Legal Framework for FDI in Turkey

Pro-business foreign investment policies have been introduced as part of the liberalization of the Turkish economy. The foreign investment legislation provides a more secure environment for foreign capital by providing support from several bilateral and multilateral agreements and organizations, granting foreign capital the same rights and obligations as local capital, and guaranteeing the transfer of profits, fees and royalties and the repatriation of capital.

The foreign direct investment Law No. 4875, which has been in force since June 17, 2003, emphasizes the key elements of the liberal investment environment in Turkey, and represents a "legal guide" to international investors about their rights and obligations. Since all companies established in Turkey within the framework of the Turkish Commercial Code are considered Turkish companies, all duties and responsibilities are the same, regardless of the nature of the capital structure of the company..

Law No. 4875 provides:

• freedom to invest by eliminating all former FDI-related screening, approval, share transfer and minimum capital requirements;

• reassurance of existing guarantees in one transparent and stable document;

• upgrading to accepted international standards for definitions of "foreign investor" and "foreign direct investment"; and

• a policy shift from ex-ante control to a promotion and facilitation approach with minimal ex-post monitoring.

Turkey has been a party to several international organizations and bilateral and multilateral agreements, which provide a more secure investment environment for foreign investors, such as:

• Turkey is a member of OECD, WTO,

IMF, World Bank and organizations of the World Bank, including Multinational International Guaranty Agency ("MIGA").

• Agreements to protect and promote investment have been signed with 77 countries, and 62 of these such agreements are currently in force.

• Agreements to avoid double taxation are currently in effect with 61 countries.

• Turkey has been a party to OECD Codes of Capital Movements and Invisible Transactions and the convention on the International Center for Settlement of Disputes.

• Turkey has been a party to investment-related agreements on WTO platforms such as TRIMs (Trade Related Investment Measures) and TRIPs (Trade Related Intellectual Property Rights).

In 1999, the Grand National Assembly passed a Constitutional amendment permitting national and international arbitration of certain business disputes involving concession agreements for public services. In 2000, the related implementation laws allowing international arbitration in contracts involving Turkey and foreign investors were approved by the Parliament.

In addition, regulated markets for electricity and natural gas were introduced to address the shortcomings of the current centralized model. The telecommunications sector has also undergone changes, transforming the formerly monopolistic structure to a regulated and competitive sector. The High Council of Telecommunications was established in 2000 as a supervisory body for the telecommunication industry. The last step towards a full liberalization of the sector began on January 1, 2004 following the termination of the monopoly of Turk Telekom on voice telephony services and telecommunication infrastructure, Following full liberalization, the Telecommunication Authority granted the first licenses for territorial data transmission.,

FDI Statistics

According to the balance of payment statistics published by the Central Bank of the Republic of Turkey, the capital (inflow) of US $ 1.752 million in 2003 has increased by 55,9 % in 2004 and reached to US $ 2.837 million. In 2000, 2001 and 2002 total direct foreign capital (inflow) are US $ 982 million, US $ 3.352 million and US $ 1.137 million respectively.

In line with the recovery of the main economic indicators and efforts to improve investment environment, FDI inflows continued to rise in 2005. Net FDI inflows into Turkey totaled $ 9.667 million in 2005, implying more than three fold increase compared to 2004.

As of 2005, there are 11.685 companies with foreign capital in Turkey. Out of these, 9.684 are of new company and branch establishment and 2.001 are of foreign capital participations into existing companies.

Investments in the services sector accounted for 91 % of total foreign direct investment for 2005, while manufacturing accounted for 8,5 % of such total.

In the year of 2005, 209 incentive certificates were issued for investments to be carried out by companies with foreign capital, and the estimated total value of these investments within these certificates amount to US$ 3,49 million, of which 51% will be undertaken by foreign shareholders.

In terms of accumulated foreign capital commitment up to today; the leading investors are Germany, USA, the Netherlands, Greece, United Kingdom, Switzerland, Belgium and Russian Federation.

Within the manufacturing industries, the leading sectors are;

• Automotive and transportation equipment

• Food, beverage and tobacco industries

• Chemical and petroleum products

• Electrical machinery and electronics Within services sector, the leading sectors are;

• Banking

• Trade & retail chain stores

• Telecommunications

• Tourism

Policy Reforms to Increase the FDI Inflows to Turkey

Strengthening private sector activity in the Turkish economy is an integral part of the Government's overall macroeconomic stabilization program. The aim of the program is to achieve a sustainable growth level with a vibrant private sector and a smaller but more effective public sector. Key structural reforms in major markets such as agriculture, pensions, banking, telecommunications and energy and accelerated privatisation program have been adopted, which will pave the way for a more dynamic private sector.

Despite its competitive advantages and diverse market opportunities, FDI inflows have not lived up to the potential of an economy of that size. Recognizing the importance of this issue, the Government placed efforts for improving the investment environment at the top of the political agenda.

The Government of Turkey has therefore initiated a comprehensive reform program in December 2001, to streamline all investment-related procedures and to attract more private direct domestic and foreign investment and besides legal allowance preformed in 2003, providing real people and corporate assets of foreign origin to acquire property in Turkey, was overturned by the Turkish Court in 2005.. The Government has established a Co-ordination Board for Improving the Investment Environment (YO-IKK). The Board assigned specialized technical committees to work on developing concrete proposals and strategies in order to overcome all main obstacles. Productive collaboration between the public and the private sector is the key in this process. To ensure that policy reforms truly reflect and address private sector concerns, intensive and direct involvement of companies and investors in this process is critical. Each technical committee therefore consists of private sector and government agencies' representatives. The Board's mandate is to make specific recommendations to the Council of Ministers who will take the required political decisions to remove the obstacles impeding the improvement of the investment climate.

General Incentive Regime

The principal purpose of incentives is to eliminate inter-regional imbalances, facilitate a larger capital contribution by the public and support activities that have a positive effect on employment. Furthermore, inflow of foreign currency and advanced technology and improvement of international competitiveness are also aimed without breaching international obligations.

Incentives for investments to be realized in the priority and least developed regions simply aim to increase employment in these regions through tax exemptions and other financial incentives.

Major Incentive Instruments

• Exemption from customs duties and fund levies: This incentive measure ensures that the imported machinery and equipment for investment purposes are exempted from customs duties and fund levies. Such machinery and equipment must be included in the imported machinery and equipment list to be approved by General Directorate of Foreign Investment (GDFI). Raw materials and intermediate goods cannot be imported under this provision.

• Value Added Tax (VAT) exemption: The VAT, payable for both imported and locally purchased machinery and equipment, is exempted under this incentive measure. Such machinery and equipment must be included in the import machinery list and approved by GDFI. The locally purchased machinery and equipment should be included in the locally procured machinery list and approved by the GDFI.

• Credit Allocation from the Budget: Credits can be allocated from the budget to the following investments: Research and Development (R&D) investments, Technopark Establishment, Investments in Technoparks, Investments for Environmental Protection, Priority Technological Investments which are determined by the Supreme Council of Science and Technology or Scientific and Technological Research Council of Turkey (TUBI-TAK).ln addition to the above investments to be moved to provinces specified for regional development and investments to be moved to priority regions and other organized zones from developed regions and manufacturing, agro-industry and mining investments to be realized in the priority regions in compliance with the legislation on State Subsidies for Investments.

Turkey has three types of regions with regard to implementation of incentive regime

• Developed regions- the Provincial boundaries of Istanbul and Kocaeli, and the municipality boundaries of Ankara, Izmir, Bursa, Adana and Antalya.

• Priority Turkish regions- 50 provinces determined by the Council of Ministers; Adıyaman, Aksaray, Amasya, Ardahan, Artvin, Batman, Bartın, Bayburt, Bingöl, Bitlis, Çanakkale (only the provinces of Bozcaada and Gökçeada) Çorum, Erzincan, Erzurum, Giresun, Hakkari, Karabük, Karaman, Kars, Kastamonu, Kilis, Malatya, Mardin, Ordu, Osmaniye, Rize, Samsun, Siirt, Sinop, Sivas, Tokat, Trabzon, Tunceli, Van, Yozgat and Zonguldak.

• Normal regions- the remaining provinces.

Eligibility criteria for the incentives

• The minimum amount of fixed investment must be YTL 400.000 for developed regions and normal regions, YTL 200.000 for priority regions.

Incentives for the Least Developed Regions

According to the Law for the Encouragement of Investments and Employment, No. 5084, dated February 6, 2004, and Law on Amendments of the Law No.5084, No. 5350, dated May 12, 2005 additional incentives are granted to the investors that invest in the following provinces, which have per capita income equal to or less than $ 1,500 or the provinces with a minus index value on the socio-economic development ranking: Sinop, Giresun, Amasya, Malatya, Sivas, Tokat, Afyon, Erzincan, Osmaniye, Düzce, Siirt, Ordu, Erzurum, Batman, Bayburt, Mardin, Aksaray, Adıyaman, Kars, Van, Yozgat, Ardahan, Hakkari, Bingöl, Bitlis, Artvin, Çorum, Karaman, Kastamonu, Rize, Tunceli, Kilis, Kütahya, Trabzon.

Additional incentives granted in the aforementioned provinces are as follows:

• Incentive on witholding of income tax,

• Insurance premium incentive for employers,

• Energy support,

• Free land allocation.