1. General Information and Comparison with Liaison Offices
Aside from establishing a company or a liaison office in Turkey; foreign companies also have the option to establish branches (şube) in Turkey. Unlike liaison offices, branches can carry out commercial activities, however, being limited only to the activities of the parent company and all activities are carried out on behalf of the parent company in a form which is legally similar to the status of legal representative/agent. Branches can carry out business in Turkish Lira, generate income and transfer profit abroad.
Although branches must be independently registered with the Trade Registry in Turkey and they have autonomy in terms of accounting and carrying out commercial transactions; they are not considered as separate legal entities and are very closely associated with their parent companies with respect to their internal management and assumption of obligations and risks. A branch in Turkey carries out all commercial activities and assumes all legal obligations and risks on behalf and to the account of the parent company. Branches do not have a separate shareholding structure and there is no distinct corporate veil between the parent company and the branch.
Unlike liaison offices, branches do not have any automatic tax exemptions. Branches can employ both Turkish and foreign employees who must all be registered to the Social Security Institution and branches can benefit from tax and social security premium incentives like ordinary companies. Branches are eligible for the incentives applied by the Ministry of Economy under the New Investment Incentive System of Turkey, which was introduced in April 2012 and incentive and support programs for Technology Development Areas.
Unlike liaison offices, there is no restriction on the term of the branches, as a branch may be incorporated for an indefinite period of time.
Since branches engage in commercial activities, they are regarded as corporate tax and value added tax payers, and they are required to keep the corporate books (prepared on a balance sheet basis) required under the Tax Procedural Law.
Establishing a branch in Turkey does not require a prior permission from any authority in Turkey and is made through an application1 filed before the Trade Registry in the city in which the branch will be located (e.g. Istanbul Trade Registry), with the following documents:
- Incorporation notification form;
- Chamber registration form;
- A notarized and apostilled copy of the Certificate of Activity of the parent company and the articles of association obtained from the relevant trade registry (or chamber of commerce) to which the parent company is registered;
- A notarized and apostilled copy of the resolution of the Board of Directors (or the equivalent corporate body) of the parent company on establishing a branch and appointing the representative of the branch who must be a resident in Turkey;
- A notarized and apostilled copy of the standard undertaking to be signed by the parent company indicating certain information such as trade name, type, line of business, capital amount, incorporation date, trade registry number of the parent company and contact information of the representative, etc.;
- A notarized and apostilled copy of the signature declaration of the representative manager of the branch;
- A notarized and apostilled passport/identification certificate of the representative manager of the branch;
- A notarized and apostilled power of attorney granted to the representative manager of the branch (if not specified in detail in the resolution);
- Other documents that may be required by the trade registry to which the parent company is registered in the foreign country.
According to Article 5 of the Regulation for the Implementation of the Direct Foreign Investment Law (the "Regulation"), branches are required to file an activity report to the Ministry until the end of May of each year, regarding their activities, financials and operations. There are also other reporting requirements in case of capital transfers and share transfers.
4. Closing (Liquidation)
The process for liquidating a branch is more complicated than closing a liaison office, but easier then liquidating a subsidiary. In order to close and liquidate a branch, an application must be made to the Trade Registry located in the city in which the branch will operate, with the following documents:
- A notarized and apostilled copy of the resolution of the Board of Directors (or the equivalent corporate body) of the parent company on closing down and liquidating the branch;
- A notarized and apostilled copy of the signature declaration and letter of acceptance of duty of the liquidation officer2;
- A notarized and apostilled passport/identification certificate of the liquidation officer;
- Notification letters (in standard form) signed by the liquidation officer, to be announced by the Trade Registry in the Trade Registry Gazette for the creditors of the branch (if any).
Immediately after the announcement of the notification letters in the Trade Registry Gazette, another application must be made to the Trade Registry with the following documents:
- A notarized and apostilled copy of the resolution of the Board of Directors (or the equivalent corporate body) of the parent company approving the liquidation balance sheet;
- Liquidation balance sheet.
5. Advantages and Disadvantages of Establishing a Branch
Although establishing a branch is not as common as opening a liaison office or incorporating a subsidiary in Turkey, some foreign companies prefer a branch to enter to the Turkish market on temporary basis without engaging in a fully independent company. Branches have less corporate formality (i.e. there is no need to hold annual General Assembly meetings, no need to appoint Board of Directors and obtain Board resolutions, liquidation procedure is easier when it is decided to close down the branch and there is easier procedure for capital increase, etc.) and they can be managed relatively more easily from abroad. However, one must remember that branches are permitted to enter into commercial transactions and undertakings in Turkey, with all the liabilities and risks to be assumed by the parent company and at least one representative manager of the branch must be vested with full authority, which may not be desired by companies that are not willing to carry out any activity in Turkey in the short term.
The main dissuasive element of opening a branch in Turkey for foreign companies is the requirement to have at least one manager who is a resident in Turkey. Also, as mentioned above, the branch's legal eligibility to enter into commercial transactions when there is no distinct corporate veil between the parent company and the branch may also be disadvantage for some foreign companies who do not want to perform any commercial activity in Turkey and thus they may prefer liaison offices. Branches also do not have the automatic tax exemptions that are provided to the liaison offices.
1. Initial application is made online via MERSIS and then additional documents are physically submitted to the Trade Registry.
2. Liquidation operations must be carried out by a liquidation officer who can be a foreigner. However, please bear in mind that one manager who is a local resident must still be in office throughout the process. Said manager can also act as the liquidation officer.
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.