroad and directly or indirectly owned, operated, managed or participated with a minimum shareholding of 50% by the persons residing in Turkey will also be considered as persons residing in Turkey for the application of the Amendment Order and be subject to the restrictions applicable to the contracts executed in or indexed to foreign currency, as determined with the Amendment Communique.
4. It is not clear from the wording of the Communique, whether the requirement of being produced abroad extend to cover both (i) the contracts relating to sale of software and (ii) the service and license contracts concerning the hardware and software; or applicable only to the contracts relating to sale of software, produced abroad and this situation shall be required to clarified by the Ministry.
5. The Ministry shall be authorized to conduct certain transactions for effective financing of the public institutions through internal and external borrowings or other financial measures. The transactions that are conducted by the Ministry with the banks to that end have been exempted from the restriction to determine values in foreign currency.
6. Article 17 and 17/A of the Decision No. 32 permits determination of values for certain financial leasing transactions (e.g. those linked to loans in foreign currency) in foreign currency.
7. The Amendment Communique sets forth that indexing the prices to the precious metal and/or commodities, prices of which are determined in foreign currency or to the foreign currency in an indirect manner shall be construed as a indexing to foreign currency. Therefore, such kind of indexing shall not be resorted, as well.
8. The Amendment Communique also restrain the determination of the values in the negotiable instruments -created pertaining to the contracts that may not be concluded in or indexed to foreign currency- in foreign currency.
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.