Investment Climate in Turkey

A Hot Tip about Foreign Direct Investment in Turkey

Posted on: 22 Dec 2009

Openness to Foreign Investment

The Government of Turkey (GOT) views foreign direct investment as vital to the country's economic development and prosperity. Accordingly, Turkey has one of the most liberal legal regimes for FDI in the OECD. With the exception of some sectors (see below), areas open to the Turkish private sector are generally open to foreign participation and investment. However, all investors – regardless of nationality – face a number of challenges: excessive bureaucracy, a slow judicial system, high taxes, weaknesses in corporate governance, sometimes unpredictable decisions made at the local government level, and frequent changes in the legal and regulatory environment.

Regulations governing foreign investment are, in general, transparent. Turkey provides national treatment, including in the acquisition of real estate by foreign-owned corporate entities registered under Turkish law, and in most sectors does not have an investment screening system (only notification is required). The GOT set "reciprocity with the related nation" as a precondition for real estate property purchases by foreigners, and set an upper limit of 30,000 square meters to the area of the real estate foreigners can buy.

Equity participation of foreign shareholders is restricted to 25 percent in broadcasting and 49 percent in the aviation and maritime transportation sectors. Establishment in financial services, including banking and insurance, and in the petroleum sector requires special permission from the GOT for both domestic and foreign investors. In practice, regulators have not restricted foreign ownership in the financial sector: in 2005 and 2006 a series of foreign acquisitions in the sector were approved, and several foreign financial houses have longstanding operations in Turkey.

Turkey's privatization process continues to move forward. The GOT privatizes State Economic Enterprises through block sales, public offerings, or a combination of both. Transactions completed under the Turkish privatization program generated $8.1 billion in 2006 and approximately $3.8 billion for 2007. On a cash basis, however, the program yielded $3 billion in 2005 and $9.6 billion in 2006, since privatizations are often paid for in installments. The Turkish government is committed to continuing the privatization process despite delays that may occur in some individual cases.

Bureaucratic "red tape" has been a significant barrier to companies, both foreign and domestic. However, recent reforms have simplified company establishment procedures, reduced permit requirements, instituted a single company registration form, and enabled individuals to register their companies through local commercial registry offices of the Turkish Union of Chambers and Commodity Exchanges.

Since 2001, the Turkish government has been implementing a comprehensive investment climate reform program. This program aims to streamline all investmentrelated procedures and to attract more FDI to the country. A national platform jointly formed by the public and private sectors, the Coordination Council for the Improvement of Investment Environment (YOIKK), provides technical guidance for issues relating to the investment environment.

In addition, the Investment Advisory Council of Turkey (IAC) was created in 2004 to provide an international perspective for the reform agenda of Turkey. IAC members include executives from multinational companies, representatives of international institutions such as the IMF, World Bank and EIB, and the heads of Turkish NGOs representing the private sector. The Council, chaired by the Prime Minister, convenes yearly to advise the government on the direction of its reform program. The Council’s recommendations serve as a guideline for the YOIKK Platform, and developments regarding the Council recommendations are published in the Turkish Treasury's annual IAC Progress Reports.

The government continued to implement judicial reforms in 2007, some of which aim to attract foreign investment to Turkey. The National Judiciary Network project, an automation and integration project overseen by the Ministry of Justice, reached its final preparatory stage in 2007 and is expected to come online in 2008. This will significantly speed the processing of commercial cases by sharing documents and court records more easily, as well as allowing for the filing of suits online. The Ministry of Justice began redistributing caseloads among courts in 2007 to reduce the burden in the busiest courts. As part of this redistribution, the Ministry shut down 137 small district courts and reassigned their resources to those with increased workloads. In addition, the government has improved foreign investors' access to justice, including to legal aid and Alternative Dispute Resolution mechanisms supported by the U.S., the EU, and the World Bank.

In addition to structural reforms, the Investment Promotion Agency (IPA), whose main objective is to support new investors throughout the establishment process and solve problems that arise after establishment, became much more active in 2007. The agency serves as an advocate within the government for reforms that promote investment and will work to raise public awareness of the benefits of investment.

 

Conversion and Transfer Policies

Turkey also made the taxation system more investor-friendly. In 2006, the basic corporate tax rate was reduced from 30 to 20 percent. The Government also cancelled the withholding tax for foreign investors' holdings of bonds, bills, and stocks, while retaining it for bank deposits and repurchase agreements. The 15 percent rate on bonds, bills, and stocks was reduced to 10 percent for domestic investors. The Tax Administration also established a large taxpayer unit in 2007 that will handle tax collection from large corporations. The GOT failed to implement further tax reforms, however, including an employment tax reduction, the rate of which is among the highest of OECD countries. The GOT also increased the VAT tax on leasing activities from 1 percent to 18 percent at the end of 2007.

Turkish law guarantees the free transfer of profits, fees, and royalties, and repatriation of capital. This guarantee is reflected in Turkey's 1990 Bilateral Investment Treaty (BIT) with the United States, which mandates unrestricted and prompt transfer in a freelyusable currency at a legal market-clearing rate for all funds related to an investment. There is no difficulty in obtaining foreign exchange, and there are no foreign exchange restrictions. As the result of a 1997 court decision, however, the Turkish Government has blocked full repatriation of investments by oil companies under Article 116 of the 1954 Petroleum Law, which protected foreign investors from the impact of lira depreciation. Affected companies have challenged the 1997 decision, but lost the case in 2002. Companies expect the new Petroleum Law, which the GOT claims will go before Parliament in 2008, to address this problem and to improve the investment environment for oil and gas exploration.

 

Expropriation and Compensation

Under the BIT, expropriation can only occur in accordance with due process of law. Expropriations must be for public purpose and non-discriminatory. Compensation must be reasonably prompt, adequate, and effective. The BIT ensures that U.S. investors have full access to the local court system and the ability to take the host government directly to third-party international binding arbitration to settle investment disputes. There is also a provision for state-to-state dispute settlement.

As a practical matter, the GOT occasionally expropriates private real property for public works or for State Enterprise industrial projects. The GOT agency expropriating the property negotiates and proposes a purchase price. If the owners of the property do not agree with the proposed price, they can go to court to challenge the expropriation or ask for more compensation. There are no outstanding expropriation or nationalization cases.

 

Dispute Settlement

There are some outstanding investment disputes between U.S. companies and Turkish government bodies.

Turkey's legal system provides means for enforcing property and contractual rights, and there are written commercial and bankruptcy laws. However, the court system is overburdened, which sometimes results in slow decisions and judges lacking sufficient time to grasp complex issues. Judgments of foreign courts, under certain circumstances, need to be executed by local courts before they are accepted and enforced. Monetary judgments are usually made in local currency, but there are provisions for incorporating exchange rate differentials in claims.

Turkey is a member of the International Center for the Settlement of Investment Disputes (ICSID), and is a signatory of the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards. Turkey ratified the Convention of the Multinational Investment Guarantee Agency (MIGA) in 1987. There are no arbitration cases pending before ICSID involving a U.S. company.

Turkish law accepts binding international arbitration of investment disputes between foreign investors and the state. In practice, however, Turkish courts have on at least one occasion failed to uphold an international arbitration ruling involving private companies.

 

Performance Requirements and Incentives

Turkey is a party to the WTO Agreement on Trade Related Investment Measures (TRIMS).

Turkey's investment incentive system was substantially amended in 2006 to promote investment in manufacturing services and the energy sector and to encourage exports. The general investment incentive regime provides tax benefits and in some cases credit possibilities. It is applied in diverse ways according to the location, scale, and subject of the investment. It includes exemption for customs duties and fund levies and customs and value-added (VAT) tax exemptions for locally-purchased or imported machinery and equipment. The Turkish Treasury also covers selected parts of investment credit interest rates for SMEs, research and development (R&D) projects, environmental projects, and projects in 50 prioritized development provinces that have annual per capita income below $1,500.

For these prioritized development provinces, under certain conditions, the law provides for withholding tax incentives on income tax, social security premium incentives, free land, and electricity price support of between 20 and 50 percent. These incentives will remain in effect until the end of 2008, except for allocation of free public land, which has no expiration date. The same law also limits certain tax preferences previously enjoyed by Turkey's free zones (see below).

For R&D support, Turkey's Scientific and Technological Research Council (TUBITAK) and the Turkish Technology Development Foundation (TTGV) both reimburse and/or grant R&D related expenses and capital loans for R&D projects. Projects eligible for such incentives include concept development, technological research and technical feasibility research, laboratory studies to transform a concept into a design, design and sketching studies, prototype production, construction of pilot facilities, test production, patent and license studies, and activities related to post-scale problems stemming from product design. In addition to these incentives, the Turkish government also provides support to Technology Development Zones (TDZs) that includes infrastructure and facilities, exemption from income and corporate taxes (through December 31, 2013) for profits derived from software and R&D activities, exemption from all taxes (through December 31, 2013) for the wages of researchers, software, and R&D personnel employed in TDZs, VAT exemptions for the same period of income and corporate tax exemptions for IT specific sectors, and customs, duties, and fund levy exemptions. Finally, the Turkish government's export incentive program focuses on R&D activities, market research, and participation in exhibitions and international fairs.

There are no performance requirements imposed as a condition for establishing, maintaining, or expanding an investment. There are no requirements that investors purchase from local sources or export a certain percentage of output. Investors' access to foreign exchange is not conditioned on exports.

There are no requirements that nationals own shares in foreign investments, that the shares of foreign equity be reduced over time, or that the investor transfer technology on certain terms. There are no government-imposed conditions on permission to invest, including location in specific geographical areas, specific percentage of local content – for goods or services – or local equity, import substitution, export requirements or targets, employment of host country nationals, technology transfer, or local financing.

The GOT does not require that investors disclose proprietary information, other than publicly available information, as part of the regulatory approval process. Enterprises with foreign capital must send their activity report, submitted to the general assembly of shareholders, auditor's report, and balance sheets to the Treasury's Foreign Investment Directorate every year by May.

With the exceptions noted under "Openness to Foreign Investment" and "Transparency of the Regulatory System", Turkey grants all rights, incentives, exemptions and privileges available to national capital and business to foreign capital and business on a most-favored-nation (MFN) basis. American and other foreign firms can participate in government-financed and/or subsidized research and development programs on a national treatment basis.

Military procurement generally requires an offset provision in tender specifications. The offset guidelines were modified to encourage direct investment and technology transfer.

 

Right to Private Ownership and Establishment

With the exceptions noted above, private entities may freely establish, acquire, and dispose of interests in business enterprises, and foreign participation is permitted up to 100 percent. Competitive equality is the standard applied to private enterprises in competition with public enterprises with respect to access to markets, credit, and other business operations. Turkey has an independent Competition Board.

 

Protection of Property Rights

Secured interests in property, both movable and real, are recognized and enforced. There is a reliable system of recording such security interests. For example, there is a land registry office where real estate is registered. Turkey's legal system protects and facilitates acquisition and disposal of property rights, including land, buildings, and mortgages, although some parties have complained that the courts are slow to render decisions and that they are susceptible to external influence (see "Dispute Settlement").

Turkey's intellectual property rights regime has improved in recent years, but certain deficiencies from international standards remain a concern. Turkey remained on the U.S. Special 301 Priority Watch List in 2007 due to insufficient protection for confidential pharmaceutical test data and continued high levels of piracy and counterfeiting of copyright and trademark materials.

Turkey's copyright law provides deterrent penalties for copyright infringement. The law contains several strong anti-piracy provisions, including a ban on street sales of all copyrighted products and authorization for law enforcement authorities to take action without a complaint by the rights holder. The law established minimum penalties of three months to two years imprisonment and/or a fine between 5,000 and 50,000 YTL (new Turkish lira) (approximately $4,200 to $42,000) depending on the severity of the damages. The law sets the maximum penalty at three to six years imprisonment and/or fines between 50,000 and 250,000 YTL (approximately $42,000 to $210,000). While pirated materials are still common, the number of cases brought against the producers and/or distributors of these goods has increased significantly, and deterrent penalties have become more common.

Turkey is a signatory to a number of international conventions, including the Stockholm Act of the Paris Convention, the Patent Cooperation Treaty, the Strasbourg Agreement, and the WIPO Copyright Agreement and Performances and Phonograms Treaty. Turkey accepts patent applications in compliance with the TRIPS agreement "mailbox" provisions. The patent law does not, however, contain interim protection for pharmaceuticals in the research and development "pipeline".

Turkey's Patent Law provides for penalties for infringement of up to 4 years in prison, or 46,000 YTL (approximately $39,000) in fines, or both, closure of the business for at least one year, and a prohibition on the owner's participation in any commercial activity during that same period. However, research-based companies in the pharmaceuticals sector have criticized provisions which delay the initiation of infringement suits until after the patent is approved and published, permit use of a patented invention to generate data needed for the marketing approval of generic pharmaceutical products, and give judges wider discretion over penalties in infringement cases.

Unlike some other countries, including the United States, Turkey does not currently have a system that directly links marketing approval for pharmaceutical products to the patent protection system. The Patent Institute sends reports to the Ministry of Health informing them of pharmaceutical-related patents that have been approved. In addition, in 2006, the Patent Institute, with assistance from the World Bank, created an online database that allows users to search for valid patents. The Patent Institute does not, however, share with other entities or the public unpublished information regarding patent applications that have not yet been approved. In general, the Ministry of Health provides protection for confidential test data submitted in support of applications to market pharmaceutical products. However, several of the regulation's provisions undermine protection for confidential test data. Data exclusivity is limited to original products licensed in a European Customs Union country after January 1, 2001, for which no generic manufacturers had applied for licenses in Turkey as of January 1, 2005. In addition, the term of exclusivity is limited to the duration of the drug patent. The six-year term of data protection starts on the date of licensing in a European Customs Union country, implying a shorter term of protection because of the length of the marketing approval process in Turkey.

Trademark holders also contend that there is widespread and often sophisticated counterfeiting of their marks in Turkey, especially in apparel, film, cosmetics, detergent and pharmaceuticals. Turkey provides protection for commercial seed under its Plant Variety Protection (PVP) Law.

 

 

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Posted: 22 December 2009

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