Neslihan Tuna Saracgil Pelin Ecevit November 16 2018 Amendments to decree protecting value of Turkish currency in relation to foreign currency loans Selvi & Ertekin | Banking & Financial Services - Turkey Neslihan Tuna Saracgil, Pelin Ecevit Banking & Financial Services IntroductionTurkish-resident legal entitiesTurkish-resident real personsForeign currency indexed loansCommentIntroductionDecree 32 on the Protection of the Value of Turkish Currency was published on 11 August 1989 to determine:the value of Turkish currency against foreign currencies;the import and export documents regarding Turkish currency;transactions concerning foreign currency imports and exports; andother procedures with the aim of protecting Turkish currency.(1)In addition to the numerous amendments made over the years, on 25 January 2018 the Council of Ministers published a decree amending Decree 32, which entered into force on 2 May 2018 and imposed restrictions on foreign currency loans and foreign currency indexed loans in order to decrease the foreign currency risk in the market.(2)This article examines the recent amendments to Decree 32 and the amending decree's relevant provisions, respectively.Turkish-resident legal entitiesDecree 32 includes two separate sections for foreign currency loans:foreign currency loans obtained from overseas (Article 17); andforeign currency loans obtained in Turkey (Article 17/A).However, in both sections, legal entities with foreign currency income are regulated differently than those that generate no foreign currency income.All Turkish-resident legal entities, irrespective of whether they generate foreign currency income, can obtain a foreign currency loan without being subject to any limitation if their existing credit exposure is equal to or more than $15 million. However, if the existing credit exposure of a legal entity is less than $15 million, the amending decree imposes certain limitations on foreign exchange borrowing.Article 2(y) of Decree 32 defines 'foreign currency income' as "the income generated from export, transit trade, sales and deliveries that qualify as export activities, and services and activities generating foreign currency specified in relevant legislation". The definition is further clarified under Article 15 of the Circular on Capital Movements of 2 May 2018. In terms of sales and deliveries qualified as export activities and services and activities generating foreign currency, the circular refers to Communique 2017/4 on Tax, Duty and Charge Exceptions on Exports, Transit Trade, Sales and Deliveries that Qualify as Export Activities. For the avoidance of doubt, foreign currency generated from transactions between legal entities resident in Turkey does not fall within the scope of foreign currency income, save for the activities stated in Communique 2017/4. The procedure and principles to declare foreign currency income are set out under Article 16 of the Circular on Capital Movements. According to same provision, foreign currency income in the last three fiscal years can be certified with declaration forms and reports, including evidence pertaining to documents indicating foreign currency income.Another newly introduced term is the credit exposure of legal entities. Article 2(z) of Decree 32 defines 'credit exposure' as "the outstanding amount of foreign currency cash loans obtained within Turkey or from abroad". Legal entities resident in Turkey with a credit exposure equal to or above $15 million on the utilisation date can obtain a foreign currency loan and are not subject to limitations pertaining to foreign currency income. However, the utilisation date is questionable, as it has not yet been clarified under Decree 32. The Circular on Capital Movements regulates the utilisation date of loans utilised by financial leasing and financing companies as the date of the agreement. However, it is still unclear for loans obtained from banks whether the signing date of the loan agreement or first drawdown date will be considered to be the utilisation date under Decree 32.Legal entities with foreign currency incomeUnder Articles 17 and 17/A of Decree 32, Turkish residents that generate foreign currency income can obtain foreign currency loans from abroad or within Turkey provided that the sum of their existing credit exposure and the amount of the new loan do not exceed their total foreign currency income in the past three fiscal years.In order to avoid any misunderstanding, if a legal entity generates a foreign currency income less than the facility amount that it desires to withdraw (and it already has an outstanding credit exposure equal to or more than $15 million) can obtain such loan as per the general principle.Legal entities without any foreign currency incomeAccording to the amending decree, legal entities that generate no foreign currency income cannot obtain foreign currency loans from abroad or within Turkey, save for the exceptions stated in Article 17 for loans from abroad and Article 17/A for loans within Turkey.Overseas loansTurkish residents that have no foreign currency income cannot obtain a foreign currency loan from abroad. However, in the following cases, the 'having foreign currency income' criterion is not required:foreign currency loans obtained by public agencies and institutions, banks and Turkish-resident financial leasing, factoring and financing companies;foreign currency loans by Turkish residents with a credit exposure equal to or above $15 million on the utilisation date;foreign currency loans obtained by Turkish residents:within the scope of investment incentive certificates; orfor the financing of certain machines and equipment listed in the List (I) Annex of Decree 2007/13033 on the Determination of Value Added Tax (VAT) Ratios of Goods and Services (the amount of the loan should not exceed the amount stipulated in the investment incentive certificate);foreign currency loans obtained by Turkish residents which have been awarded to internationally announced tenders in Turkey or that are contractors under defence industry projects approved by the undersecretary of defence (the amount of the loan must not exceed the tenancy agreement or project agreement amount);foreign currency loans obtained by Turkish residents in charge of performing public-private partnership projects (the amount of the loan must not exceed the project agreement amount);foreign currency loans not exceeding the sum of authenticated potential foreign currency income obtained by Turkish residents that did not generate foreign currency income in the past three fiscal years, provided that their connections to export, trade, sales and deliveries qualify as export activities, foreign currency generating services and activities and potential foreign currency income; andforeign currency loans obtained by Turkish residents within the rules and procedures determined by the Ministry of Treasury and Finance.Pursuant to the last exception, Article 21 of the Circular on Capital Movements states that the ministry has determined exemptions in addition to Article 17 for:foreign currency loans obtained by Turkish residents to finance investments in renewable energy sources under the scope of the guarantee of purchase in accordance with Law 5346 on the Use of Renewable Energy Resources for Generating Electricity;foreign currency loans obtained by Turkish residents awarded tenders under the scope of the Privatisation Implementation Law 4046 and public tenders in which the price is determined in a foreign currency (provided that the loan amount does not exceed the tender price);foreign currency loans obtained by Turkish resident special purpose companies established with the aim of share purchasing which conduct no activity other than the execution of this aim (the amount of the loan must not exceed the share purchase price); andforeign currency loans provided by group companies resident overseas with foreign capital to Turkish residents whose capital entirely belongs to such group companies.In addition, loans borrowed from the branches of Turkish-resident banks and financial institutions abroad (including offshore branches but excluding free-zone branches) are considered foreign currency loans obtained from overseas.Loans obtained in TurkeyThe framework that applies to loans obtained from overseas also applies to loans obtained in Turkey by Turkish residents. However, in addition to the above exceptions, Turkish residents with no foreign currency income can obtain a foreign currency loan in Turkey or enter into a foreign currency leasing transaction under the following scenarios:foreign currency loans obtained by Turkish residents which do not exceed the amount of foreign currency deposited in banks in Turkey as collateral or foreign currency securities issued by or under the suretyship of the central bank or central administrations of Organisation for Economic Cooperation and Development member states;financial leasing transactions in foreign currency for the purchase of certain machines and equipment listed in List (I) Annex of Decree 2007/13033 on the Determination of VAT Ratios of Goods and Services; andloans obtained from Turkish-resident banks and financial institutions in free zones are considered to be loans obtained in Turkey and are subject to restrictions regulated under Article 17/A. However, according to Article 17(A)(9) of Decree 32, banks and financial institutions resident in Turkey can provide foreign currency loans to residents abroad.Since Turkish residents can obtain foreign currency loans only from banks and financial institutions, non-financial entities cannot provide foreign currency loans to each other under Decree 32.Turkish-resident real personsIn contrast to the previous version of Decree 32, two fundamental procedures are no longer in operation. The first concerns the provision of foreign currency loans to real persons. Before the amending decree was introduced, providing foreign currency loans of $5 million or above with an average maturity of more than one year to real persons resident in Turkey was allowed. In addition, Article 17(f) stated that special cases determined by the Ministry of Treasury and Finance would not fall within the scope of the restriction on foreign currency indexed loans as outlined above. The amending decree takes this restriction further and prohibits providing foreign currency loans from abroad or within Turkey to real persons resident in Turkey without exceptions.Foreign currency indexed loansThe second implementation allowed foreign currency indexed loans to be obtained by Turkish residents. Before the amending decree was introduced, banks could provide foreign currency indexed loans with a commercial or professional aim to a legal entity or real person under Decree 32. Moreover, the Ministry of Treasury and Finance had the right to determine cases that were exempt from the restrictions on foreign currency indexed loans. The amending decree prohibits obtaining foreign currency indexed loans from overseas and in Turkey for real persons and legal entities resident in Turkey.CommentThe amending decree introduced strict restrictions on foreign currency loans from overseas or in Turkey. The provision of foreign currency loans to real persons resident in Turkey is now forbidden, as is providing foreign currency indexed loans to legal entities or real persons under Decree 32. In terms of legal entities, Decree 32 states that Turkish residents with foreign currency income can use foreign currency loans within the limits of their foreign currency income in the past three years. However, legal entities which generate no foreign currency income but have credit exposure equal to or above $15 million are free to obtain foreign currency loans without limitation.For further information please contact Neslihan Tuna Saracgil or Pelin Ecevit at Selvi & Ertekin by telephone (+90 212 236 12 12) or email ([email protected] or [email protected]). The Selvi & Ertekin website can be accessed at www.selviertekin.com.Endnotes(1) Official Gazette 20249, 11 August 1989.(2) Official Gazette 30312, 25 January 2018.