Turkey: Trading In A Flexible Business Environment: Free Zones In Turkey

1. Free Zones in Turkey

Free zones are defined as special sites within a country that are deemed to be outside of its customs borders, and as regions where valid regulations for foreign trade and legal and administrative regulations for commercial, financial and economic areas are either partially applicable or not applicable at all. Free zones offer a more convenient and flexible business environment in order to increase trade volume and exports for some industrial and commercial activities in comparison to other parts of the country.

Matters relating to the establishment of free zones in Turkey, the determination of their locations and borders, fields of activity, management, operation, and the establishment of structures and facilities within the free zones are regulated in Free Zones Law No. 3218 ("Free Zones Law"). In addition, free zones are regulated within the scope of the "Free Zones Implementation Regulation," the "Establishment, Duties, Authorities and Working Principles of Free Zone Directorates," the "Decision on Payments to be Made in Free Zones in Turkish Lira," and the Circulars of the General Directorate of Free Zones.

In general, a variety of business activities can be performed in Turkish free zones such as: manufacturing, research and development (R&D), software, general trading, storing, packing, banking and insurance, assembly and disassembly, and maintenance services.

Currently, there are 18 free zones in Turkey, which are as follows:

2. Advantages of Turkish Free Zones

Turkish free zones include certain financial advantages, and customs-related exemptions and benefits. As published by the Ministry of Trade of the Republic of Turkey on 9 February 2022¹, the advantages of Turkish free zones are as follows:

a. Opportunity to Benefit from Tax Advantages: Some transactions and incomes that meet certain conditions are exempt from tax.

- Until the end of the taxation year, including the date when Turkey becomes a full member of the European Union, the earnings of manufacturers generated through the sale of goods that are produced in the zones are exempt from income and corporate taxes.

- Until the end of the taxation year including the date when Turkey becomes a full member of the European Union, the wages of workers employed by manufacturers who export at least 85% of the FOB (Free on Board) value of the goods they have produced in the zones are exempt from income tax.

- Transactions and arranged documents relating to activities carried out by manufacturer users in the zones are exempt from stamp duties and fees.

- Property tax is not paid on buildings or land in the free zones.

- Logistical services supplied to third countries are exempt from VAT.

b. Opportunity for Medium and Long-Term Planning: The validity period for an operating license is five years for tenant users, 20 years for manufacturer tenant users, 30 years for users who build their own working premises (investor users), and 45 years for manufacturer-investor users. Building plots and buildings on Treasury owned land can be leased or granted easement for up to 49 years for investor users.

c. Opportunity to Transfer Profits: The revenue and earnings from free zone activities can be freely transferred to Turkey or abroad without permission.

d. Facilitation of Foreign Trade: Since goods sold from Turkey to free zones are subject to an export regime, free zone users can buy goods and services from Turkey without paying value added tax. Conversely, trade between free zones and third countries is not subject to a foreign trade regime. Moreover, upon request, goods of Turkish origin that are less than 5,000 USD in value or its equivalent in Turkish Lira can be exempted from export procedures.

e. Trade Facilities Free from Customs Duty Procedure: Since the free circulation status of Turkish or EU originated goods brought into the zones does not change, these goods are exempt from customs duty while entering into Turkey or the European Union's customs territories. Third country originated goods are exempt from customs duty while entering into the free zones or while being exported to countries other than Turkey or the EU.

f. Easy Access to EU Countries: Since free zones are part of the Turkey-EU Customs Territory, goods in free circulation can be sent to EU Countries using an A.TR certificate. Customs duties for goods of third country origin are also not paid upon entry into the free zones. However, goods of third country origin that are not in free circulation can only be sent to EU countries using an A.TR certificate, after customs duties are paid according to the rates determined in the Common Customs Tariff.

g. Equal Treatment: The incentives and advantages provided in free zones are available to all firms regardless of their origin.

h. No Time Limitation: Goods in the zones are not subject to a time limit.

i. Managing Trade Activities According to Market Demands and Conditions: In Turkish free zones, any authority regarding prices, quality and standards granted to public institutions and agencies by laws or by other legislation is not valid unless manufacturers demand so. Legislative provisions pertaining to customs and foreign exchange obligations are also not applicable in the zones.

j. Inflation Accounting Opportunity: Every payment in the Turkish free zones is made using convertible currencies or the equivalent in Turkish Lira.

k. Access to Domestic and Foreign Markets: In contrast to most of the free zones in the world, sales to the domestic market, with the exception of consumer and risky products, are allowed.

l. Reduced Bureaucratic Procedures and Dynamic Management: During the application and operation process bureaucracy is minimized. Professional private sector companies manage free zones.

m. Strategic Locations: Turkish free zones are close to the EU and Middle East markets, adjacent to the major Turkish Ports on the Mediterranean, Aegean and Black Sea and have easy access to international airports and highways.

n. Competitive Infrastructure Standards: Turkish free zones' infrastructure is competitive with international standards.

o. Supply Chain Management:  Turkish free zones offer supply chain management opportunities, particularly for export manufacturers, by providing intermediate and raw materials.

3. Free Zone Activities and Operating License

Pursuant to Article 5 of the Free Zones Law, local or foreign real or legal persons can operate in free zones provided that they obtain an "Operating License" by following the necessary procedures. There is no domestic or foreign capital limitation for legal entities that operate in free zones.

In order to operate in a free zone, local or foreign real or legal persons may i) open a branch in the free zone if they are already headquartered in Turkey or ii) directly establish a free zone-based company. Thus, companies whose head office is located in Turkey and who continue their commercial activities in Turkey are obliged to establish a "Free Zone Branch" to carry out their activities in the free zone due to the necessity for keeping separate accounting records and issuing capital for their activities in the free zone. Local or foreign real or legal persons that do not reside within the borders of Turkey cannot open branches in a free zone but can establish a company within it.

In order to carry out commercial activities in a free zone, an Operating License must be obtained from the General Directorate of Free Zones of the Ministry of Trade of the Republic of Turkey ("General Directorate").

4. Operating License Application Procedures

Application procedures for obtaining an operating license are as follows:

• Firstly, an "Operating License Application Form," obtained from either www.ticaret.gov.tr, the General Directorate, or the Zone Operator/Founder and Operator Company – should be completed.
• An application fee of 5,000 USD or its equivalent in Turkish Lira should be deposited to the relevant accounts of the Central Bank of the Republic of Turkey.
• The application file with a petition should be submitted to the General Directorate.

An application file should contain the following information and documents:

- A copy of the completed "Operating License Application Form,"²

- Descriptive information about the applicant and its free zone operation,

- An authorization document and a specimen signature of the signatory and (if any) power of attorney and a specimen signature of the firm agent,

- If the applicant:

a. is an already established firm: a copy of the Turkish Trade Register Gazette covering its establishment announcement and the last capital and partnership structure of the applicant firm document obtained from the Chamber of Commerce and/or Industry (A copy of the establishment documents of a firm that has been established outside of Turkey, ratified by the Turkish Consulates),

b. is a firm that will be established within the free zone: the articles of incorporation.

- The last three year's balance sheets, and income statements,

- An original copy and a photocopy of the receipt for the Operating License fee paid to the Central Bank of the Republic of Turkey,

- Documents relating to foreign currency brought into Turkey within the last three years (if any),

- An establishment permit from the Banking Regulation and Supervision Agency of Turkey (BRSA) for bank and financial leasing institutions and from the Undersecretariat of the Treasury Directorate General of Insurance for insurance companies.

• If the General Directorate does not approve the application, the application fee is refunded.
• It is obligatory for companies approved by the General Directorate to make a lease agreement with the free zone founder and operator/operating company within 30 days.
• Applications are made to the Regional Directorate of Free Zones ("Regional Directorate") together with the lease agreement. The General Directorate will approve the lease agreement.
• Finally, the General Directorate will issue an operating license and send it to the Regional Directorate.

The operating license period is:

- 10 years for the lessee/local or foreign real or legal persons who lease an already existing workplace (15 years for those engaged in production),

- 20 years for investors/local or foreign real or legal persons who construct their own workplace (30 years for those engaged in production).

At the end of this period, an operating license may be granted again, upon application if the conditions are met. In addition, the General Directorate may grant operating licenses for "Private Investments" evaluated on a project basis, for a period between 49 - 99 years.

5. Company Establishment in Free Zones

Investors may establish a company, provided that they operate exclusively within the free zone and by providing proof of the company's address in the free zone.

The requirements for investors who wish to establish a company within the free zone are as follows:

• The Articles of Association for a Company Must Comply with Circular No. 1998/4 of the General Directorate, titled "Assessment of Operating License Applications, Branch, Branch Addressed Firm" (Circular No. 1998/4").

The provisions regarding the title, purpose and subject, head office address and duration of the company, which should be included in the company's articles of association, must be regulated in accordance with the Circular No. 1998/4.

The draft of the articles of association, prepared in accordance with Circular No. 1998/4, must be submitted to the General Directorate along with other documents necessary to obtain an operating license, which is mandatory for the company to operate in the free zone.

• The Company Must Obtain an Operating License.

Real or legal persons who wish to establish a company to operate in a free zone must obtain an operating license as explained above.

• Once an Operating License is Obtained, Legal Entities Can Proceed to Establishing a Company.

The company's articles of association, prepared in accordance with the Circular No. 1998/4, are sent to the General Directorate together with the Operating License Application Form and the necessary documents attached to the form.

After an approval letter regarding the operation license application is received, an application is made to the trade registry for the establishment of the company together with the other necessary documents required by the related chamber of commerce. The company can be established in accordance with the provisions of the Turkish Commercial Code No. 6102 and begin its activities in the free zone.

6. Conclusion

In recent years, Turkey has developed programs that provide incentives and support to investment projects in various ways in order to attract local and foreign investors. With certain discounts, support and exemptions, Turkey has become an attractive trade center that paves a way for investors to create income.

In this regard, free zones are also a decent opportunity for investors as they are designed to boost export-focused investment. Free zones have a crucial role in promoting export-oriented investment and production, accelerating foreign direct investment and technology access, directing enterprises towards export and in developing international trade. Local and foreign investors who wish to invest in Turkey can benefit from the advantages of the free zones, and trade freely with exemptions in a flexible business environment.

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.