As explained in our E-alert of 19 September 2018, on 13 September 2018, the President of the Republic of Turkey restricted the use of foreign currency denominated or indexed payments for certain types of contracts among Turkish residents (the “Restriction”). The Restriction also applies retrospectively, and therefore any existing contracts, which would fall within its scope, must be re-visited and the amounts therein converted into Turkish Lira.
Following the introduction of the Restriction, all eyes turned to the Ministry of Treasury and Finance (the “Ministry”) to announce the exemptions, which came into effect upon their publication in the Official Gazette on 6 October 2018.
The Restriction only applies to contracts among Turkish residents – meaning either corporate entities established in, or individuals resident in Turkey. Contracts involving a foreign party are exempt from the Restriction, provided that (a) such foreign party is not (i) a branch, representation office or liaison office of a Turkish resident, or (ii) a fund operated or managed by a Turkish resident; or (b) a non-Turkish resident, whether directly or indirectly, owns at least 51% of such foreign entity’s share capital.
No exemptions have been provided in relation to the sale and lease of immovable property, hence the Restriction shall continue to strictly apply. However, it is worth noting that the conversion into Turkish Lira of payments specified under residential and workplace lease contracts executed prior to 13 September 2018 shall only be effective for 2 years and will be subject to indexation based on the consumer price index as announced by the Turkish Statistical Institute.
In summary, the exemptions to the Restriction can be classified under the following categories:
- Sale and lease of movable property: Only contracts relating to the sale or lease of vehicles shall be subject to the Restriction. Although the general rule is that any existing contract subject to the Restriction must be denominated into Turkish Lira, there will be no such requirement in connection with vehicle lease contracts executed prior to 13 September 2018. All other contracts on the sale or lease of movable property are exempt and therefore can be denominated or indexed in foreign currency and there is no need to convert existing contracts into Turkish Lira.
- Employment contracts: Employment contracts may be denominated or indexed in foreign currency if and where:
- the performance thereunder shall take place outside of Turkey;
- the employee is not a Turkish citizen; or
- the employer is a branch, representation office or liaison office of a non-resident in Turkey; 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 is an entity operating in a free zone in Turkey. For the latter, the exemption shall only apply if the employment contract is concluded in relation to activities in the free zone.
- Service contracts: Service contracts shall be exempt from the Restriction if and where:
- it relates to activities to be conducted outside of Turkey;
- one of the parties is not a Turkish citizen;
- it is executed in relation to (a) exports, transit trade or trade considered as export, (b) foreign currency earning services, or (c) transactions as determined by the relevant legislation;
- it is concluded in relation to the provision of electronic communication services starting in Turkey and ending abroad or vice versa; or
- the employer is a branch, representation office or liaison office of a non-resident in Turkey; 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 is an entity operating in a free zone in Turkey. For the latter, the exemption shall only apply if the service contract is concluded in relation to activities in the free zone.
- Works contracts: Only contracts on the construction, repair and maintenance of vessels shall be exempt from the Restriction. All other works contracts need to be denominated in Turkish Lira.
- Technology contracts: To the extent that the software is developed abroad, contracts relating to software sale may be denominated or indexed in foreign currency. Hardware and software licensing and maintenance contracts are also exempt from the Restriction.
- Public contracts: Public institutions may contract in foreign currency, except for the sale or lease of immovable property. To the extent that it is within the scope of performance by a public institution under (i) a tender documentation or contract denominated or indexed in foreign currency, or (ii) international treaties, a contractor of the public institution may execute with a third party a contract denominated or indexed in foreign currency. However, this exemption does not extend to the sale or lease of immovable property or to employment contracts, which need to be denominated in Turkish Liras, unless there is another exemption available.
- Other contracts: The Ministry has further announced that, among other exemptions, (i) financial leasing contracts may be denominated or indexed in foreign currency, (ii) capital market instruments may be issued in foreign currency, and (iii) airlines and service companies active in the civil aviation sector may transact in foreign currency, except for the sale or lease of immovable property.
Where an existing contract does not benefit from the application of an exemption, the value of the corresponding contract must be converted into Turkish Lira. In line with the principle of freedom of contract, the parties shall be free to determine the applicable exchange rate. However, if they fail to reach an agreement, the effective selling rate of the Central Bank of the Republic of Turkey as of 2 January 2018 will be the applicable exchange rate.
Once the conversion is completed, the new amount in Turkish Lira shall be adjusted based on the consumer price index between 2 January 2018 and the date of conversion, as announced by the Turkish Statistical Institute.
Since no extension has been granted as at the date of this alert, those contracts that are not covered by any exemption must be denominated in Turkish Lira by 13 October 2018.