Turkey: Foreign Direct Investment In Turkey

Article by Burcu Modanli

As expressed by Robert C. Feenstra, a well-known expert on Foreign Direct Investment (FDI), "FDI combines aspects of both international trade in goods and international financial flows, and it is a phenomenon more complex than either of these."

In contrast with investments that enter and leave countries easily when at risk, FDI contributes to economical growth, employment, technological development and exportation-centered production of the host country (where investments are made) by also developing relationships even among distant countries. Considering the advantages for their economy, host countries wish to attract and provide legal safeguards for this kind of investment. Accordingly, international treaties and national investment regulations in general are intended to protect and incite FDI.

In line with this idea, the "Foreign Direct Investment Law No. 4875" ("FDI Law"), which emphasizes the opening of the investment environment in Turkey, was enacted. This law was enacted with a view to eliminate a variety of problems relating to the foreign investors concerned about their ownership rights in host countries and to the worries of host countries’ public with regard to the probable decrease in employment and loss of independence and ineffectiveness of the former existing Foreign Investment Promotion Law No. 6224 (the "Old Law"). The FDI Law also appropriately deals with foreign investors’ rights by current international standards. The main objective of the FDI Law is to reduce the bureaucratic barriers that foreign investors face when doing business in Turkey. The FDI Law reflects Turkey’s liberal approach to international investments and makes FDI easier to implement than the Old Law.

Under the FDI Law, the term "foreign investor" means real persons who possess foreign nationality, Turkish nationals resident abroad, legal entities established under the laws of foreign countries and international institutions, who make foreign direct investment in Turkey. The term "foreign direct investment" means establishment of a new company or branch of a foreign company by a foreign investor, or share acquisition of an existing company (any percentage of shares acquired outside the stock exchange or ten percent or more of the shares/voting power of a company acquired through the stock exchange) by means of, but not limited to, the following economic assets:

a) Assets acquired from abroad by foreign investor:

- capital in cash in the form of convertible currency bought and sold by the Central Bank of Turkey,

- securities of foreign companies (excluding government bonds),

- machinery and equipment,

- industrial and intellectual property rights;

b) Assets acquired from Turkey by foreign investor:

- reinvested earnings, revenues, financial claims, or any other investment-related rights of financial value,

- rights for the exploration and extraction of natural resources.

Following these definitions, we would like to determine the conveniences provided to foreign direct investors by the FDI Law No. 4875:

1. Abolition of the Preliminary Authorization:

The Preliminary Authorization of the General Directorate of Foreign Capital – that was obligatory under the Old Law - for foreign investors to establish foreign capital companies is no longer required under the FDI Law No. 4875.

2. Equal Treatment:

The fundamental principle of today’s investment regulations is the principle of "equal treatment" between foreign investments and domestic investments. Accordingly, this principle stipulated by the Old Law is kept under FDI Law No. 4875 and in Turkey foreign investors and domestic investors are subject to the same rights and obligations unless a contrary legal provision does exist in international conventions or special laws.

In order to make this principle effective, administrative hurdles that related to foreign capital inflow and were in contradiction with the equal treatment principle, have been removed by the FDI Law No. 4875.

Foreign capital companies are fully considered as a Turkish company and consequently their establishment process is identical as domestic capital companies and they have the same rights and obligations as Turkish companies do under Turkish Commercial Code.

A notice to be made to the Turkish Treasury for statistical purposes only is considered to be sufficient FDI Law No. 4875. Statistical information concerning investments to be notified to the Turkish Treasury may not be used as evidence.

3. Transfer Liberty:

The FDI Law No. 4875 also determines the transferable assets (including but not limited to profits and capital) and procures foreign investors guarantees for transfer out of the country again. In this respect foreign investors may repatriate abroad, without any restriction or limitation, their net profit, dividends, costs of sale, liquidation and indemnities, amounts to pay against license, management, and any such agreements and capital and interest payments of foreign loans occurred by their activities and transactions in Turkey via banks or private finance institutions.

As mentioned above, companies established under Turkish Laws or participated in by foreign investors and having their administrative office in Turkey, are deemed as Turkish companies. In this respect the Turkish Commercial Code, allows commercial companies to acquire all rights and assume all obligations provided they remain within the object of the undertaking as indicated in their articles of association. Companies owned by foreign investors may acquire real estate in any place where Turkish citizens have right to acquire. However, the principle of reciprocity continues to apply to the acquisition of real estate by foreign real persons in Turkey.

International commercial relationships as a matter of their nature could entail the desire to go to arbitration procedures instead of state jurisdiction. Any uncertainty of foreign investors regarding dispute resolution has been overcome. Foreign investors are free to go to any amicable / alternative dispute resolutions such as mediation, conciliation and national or international arbitration besides state jurisdiction of the host country.

Considering the importance of employing foreign personnel for foreign investors, the question of employment of foreign personnel who are subject to labor legislation regarding the work permit is defined under FDI Law No. 4875. In this respect, the Ministry of Labor and Social Security will issue proper work permits to the personnel to be employed by companies, branches and establishments which are set up according to FDI Law No. 4875. Details of such employment and related work permit are defined in the "Regulation Concerning Employment of Foreign Personnel in Foreign Direct Investments".

Some of the most important menaces that still remain for FDI are expropriation of such investments without any justifiable ground and violation of property rights. Therefore, the principles mentioned in the Constitution and Expropriation Code are adapted in accordance with the existing bilateral investment conventions and other international convention texts with respect to expropriation. According to duly accepted international standards, FDI can be expropriated or nationalized only if such legislation requires and if public interest necessitates, provided the requirements stipulated under these mentioned regulations are fulfilled and their effective compensation is paid.

Before enactment of the FDI Law No. 4875, FDI inflow has been very low in Turkey (around 1% of the GDP) comparing to the other countries. According to the provisional figures declared by the Central Bank of Turkey, following the FDI Law No. 4875, FDI’s share in the GDP is increasing rapidly (around US$ 1 billion during the period of 1993-2002, US$ 9.7 billion in 2005 and US$ 12.4 billion in August 2006). Furthermore, the considerable increase in the number of companies with foreign capital determined since the FDI Law No. 4875 is in force, shows that the ease procured to foreign investors in Turkey largely achieved its goal. Besides this aforementioned improved legal framework to increase FDI attraction, the government’s structural reforms and endeavors to lower tax rates and create free trade zones, the reduction in inflation and the macroeconomic and political stability have also a very important role in this remarkable increase.

To conclude we would also like to emphasize that Turkey has been considerably through with its macroeconomic volatility especially following the structural changes ant policies in the economy (the fiscal consolidation and lower inflation rates) and become the fastest-growing country among the other OECD countries which makes Turkey day by day more favorable and attractive for FDI.

If you are planning to setup a legal business structure in Turkey or to participate in such an entity, then do not hesitate to draw upon our large experience in such matters.

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.