Turkey: Changes on the exemptions to the restriction on the use of foreign currency

On 16 November 2018, the Ministry of Treasury and Finance (the “Ministry”) has announced certain changes on the exemptions to use foreign currency denominated or indexed payments for certain types of contracts among Turkish residents (the “Restriction”). Changes we consider material can be summarized as follows:

Immovable Property

As noted in our e-alert of 10 October 2018, contracts for the sale or lease of immovable property must be denominated in Turkish Lira. However, effective from 16 November:

• where the buyer or the tenant (i) does not hold Turkish citizenship or (ii) is a branch, representation office or liaison office of a non- resident in Turkey, or an entity solely or jointly controlled by a non-resident in Turkey, the contract price and other payment obligations arising from these contracts may be denominated or indexed in foreign currency.
• Contractors of public contracts denominated or indexed in foreign currency, or executed pursuant to international treaties and their third party counterparts may also denominate or index lease contracts for immovable property in foreign currency.
• Lease contracts for the purposes of operating accommodation facilities certified by the Ministry of Culture and Tourism may be denominated or indexed in foreign currency.
• Lease contracts for the purposes of operating duty-free shop may be denominated or indexed in foreign currency.

Changes to previously-announced exemptions:

• Employment contracts: Prior to 16 November 2018, only Turkish entities in which a non-resident in Turkey owns, whether directly or indirectly, shares corresponding to 50% or more of the entity’s share capital were allowed denominate or index employment contracts in foreign currency. The scope of this exemption is now extended to Turkish entities jointly controlled by a non-resident in Turkey, regardless of the percentage of shares owned by such non-resident.
• Service contracts: In our e-alert of 10 October 2018, we reported that service contracts were exempt from the Restriction if and where either party is (i) a branch, representation office or liaison office of a non-resident in Turkey; (ii) a Turkish entity in which a non-resident in Turkey owns, whether directly or indirectly, shares corresponding to 50% or more of the entity’s share capital or (iii) is an entity operating in a free zone in Turkey. However, the Ministry has now amended this exemption to cover only contracts where parties listed under (i), (ii) and (iii) above are the recipients of the services (and not the providers thereof).

The scope of an existing exemption provided solely for electronic communication services has been extended to cover all type of services (i) starting in Turkey and ending abroad or (ii) vice versa or (iii) starting or ending abroad. Unfortunately, there is no guidance provided by the Ministry in relation to the implementation of this new exemption. We assume that this exemption would cover, for instance, a transportation contract in which certain goods will be transported from Turkey to abroad or vice versa.

• Work contracts (eser sözleşmeleri): Prior to 16 November 2018, only contracts on the construction, repair and maintenance of vessels were exempt from the Restriction. From now on, any work contract may be denominated or indexed in foreign currency where the input price is also denominated or index in foreign currency.
• Technology contracts: The Ministry further clarified that only license and service contracts related to hardware and software produced abroad can be denominated or indexed in foreign currency.
• Public contracts: The scope of an existing exemption has been further extended to enable (i) contractors of a public contract denominated or indexed in foreign currency, or executed pursuant to international treaties or (ii) third parties who executed agreements with such contractors in relation to the performance of such public contract to denominate or index their contracts in foreign currency, except for sale of immovable property or employment contracts, which need to be denominated in Turkish Liras, unless there is another exemption available.

Other considerations

The Ministry considers (i) branches, representation office or liaison office of a Turkish resident, or (ii) funds operated or managed by a Turkish resident; or (iii) foreign entities, in which a resident in Turkey owns, whether directly or indirectly, at least 50% or more of such foreign entity’s share capital as residents in Turkey (“Deemed Residents”). Accordingly, they are subject to the Restriction. However, if a contract between a resident in Turkey and a Deemed Resident shall be performed outside of Turkey, then such contract may be denominated or indexed in foreign currency, effective from 16 November 2018.

Finally, the Ministry has clarified that there is no need to convert the security deposits given and negotiable instruments issued in relation to immovable lease agreements prior to 13 September 2018 into Turkish Lira. The general rule on conversion is that where an existing contract does not benefit from the application of an exemption, the value of the corresponding contract and any payment obligation thereunder must be converted into Turkish Lira.

Contact

Please do not hesitate to contact us at [email protected] or [email protected] for further details on the Restriction and/or for any specific questions.