International Investments in Turkey | Legal Aspects of Foreign Investments

Türkiye’s Investment Protection and Incentive Measures

Türkiye is a promising investment destination that has attracted numerous foreign investors to conduct business. As an open economy, Türkiye has implemented a series of measures to safeguard the rights of foreign investors, promote economic growth, and provide compensation guarantees in case of expropriation. Below is an overview of Türkiye’s policies and measures concerning investment protection.

Rights and Safeguards for Foreign Investors

The Turkish government offers extensive rights and protections to foreign investors to encourage foreign direct investment. According to the Foreign Investment Law and the Implementing Regulation on Foreign Direct Investment, foreign investors enjoy the same rights and protections as domestic investors, without facing unfair treatment due to their foreign identity.

Türkiye acknowledges the principles of investment protection under international law, including fair and equitable treatment, non-discrimination, full compensation, and non-discriminatory transfer of capital and profits. Additionally, Türkiye has signed bilateral and multilateral investment agreements with many countries to further ensure the protection of foreign investors’ rights.

Right to Compensation in Cases of Expropriation

In extreme situations where the Turkish government expropriates or seizes foreign investments, investors have the right to receive fair and prompt compensation. Türkiye’s Foreign Investment Law stipulates that in case of expropriation or seizure of investments, investors should receive compensation at a just and equitable market value, and the compensation can be freely transferred abroad.

Establishing this compensation system provides additional security for foreign investors, enabling them to invest in Türkiye with greater confidence.

Investment Incentive Measures

To attract more foreign investment, the Turkish government has implemented a range of incentive measures. These measures aim to promote investment, enhance competitiveness, and drive economic development.

The incentive measures include tax exemptions, loans at preferential rates, simplification of customs procedures, favorable land leasing terms, the establishment of special economic zones, and incentives for research and innovation. These measures are not only targeted at foreign investors but also include domestic enterprises, encouraging all parties to participate in economic activities.

Investment Agreements

Türkiye has signed bilateral investment agreements with multiple countries to protect and promote bilateral investments. These agreements provide investors with broader rights protection, enhancing predictability and stability for bilateral investments.

Moreover, Türkiye is a member of the Energy Charter Treaty, which protects investments in the energy sector. These agreements and treaties collectively form the legal framework for investment protection between Türkiye and other countries.

Türkiye has adopted proactive policies in investment protection and incentive measures, offering foreign investors extensive rights and safeguards. These measures strengthen foreign investors’ confidence in the Turkish market and create a stable and profitable environment for investments. However, as an investor, it is essential to thoroughly understand Türkiye’s relevant laws and policies before investing and consult professional legal and financial advisors when necessary.

Reforms and Legal Transparency

The Turkish government has been striving to promote economic reforms to enhance legal transparency and the investment environment. To attract more foreign investment, the government has taken measures to simplify business procedures and improve the efficiency of regulatory bodies. Additionally, Türkiye has been advancing digital and informational reforms, improving communication and interaction between the government and investors, further increasing investment transparency.

Advantageous Geographical Location and Infrastructure

Türkiye’s strategic location at the crossroads of Europe, Asia, and the Middle East makes it an ideal gateway to access these markets. The modern infrastructure in Türkiye, including ports, airports, railways, and road networks, provides convenient conditions for investors, enabling more efficient business operations.

Large Market and Diversified Economy

With a population of nearly 90 million, Türkiye is a large country with a substantial internal market. This diverse market offers extensive business opportunities across various industries and sectors. Türkiye’s economy has great potential in agriculture, manufacturing, tourism, services, and information technology, providing investors with diverse investment prospects.

Challenges Ahead

Türkiye demonstrates a positive trend as a high-potential investment destination, with its government’s investment protection measures, incentive policies, bilateral agreements, geographical location, and market size offering vast development prospects for investors. However, investors should fully understand Türkiye’s legal, economic, and political environment and formulate wise investment strategies to ensure the sustainability and success of their investments. While addressing challenges proactively, it is believed that Türkiye’s investment environment will continue to evolve towards greater openness and stability.”

Conditions for opening a company in Türkiye for foreigners

Direct investment

Foreign direct investment is an investment made by a foreign investor through the establishment of a company or branch in Türkiye or as a partner in an existing company. On the other hand, indirect investments that are made by buying stocks or bonds, such as portfolio investments. Foreigners who want to make long-term and permanent investments in Türkiye and accept the risk of trade and exchange rate in Türkiye can equally benefit from the opportunities provided to domestic investors.

Law for investors

The investment law in Türkiye emphasizes two principles: equal treatment to Turks and the possibility of establishing all kinds of companies

According to this law: Investing in Türkiye is free

Foreign investors are subject to the same treatment as domestic investors. Before the correction of this law, strict procedures were adopted for the opening of foreign companies. Among the most controversial were the pre-approval of the Department of the Treasury and the existence of a minimum capital of US$50,000 for each foreign partner. Also, the amendment of the law removed the restrictions on foreign investors’ commercial activities. Previously, foreign investors were allowed to form joint-stock companies, limited liability companies and branches, but now foreign investors can establish all kinds of companies and do business in Türkiye regardless of having a legal personality. In the meantime, one of the most important changes achieved with the approval of the new law is the reform of the shareholding structure of companies. According to the new law, investors are allowed to establish single-shareholder joint-stock companies.

Types of companies in Türkiye:

Limited liability company
Corporation
Cooperative
Private company
Collective enterprise

In this article, we will examine two types of companies that are widely used in Türkiye.

Limited liability company:

A limited liability company is formed with one or more natural or legal persons who have established the company title and predetermined (fixed) capital and have limited liability in the company’s assets. The characteristics of limited liability companies are as follows:

It is established with a minimum of 1 and a maximum of 50 natural or legal persons
The required capital must be at least 10,000 liras
The responsibility of the partners is equal to the capital they have committed to the company. Partners have no personal liability for debts
It is not authorized to issue stocks and bonds

Joint stock company in Türkiye

It is a company whose capital is determined and divided into shares and is responsible for its debts only with its assets. The characteristics of a joint stock company are as follows:

Can be created with one or an unlimited number of partners
It is established with a minimum capital of 50,000 liras
Partners have obligations and rights according to the capital they have

Company establishment process for foreigners in Türkiye:

1. Timely preparation of the company’s articles of association
2. Sending the minutes and articles of association through Mercy
3. Arrangement and registration of documents
Obtaining a tax number
5. Depositing a certain part of the capital to the bank account of the competition organization
6. Deposit part of the capital to the bank account of the company
7. Application to the Business Registration Office for registration procedures
8. Acknowledgment of some legal documents related to the company
9. Request for a declaration of company establishment from the tax department
10. Setting up the signature directive

Corporate tax

Limited liability companies in Türkiye pay 20% tax. At the same time, individuals must pay their income tax throughout the year. The personal income tax rate varies between 15% and 35%. Companies or individuals whose residence, legal or business centers are located in Türkiye pay taxes on the income they earn. Also, payment of value added tax, special consumption tax and stamp duty are on the agenda. In case of profit distribution between partners at the end of the year, 15% tax is usually deducted from this profit.

Regulation of Foreign Investments in Türkiye:

Türkiye is an attractive country for international direct investors, offering a large market, strategic location, young and qualified workforce, modern infrastructure and incentive packages. Between 2003 and 2023, Türkiye attracted approximately 240 billion USD of international direct investment. Türkiye’s international direct investment strategy aims to increase its market share in global direct investments to 1.5% by 2023 and to bring in investments with high added value to the country. There are also legal processes and conditions required for foreigners to establish a company in Türkiye.

Foreign investment laws and regulations:

Foreign investment laws and regulations in Türkiye are based on the principle of equal treatment of foreign investors with domestic investors. Foreign investors can establish a company, buy a company or become a partner in any sector in Türkiye with any amount of capital. Foreign investors are given the right to freely transfer the profits, capital and assets of the companies they have established in Türkiye. Foreign investors are also offered the opportunity to obtain a work permit, residence permit and citizenship in Türkiye.

Foreign investment laws and regulations in Türkiye also provide various incentives to foreign investors. These incentives include tax reductions, insurance premium support, land allocation, interest support, customs duty exemption and regional incentives. In order to benefit from the incentives, it is necessary to comply with certain criteria and apply to the relevant institutions.

Investor’s permit and license processes:

The process of obtaining permits and licenses for foreigners in Türkiye varies according to the field in which the foreigner wishes to work or invest. In order to obtain a work permit, foreigners must apply to the General Directorate of International Labor Force of the Ministry of Labor and Social Security. The documents required for the application differ according to the application type and field of study. The application process is completed within 30 days from the application date.

Foreigners must apply to relevant institutions and organizations in order to obtain permission and license to invest. For example, foreigners must apply to the General Directorate of Mineral Research and Exploration in order to obtain a mining exploration license. The documents required for the application differ according to the license group and the type of mineral to be searched. The application process is completed within 15 days from the application date.

Rights and protections of foreign investors:

The rights and protections of foreign investors in Türkiye are guaranteed by the Foreign Direct Investment Law, which entered into force in 2003. This law adopted the principle of equal treatment for foreign investors with domestic investors, ensured compliance with international standards in investment and investor definitions, transformed the permit and approval system into an information system in the realization of foreign direct investments, and determined policies to increase foreign direct investments.

Rights and protections of foreign investors:

Some of the rights and protections of foreign investors are:

The right to establish a company, buy a company or become a partner in any sector in Türkiye with any amount of capital.

The right to freely transfer profits, capital and assets of companies established in Türkiye.

Opportunities to obtain work permit, residence permit and citizenship in Türkiye.

Opportunities to benefit from various incentives in Türkiye (such as tax reductions, insurance premium support, land allocation, interest support, customs duty exemption and regional incentives).

Opportunities to benefit from the rights arising from international agreements in Türkiye (such as national treatment of companies with foreign capital, prevention of double taxation, resolution of investment disputes)

Resolution of international commercial disputes:

Alternative dispute resolution methods, in which a neutral arbitrator helps the disputing parties to resolve the dispute without going to court, are called alternative dispute resolution methods. In other words, in these methods, the parties can choose with their free will, and they are an alternative to judicial institutions. There are several alternative methods that we will consider.

Arbitration

In the two-party arbitration method, the resolution of the dispute is left to the people who are called arbitrators, and the dispute is examined and decided by the arbitrator.

Arbitration is a method used to settle commercial and investment disputes. For this method, we need two sides. The parties can be natural or legal persons. When entering into business or investment contracts, the parties agree in an arbitration agreement that they want future disputes to be resolved through arbitration, not a court.

The stages of arbitration are:

Arbitration request
Payment of related expenses
Exchange petitions
Establishment of the arbitration court
Determining the arbitration area
Judgment and final vote

There are two types of arbitration: temporary arbitration and institutional arbitration:

Temporary arbitration: In temporary arbitration, the parties decide for themselves the rules regarding the selection of arbitrators, the nature and the procedure by setting up the arbitration agreement. In this case, the parties determine the arbitration procedure according to their needs and only within the framework of their dispute. The most important drawback of this method is that if the parties do not agree on the arbitrator, it will not be possible to resolve the dispute because the arbitrator’s decision determines the outcome.

Institutional arbitration: This arbitration method is based on the predetermined rules of various institutions and compliance with the rules is guaranteed by the relevant institutions.

International Chamber of Commerce arbitration rules

In this method, each arbitration case is handled by an arbitration court, which is responsible for examining the case and making the final decision. The International Court of Arbitration is responsible for supervising the arbitration courts.

UNCITRAL arbitration

These laws have been approved by the International Trade Law Commission of the United Nations. Arbitration rules are not responsible for the administration of arbitration, but can designate an arbitration institution as an authority.

Other arbitration centers

Some national chambers of commerce have developed their own arbitration rules, for example the London Court of Arbitration. Also, arbitration rules have been prepared by some local chambers of commerce in Türkiye. For example, Istanbul Chamber of Commerce Arbitration Rules.

Court ruling (lawsuit)

The court order is the judicial settlement of the dispute by the judge. The goal of mediation is to resolve disputes for the benefit of the parties, but the goal of litigation is usually to judge whether the issue is right or wrong.

Mediation

Mediation is a process in which the parties seek a solution to a dispute with the help of an impartial, independent and expert third party. The mediator does not have the authority to make decisions, does not impose an outcome, but rather helps the disputing parties to reach an agreement using systematic techniques.

Negotiation (direct interview)

Doing this method may be appropriate in person, but depending on the circumstances, you can use phone, fax, etc.

Prevention of disputes and their resolution methods

These disputes can be prevented by examining the parties and the laws of the countries, concluding correct and principled agreements and taking the help of experienced experts and lawyers.

International Tax Planning in Türkiye: Maximizing Opportunities for Investors

Türkiye has become a popular location for investors looking for new growth opportunities due to its advantageous location bridging Europe and Asia. One of the main aspects that makes Türkiye an appealing investment hub is its tax system, which offers various incentives and benefits for businesses. Understanding the tax environment and implementing efficient tax planning strategies are essential for investors to maximize their operations and maintain regulatory compliance.

Tax Regime in Türkiye and Tax Advantages for Investors

In line with the average rate for OECD nations, Türkiye’s corporate income tax rate of 20% is relatively low. In Türkiye, investors can also benefit from a number of tax benefits, including.

A 10% withholding tax is applied to dividends paid to non-residents.
Interest payments to non-residents are subject to a 5 percent withholding tax.
A deduction of 10% for costs incurred in research and development.
A deduction of 10% for the depreciation of fixed assets.

These advantageous tax rates and deductions help to create an environment that is welcoming to investors and promotes the establishment of businesses in Türkiye. Foreign investors can benefit from lower tax obligations and increased profitability after taxes as a result, which raises the country’s allure as a location for investments.

Double Taxation Avoidance Agreements and Practices

Türkiye has more than 80 double taxation avoidance agreements (DTAs) with other nations in order to promote cross-border trade and investment. By granting solely one country the authority to tax income, these DTAs seek to avoid double taxation of income.

The DTAs with Türkiye generally adhere to the Model Tax Convention of the OECD. However, there are some significant distinctions in how some forms of income, like royalties and dividends, are handled. Investors who abide by these DTAs can avoid having their income taxed twice—once in their home country and once in Türkiye. With the knowledge that they won’t be subjected to onerous tax burdens, this encourages foreign investors to bring their capital to Türkiye.

Tax Planning Strategies and Compliance Requirements

There are a number of tax planning strategies that can be used to minimize the tax liability of investors in Türkiye. These strategies include:

Structuring the investment in a way that takes advantage of the tax advantages available in Türkiye.
Utilizing the DTAs with Türkiye to reduce the amount of tax that is payable to both countries.
Making sure that all tax returns are filed correctly and on time.

It is crucial for investors to work closely with experienced tax advisors to develop and implement effective tax planning strategies that align with their business objectives. Proper tax planning can lead to significant cost savings and improved cash flow, enhancing the overall profitability of investments in Türkiye.

Compliance Requirements:

Investors must comply with several requirements set forth by the Turkish tax authorities.

These specifications include:.

Submitting a tax return every year.
On-time tax payment.
Keeping accurate accounting records.
Giving the necessary information to the tax authorities.

Investors operating in Türkiye must be extremely careful to adhere to all tax laws and regulations. Businesses can navigate the complexities of the tax system and prevent penalties due to non-compliance by keeping a regular eye on legislative changes and working with knowledgeable tax advisors. For investors, Türkiye provides a number of alluring tax benefits. The compliance requirements must be understood, though, in order to avoid fines. Investors can make sure they are maximizing all of the tax breaks available to them and that they are abiding by Turkish tax regulations by consulting with a tax advisor.

As a result, Turkish investors have a rare opportunity to take advantage of the country’s strategic location and tax advantages through international tax planning. Investors can maximize the advantages of investing in this dynamic and promising market by carefully planning their investments and adhering to regulatory requirements.