Turkish residents obtain credit, in the form of foreign currency or Turkish Lira, from foreign banks and financial institutions based on their various financial and investment needs. For the purposes of protecting the value of the Turkish Lira and regulating capital movements arising from foreign lending, Turkish legislation has established certain restrictions, with relevant rules and principles. With respect to loans extended from abroad, it is mandatory for residents of Turkey to act in accordance with those rules and principles, as well as any restrictions, save for a few exceptional financial models.
- Legal Framework Surrounding the Extension of Loans from Abroad
The need to extend credit, either directly from abroad or through a bank or financial institution residing in Turkey, arises for private sector firms and especially for investors, when internal resources are inadequate and external resources are sought. Under these circumstances, the extension of loans from banks and foreign institutions residing outside of Turkey is secured to satisfy the need for a necessary resource and to maintain the continuity of investments and products. Hence, Turkish legislation has established certain regulations to ensure the harmonisation of its internal regulations with international rules. This is done to ensure integrity in a global economy and to facilitate the utilization of external resources.
Pursuant to foreign exchange legislation applicable in Turkey, the following shall be considered within the scope of “foreign borrowing” for Turkish residents;
- Credit extended from foreign banks or financial institutions directly residing outside of Turkey;
- Credit extended from foreign branches of banks residing in Turkey;
- Credit extended through syndication with the participation of Turkish banks and foreign banks residing outside of Turkey.
The legislation that regulates rules and principles concerning the extension of credit from abroad is comprised of the following: i) Law No. 1567 regarding the Protection of the Value of Turkish Currency, which came into effect on 25 February 1930; ii) Decree No. 32 regarding the Protection of the Value of Turkish Currency, which came into effect on 11 August 1989 (“Decree no. 32”); and iii) Capital Movement Circular, published by Central Bank of Turkey (“CBT”) on 2 January 2002, subsequent to the publication of the Decree (“Circular”). In this framework, Decree No. 32 and the Circular are the primary pieces of legislation that set forth the regulatory principles for all operations relating to foreign exchange, the instruments representing foreign exchange, and the use and management of foreign exchange. Under Decree No. 32 and the Circular, financing purposes and investment models for loans extended from abroad are listed, and regulatory and restrictive principles on certain loans are introduced.
- Principle of Transferring Loans Extended from Abroad to Turkey and Financing Models
Pursuant to Decree No. 32, residents in Turkey, as borrowers, may freely borrow loans in foreign currency or Turkish lira from banks and financial institutions residing outside of Turkey, without authorization from any authority or government, and may obtain credit in kind and in cash from the same. However, relevant legislation stipulates in principle that those who are granted cash loans from abroad are obliged to utilize them by means of banks with residence in Turkey in the event that such loans are sought for the purpose of being utilized in Turkey. With this stipulation, the transfer of principal repayments, interest payments and other payments is to be made through banks with residence in Turkey, regardless of whether such cash loan is extended directly from a bank or financial institution outside of Turkey or through the intermediation of a bank or financial institution with residence in Turkey. On the other hand, there is no such rule for a non-cash loan, and as a result, such loans can be freely used in Turkey without the requirement to transfer them through a bank with residence in Turkey.
Even if the legislation primarily establishes that loans extended from abroad are required to be transferred to Turkey, an exception to this rule is delineated under the foreign exchange legislation. Accordingly, Turkish residents have no obligation to transfer such credit amount to Turkey through the intermediation of banks with residence in Turkey if such amount is not intended to be used in Turkey. In this regard, if the loans extended from abroad are to be used for businesses engaged abroad, such loans shall not be subject to foreign exchange legislation in Turkey, since there will be no inflow/outflow of foreign currency related to such loans. Therefore, repayment of such loans shall be executed abroad, and the credit amount shall not be transferred to Turkey in any way and shall not be subject to any investment or financing model in Turkey.
The afore-mentioned exception is explicitly established under the Circular and Decree No. 32. Accordingly, the principle of transferring loan proceeds to Turkey through the intermediation of banks will not be applied in instances in which residents of Turkey extend foreign currency loans for the purposes of utilization and financing models, as described below. In such a case, the repayment of loans can be made directly to the exporter abroad.
- Credit utilized from abroad is related to the business engaged abroad;
- Credit utilized from an export credit agency or credit guaranteed by an export credit guarantee institution abroad and directly paid to the export company abroad;
- Credit utilized exclusively for the import of goods from development banks that provide cash financing and term financing instead of cash loans;
- Credit utilized for the import of ships to be purchased abroad.
B. Financing Models Under the Legislation
Foreign currency loans extended from banks or other financial institutions, provided such loans are disbursed by means of banks with residence in Turkey, are to be utilized for the financing purposes as defined below, which are explicitly established in the Circular:
- Foreign currency loans utilized for the financing of exports, sales and deliveries assumed as export and currency savings transactions,
- Foreign currency loans utilized for the financing of transit trade,
- Foreign currency loans utilized for the financing of Turkish entrepreneurs engaged in business abroad,
- Foreign currency loans utilized for the financing of foreign trade,
- Foreign currency loans utilized for the financing of a business enterprise,
- Foreign currency loans utilized for the financing of investment in goods and services imports,
- Foreign currency loans utilized for the financing of ships to be purchased abroad, and
- Foreign currency loans utilized for financing of investment in purchases of goods allowed by investment incentive certificates.
The above-mentioned financing models are also valid for real persons residing in Turkey, and these represent the compliant models for the extension of foreign currency loans from abroad. However, pursuant to Decree No. 32, real persons are explicitly prohibited from obtaining foreign currency loans from abroad, except for commercial and professional purposes and the models specified above. With this rule, the legislator strove to prevent real persons with residence in Turkey from utilizing loans, in the form of either foreign currency or Turkish Lira, for their mortgage and consumer needs under the name of a working capital loan.
III. Repayment of loans and notıfıcatıon to undersecretariat of treasury
Save for the loans utilized by Turkish residents for their businesses engaged abroad, information regarding the utilization and repayment of long-term or short-term cash loans with a maturity of more than one (1) year for the purposes listed above are required to be reported to the Undersecretariat of the Treasury in Turkey. Banks acting as intermediaries for the extension of such foreign currency loans may remit/transfer the credit repayment abroad from either bank sources or foreign exchange deposit accounts provided that provisions in Turkish Lira are paid. However, banks with residence in Turkey are entitled to request information and documents regarding credit from the persons/entities utilizing such loans to ensure that the foreign currency loan is transferred to Turkey.
In the event that intermediary banks determine from relevant credit documents that the foreign currency loan is directly used abroad or has not been transferred to Turkey as prescribed, they have an obligation to notify the Undersecretariat of the Treasury. As part of this notification requirement, the Undersecretariat of the Treasury may initiate legal action against the relevant person(s)/entity(s) if there is a clear violation of legal regulations.
Otherwise, pursuant to the Circular, some institutions, including municipalities and public economic enterprises, are required to send agreements regarding loans with a maturity of more than one (1) year to the Ministry with an External Financing Number within 30 days of the date of the credit agreement.
With regard to the taxation of loans extended from abroad, the legislation has advantages in a broad manner. Pursuant to the Stamp Tax Law, numbered 488, and the Act of Fees, numbered 492, any kind of guaranty, paper and commentary which is drawn up for the purpose of repayment and other provisions of loans extended from banks or financial institutions abroad is exempt from the stamp tax and fee. As for working capital loans extended from abroad, there is no Banking and Insurance Transaction Tax (“BITT”) obligation. However, the Resource Utilisation Support Fund (“RUSF”) obligation is enforced at certain rates unless the maturity of the credit exceeds three (3) years.
V.Restrictions to revolving credit facilities
Pursuant to Turkish legislation, Turkish residents are not permitted to extend revolving credit from banks or financial institutions residing abroad. This restriction was announced by the CBT on 6 May 2014.
The new CBT rule defines revolving loans as follows:
- Loans extended with a maximum pre-approved credit limit,
- Loans extended within a loan availability period,
- Loan repayment and drawdown availability on any days during the term of the loan,
- Loans with primarily floating interest rates,
- Credit limit increases or decreases due to the drawdown and repayment of loans.
With this restrictive amendment, dated 6 May 2014, Turkish residents are prohibited from extending revolving loans from banks or financial institutions or any real person or entity with residence outside of Turkey unless such facilities are employed for businesses engaged abroad, meaning that repayment, transfer or usage of such facilities should not be relevant in Turkey.
Turkish legislation currently in force does not constitute an impediment for Turkey residents to obtain cash or non-cash loans extended from banks or financial institutions with residence outside of Turkey. The Undersecretariat of the Treasury stipulates that the transfer of foreign currency in the course of the repayment of foreign currency loans is to be made through banks with residence in Turkey, and the loans are to be utilized in the scope of certain credit utilization purposes and financing models. Ultimately, this legislation seeks to control the inflow and outflow of foreign currency under the auspices of credit utilization and credit repayment mechanism.
An exception to the freedom of credit extension and utilization from abroad is Turkish legislation that explicitly prohibits the utilization of revolving loans extended from abroad within Turkey, with an amendment that became effective in 2014. With this restriction, extension of loans from abroad by Turkish residents is subject to a control mechanism. In this way, lawmakers seek to prevent excessive borrowing of Turkish residents to a certain extent.