The Turkish Government has committed itself to improving the start-up ecosystem in Turkey and it is introducing new methods to support entrepreneurs.
THE Ministry of Development of the Republic of Turkey (“Ministry of Development”) issued its 10th Development Plan covering 2014-2018 (“Development Plan”) and its Medium Term Program for 2017-2019 (“Medium Term Program”), which together set forth goals and policies to support young people who are eager to run their own businesses. According to the Development Plan and the Medium Term Program, the Turkish Government will:
- steer the education system towards internalizing an entrepreneurship culture;
- diversify income sources for institutions of higher education through entrepreneurial activities;
- develop, to the degree possible, innovative entrepreneurship in every sector;
- increase access to financing for start-ups and the amount of financial resources allocated to the development of innovative entrepreneurship and R&D activities;
- transform innovation systems into entrepreneurship focused structures;
- further improve entrepreneurial culture by disseminating formal and informal programs at every level of the education system and increase the quality of existing entrepreneurship training programs by promoting and rewarding entrepreneurial role models;
- improve institutional capabilities and the collaboration of institutions that provide services and support within the entrepreneurial ecosystem;
- enhance the quantity and quality of incubators and business development centers to better serve entrepreneurs;
- support entrepreneurship based on innovation, productivity, employment, growth, and collaboration, and prioritize women, youth, and social entrepreneurship; and
- develop e-commerce services to facilitate the expansion of entrepreneurs into foreign markets.
As per the 2017 Investment Program (“Investment Program”) prepared by the Ministry of Development and based upon the Development Plan and the Medium Term Program, public authorities will reward successful start-ups in order to promote entrepreneurship culture and increase awareness in society. The Investment Program also sets forth that a “portfolio guarantee system” will be employed by the Credit Guarantee Fund (Kredi Garanti Fonu) as an alternative financing mechanism for start-ups to easily access financing. In this way, the Credit Guarantee Fund can serve as the guarantor for entrepreneurs who could not otherwise borrow from banks due to a lack of collateral.
Definition of Entrepreneurs establishing Start-ups under Turkish law
The 2015-2018 Entrepreneurship Strategy and Action Plan (“ESAP”) prepared by the Ministry of Science, Industry, and Technology (“MSIT”) begins by quoting the Organization for Economic Co-operation and Development (“OECD”) which defines an entrepreneur under its Entrepreneurship Indicators Programme as
those people who seek to generate value, through the creation or expansion of economic activity, by identifying and exploiting new products, processes or markets. According to this definition entrepreneur is evaluated not only by his/her actions, but also with the results of these actions. Entrepreneur makes an investment using time, idea and other resources to start an activity which consists of risks and uncertainty. This activity shall bear “new” results which cause previous results to disappear and an economical and/or social value should be generated.
ESAP offers its own definition of entrepreneurs as people who own and/or operate micro or small companies such as joint stock companies, limited liability companies, or general partnerships, which can be operated individually or with employees. It goes on to identify young entrepreneurs as those under the age of 29 and new entrepreneurs as those who have owned their business for a period of less than 42 months (3.5 years).
The Income Tax Code (“Income Tax Code”) defines young entrepreneurs as persons under the age of 29 who operate or manage their own business. In this respect, companies incorporated by such young entrepreneurs can be considered “start-up companies” (başlangıç firmaları).
Income Tax Exemption
As per the Income Tax Code, young entrepreneurs who are obligated to pay income tax for the first time due to their commercial, agricultural, or professional activities and who are under the age of 29 at the time they become tax payers can qualify for an income tax exemption of up to 75,000 Turkish Liras generated over three taxation periods, provided that they meet the following conditions of the Income Tax Code:
- the employment start date has been submitted within the legal notice period;
- they operate or manage their own businesses;
- they have not taken over professional activities or businesses from spouses, blood-relatives, or up-to-third-degree relatives, except when the activities have been taken over by a spouse and/or child in the case of death;
- they do not subsequently become partners in an existing business or professional activity; and
- in the event that the business activity is carried out under a general partnership or private company (şahıs şirketi), any partners also meet these conditions.
Public Financing of Start-ups through the Entrepreneur Support Program
The General Directorate for the Development of Small and Medium Enterprises (“SME General Directorate”) of the MSIT conducts a program called the Entrepreneur Support Program to provide non-recourse financial support up to a certain amount to young entrepreneurs who need to finance their businesses. Young entrepreneurs who complete entrepreneurship training provided by the SME General Directorate or who benefit from Business Development Centers Support, which is also provided by the SME General Directorate, can participate in the program. The scope of the program is briefly as follows:
Maximum limit (TRY)
Incorporation of business
Machine and equipment support
Company Incorporation Expenses
Savings on Notary Fees
Prior to 2016, the only way to execute Articles of Association (“AoA”) was for the founders (or their proxies) of joint stock companies, limited liability companies, limited partnerships, limited partnerships with shared capital, and general partnerships to sign an AoA before a notary public in the place of incorporation, which carried significant additional costs. However, a recent legislative change now allows the owners of such companies the alternative of signing the AoA before the trade registry offices in the location where their companies will be incorporated and registered. This allows the founders (or their proxies) to choose whether to sign an AoA before a local notary public or save money by going to the trade registry office, which removes a potentially significant obstacle especially for entrepreneurs and start-ups.
Emission Premium System in Start-up Companies
From a practical corporate law perspective, in the event that equity investors wish to invest in a start-up company by injecting equity directly into the company, the company may issue shares with an emission premium by creating a new class of shares whereby the equity investors pay a value higher than the nominal value of the shares in order to put money into the company’s reserve fund. In this way, differentiation in the valuation of shares may be introduced without diluting existing shareholders (e.g., founders, seed or early stage investors) of the start-up company, and the investor remains entitled to receive the amount in excess of the valuation from the reserve fund later if there is a surplus.
Of greatest interest to entrepreneurs in the field of intellectual property law is the recent passage of the Industrial Property Code, which abolished previous decree codes regarding certain entrepreneurial-related rights. The purpose of abolishing the previous decree codes and rolling the protection of all rights related to trademarks, patents, designs, geographical signs, utility models, and traditional product names under one code was to combine the applications for the registration of these intellectual property rights and the sanctions for violation of these rights under a single body of legislation.
In addition to combining these rights under one code, new provisions were introduced regarding patent rights over employee inventions made at universities and projects supported by public institutions and authorities. Universities always retain ownership of patent rights over employee inventions emerging as a result of scientific research. Likewise, when an invention is made within the scope of projects supported by public institutions and authorities, the inventor must inform the relevant public institutions and authorities of this invention. However, the inventor will also have one year to request ownership of the patent right over such invention from the relevant public institutions and authorities. If the inventor fails to request ownership over such invention, then the relevant public institution or authority will own the patent right over the invention. In any event, the distribution of revenue arising from the usage of the invention will be determined by an agreement between the inventor and the relevant public institutions and authorities.
Judging from the recent initiatives by public authorities and legislative amendments made in favor of young entrepreneurs, the Turkish government aims to develop the start-up ecosystem and encourage entrepreneurship in Turkey by providing financial support to young entrepreneurs, increasing the quality of the entrepreneurship education, and promoting entrepreneur role models. This type of positive reinforcement, together with the removal of certain tax and legal burdens and an update to the regime protecting inventions, should contribute greatly to the entrepreneurship culture and innovation in Turkey.