Free Trade Zones ("FTZ's") in Turkey provide many advantages to companies and investors by allowing them to take advantage of duty-free importation of materials for manufacturing and the subsequent tax free export of finished products. This enables businesses to cost-effectively penetrate different markets through the elimination of customs and legal restrictions on trade. FTZs are thus enjoy preferential treatment with respect to matters of tax and foreign currency regulations in Turkey.
FTZs are primarily governed by the Free Zones Law No: 3218, published in the Official Gazette on June 15, 1985 and numbered 18785 (the "Law") and the Regulation regarding the Implementation of the Free Zones Law published in the Official Gazette dated March 10, 1993 and numbered 21520 (the "Regulation"), as amended The Law and the Regulation control the operation, management and activities of FTZs. Accordingly, the following shall be applicable to companies established in FTZs:
Pursuant to Article 6 of the Law, FTZs are considered to be outside of the customs territory. Therefore, legislative provisions pertaining to customs and foreign exchange obligations are not applicable in these zones. A business may be operated in a FTZ through setting up (i) a branch of an existing company in Turkey, (ii) a branch of an existing company abroad, or (iii) establishing a new company according to Turkish Law.
According to Article 11 of the Regulation, all companies that will conduct business in FTZs are required to obtain an operating license (the "Operating License") from the General Directorate of Free Zones or Directorate of Free Zone (the "General Directorate"). Accordingly, a separate application for the Operating License has to be made for different fields of activities such as purchase-sale, services, maintenance-repair, and production. The Operating License is granted for 20 years for production/manufacturing activities and 15 years for other activities in FTZs. Upon the expiration of the term of an Operating License, a renewal application may be made to the General Directorate.
The following documents are required to be submitted to the General Directorate in connection with the application for an Operating License:
- Operating License Application Form.
- Descriptive information about the applicant and its FTZ operation.
- Receipt regarding the payment of the Operating License fee.
- Tax Identification Number.
- Draft Articles of Association of the company to be formed in the FTZ.
- If the shareholder is a legal entity, trade registry records showing the establishment and shareholder structure of such shareholder in its country.
- If the shareholder is a legal entity, the last three years' balance sheets and income statements of the shareholder.
- Documents related to the foreign currency brought into Turkey within the last three years by the shareholder (if any).
- If the shareholder is a real person, a photocopy of the shareholder's identity card.
- If the shareholder is a real person, the notarized translation of the shareholder's passport.
- Conformity Letter of the FTZ operator.
- Power of attorney and signature declaration.
It is also possible that the General Directorate may request additional documents, on a case by case basis.
Benefits of Free Trade Zones in Turkey
As per the Law, the benefits of FTZ's for sale-purchase-manufacturing activities are summarized below:
- Opportunity to Benefit from
- All companies established in FTZ's are exempt from Value Added Tax (VAT).
- The transactions and arranged documents related to the activities carried out in the FTZs are exempt from stamp duties and charges.
- Trade Facility Free from
Customs Duty Procedure
- The goods in free circulation can be sent to Turkey or to the EU countries from the FTZ's without any customs duty payment. Moreover, no customs duty is applied on the goods of third country origin upon entry into the FTZs and their subsequent exit to third countries. However, goods not in free circulation of third country origin which are sent to Turkey or to the EU countries from a FTZ shall be subject to the custom duty stated in the Common Custom Tariff.
- Easy Access to EU
- Article 23 of the EC Treaty stipulates free circulation for Community goods throughout the European Community (EC). This principle applies not only to goods made in the Community but also to imported goods which have been released for free circulation after payment of the relevant import duties to which they are subject. Since FTZ's are part of the Turkey-EU Customs Territory, goods in free circulation can be sent to the EU Countries with an ATR.1 certificate. The ATR.1 Certificate is a customs document used in trade between EU members and Turkey, so that they can benefit from lower rates of duty. The legal basis for the use of the certificate is the EU-Turkey Customs Union. It is important to remember that not all products are included in the Customs Union. Examples of products not included in the Customs Union are steel and coal and some agricultural products. Many of these are included in the EU-Turkey FTA, instead.
- It is also worthwhile to note that the ATR.1 certificate is not a certificate of origin, but rather a status certificate. It certifies that the product has been put in free circulation either in the EU or in Turkey, which means that the product had gone through the importation procedure in either country. Customs duties for the goods of third country origin are also not paid upon entry into the FTZ's. However, the goods of third country origin that are not in free circulation can be sent to the EU countries by an ATR.1 certificate only after the customs duties are paid over the rates determined in the Common Customs Tariff.
- Upon request, goods of Turkish origin with a value less than US$5000 or its equivalent in Turkish Lira can be exempted from export procedures.
In addition to the above mentioned benefits, employees of companies having an FTZ operating license that export at least 85% of FOB value of the goods they produce in the FTZ are 100% exempt from income tax on their salaries.
How to Start Operating in a FTZ
In order to start a business in FTZs the steps outlined below must be followed:
- A protocol or a memorandum of understanding shall be signed between the company and the company that operates the FTZ with respect to a determination of the company's physical location and approved activities in the subject FTZ.
- An application shall be made to the General Directorate for an Operating License, together with the relevant Operating License Application Form and other required documents.
- For this purpose a one-time license fee of US$5000 shall be transferred to the Central Bank of the Republic of Turkey. In the event that the application is rejected, such license fee will be returned to the applicant.
- Upon initial approval of the General Directorate regarding the application for the Operating License (in practice, it takes approximately 3 weeks to receive the initial approval from the date of the submittal of the required documents to the General Directorate), the company shall be incorporated at the relevant Trade Registry.
- Within 30 days of the initial approval of the General Directorate, a lease agreement shall be executed between the company and the operator company of that FTZ in line with the protocol mentioned above.
- The executed lease agreement shall be submitted to the Free Trade Zone Directorate for approval. Upon approval of the FTZ Directorate, the executed lease shall be transmitted to the General Directorate together with the required documents by the Regional Directorate for review. Finally, the operating license is obtained from the General Directorate, whereupon the company may commence its activities in the FTZ.
The benefits of Free Trade Zones, particularly the obvious tax and customs duty advantages, and the rapidly increasing number of companies wanting to establish themselves in FTZ's has resulted in a dramatic rise in the number of Free Trade Zones developed throughout Turkey. The combination of financial incentives, Turkey's excellent transportation and shipping infrastructure, and relative proximity to Southern and Eastern Europe and the MENA region have made its Free Trade Zones particularly attractive for manufacturing and assembly companies that primarily produce for export. For any attorney representing an international company with the intention of operating in Turkey, setting up shop in a FTZ is an option that should not be overlooked.
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.