I. INTRODUCTION

Presidential Decree no. 85 ("Decree No. 85") amending Decree No. 32 on the Protection of the Value of Turkish Currency ("Decree No. 32") was published in the Official Gazette on 13 September 2018. Decree No. 85 requires that the contract price and any other payment obligation arising under any sale and purchase agreements for movable and immovable assets; lease agreements for any movable and immovable assets, including vehicles and financial leasing; employment, service and construction contracts or contracts for works that are executed between persons resident in Turkey must be denominated (or for existing contracts redenominated from a foreign currency) in Turkish Lira. Persons resident in Turkey include both real and legal persons.

Decree No. 85 provided that exemptions from this requirement may be determined by the Ministry of Treasury and Finance (the "Ministry"). On 6 October 2018, the Ministry published various exemptions under a Communique (the "Communique"). This memorandum has been prepared to summarise the details set forth in the Communique.

II. EXEMPTIONS

The Communique provides for the following exemptions from the requirement to convert foreign currency contracts into Turkish Lira:

1. Employment Agreements

Persons residents in Turkey can agree employment contracts in foreign currency or indexed to foreign currency contract prices where:

a. the performance of the contract is outside of Turkey;

b. the employee is not a Turkish citizen; or

c. where the employer is a branch, representative or liaision office of, or is owned 50% or more directly or indirectly by, a non-Turkish entity or is a company operating in a free trade zone in relation to its activities in the free trade zone.

2. Service Agreements

Persons residents in Turkey can agree consultancy agreements, intermediary contracts or transportation contracts or other types of service agreements in foreign currency or indexed to foreign currency contract prices:

a. where one of the parties, whilst resident in Turkey, is not a Turkish citizen;

b. for export, transit trades, export sales, deliveries and service agreements that generate foreign currency earnings;

c. where the agreement is carried out outside of Turkey;

d. where the service is provided to a branch, representative or liaision office of, or to a company owned 50% or more directly or indirectly by, a non- Turkish entity or to a company operating in a free trade zone in relation to its activities in the free trade zone.

3. IT Sector Agreements

The following broad exemptions have been introduced for the IT sector to permit foreign currency or foreign currency indexed prices for:

a. electronic communication services which start in Turkey and conclude abroad or vice versa; or

b. agreements relating to software produced abroad for sale or for licensing and service agreements relating to the hardware and software.

4. Movable Assets

Persons resident in Turkey can agree prices in foreign currency or indexed to foreign currency in relation to:

a. agreements for the sale or rental of movable goods excluding vehicle and construction machinery sales and rentals;

b. leasing agreements for ships.

5. State Tender Agreements

Contractors may conclude agreements with third parties (except for real estate and rental agreements and employment agreements) in foreign currency or foreign currency indexed for the performance of tenders or contracts executed with public institutions and organizations.

6. Other Special Types of Agreements

The exemptions also apply in certain other sector specific contracts between persons resident in Turkey as follows:

a. Financial leasing agreements regulated under Decree No. 32 regarding foreign borrowing;

b. Agreements other than real estate sales and real estate rentals which are made by public institutions and the Turkish Army Forces Foundation companies;

c. Agreements to which banks are parties relating to transactions carried out by the Ministry of Treasury in foreign currency or indexed to a foreign currency (e.g. Treasury bonds issued in foreign currency);

d. subject to the other provisions of Decision No. 32, the sale and trading of capital markets instruments;

e. various entities operating in the airline sector (including airline companies, technical maintenance providers or ground handling service providers) can conclude real estate sales, rental agreements and employment agreements in foreign currency or indexed to a foreign currency; or

f. agreements indexed to precious metals and/or commodities whose price is determined in foreign currency in the international market.

It remains the case that real estate sales and rentals, except for certain very specific exceptions (e.g. airport contracts), need to be concluded in Turkish Lira between residents in Turkey and no broad exemptions have been made in this space.

III. BASIS FOR CONVERSION TO TURKISH LIRA

The other main open issue from Decree 85 concerned the basis for the conversion of foreign currency contracts into Turkish lira where an exemption does not apply. The Communique has brought some clarity on this but there remain some questions of interpretation.

For existing non-real estate contracts, where parties have not been able to agree a Turkish lira price for existing contracts then the Communique states that the price to apply will be the Turkish Lira amount calculated by using the indicative effective sale rate published for 2 January 2018 by the Turkish Central Bank. For prices that are to apply after that date then this sum is increased by reference to the monthly change to the consumer price index published on a monthly basis by the Turkish Statistical Institute after 2 January 2018 until the date at which the price conversion is made.

For existing real estate rental contracts a more complicated conversion regime applies. The parties may agree the contract price to apply for a period of 2 years on the same basis above as applies to non-real estate contracts. However if the parties do not agree then the conversion must apply as follows: In relation to the first year from the date at which the conversion should occur the contract price is adjusted by the rate of the monthly changes to the consumer price index determined monthly by the Turkish Statistical Institute. The price for the second year is determined by increasing the contract price applying for the year before in accordance with the rates of the monthly changes on the consumer price index determined monthly by the Turkish Statistical Institute.

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.