Turkey: Joint Ventures Under Turkish Foreign Direct Investment Law

Last Updated: 1 September 2010
Article by Onur Alper

I. Introduction

By the late 1980s, entry of foreign capital into Republic of Turkey has significantly increased, following the amendments in the foreign investment law. The considerable increase of foreign investors into the Turkish market, particularly in the form of business partnerships have played an important role for the economic development of Republic of Turkey. Foregoing foreign investments have stimulated an improvement in the commercial activities, business operations, technological progresses and industrializations which lead to the introduction of substantial transactions into the Turkish economy. In such transactions, foreign investors tend to collaborate with two or more companies to share the major risks of investing in a market. Another reason for such collaboration is the need for a strong company capital structure and advanced technological supplies.

II. Joint Ventures in the Turkish Legal System

Due to the limited financial resources of Turkish companies, collaboration activities to share the costs, experiences and risks, have increased. Although in some parts of the international area, such collaboration activities have been mandatory between foreign investors and a domestic company, in order for foreign investors to enter into a domestic market. Consequently terms of business partnership ("Joint Venture") have been introduced to the Turkish Legal System with the enactment of the Communiqué numbered 2009/2.1

The Turkish Code of Obligations (the "TCO") and the Turkish Commercial Code ("the TCC") do not regulate Joint Ventures in specific terms. However, taking into consideration of its characteristics, Joint Venture is deemed as a general partnership ("adi ortalık") whereby two or more legal entities or individuals ("Parent Companies"), who are independent of each other in legal and economical terms, gather for the accomplishment of a common task. A Joint Venture is generally created for a specific project and the main elements needed for a joint venture are either the individuals or the legal entities ("Partners"), a common objective, contributions and the agreement of the Partners.

III. Forms and Establishment of Joint Ventures in Turkey

There are several ways in which Joint Ventures can be formed in Turkey. The structure of the Joint Venture may be formed under two umbrellas; (i) a commercial company ("ticaret şirketi"), regulated by the TCC, (ii) an ordinary company ("adi şirket"), regulated by the TCO.

The most common types of commercial companies in Turkey established by foreign investors are joint stock companies ("anonim şirket"), limited liability companies ("limited şirket"), branch offices and liaison offices.

The other form of Joint Venture, which is an ordinary company governed by the TCO, is not recognized as for having a legal identity. It can be formed for profit-making or non-profit making purposes. In most cases, a contract will bind the understanding between the parties but where no contract or agreement is signed, the Joint Venture will be governed solely by the provisions governing ordinary companies under the TCO or TCC. These two types of ordinary companies are ordinary partnerships and consortiums, which are ideal means for foreigners to establish a partnership with Turkish entities. All partners of an ordinary company are jointly liable against third persons in succession, because their liability and the transactions of the Joint Venture and are unlimited.

IV. Specific Provisions of Foreign Direct Investment

Joint Ventures shall be established in Turkey by the introduction of the new Foreign Direct Investment Law ("FDIL")2 numbered 4875.

The FDIL was initiated with a motive to attract foreign investment in Turkey and raise its ability to attract more foreign direct investment and thereby, brought certain principles to protect the investors' rights and equal treatment for domestic and foreign capital companies.

In that regard, Article 3 of the FDIL states that it is free for the foreign investors to engage in foreign direct investment in Republic of Turkey, which means that there is no need for foreign investment anymore to obtain permission from the Undersecretaries of Treasury and there is no restriction on foreign ownership. Also the foreign direct investment cannot be expropriated or nationalized unless there is a public interest and fair compensation is paid, just as the case for domestic companies.

The foreign investors are free to transfer their proceeds gained from the foreign direct investment to abroad. The foreign direct investment can be made through allocation of cash, securities, machinery and equipment, intellectual property from abroad or through the allocation of economical values such as profit, receivables, other proceeds or rights with regard to the exploration and operation of natural resources from domestic sources.

Additionally, their following rights are secured with FDIL;

  • acquisition of real estate in Turkey
  • dispute settlement either in local courts or international arbitration bodies
  • valuation of non-cash capital
  • work permits for foreign personnel
  • opening a liaison office

In respect of the FDIL, foreign investors are defined and categorized as the foreign individuals, foreign legal entities and institutions or Turkish nationals residing abroad. The foreign investment is pursued either through the incorporation of new companies or establishment of branch or liaison offices or participation therein through share purchases. Pursuant to Article 9 of the FDIL, Joint Ventures are deemed as general partnerships and are accepted as models for FDIL. It clearly states that the foreign investors can make investments in Republic of Turkey by incorporating one of the company types specified under TCC or establishing an ordinary partnership within the scope of the TCO. The incorporators of the company can all be foreigners since there is no provision in the legislation, which prohibits or restricts the incorporators of a company to be foreigners. As the companies within the scope of the FDIL are deemed and defined as Turkish companies, such companies will be incorporated and registered pursuant to the incorporation procedure of a Turkish company.

It should also be noted that other kinds of partnerships which are not specified under the TCC can also be established by foreign investors based on an agreement such as consortiums, business associations or Joint Ventures, but they will still be deemed as ordinary partnerships within the context of the FDIL.

V. Conclusion

In the light of the above mentioned, one can argue that, legal infrastructure in Turkey has paved all the way to the success of Joint Ventures in Turkey , although obviously the financial and corporate strategic aims shall be highly related to the success of a Joint Venture.

Turkey's approach to foreign direct investment is to promote foreign direct investments and consequently prepared a competitive legal basis to attract investors in Turkey. As a result, Joint Ventures, as a means of foreign direct investment, are also encouraged and simplified by new FDIL. With this policy in practice for almost a decade, Turkish economy is transforming into a highly attractive market for foreign investors.

Footnotes

1. Published in the Official Gazette dated April 01,2009 and numbered 27187.

2. Published in the Official Gazette dated June 17,2003 and numbered 25141.

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