Turkey: A Legal and Sectoral Overview of the Turkish Investment Climate

Last Updated: 20 May 2011
Article by Esra Tekil

Turkey has become a new economic powerhouse and an ideal location for production with its unique geopolitical status giving direct access to Europe, Caucasus, Central Asia, the Middle East and North Africa. With a population of over 70 million, Turkey appears as a good market opportunity in terms of consumer potential, especially in sectors directly addressing consumers such as telecommunications, retail, banking and real estate. Life sciences, comprising health, medicine, pharmaceutical and biochemistry sectors, is expected to be the most popular investment field in Turkey in the next decade and to make Turkey the centre of life sciences.

Turkey has a remarkable labour force considering that 60 percent of the country's population is under the age of 35. Nevertheless, due to the impact of the competitive labour force provided by China and India, it is not anymore possible for Turkey to base its global competition strategy on providing labour force at low rates. Therefore, the country is now focused on supporting the improvement of its labour quality by maintaining its competitive rates, but also creating a well motivated and qualified labour force that will be more valuable in the upcoming years for the workforce needs of the whole region.

Moreover, the country has become one of the most attractive investment destinations by enhancing its business environment for foreign investment and making structural reforms in that respect. By 2010, over 23,000 international companies had invested in Turkey. This number is expected to increase tremendously in the coming years with the positive impact of Turkey's successful performance during the recent global financial crisis. The stability in both economic and political status creates trust on the foreign investors' side for sustainable and long term business investments in the rising sectors. According to OECD, Turkey is expected to be the fastest growing economy among OECD members from 2011-2017, with an annual average growth rate of 6.7 percent.

In line with EU's Lisbon Strategy, Turkey focused its industrial development policy on "knowledge" and "innovation", and targeted to become "the production base of Eurasia in medium and high-tech products", by increasing the competitiveness of its private sector, the quality of its labour force and supporting the manufacturing of high-tech products with high added value as mentioned in 2011-2014 Industrial Strategy of Turkey announced by the Ministry of Industry and Trade in November 2010. Before the formation of this strategy, 27 sectors had been analyzed and the problems arising from the regulatory framework, tehnology, innovation, environment, energy, finance and trade had been re-evaluated.

Infrastructure reforms to enhance the investment climate: While enhancing the business climate for attracting foreign investment, Turkey initially revised its legal, industrial and service infrastructure. As compared to the 1990s, the bureaucratic barriers are now replaced by a welcoming and attractive business environment that is well organised for facilitating all the legal and official steps during the investment process. From the legal perspective, Turkey adopted new laws assuring the country's legal compliance with the EU legal system. The foreign direct investment law allows the formation of a company with 100 percent foreign investment (with certain exceptions such as media corporations that are allowed to have foreign shareholding up to 50 percent of their total capital, as per the new law no. 6112 concerning the Establishment of Radio and Television Enterprises and Their Broadcasts that came into force in March, 2011), and guarantees equal treatment to foreign investors. Likewise, the new Commercial Code that will be effective in July 2012, enables the formation of a company with a single shareholder (i.e. "société unipersonelle" or "single member company") and the online performance of almost all essential legal proceedings in relation with the company. The new Commercial Code ensures a reliable, transparent and well regulated investment climate for foreign investors by preventing double taxation, simplifying company formations, providing compliance of the financial reporting system with EU standards, and strengthening the provisions concerning unfair competition. Likewise, the digitalization of corporate proceedings (e.g. General Assemblies, company formations, etc.) is expected to have a positive impact on the reduction of the paper work as well as the operational costs resulted from these formalities.

According to the new regulation concerning the purchase and ownership of immovable properties by foreigners, foreign investment companies established in Turkey are legally allowed to own immovable properties subject to the permission of the local governorship. The permission process is easier comparing with former practices and the ownership claim may only be rejected in case where the immovable is located at the military or other special security zones determined by the legislator.

Regarding potential partnerships, it is clear that Turkish companies are becoming more international and they are certainly intended to expand their businesses abroad. These companies are watching all possible investment and partnership opportunities outside Turkey quite closely. The increasing concentration of business growth also has a positive impact on Turkish companies' interest and needs to private equity.

Increasing need for ICT: Turkey has a huge interest in information and communication technologies, especially high-tech telecommunication services, thanks to its large population. The government allocated a considerable part of the budget to IT infrastructure in order to support the ongoing and future projects aiming to improve the quality and efficiency of IT based public services.

Turkey is also focused on making a leap forward in technological innovations and therefore adopted a new R&D and Innovation Support Law in 2008 (Law no.5746). The R&D Law aims to support the development of technological innovations, the improvement of product quality and standards, and especially the access of direct foreign investments which are focused on R&D and innovation projects. For this purpose, the Law provides technology and R&D centers, R&D and innovation projects (that are supported by public enterprises or foundations established pursuant to the Law or projects supported by international funds), pre-competition cooperation projects and technoenterprises with a tax discount of 100 percent in the determination of the corporate and commercial earnings under the Corporate Tax Law and Income Tax Law, for their R&D and innovation expenditures to be incurred until December 31st, 2023. The Law also ensures tax incentive concerning income tax witholding, as well as stamp tax exemption and social security premium support in relation with R&D activities. Investments concerning the transfer of industrial know-how and new technologies are particularly supported with special tax advantages and incentives in the Technology Development Zones, Industrial Zones and Free Zones.

Energy sector, new privatisation projects on the way: Considering the existence of various natural resources of energy such as geothermal, solar, wind and bio-mass energy, Turkey has a huge potential in terms of foreign investment in the field of renewable energy. In addition, the fast industrialisation and urbanisation of Turkey makes environmental technology investments more interesting, especially in the field of waste management, water supply and management, and air pollution control. All environmental projects, particularly investments in environmental technologies, are supported with special incentives. It is also worth mentioning that the Turkish energy sector offers good investment opportunities by means of future privatisation of state-owned electricity and distribution companies.

Logistics, the emerging star for future investments: Turkey has an advantageous position in the field of maritime and land transportation. Logistics appear as one of the fastest developing sectors in the last few years. Foreign investors' interest towards the sector is quite visible, as clearly indicated by recent acquisitions in the sector. The geographical proximity to emerging markets enables Turkey to offer combined transportation opportunities to these markets. Turkey is estimated to become an important logistics centre in the coming years by means of infrastructure investments, incentives, privatisation opportunities and its geographical status giving easy access to major trade routes.

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.

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