Project Finance 2021 - Project Finance/PPP & PFI

1. OVERVIEW

1.1 What are the main trends/significant developments in the project finance market in your jurisdiction?

Despite the challenging conditions which the financial markets suffered globally due to the measures taken to cope with the consequences of the COVID-19 pandemic, the Turkish market closed numerous project finance transactions in 2020. Energy, transport, infrastructure and technology (especially fintech) were the sectors which gained significant attention in terms of project financing in the Turkish market.

Due to Turkey's geopolitical position and hungry economy, energy is still the foremost sector for project finance in Turkey. Turkey has an aim of liberalising the energy sector and attracting private sector participation and the establishment of a competitive market. In recent years, Turkey has substantially increased the share of renewable energy and continues to do so. Despite the decline in energy prices this year (especially petroleum and natural gas), the increasing currency rates caused a strong current account deficit for Turkey. This has been the driving force of the new energy projects and investments, especially for renewable energy, of which hydroelectricity makes up the biggest chunk. It is nevertheless worth noting that, lately, there has been increasing investment in other renewable energy sectors, such as wind and solar.

Within the last few years, there have also been a significant number of ongoing public-private partnership (PPP) projects in the energy, highways, ports, healthcare and railway sectors. The Turkish government promotes independent investment in these sectors and has also focused heavily on PPP projects in recent years. These PPPs are mainly centred around the Turkish energy, airport, road, railway and infrastructure sectors.

In order to facilitate the investments, with the recent amendment made to the Capital Markets Law No. 6362, an alternative project financing method (i.e. project finance fund) and a new type of security (i.e. project-backed security) are also being introduced, with the purpose of contributing project financing for investments with long terms and high capital, such as infrastructure, energy, industry, technology, communications and health projects.

Still, in terms of new investments, we believe that, in 2021, despite the significant project financing transactions undertaken, many companies, domestic and foreign investors and large conglomerates are reluctant to make new investments and are instead seeking to refinance existing ones due to the crisis suffered in the wake of the pandemic.

1.2 What are the most significant project financings that have taken place in your jurisdiction in recent years?

The following are some of the most significant project financings that are ongoing or have closed in recent years in Turkey:

$4.5bn financing and $1.6bn additional financing of the Third Bosphorus Bridge and Northern Marmara Motorway.
€125m financing of the Third Airport of İstanbul.
$1.2bn financing of the road infrastructure project for a tunnel connecting Asia to Europe, namely Avrasya Tüneli.
IC İçtaş's $1.2bn expansion of the Tuz Gölü (Lake Tuz) Underground Natural Gas Storage.
JP Morgan's $1.1bn financing of the 1,000 MW Wind Power Renewable Energy Resource Area (YEKA).
K-Exim, K-Sure and Islamic Development Bank's $1.2bn financing of the 1,000 MW Solar Power Renewable Energy Resource Area (YEKA).
€1.1bn financing for the design, construction, operation, maintenance and repair of the Ankara–Niğde Motorway procured by the General Directorate of Highways of Turkey under a build-operate-transfer model.

2. SECURITY

2.1 Is it possible to give asset security by means of a general security agreement or is an agreement required in relation to each type of asset? Briefly, what is the procedure?

General security agreement is not possible under Turkish law. Each type of asset shall be collateralised separately. In general, the following securities are utilised in project finance deals:

Pledge.
Pledge over movables.
Pledge over shares of the company.
Pledge over bank accounts.
Mortgage.
Transfer/assignment of receivables.
Guarantee and suretyship.

2.2 Can security be taken over real property (land), plant, machinery and equipment (e.g. pipeline, whether underground or overground)? Briefly, what is the procedure?

Yes; the respective procedures are as follows:

Pledge over movables

The following, amongst others, are subject to the pledge over movables under Movable Pledge Law No. 6750: all present and future movable operation equipment such as machinery and equipment, tools, devices, electronic communication devices as well as receivables; intellectual and industrial property rights; licences and permits that are not required to be registered to another registry and are not considered as administrative permission; raw materials; consumables; all kinds of earnings and revenues; rental income; stocks; commercial projects; trade name and/or commercial title; commercial enterprise; and all machinery allocated to the operation of the commercial enterprise to the extent that the pledge is established over the commercial enterprise as a whole, together with its fixtures, legal proceeds, natural products and substitutions. Pledge over movables is established through execution of a pledge agreement before a Notary Public and registration of the same together with the list of pledged movables before the Pledged Movables Registry, which is also kept by the Notaries Union of Turkey. Records of the Registry are publicly available.

Mortgage

A mortgage denominated in TRY can be created by registering the mortgage with the land title registry. In addition, a mortgage denominated in foreign exchange can also be established to the extent that the mortgagee is a domestic or foreign credit agency in order to secure a loan granted in terms of foreign currency. A mortgage is created through following a two-stage process:

The contractual terms agreed by the parties that form the mortgage agreement are typed by the land title registrar on printed official forms constituting the official deed of mortgage. The deed of mortgage is signed by the parties before the land title registrar, who also signs and seals the deed.
The deed of mortgage is registered by the registrar in a specific column in the records for the mortgaged real property, which is kept at the land title registry.

2.3 Can security be taken over receivables where the chargor is free to collect the receivables in the absence of a default and the debtors are not notified of the security? Briefly, what is the procedure?

Yes. Assignment is created by a written agreement between the assignor and the assignee. While the consent of the counterparty of the contracts is not required for the validity and effectiveness of the assignment, it is advisable to inform the counterparties of the assignment in return for an acknowledgment for evidentiary purposes. If the counterparty is not informed, the counterparty discharges his obligations if he pays the assignor. Even though not mandatory, in practice the assignor continues to retain the assigned rights if there is no event of default. If an event of default occurs, these rights are then directed to the assignee or to its order.

2.4 Can security be taken over cash deposited in bank accounts? Briefly, what is the procedure?

Yes. A written pledge agreement is required for the establishment of a bank account pledge. Although consent/notification of the account bank is not mandatory for validity, a notification against an acknowledgment notice from the account bank is recommended in order to ensure certain obligations of the account bank, such as restricting withdrawals, and to confirm that no prior ranking pledge, assignment or counterclaim exists.

2.5 Can security be taken over shares in companies incorporated in your jurisdiction? Are the shares in certificated form? Briefly, what is the procedure?

Yes, share pledges can be established as a security over company shares:

1. Non-public joint-stock companies

(a) Registered shares: registered shares shall be issued in certificated form and delivered to the shareholders pursuant to the request of minority shareholders.

In respect of registered shares which are certified, the pledge can be established either by: (i) concluding a written pledge contract and delivery (transfer of possession) of registered share certificates (Turkish Civil Code Article 955/1) to the pledgee; or (ii) endorsement and transfer of the registered share certificate (Turkish Civil Code Articles 647/2 and 689/1) as required. It is common practice, however, for both to execute a written pledge contract, together with the delivery of registered share certificates to the pledgee, with a pledge endorsement.

If the shares are not in certified form, it is sufficient to conclude a pledge contract for the establishment of the pledge right on an uncertified share (Turkish Civil Code Article 955/3).

(b) Bearer shares: share certificates cannot be issued for the bearer shares which are not fully paid. However, upon full payment of the share price, the board, within three months as of the payment, is obliged to issue share certificates in printed form in respect of such bearer shares.

Regardless of whether the shares are certified or uncertified, an approval decision of the pledge by the company and registration of the pledge on the share ledger of the company are also common practice and recommended for evidentiary purposes.

2. Limited companies

Share certificates of a limited company may not be in printed form; in such case, the shareholders' resolution approving the pledge and registration of the pledge to the share book of the company are required. The pledge agreement for limited companies must also be executed before a Notary Public.

3. Public companies

As for public companies, the pledge over the decentralised shares of the company is established though a written pledge agreement and notification to the Central Registry Agency.

2.6 What are the notarisation, registration, stamp duty and other fees (whether related to property value or otherwise) in relation to security over different types of assets (in particular, shares, real estate, receivables and chattels)?

Please see above for the notarisation and registration requirements for various collaterals.

Stamp duty of 0.948% is applied for each security agreement but shall be capped by approximately TL 3,534,679.90 in 2021. Pledge over movables is exempt from stamp duty and other taxes. In addition, exemptions foreseen for stamp tax generally apply to financings by banks, foreign credit institutions or international finance institutions. Furthermore, construction agreements for manufacturing and capex investments for construction within the scope of an investment incentive certificate are also exempt from stamp duty.

Negligible notary fees and costs are accrued for a share pledge over limited companies. A mortgage is subject to deed charges of 4.55% over the mortgage amount.

2.7 Do the filing, notification or registration requirements in relation to security over different types of assets involve a significant amount of time or expense?

Filing, notification or registration is required depending on the type of the collateral. Please see above for further explanation.

In general, provided the required documents and information are in order and appointments are taken from the relevant registries or notaries (if necessary), the filing or registration process is completed on the date of application or within a couple of days following the application date.

2.8 Are any regulatory or similar consents required with respect to the creation of security over real property (land), plant, machinery and equipment (e.g. pipeline, whether underground or overground), etc.?

No, except for the regulated markets such as energy (electricity, petroleum, gas and liquefied petroleum gas), there is no specific regulatory consent required from the governmental authorities for the creation of security in Turkey.

Although it is not a consent requirement, it is worth noting that Turkish-resident guarantors providing a guarantee in favour of foreign parties should inform the Turkish Treasury within 30 days following the date of the guarantee.

3. SECURITY TRUSTEE

3.1 Regardless of whether your jurisdiction recognises the concept of a "trust", will it recognise the role of a security trustee or agent and allow the security trustee or agent (rather than each lender acting separately) to enforce the security and to apply the proceeds from the security to the claims of all the lenders?

Although the security agent structure is widely utilised in foreign law-governed transactions accompanied by Turkish law security documents where the security is held by a security agent or trustee, as none of those transactions have been tested before the courts in Turkey regarding the security agent provisions, to date, there is no relevant court precedent on the subject.

Although there is no court precedent directly on the concept of security trustees, it is worth noting that there are Turkish court precedents recognising fiduciary transactions (inançlı işlemler) and indirect representatives (dolaylı temsilci). Fiduciary transactions are transactions where the ownership of an asset is transferred to a fiduciary for securing an obligation. In fiduciary transactions, the fiduciary is obliged to transfer the relevant asset back to the beneficiary after holding such asset as security. In respect of transactions involving an indirect representative, such representative is deemed to act on its own name, but on behalf of and for the benefit of a third party.

Even though there are no rules or regulations on the concept of a security trustee for lending transactions, as of February 2020, the concept of security trustee has been introduced by the amendments made to the Capital Markets Law No. 6362 in respect of debt securities. Further secondary legislation is expected to be issued by the Capital Markets Board of Turkey (CMB) in this respect for the implementation.

3.2 If a security trust is not recognised in your jurisdiction, is an alternative mechanism available (such as a parallel debt or joint and several creditor status) to achieve the effect referred to above which would allow one party (either the security trustee or the facility agent) to enforce claims on behalf of all the lenders so that individual lenders do not need to enforce their security separately?

Save for the security trust which has recently been introduced by the CMB in respect of debt securities, in terms of lending transactions in Turkey, the following are utilised as alternative mechanisms:

Parallel debt is commonly utilised while structuring the security agent concept. In a parallel debt structure, the borrower undertakes and accepts that it has, by way of an abstract acknowledgment of debt (mücerret borç ikrarı), a separate and independent payment obligation against the security agent, in an amount equal to the outstanding amounts under the loan agreement. Therefore, the security agent has an independent right to demand payment of the parallel debt, i.e. the outstanding amounts under the loan agreement.
It is also possible to utilise a joint and several creditorship system, in which each lender has a right to claim the outstanding amounts under the loan agreement from the borrower, and the amounts collected by the security agent (acting on behalf of and for the benefit of the lenders) can be distributed to the other lenders pro rata in respect of their claims in accordance with the finance documents.
In some cases, a foreign security agent structured outside the jurisdiction of Turkey is preferred, since if the security agent arrangement is recognised by foreign jurisdiction, it is likely that a Turkish court may also uphold it as being valid.

Still, enforceability issues may arise, as the Turkish courts are not yet familiar with these structures or the concept.

4. ENFORCEMENT OF SECURITY

4.1 Are there any significant restrictions which may impact the timing and value of enforcement, such as (a) a requirement for a public auction or the availability of court blocking procedures to other creditors/the company (or its trustee in bankruptcy/liquidator), or (b) (in respect of regulated assets) regulatory consents?

In principle, the foreclosure process for mortgages and pledges is carried out by the competent execution office, which will initiate a public auction for the sale of the mortgaged/pledged assets. Although public auction is a transparent method and has a likelihood of being challenged by the debtor or third parties, it has certain disadvantages with respect to its complicated procedure and long duration.

In terms of movable pledges, the Movable Pledge Law No. 6750 also provides a right to the pledgee to request the transfer of the ownership of the movable asset to itself or transfer its receivable under the pledge agreement to a licensed asset management company upon non-performance of the debt. If it is the intention of the parties to grant the pledgee such a right, then this should be included in the Movable Pledge Agreement. In addition, the Capital Markets Law No. 6362 also provides a right to the pledgee to request the transfer of the ownership of the movable asset to itself in respect of the pledges over the decentralised capital markets instruments (e.g. decentralised shares of public companies), provided that the right of transfer is explicitly included within the pledge agreement.

Except for the regulated areas such as the Turkish energy markets (electricity, petroleum, gas and liquefied petroleum gas), there is no specific regulatory consent required for enforcement.

4.2 Do restrictions apply to foreign investors or creditors in the event of foreclosure on the project and related companies?

Foreclosure proceedings by foreign lenders may be subject to cautio judicatum solvi, or security costs for foreigners, unless there is de facto or de jure reciprocity with the country of such foreign lenders.

5. BANKRUPTCY AND RESTRUCTURING PROCEEDINGS

5.1 How does a bankruptcy proceeding in respect of the project company affect the ability of a project lender to enforce its rights as a secured party over the security?

In the case that the project company is declared bankrupt by the courts and the liquidation process is commenced against the company via official bankruptcy offices, the secured party may not proceed with an individual debt collection proceeding but would have to apply to the bankruptcy offices to be registered and recorded during the liquidation process. Sale of the secured assets is handled together with the sale of "all assets in the bankruptcy estate", and the proceeds may be held off from the creditor if there are challenges against the ranks or receivables.

Please refer to question 5.2 below for the ranking principles.

5.2 Are there any preference periods, clawback rights or other preferential creditors' rights (e.g. tax debts, employees' claims) with respect to the security?

According to the Execution and Bankruptcy Law No. 2004, the receivables of secured creditors have a right to preference over the sale proceeds of the secured assets.

Following recent amendments, public receivables arising from real property and assets such as customs duties, building and land tax will come after the pledged receivables in ranking for collection from the sale proceeds of such secured assets.

The distribution of the sale proceeds of the bankruptcy estate to the creditors, which do not have secured receivables, will be ranked as follows:

First rank

Receivables of the employees, including notice and severance pay accrued within a year prior to the bankruptcy, and notice and severance pay that accrues due to the termination of the employment following the bankruptcy of the company.
Debts of the employer to institutions and funds that are legal entities incorporated to establish aid funds for employees.
Any and all alimony receivables arising from family law accrued within a year prior to the bankruptcy.

Second rank

Receivables of persons whose assets have been left to the administration of the bankrupt as a guardian/administrator.

Third rank

Receivables that are privileged pursuant to the provisions of special laws.

Fourth rank

All other receivables of the creditors which do not enjoy a privilege.

5.3 Are there any entities that are excluded from bankruptcy proceedings and, if so, what is the applicable legislation?

Public bodies are excluded. However, commercially operated or managed companies established by public bodies/enterprises under private law provisions can be subject to bankruptcy proceedings under the principles of the Execution and Bankruptcy Law No. 2004.

5.4 Are there any processes other than court proceedings that are available to a creditor to seize the assets of the project company in an enforcement?

If the debtor company is declared bankrupt by the courts, the creditors cannot individually seize the assets of a company in an enforcement or debt collection proceeding. If there is no bankruptcy or concordat (see question 5.5 below), creditors may initiate debt collection proceedings against the debtor, without filing any lawsuit before the courts. A provisional attachment, although necessitating certain conditions and a judge's approval, is also a fast way to seize the assets of the company and to avoid the flight or withdrawal of capital.

In terms of movable pledges, the new Movable Pledge Law No. 6750 also provides the right to pledgees to request the transfer of the ownership of the movable asset to itself upon failure to perform the secured obligations.

5.5 Are there any processes other than formal insolvency proceedings that are available to a project company to achieve a restructuring of its debts and/or cramdown of dissenting creditors?

Turkish courts may grant a moratorium by suspending debt collection proceedings against the debtor in the case that the debtor's request for reorganisation or a concordat request is accepted by the court.

In the concordat procedure, the court may also suspend other debt collection proceedings against a company for a predetermined period (generally a maximum of 23 months). However, during this period, a commissioner (supervisor) is assigned to the company to avoid the flight of capital and any action that can adversely affect the fiscal status of the company, such as establishment of a new pledge or mortgage, or donations or transfer of immovables without the approval of the court.

5.6 Please briefly describe the liabilities of directors (if any) for continuing to trade whilst a company is in financial difficulties in your jurisdiction.

Under the Turkish Commercial Code No. 6102, the directors should constantly inspect the latest balance sheet of the company for any signs of financial distress and take necessary measures to overcome it or to liquidate the company if it is not possible for the company to overcome such distress.

According to Article 376 of the Turkish Commercial Code No. 6102:

if the latest annual balance sheet affirms that half of the share capital and legal reserves remains uncovered due to loss, the directors shall invite the shareholders to a general assembly meeting and propose remedial measures;
if the latest annual balance sheet affirms that two-thirds (2/3) of the sum of share capital and legal reserves remain uncovered due to loss, this will result in the automatic dissolution of the company (i.e. the company is deemed technically bankrupt) unless the general assembly adopts a resolution either to decrease the capital to one-third (1/3) or to replenish the lost equity as per the proposal of the board of directors; thus, the directors shall immediately invite the shareholders to convene a general assembly meeting and inform the shareholders in the relevant meeting of the current financial distress the company is in; and
if there are any signs that could indicate that the company has become "insolvent" (i.e. if the company's assets are inadequate to cover its debts), the board of directors shall prepare an interim balance sheet based on both the methods-of-continuity principle and the possible market value of the assets. The duty of care of the board of directors may be associated with the notification requirements imposed on the board of directors.

Considering the deteriorating financial conditions of a company, the analysis would thus be two-fold:

a claimant may argue that the board of directors was at fault when failing to act with care in regard to the financial situation of the company and such fault resulted in damages to the company; or
a claimant may allege that the board of directors failed in its notification duties (provided that such failure leads to such damages).

Members of the board of directors are liable as per Article 553 et seq. of the Turkish Commercial Code No. 6102. Such Article stipulates that the members of the board of directors shall be liable towards the company, its shareholders and its creditors in the event that they breach their duties arising out of the law and the articles of association of the company. A claim for compensation (without bankruptcy) may only be demanded by the shareholders, the company and the creditors. The applicable statute of limitations is two years after the shareholders or creditors become aware of the liable person and the damage, and in any case, five years following the breach.

6. FOREIGN INVESTMENT AND OWNERSHIP RESTRICTIONS

6.1 Are there any restrictions, controls, fees and/or taxes on foreign ownership of a project company?

In general, there is no restriction restraining foreign companies from having ownership of a project company established in Turkey, except for companies operating in certain regulated sectors such as banks, insurance and brokerage companies, energy companies acting based on licences, factoring and financial leasing companies. Obtaining prior authorisations or approvals from competent governmental authorities may be required in order to acquire shares or voting rights that reach or exceed certain thresholds.

Foreign real persons or foreign legal entities having 50% or more of the shares or the right to appoint or remove the majority of the persons having the management rights in a Turkish company, must apply to the governorship where the target real estate is located ("governorship approval") before acquiring the title before the land registry. The respective governorship communicates with the general staff and the City Police Department to check if the target real estate is located within a military or security zone, prohibited zone or special security zone. After making the evaluation, if the general staff and the City Police Department provide clearance, the governorship provides an approval (valid for six months) to the foreign shareholding project company to acquire the title of the target real estate.

Finally, foreign investors can transfer these amounts abroad through Turkish banks in foreign currency or Turkish Lira. If the amount is above or equal to US$50,000, the relevant Turkish bank conducting the transfer must notify the relevant Turkish authorities within 30 days following the transaction (excluding payments for exports, imports and invisible transactions).

6.2 Are there any bilateral investment treaties (or other international treaties) that would provide protection from such restrictions?

No. However, Turkey is a party to Bilateral Agreements on Promotion and Protection of Investments with 94 countries, and Bilateral Agreements on Prevention of Double Taxation with 80 countries, as well as several treaties generally on customs union, free trade, multilateral investments, protection of social security rights, and agreements concerning alternative dispute resolution methods (e.g. the Convention on the Settlement of Investment Disputes between States and Nationals of Other States – Washington Convention).

6.3 What laws exist regarding the nationalisation or expropriation of project companies and assets? Are any forms of investment specially protected?

Other than the general provisions in the Turkish Constitution, nationalisation and expropriation are provided in the Law on the Nationalization of Private Entities Engaged in Public Services in Cases of Public Interest No. 3082 and the Expropriation Law No. 2942 and its implementing regulations. However, unless there is public welfare and prompt, adequate and effective compensation to be paid in return, foreign direct investments may not be expropriated or nationalised.

In addition, Bilateral Agreements on Promotion and Protection of Investments provide certain protections against nationalisation for investors.

In order to mitigate the risks of nationalisation and expropriation in PPP projects, measures on nationalisation and expropriation events are included within the project agreements executed with governmental bodies. Accordingly, the project companies and, indirectly, the lenders can claim for compensation in case of nationalisation or expropriation.

7. GOVERNMENT APPROVALS/RESTRICTIONS

7.1 What are the relevant government agencies or departments with authority over projects in the typical project sectors?

The Energy Market Regulatory Authority (EMRA), Energy Exchange Istanbul (Enerji Piyasaları İşletme Anonim Şirketi), the State Hydraulics Authority (Devlet Su İşleri) and the Banking Regulation and Supervision Agency (BDDK) are the main relevant governmental agencies or departments with authority over the projects. Local municipalities also have authority for certain permits such as construction permits or workplace opening and operating permits.

7.2 Must any of the financing or project documents be registered or filed with any government authority or otherwise comply with legal formalities to be valid or enforceable?

In general, legal entities, the tariffs of which are regulated and which hold a licence, are permitted to provide share pledges over their shares or assign/transfer the receivables in relation to such licences, provided that the company obtains the prior consent of the relevant regulatory authority. For example, companies holding an electricity generation licence are required to obtain prior consent from EMRA in order to establish a share pledge. In addition, certain direct or indirect share transfer restrictions or conditions of the relevant governmental authority's prior consent are set forth under the relevant regulations. However, changes which do not require EMRA consent will still need to be notified (where necessary, together with an application for a licence amendment) within six months.

7.3 Does ownership of land, natural resources or a pipeline, or undertaking the business of ownership or operation of such assets, require a licence (and if so, can such a licence be held by a foreign entity)?

The construction and operation of certain projects, such as energy or natural resources, are subject to licensing. For example, companies are required to obtain a licence in order to explore, extract, sell, import and/or export petroleum resources, as well as minerals, due to the fact that the title to such resources and minerals is vested in the state regardless of the ownership of the land in which they are located.

For petroleum resources, apart from some exceptions, in general the upstream and downstream licence holders can be Turkish or foreign individuals or legal entities. On the other hand, for minerals, only Turkish residents (real and legal persons) can hold a licence. However, it should be noted that legal entities duly incorporated in Turkey with foreign shareholders (regardless of share percentage) are also regarded as Turkish residents.

In terms of the ownership of land, it should be checked whether acquisition of land by such foreign company is restricted due to its country of incorporation, as determined by the Council of Ministers' decision based on the bilateral international arrangements.

7.4 Are there any royalties, restrictions, fees and/or taxes payable on the extraction or export of natural resources?

The extraction and export of natural resources requires licensing and the holders of licences may be required to pay royalties or fees over the extracted natural resources to the relevant authorities. Subject to certain exemptions, the exportation of national resources may also be subject to certain customs duties as well.

Under Turkish law, general royalties are revenue-based. The licensee is obliged to pay a royalty varying between 1–15% of the sale price of the minerals, depending on the group that the relevant mineral belongs to. An additional rental payment applies for mining activities conducted on state-owned lands. The mining legislation reduces the royalty by 50% if the ore is processed in Turkey.

For petroleum production (crude oil or gas) the royalty is 12.5% of the sale price, based on a price set by the state. There is no distinction between Turkish nationals and foreigners regarding calculation of the royalty amount to be paid to the state.

7.5 Are there any restrictions, controls, fees and/or taxes on foreign currency exchange?

Certain restrictions are provided for foreign currency exchanges pursuant to Decree No. 32 on Protection of the Value of Turkish Lira and its implementing regulations.

Due to the continuous decrease in the value of Turkish Lira, in 2018 significant restrictions were imposed on Turkish residents with no foreign currency earnings, especially in terms of borrowings denominated in foreign exchange and execution of contracts denominated in foreign currency; though some exceptions are provided, such as loans denominated in foreign currency within the scope of a PPP project.

Banking and Insurance Transactions Tax (BITT) at a rate of 1% of the sale value is imposed on the sales price of a foreign exchange transaction. Nevertheless, a BITT rate of 0% will apply to the following foreign exchange sales:

between banks and authorised institutions;
to the Ministry of Treasury and Finance; and
to the loan debtor by the bank that extended or intermediated the foreign exchange loan, in order for the foreign exchange loan to be paid.

Corporate or income taxes may also accrue depending on the profits gained by or the status of the relevant persons.

7.6 Are there any restrictions, controls, fees and/or taxes on the remittance and repatriation of investment returns or loan payments to parties in other jurisdictions?

As regards loan repayments, all facility and security documentation where the loan is granted by banks, foreign credit institutions or international finance institutions is exempt from stamp tax. However, this exemption is only applied if the loan is utilised in Turkey. Otherwise, stamp tax is applied and must be paid for each original copy.

BITT is also not payable when the lender is a foreign bank.

Loans granted by foreign financial institutions are subject to the resource utilisation support fund (RUSF). According to the current legislation, regressive RUSF rates apply to foreign exchange and gold borrowings (except fiduciary transactions) provided to Turkish residents (banks and financing institutions are exempt) from abroad, depending on maturity, to the extent that such loans are utilised in Turkey.

The RUSF rates on foreign currency denominated loans from abroad are as follows:

With a maturity of less than one year: 3%.
With a maturity of between one (including one year) and two years: 1%.
With a maturity of between two (including two years) and three years: 0.5%.
With a maturity of between three (including three years) and more than three years: 0%.

The RUSF rates on Turkish Lira-denominated loans from abroad are as follows:

With a maturity of less than one year: 1%.
With a maturity of between one (including one year) and more than one year: 0%.

In addition, the RUSF calculation differs based on the type and the currency of the loan. RUSF is calculated:

Over the principal amount in the case that the loan is foreign exchange-denominated.
Over the interest payments in the case that the loan is Turkish Lira-denominated.

Thin capitalisation rules are applied irrespective of the relevant party's country of incorporation.

7.7 Can project companies establish and maintain onshore foreign currency accounts and/or offshore accounts in other jurisdictions?

Yes. Project companies can establish and maintain onshore foreign currency accounts and/or offshore accounts in other jurisdictions.

7.8 Is there any restriction (under corporate law, exchange control, other law or binding governmental practice or binding contract) on the payment of dividends from a project company to its parent company where the parent is incorporated in your jurisdiction or abroad?

As a general principle, a withholding tax at the rate of 15% shall be applicable over the dividends paid out to a foreign shareholder by a project company. This rate may differ depending on the jurisdiction agreements. If the relevant double taxation agreement stipulates a lower rate than that stipulated in Turkish law, then the lower rate shall apply.

Please see question 7.6 above with regard to RUSF.

7.9 Are there any material environmental, health and safety laws or regulations that would impact upon a project financing and which governmental authorities administer those laws or regulations?

Applicable laws and regulations and the required licences differ in accordance with the nature/type of the project.

The main licences and relevant authorities are as follows:

EMRA: electricity generation licence; electricity distribution licence; retail licence; transmission licence; wholesale licence; export-import licence; and natural gas import licence.
Municipalities: workplace opening and operating licence; non-sanitary enterprise certificate; health protection certificates; and operation permit and zoning permits.
Relevant Ministries: environmental impact assessment certificate; tourism investment certificate; investment incentive certificate; tourism operation licence; environmental permit and environmental licence; industrial registry certificate; and forestry permissions.

7.10 Is there any specific legal/statutory framework for procurement by project companies?

In general, procurements must comply with the requirements in the Law on Prevention of Unfair Competition on Importation. In addition, procurements of foreign equipment are subject to the Customs Law and its implementing regulations. Finally, if more than 50% of the shares of the project company are owned directly or indirectly by public entities, Public Procurement Law No. 4734 and State Procurement Law No. 2886 shall be applicable.

8. FOREIGN INSURANCE

8.1 Are there any restrictions, controls, fees and/or taxes on insurance policies over project assets provided or guaranteed by foreign insurance companies?

Insurance Law No. 5684 requires Turkish companies to insure their insurable interests in Turkey through insurance companies operating in Turkey. Accordingly, save for the below cases, foreign insurance companies cannot provide or guarantee the project assets:

Transportation insurance for goods subject to export/import.
Hull insurance for aircraft, ships and helicopters which are purchased with foreign loans, exclusively limited to the loan amount and applicable for the term until the foreign debt is paid, or limited to the period of financial leasing if the same are brought home by financial leasing obtained abroad.
Liability insurance arising from the operation of ships.
Life assurance.
Personal accident, sickness, health and motor vehicle insurance, limited to the time people will be abroad or their temporary stay abroad.

In addition to the above, liability insurance determined by the Turkish Treasury can be provided by foreign insurance companies.

8.2 Are insurance policies over project assets payable to foreign (secured) creditors?

Yes. The insurance policies over project assets are payable to foreign secured creditors.

9. FOREIGN EMPLOYEE RESTRICTIONS

9.1 Are there any restrictions on foreign workers, technicians, engineers or executives being employed by a project company?

There is no legal stipulation which may restrict foreign citizens from being employed by a project company, although certain specific sectors' rules and regulations should be checked.

However, foreign employees employed by project companies are required to hold a valid work permit. Even if the foreign employee is employed by a foreign company while he/she is performing services on site (i.e. within the boundaries of Turkey), he/she will still be regarded as a cross-border service provider temporarily located in Turkey for the provision of services under Law No. 6735 on International Labour Force and thus become subject to a work permit. Law No. 6735 also foresees some exemptions from the work permit requirement. Upon request, the Ministry of Labour and Social Security might issue Work Permit Exemption Certificates for foreigners who are exempt from a work permit. Some of these exemptions are as follows:

Foreign nationals deriving their rights to be exempted from the work permit requirement from bilateral and multilateral agreements to which Turkey is as a party.
Foreign nationals who come to Turkey temporarily for less than three months, in order to perform the assembly of, maintenance of or training on imported machines and equipment and those coming to deliver equipment or to repair damaged equipment, as long as they provide supporting documents relevant to their purpose of travel.
Foreign nationals who enter Turkey for training purposes related to exported or imported goods and services.
Foreign nationals who come to Turkey temporarily in order to improve their knowledge and experience in universities or public institutions and organisations, for a period limited to their education which does not exceed two years, provided that the situation is supported by relevant documentation.
Foreign nationals regarding whom a reasoned offer is made by the relevant authorities about their abilities to render significant contributions to Turkey in socio-cultural, technological and educational fields, for a period that does not exceed six months.
Foreign experts assigned to projects within the context of EU–Turkey Financial Co-operation programmes.

It should be noted that these exemptions are a prerequisite for the evaluation and they do not necessarily guarantee approval by the relevant authorities.

10. EQUIPMENT IMPORT RESTRICTIONS

10.1 Are there any restrictions, controls, fees and/or taxes on importing project equipment or equipment used by construction contractors?

Private procurements are generally covered by the Customs Law and its implementing regulations, and shall be compliant with the Law on Protection of Unfair Competition on Importation No. 3577. In addition, customs duties and VAT calculated over the customs value, together with certain fees, are paid on goods imported to Turkey. Further, certain goods are subject to controls or approvals of the relevant authorities based on the qualification of the goods. Certain goods which have hazardous effects with respect to environmental protection or certain chemicals and scrap metals are prohibited.

Furthermore, pursuant to the Law on Building and Renewal of Facilities and Procurement of Services through Public Private Partnership Model No. 6428, at least 20% of the medical instruments constituting a part of a fixed investment are required to be manufactured in Turkey.

10.2 If so, what import duties are payable and are exceptions available?

VAT rates of 1%, 8% or 18%, depending on the type of the imported good, are applied.

There are four main incentive implementations, which consist of general incentives, regional incentives, incentives for large-scale investments and for strategic investments as per the State Aid for Investment Decision No. 2012/3305. The incentives generally include (i) a VAT exemption, (ii) a customs duty exemption, (iii) an exemption comprising certain other tax reductions, or (iv) land allocations.

11. FORCE MAJEURE

11.1 Are force majeure exclusions available and enforceable?

Despite the lack of a uniform force majeure definition or exclusion under Turkish law, the concept is well known and commonly utilised in Turkish practice, based on freedom of contract. Parties are required to determine explicitly the force majeure events, exclusions and consequences in their agreements, to the extent that the contractual provisions in this respect are not contradictory to the mandatory provisions of Turkish law, especially Article 2 of the Turkish Civil Code No. 4721, regulating the principle of good faith.

12. CORRUPT PRACTICES

12.1 Are there any rules prohibiting corrupt business practices and bribery (particularly any rules targeting the projects sector)? What are the applicable civil or criminal penalties?

Other than the general provisions under the Turkish Criminal Code No. 5237, which mainly covers and criminalises bribery, embezzlement, fraud, bid rigging and other forms of corruption, such as the negligence of supervisory duty and the unauthorised disclosure of business secrets, the following legislation applies to corrupt business practices and bribery:

Criminal Procedure Law No. 5271.
Law on Public Officers No. 657.
Law on the Declaration of Property and Fight Against Bribery and Corruption No. 628.
Regulation on the Declaration of Property.
Regulation on Ethical Principles for Public Officers and Procedures and the Principles for Application.
Law on Misdemeanors No. 5326.
Law on the Financing of Terrorism No. 6415.
Law on the Prevention of Laundering the Proceeds of Crime No. 5549.
Regulation on Compliance Programs Regarding Obligations on Laundering the Proceeds of Crime and the Prevention of Financing of Terrorism.
Regulation on Precautions Regarding the Prevention of Laundering the Proceeds of Crime and the Financing of Terrorism.

13. APPLICABLE LAW

13.1 What law typically governs project agreements?

Other than those executed with or issued by government entities or related to the transfer of operating rights or licences or concession agreements or operation and transfer arrangements, which shall be governed by Turkish law, parties are free to determine foreign law and jurisdiction for project agreements, such as supply and maintenance agreements, construction agreements, procurement agreements, etc.

In general, unless executed with a Turkish bank, agreements governed by English law or based on Loan Market Association documentation are preferred in the Turkish markets.

13.2 What law typically governs financing agreements?

In general, Turkish law and English law are determined, depending on the nature/type of the project agreement.

13.3 What matters are typically governed by domestic law?

Other than those listed in question 13.1 above, security arrangements for the rights, receivables and assets (including pledge over the shares of a Turkish project company) located or having arisen in Turkey are governed by Turkish law.

14. JURISDICTION AND WAIVER OF IMMUNITY

14.1 Is a party's submission to a foreign jurisdiction and waiver of immunity legally binding and enforceable?

Parties are free to settle on a court of foreign jurisdiction for an agreement containing a foreign element, unless the subject matter of the dispute falls in the exclusive jurisdiction of the Turkish courts. It should be noted that a specific foreign court in the relevant jurisdiction (the High Court in London, rather than English courts) must be selected as a competent court in the agreement.

In general, states or any state entity will enjoy sovereign immunity from both a lawsuit and seizure. However, states or any state entity shall not benefit from such immunity while acting in a private or commercial capacity. In addition, according to the Vienna Convention on Diplomatic Relations, in order for the immunity to be valid and binding for a state or state entity, the waiver must be made by the relevant state itself.

15. INTERNATIONAL ARBITRATION

15.1 Are contractual provisions requiring submission of disputes to international arbitration and arbitral awards recognised by local courts?

Yes. However, foreign arbitration or arbitral awards are not recognised in cases where (i) there is an absence of an arbitration agreement or clause in written form (which is recommended to also be written in the Turkish language), (ii) the subject matter of the dispute is not capable of being settled by arbitration under Turkish law, (iii) the recognition or enforcement of the award is evidently contrary to public policy in Turkey, (iv) the judgment given on the matter falls within the exclusive jurisdiction of the Turkish courts, or (v) the award is not final.

In addition, such an award is not recognised if one of the parties claims that (i) such party was not properly represented before the arbitral tribunal in accordance with the due process and thus, such party does not accept the tribunal's award, (ii) such party was not given notice as to the appointment of the arbitrator or arbitration proceedings or was otherwise unable to present his/her case, (iii) the arbitration clause/agreement is invalid under the applicable law, (iv) the appointment of arbitrators or procedural rules applied by the arbitrators is contrary to the parties' agreement, (v) the arbitral award relates to a matter that was not in the arbitration agreement/clause or it exceeds its scope, or (vi) the arbitral award has not become final or enforceable or binding under the applicable law or the procedural rules to which it was subject or the arbitral award was annulled by the competent body of the place where it was made.

15.2 Is your jurisdiction a contracting state to the New York Convention or other prominent dispute resolution conventions?

Yes. Turkey has been a party to the 1958 New York Convention on the Recognition and Enforcement of Arbitral Awards (NY Convention) since 1992 and enforces arbitral awards of other contracting states without re-examination of the merits, subject to the conditions set forth under the NY Convention.

As Turkey has been a party to the Washington Convention since 1987, the disputes may be resolved before the International Centre for Settlement of Investment Disputes, provided that the dispute arises out of a foreign investment and the other necessary conditions are fulfilled.

In addition, Turkey ratified the European Convention on International Commercial Arbitration in 1991.

15.3 Are any types of disputes not arbitrable under local law?

Yes. For instance, (i) disputes arising out of in rem rights such as rights over the immovable, and (ii) disputes which cannot be subject to the parties' will, such as facility or employment issues, family law or issues related to administrative (such as taxation), criminal or bankruptcy law, cannot be subject to the arbitration procedure.

15.4 Are any types of disputes subject to mandatory domestic arbitration proceedings?

Depending on the laws and regulations applicable to such claims, some of the disputes such as disputes regarding collective bargaining agreements, consumer law or disputes regarding private legal relationships between state-owned institutions such as municipalities are subject to mandatory arbitration in Turkey.

16. CHANGE OF LAW / POLITICAL RISK

16.1 Has there been any call for political risk protections such as direct agreements with central government or political risk guarantees?

Turkey has signed bilateral investment treaties (BITs) with 98 countries and 76 of them are currently in force. BITs are a valuable tool to promote and protect foreign investment. Other than the foreign investments protected within the context of BITs, there have been none that we are aware of which call for political risk protections.

17. TAX

17.1 Are there any requirements to deduct or withhold tax from (a) interest payable on loans made to domestic or foreign lenders, or (b) the proceeds of a claim under a guarantee or the proceeds of enforcing security?

Turkish law requires Turkish borrowers to withhold taxes from interest and similar payments to foreign lenders under facility agreements. The general rate of applicable income tax, i.e. through withholding, is 10% for foreign lenders that are not licensed banks or financial institutions, while it is 0% for regulated banks or qualified financial institutions.

In addition, while BITT is not applied to foreign lenders, BITT of 5% over interest or other income, such as fees, is applied to Turkish banks or to any facility office of foreign lenders located in Turkey.

The proceeds of enforcing security or of a claim under a guarantee, on the other hand, are taxable unless the beneficial owner has a taxable presence in the form of a permanent establishment in Turkey. Furthermore, for income arising from deposit transactions between banks, stock exchange money-market transactions, repo and reverse-repo transactions and the sale of Treasury Bills and Government Bonds prior to their maturity, the applicable BITT rate is 1%.

17.2 What tax incentives or other incentives are provided preferentially to foreign investors or creditors? What taxes apply to foreign investments, loans, mortgages or other security documents, either for the purposes of effectiveness or registration?

All facility and security documentation where the loan is granted to Turkish borrowers by banks, foreign credit institutions or international finance institutions are exempt from stamp tax. However, this exemption is only applied if the loan is utilised in Turkey. Otherwise, stamp tax is applied and must be paid for each original copy.

BITT is also not payable when the lender is a foreign bank.

Please see question 7.6 above for more detailed information regarding RUSF.

In addition, there are significant foreign investment incentives based on the investment location. Turkey is divided into six regions, with less developed areas of the country having greater incentives than the highly industrialised zones.

Turkey also has Free Trade Zones dispersed around the country, especially in trade hubs like İstanbul, İzmir, Bursa and Adana, with significant tax incentives.

18. OTHER MATTERS

18.1 Are there any other material considerations which should be taken into account by either equity investors or lenders when participating in project financings in your jurisdiction?

Subordination rules and clawback risk may be deemed potential issues for a foreign lender.

In contractual subordination: firstly, it may not be possible to obtain specific performance before the execution offices, since it is neither recognised nor tested by law; and secondly, in case of bankruptcy, all the creditors of the bankrupt debtor will be ranked in accordance with the provisions of Execution and Bankruptcy Law No. 2004. (Please see question 5.2 for the orders of ranking.)

In addition, the lenders may have a clawback risk vis-à-vis other creditors of a Turkish debtor that is unable to pay its debts (insolvent), whereby other creditors are entitled to apply to courts to invalidate certain transactions entered into by the insolvent debtor. These voidable transactions generally consist of those made: during the year immediately prior to the insolvency proceedings, such as the granting of a security for an existing debt (excluding those which the debtor had previously undertaken to grant); or in the last two years prior to the insolvency proceedings, such as transactions made for no consideration (including donations), for a consideration that is significantly less than the actual value of the transaction, or with the intention of harming its creditors.

In addition to the above, guarantee and surety in security options may be important for lenders or equity investors:

Guarantee: The obligation of the guarantor is independent of the agreement it guarantees. As a result, the validity of the underlying contractual relationship does not affect the enforceability of the guarantee obligation. A guarantee is not subject to specific creation requirements (for example, a written agreement or requirement determining a cap on the guarantee), with the exception of a personal guarantee. According to the Turkish Code of Obligations, the suretyship conditions are applicable to create a personal guarantee.
Surety: The security obligation of the surety depends on the validity of the debtor's debt, i.e. if the debtor's debt becomes invalid for any reason, the surety is entirely released of all its obligations (contrary to the guarantee). Accordingly, the surety's liability is always ancillary in nature. Surety is established through written agreement, which includes a statement of the amount of maximum liability agreed in handwriting by the surety. In addition, the suretyship period for real persons and the type of suretyship (for example, whether ordinary or several) must be specified in the agreement. If a married individual is the surety, the law requires the spouse of the surety to provide consent on or before the date of the surety agreement, except for certain cases.

18.2 Are there any legal impositions to project companies issuing bonds or similar capital market instruments? Please briefly describe the local legal and regulatory requirements for the issuance of capital market instruments.

In general, the issuance of debt instruments through public offering or private placement or to qualified investors is subject to the following laws and regulations:

Turkish Commercial Code No. 6102;
Capital Markets Law No. 6362;
Decree on the Protection of the Value of Turkish Lira No. 32 and its implementing regulations;
Communiqué on Shares;
Communiqué on Debt Instruments;
Communiqué on Prospectus and Issue Document;
Communiqué on Sales of Capital Market Instruments; and
Listing Directive of Borsa Istanbul.

The total amount of issuance shall not exceed certain limits determined for the issuing company by the CMB, the sole authority on capital markets in Turkey. In addition, the issuing company must be registered with Borsa Istanbul and must obtain an approval certificate for the issuance and for the issuance limit set by the CMB.

19. ISLAMIC FINANCE

19.1 Explain how Istina'a, Ijarah, Wakala and Murabaha instruments might be used in the structuring of an Islamic project financing in your jurisdiction.

Sukuk: This is the most common instrument utilised in financings on Turkish markets. According to the Communiqué on Lease Certificates, lease certificates/sukuk can be structured on an asset (sukuk al ijarah), management, purchase and sale, partnership (sukuk al-musharaka) or construction agreement (sukuk al-istisna) basis.
Ijarah: Similar to financial leasing, this structure is based on the use of assets and the receipt of rental receivables while the ownership remains with the lessor with all its liabilities. It is commonly used if a company needs an asset but cannot afford or is unwilling to purchase the same in cash.
Istisna'a: This is a type of contract where one party is obliged to produce a specific item of a specific quality and size, such as a facility or product, in a given period for a determined amount, where the other party is obliged to pay the total amount of money at the end of the period. These certificates enable payment at a future date and include the cost, which is equal to the total complete sale price and fund costs.
Murabaha: This is an instrument based on a sale contract between the seller and the client for the sale of goods, which includes profit agreed by the parties; repayments are mostly made in instalments.
Wakala: As an Islamic type of power of attorney or agency arrangement, Wakala is an agreement where the client appoints an agent to invest funds and such agent manages those investments on behalf of the clients for a specific period of time to generate an agreed profit in return.

19.2 In what circumstances may Shari'ah law become the governing law of a contract or a dispute? Have there been any recent notable cases on jurisdictional issues, the applicability of Shari'ah or the conflict of Shari'ah and local law relevant to the finance sector?

As long as there is a foreign element, parties are free to determine foreign law to govern their agreement, including Shari'ah law. However, amongst other factors, the enforcement and recognition of decisions provided under Shari'ah law before Turkish courts depends on the fact that it should not be contrary to public policy.

19.3 Could the inclusion of an interest payment obligation in a loan agreement affect its validity and/or enforceability in your jurisdiction? If so, what steps could be taken to mitigate this risk?

This should be subject to the general rules and principles of Turkish law on recognition and enforcement.

Originally published by International Comparative Legal Guide – Project Finance 2021.

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.

Turkey: Project Finance 2021