Doing Business In Turkey

Halil Rıfat Paşa Mahallesi, Yüzer Havuz Sokak, No:01, Okmeydanı, Istanbul
Tel: +90 212 222 51 31 Fax: +90 212 222 64 88 Email: halilkayaozer@chiturkey.com

LOCATION & CLIMATE

Turkey is a Eurasian country that stretches across the Anatolian peninsula in western Asia and Thrace (Rumelia) in the Balkan region of southeastern Europe. Turkey is bordered by eight countries: Bulgaria to the northwest; Greece to the west; Georgia to the northeast; Armenia, Azerbaijan and Iran to the east; and Iraq and Syria to the southeast. The Mediterranean Sea and Cyprus are to the south; the Aegean Sea and Archipelago are to the west; and the Black Sea is to the north. Separating Anatolia and Thrace are the Sea of Marmara and the Turkish Straits (the Bosphorus and the Dardanelles), which are commonly reckoned to delineate the border between Asia and Europe, thereby making Turkey transcontinental.

Due to its strategic location astride two continents, Turkey's culture has a unique blend of Eastern and Western tradition. A powerful regional presence in the Eurasian landmass with strong historic, cultural and economic influence in the area between Europe in the west and Central Asia in the east, Russia in the north and the Middle East in the south, Turkey has come to acquire increasing strategic significance.

Eastern Turkey has a more mountainous landscape, and is home to the sources of rivers such as the Euphrates, Tigris and Aras, and contains Lake Van and Mount Ararat, Turkey's highest point at 5,165 metres (16,946 ft).

Winter temperatures average below 1 °C (34 °F). Summers are hot and dry, with temperatures generally above 30 °C (86 °F) in the day.

POPULATION, LANGUAGE & CURRENCY

The population of Turkey stood at 71.5 million.

Turkey’s main language is Turkish.

The currency used in Turkey is Turkish Lira (TL).

ECONOMY

Turkey is a founding member of the OECD and the G-20 major economies.

Turkey has gradually opened up its markets through economic reforms by reducing government controls on foreign trade and investment and the privatisation of publicly owned industries, and the liberalisation of many sectors to private and foreign participation has continued.

The GDP growth rate from 2002 to 2008 averaged 7.4%, which made Turkey one of the fastest growing economies in the world during that period. Turkey's economy is dominated more by a highly dynamic industrial complex in the major cities, mostly concentrated in the western provinces of the country, along with a developed services sector.

The tourism sector has experienced rapid growth in the last twenty years, and constitutes an important part of the economy. 

Other key sectors of the Turkish economy are banking, construction, home appliances, electronics, textiles, oil refining, petrochemical products, food, mining, iron and steel, machine industry and automotive. Turkey has a large and growing automotive industry, ranking as the 6th largest automotive producer in Europe. Turkey is also one of the leading shipbuilding nations; 4th in the world in terms of the number of ordered ships.

Turkey has taken advantage of a customs union with the European Union, signed in 1995, to increase its industrial production destined for exports, while at the same time benefiting from EU-origin foreign investment into the country.

A series of large privatizations, the stability fostered by the start of Turkey's EU accession negotiations, strong and stable growth, and structural changes in the banking, retail, and telecommunications sectors have all contributed to a rise in foreign investment.

THE PARLIAMENT AND GOVERNMENT

The head of state is the President of the Republic and has a largely ceremonial role. The president is elected for a five-year term by direct elections. The current president is Abdullah Gül. Executive power is exercised by the Prime Minister and the Council of Ministers which make up the government, while the legislative power is vested in the unicameral parliament, the Grand National Assembly of Turkey.

The Prime Minister is elected by the parliament through a vote of confidence in his government and is most often the head of the party that has the most seats in parliament. The current Prime Minister is the former mayor of Istanbul, Recep Tayyip Erdogan.

There are 550 members of parliament who are elected for a four-year term by a party-list proportional representation system from 85 electoral districts which represent the 81 administrative provinces of Turkey. Parties that win at least 10% of the votes cast in a national parliamentary election gain the right to representation in the parliament.

STEPS TO INCORPORATE A COMPANY IN TURKEY

Following documents are required to be submitted to the Trade Registry Office. (The documents required may vary depending on if the shareholders are legal entities or if they are real persons)

• Articles of Association certified by a Public Notary
• A receipt issued by the bank verifying the payment of capital contribution if the capital is contributed by the shareholders at establishment
• A bank receipt verifying the payment of Fund for Protection of Competition 4% in the 10.000 of the capital commitment

Give details of its directors, company secretary and members.

An application to the tax office is required wherein the company headquarters is located, on the same day or the day before the registration date. A tax registration number is received and legal books are certified by a Public Notary.

Following these registrations, the establishment procedures are completed and the company may start to operate. Expected period for finalizing the above registrations is 2-3 days.

EMPLOYMENT REGULATIONS

Employment rules in Turkey are designed to ensure that there is no discrimination or unfair treatment of employees. Under the legislation an employer cannot compel an employee to work more than 45 hours per week, unless the worker has agreed to do so in writing. All workers are entitled to paid holiday from the day they start worked.

WORK PERMITS

Unless otherwise provided in the bilateral or multi-lateral agreements to which Turkey is a party, the foreigners are obliged to get permission before they start to work dependently or independently in Turkey.

Working permission for a definite period of time is given to be valid for at most one year, taking into consideration the situation in the business market, developments in the labour life, sectorial and economic conjuncture changes regarding employment, according to the duration of residence permit of the foreigner and the duration of the service contract or the work, to work in a certain workplace or enterprise and in a certain job.

The independently working foreigners are obliged to inform the situation to the Ministry within at most fifteen days, from the date they have started working and from the end of the work.

The employers that employ foreigners are obliged to inform the situation to the Ministry within at most fifteen days when he/she has started to work, in case he/she doesn’t start working within thirty days from the date when the working permission was given, from the end of this date and from the date when the service contract was terminated for any reason.

RESIDENT PERMITS

If you want to obtain a residence permit permit in Turkey, you have to apply for it at Foreigners Section of Security Directorate in your district.

FOREIGN EXCHANGE CONTROLS

Turkey has a very liberal exchange control regime. The protection of the value of the Turkish currency legislation guarantees the free transfer of profits, fees and royalties.

The transfer of profits, dividends, proceeds of sale and liquidation, license, know-how, technical assistance fees, repayment of loans and interests is unrestricted.

Turkish Lira is fully convertible. The supply of foreign exchange is not limited and banks may open foreign exchange deposit accounts for both the residents and the non-residents. Principal and interests of non-residents can be transferred through the investor’s bank. Non-residents may sell and buy securities at the Istanbul Stock Exchange, without being subject to any limitation and/or approval.

FOREIGN INVESTMENT

Turkey is a country offering significant opportunities for foreign investors with its geographically perfect position to function as a gateway between Europe, Middle East and Central Asia. The opportunities exist not only in the dynamic domestic market, but also throughout the region.

Hospitality and tolerance being the traditional cornerstones of the Turkish way of life, the country is open to foreign investors with many attractions to offer.

• Large and growing domestic market
• Mature and dynamic private sector
• Leading role in the region
• Liberal and secure investment environment
• Supply of high quality and cost-effective labor force
• Customs union with EU countries
• Developed infrastructure
• Institutionalized economy
• Competitive tax system

Turkey has climbed to 22nd place among top FDI attracting countries in 2005, up from 53rd place in 2003 and 37th place in 2004. According to the preliminary data for 2006, Turkey will be among top 10 FDI attracting countries. Thanks to macroeconomic stability, implications of EU membership process and efforts for the improvement of the investment environment; level of FDI inflows to Turkey has increased from an average of 853 million USD in the 1995-2000 period to 9.8 billion USD in 2005 and to 20.1 billion USD in 2006. Out of 20.1 billion USD of FDI, 2.9 billion was real estate purchases by foreigners. Top 5 FDI deals accounted for the 13.2 billion USD of the remaining 17.2 billion USD. Mergers and acquisitions amounting to 15.4 billion USD constituted an important part of FDI inflows.

Turkey succeeded in attracting 21.9 billion USD in FDI in 2008 and is expected to attract a higher figure in following years. A series of large privatizations, the stability fostered by the start of Turkey's EU accession negotiations, strong and stable growth, and structural changes in the banking, retail, and telecommunications sectors have all contributed to a rise in foreign investment.

LEGAL SYSTEM

Turkey is a parliamentary representative democracy. Since its foundation as a republic in 1923, Turkey has developed a strong tradition of secularism. Turkey's constitution governs the legal framework of the country. It sets out the main principles of government and establishes Turkey as a unitary centralized state.

The judiciary is independent of the executive and the legislature, and the Constitutional Court is charged with ruling on the conformity of laws and decrees with the constitution. The Council of State is the tribunal of last resort for administrative cases, and the High Court of Appeals for all others.

SOURCES OF FINANCES

There are number of banks operating in Turkey. Some of them are listed below:

• Türkiye Cumhuriyeti Ziraat Bankasi plc http://www.ziraatbank.com.tr 
• Türkiye Halk Bankasi plc http://www.halkbank.com.tr 
• Türkiye Is Bankasi plc http://www.isbank.com.tr 

TAXATION

Turkish direct taxation system consists of two main taxes; income tax and corporate tax. An individual is subject to the income tax on his income and earnings, in contrast to a company which is subject to corporate tax on its income and earnings.

INCOME TAX:

Taxable Income:

The income tax is levied on the income of individuals. The term individuals mean natural persons. In the application of income tax, partnerships are not deemed to be separate entities and each partner is taxed individually on their share of profit. An individual’s income may consist of one or more income elements listed below:

• Business profits,
• Agricultural profits,
• Salaries and wages,
• Income from independent personal services
• Income from immovable property and rights (rental income)
• Income from movable property (income from capital investment)
• Other income and earnings without considering the source of income

Tax Liability:

In general residency criterion is employed in determining tax liability for individuals. This criterion requires that an individual who has his place of residence in Turkey is liable to pay tax for his worldwide income (unlimited liability). Any person who remains in Turkey more than six months in a calendar year is assumed as a resident of Turkey. However, foreigners who stay in Turkey for six months or more for a specific job or business or particular purposes which are specified in the Tax Law are not treated as resident and therefore, unlimited tax liability does not apply to them.
Non-residents are only liable to pay tax on their income derived from the sources in Turkey (limited liability). For tax purposes, it is especially important to determine in what circumstances income is deemed to be derived in Turkey. In the following circumstances, the income is assumed to be derived in Turkey.

Business profit: A person must have a permanent establishment or permanent representative in Turkey and income must result from business carried out in this permanent establishment or through such representatives.

Agricultural income: Agricultural activities generating income must take place in Turkey.

Wages and Salaries:

• Services must be rendered or accounted for in Turkey.
• Fees, allocations, dividends and the like paid to the chairmen, directors, auditors and

liquidators of the establishment situated in Turkey must be accounted for in Turkey.
Income from Independent Personal Services: Independent personal services must be performed or accounted for in Turkey.

Income from Immovable Property:

• Immovable must be in Turkey;
• Rights considered as immovable must be used or accounted for in Turkey.

Income from Movable Capital investment:Investment of the capital must be in Turkey.

Other Income and Earnings: The activities or transactions generating for other income,
specified in the Income Tax Act, must be performed or accounted for in Turkey.
The term accounted for used above to clarify tax liability of the non-residents means that a payment is to be made in Turkey, or if the payment is made abroad, it is to be recorded in the books in Turkey.

CORPORATE TAX:

Taxable Income:

The corporate tax is levied on the income and earning derived by corporations and corporate bodies. Corporate Tax Law sets provisions and rules applicable to the income resulted from the activities of corporations and corporate bodies, whereas the income Tax Law deals with the income derived by individuals. Corporations and corporate bodies specified by the Law as taxpayers in respect to the corporate tax are as follows:

• Capital companies and similar foreign companies;
• Cooperatives;
• Public enterprises;
• Enterprises owned by foundations societies and associations;
• Joint ventures.

Tax Liabilities:

According to the Corporate Tax Law, those legal entities covered by the law, which their legal head office situated in Turkey, or the place of effective management in Turkey are taxed on their world-wide income (unlimited liability). The term legal head office, as used in the context of the Corporate Tax Law, means the office specified in the written agreements of the mentioned entities. Therefore, it is not difficult to as certain where the legal head office of a company is located. However, the place of effective management, which is defined as the place in which the business activities are concentrated and supervised, is not easy to determine in some cases.
As may be expected, the Law defines the term limited tax liability quite parallel to term unlimited tax liability, as the liability requiring to tax only the income derived in Turkey, provided that both legal head office and the place of effective management are abroad.

Corporate Tax Return:

Like income tax, the corporate tax is also assessed on the base declared through tax returns filled annually by taxpayers. Tax returns contain the results of related taxation period. In principle, every taxpayer is required to file only one single tax return, even if he has derived the income through different business places or branches and those places and branches have their own accounting and allocated capital.
The corporate tax return is filled until the 25th day evening of the fourth month of the year following the month in which the fiscal year ends and the assessed taxes are paid until the end of that month. However, if a limited liable taxpayer leaves the country for sure the corporate tax return has to be submitted to the authorized tax office in the 15 days preceding. In such case, taxes are paid in the same period of time as forth for the declaration.

If the income earned by the foreign companies which are subject to the limited liability in respect to the corporate tax, consists of capital gains and non-recurring income discussed in the preceding sections (except for income earned from sale and transfer of intangible rights like license, know-how, and royalty), then the income is declared to the authorized tax offices those taxpayers (or the persons acting on behalf of them) in the fifteen days after the income has been earned. This procedure is called "special declaration". If there is no presence in Turkey, withholding tax will generally be charged on income earned; for example income earned from sale and transfer of intangible rights like license, know-how, and royalty, income from movable and immovable property and income from independent professional services provided in Turkey. However, if there is an avoidance of double taxation treaty, reduced rates of withholding tax may apply.

Tax Rates:

Corporate income tax is applied at 20% rate on the corporate earnings. Taxpayers (only for income from commercial activities and agriculture in limited tax liability cases) pay provisional tax at the rate of corporate tax, these payments are deducted from corporate tax of current period. 

STAMP DUTY

Stamp tax:
Stamp Tax applies to a wide range of documents, including but not limited to, contracts, agreements, notes payable, letters of credit and letters of guarantee, financial statements and payrolls. Stamp duty is levied as a percentage of the value stated on the document at rates ranging from 0.15% to 0.75%. The Stamp Tax Law provides that each relevant party shall be responsible for payment of the total amount of stamp tax on the agreements. Each original document is separately subject to stamp tax.

ACCOUNTING

In March 2006, the Turkish Accounting Standards (TAS) has been published by Turkish Accounting Standards Board which was declared to be effective as of January 1, 2006. The legal requirements to apply TAS has been referred to in the draft revised Turkish Commercial Code; however, such draft has not yet been approved by the Grand National Assembly of Turkey. Accordingly, companies follow the existing Turkish Commercial Code, Turkish Procedural Tax Law and the communiqué issued by Ministry of Finance in 1992 applicable to all Turkish entities (excluding financial institutions) in preparing the statutory financial statements. Starting in 1994, the communiqué requires such entities to prepare their financial statements in a prescribed format using a uniform chart of accounts and certain fundamental accounting and reporting concepts specified in the communiqué.

Under Capital Markets Board (CMB) regulations, all listed companies, financial intermediaries, mutual funds, investment partnerships, and companies not listed but considered as publicly traded due to high number of shareholders (more than 250) are subject to CMB regulations. With minor exceptions, these CMB standards generally conform to International Financial Reporting Standards (IFRS) prevailing as of December 31, 2004. However, since updates in IFRS thereon could not be implemented in CMB standards, CMB announced that financial statements prepared in accordance with IFRS are also acceptable.

Starting from December 31, 2006, financial institutions other than insurance companies, prepare their financial statements in accordance with the Turkish Accounting Standards which are in line with IFRS. However, there are certain departures from IFRS as explained in communiqués of Banking Regulations and Supervision Agency (BRSA) like non-consolidation of non-financial institutions.

A separate set of accounting principles together with uniform chart of accounts applicable to insurance companies are issued by Undersecretariat of Treasury.

Statutory Financial Statements

The statutory financial statements should include at least the following:

• Balance sheet
• Profit and Loss Statement and
• Notes to the Financial Statements.

Supplementary financial statements, which are not mandatory for all companies are:

• Statement of Changes in Shareholders’ Equity
• Statement of Cash Flows
• Statement of Cost of Sales

AUDIT REQUIREMENTS

In the framework of Turkish Commercial Law and capital market legislation, the board of directors of issuers and intermediaries is responsible for the preparation, presentation and true and fair view of financial statements and reports in accordance with the Board’s accounting standards and generally accepted accounting principles. The board of directors of issuers and intermediaries has to take a separate decision related with approval of financial statements and annual reports. Moreover, during the announcement and submission of financial statements and annual reports of issuers and intermediaries, these annual and interim financial statements and annual reports have to be signed and disclosed by general manager, accounting officer and, the independent auditor with the following explanations;

a) Financial statements and annual reports are examined by themselves,

b) According to information that they have, the reports do not include any unrealistic explanation or by the date of announcement, there is any deficiency that result in misleading explanations.

c) According to information that they have, financial statements and other financial information in the reports reflect true nature of the financial situation and operation results of the issuer.