Volkan Hidayetoglu of Hidayetoğlu & Co looks at how Turkey has reformed its investment environment to create a level playing field for local and foreign investment alike

Turkey's ongoing efforts in being a member of the European Union combined with its commitment to attract the highest level of foreign investment has resulted in a range of developments in its laws and legislation.

The objectives and implementation have varied over the past decade, but Turkey has remained aware of the global economy and ready to follow its lead. This is reflected not only in private sector and government statements, but also in new laws and regulations that have managed to eliminate obstacles to foreign investment. After a decade of persistent economic reforms, the Government of Turkey initiated the integration of the Turkish economy into the world market system by admitting deficiencies in its legislation: the reign of red tape, discrimination between foreign and local investors, the non-existence of corporate governance principles causing non-transparency, unfair competition and the violation of minority rights.

For a more effective involvement in the global economy and to attract foreign investment, amendments and alterations have been made to capital markets, investment regulations, arbitration, taxation, and privatisation. Investment agreements have been concluded which altogether demonstrate a strong desire for the reformation of the investment environment in Turkey.

The quality of capital markets personnel will be improved, as only successful candidates will now be given a licence after examination and training. This in turn provides a more professional service to customers and market players.

A law on arbitration, an alternative dispute settlement method by which foreign investors can apply (alongside authorised local courts, national and international arbitration, and other means of dispute settlement) providing that regulations are fulfilled and parties are in agreement, has been in effect since 2001 (Turkish International Arbitration Code, Law 4686). Turkey has also become a member of the International Center for the Settlement of Investment Disputes (ICSID) and a signatory to the New York Convention of 1958 on the recognition and enforcement of foreign arbitral awards.

With a unique location at the intersection of two continents, Istanbul is a global city, and the heart of commerce in Turkey. The law establishing the Istanbul Arbitration Centre entered into force on January 1 2015. This law provides a settlement opportunity within a shorter term, and at a lower cost, particularly with respect to commercial disputes bearing foreign elements.

Freedom for foreign investors

Amendments made to the Capital Markets Regulation, and new principles of corporate governance will provide a more transparent, stable, predictable and reliable market. The discrimination between foreign and local investors has been removed and foreign investors are entitled to the same rights and obligations as local investors.

The new Commercial Code aims to integrate local applications with EU law, improve transparency, protect minority rights and strengthen corporate governance principles. It has been amended in favour of foreign investors, who are released from bureaucratic obligations: they will no longer need to obtain a permit for the establishment and corporate procedures of a company. Another significant amendment permits legal entities with foreign capital (established and registered under the rules of Turkish Commercial Code) to acquire real estate under the same principles as Turkish nationals, but the principal of reciprocity is still valid for foreign persons. It is now easier to establish and manage cooperative activities in a transparent environment, such as the incorporation of a joint stock company and a limited liability company with a single shareholder or partner. Further, the new Code requires each capital company to have a website and if such a site is already available, to render a certain part of it specific for information to stakeholders. All administrative transactions of joint stock companies may be conducted online, which will create such options as online attendance for general assembly meetings, online submission of motions, online negotiations and online voting. This will even allow foreign shareholders to manage the company and participate in company procedures from abroad.

International cooperation

Law 6224 on the Encouragement of Foreign Capital enacted on January 18 1954 was a liberal law compared with the legislation of some OECD countries of the time. However, notions, definitions and applications concerning foreign direct investment changed so rapidly that the Law lagged behind the demand of both foreign investors and Turkey itself. As a result, the need for a new Foreign Direct Investment Law emerged.

The new Foreign Direct Investment Law was adopted; bilateral agreements for the promotion and protection of investments were signed to increase the flow of capital between contracting parties, while ensuring a stable investment environment; and, double taxation prevention treaties were signed, enabling tax paid in one of two countries to be offset against tax payable in the other. Further, social security agreements were signed to make it easier for expatriates to move between countries.

The Customs Union Agreement between Turkey and the European Union has been in effect since 1996. This agreement allows trade between Turkey and EU countries without any customs restrictions. The EU-Turkey Customs Union is an important step towards full Turkish membership of the EU. Turkey has free trade agreements with more than 30 countries, in which the countries involved agree to eliminate tariffs, quotas and preferences on most goods and services traded between them.

Restrictions on foreign investors, such as permits (company and branch establishment pre-permits, foreign partner participation pre-permits, investment permits, permits for changes in activity for foreign companies, permits for capital increase or sale of shares of foreign companies, indirect participation permits, registrations of licence, know-how, technical assistance and similar agreements) have been eliminated, creating a liberal business and investment environment. Foreign investors are now subject to the same regulations as a local investor, regardless of the nature of the capital it represents. Restrictions applicable to foreign investors have been relaxed, allowing easier access to the markets. Funds for investment facilities, profit, dividends, fees, royalties, capital and similar instruments may be freely transferred abroad with no further requirements for a permit or approval. Arrangements for the valuation of non-cash capital instruments have been made which favour investors, and bureaucratic obstacles to the employment of foreign personnel in Turkey have been abolished and the employment of expatriates is now explicitly regulated by law.

Foreign investors are now entitled to benefit from the range of state-owned lands, which will be set at an affordable amount once the current situation of such lands have been defined.

The rate of taxation implemented on capital market instruments and similar means has been reduced to affordable ratios and double taxation has been abolished by multilateral agreements. Foreign investors have access to incentive schemes on the same basis as local enterprises; investors, either local or foreign, are entitled to obtain incentives from the government, with a focus on certain areas.

Privatisation programme

Law 4046, adopted in 1994 (Arrangements for the Implementation of Privatization and Amending Certain Laws), sets out the major goals of the privatisation programme. These include: (i) minimum state involvement in the markets; (ii) provision of a legal and structural environment for free enterprises to operate; and, (iii) transfer of privatisation revenues to major infrastructure projects.

Enterprises owned by the state in Turkey can be classified into three categories: (i) state economic enterprises (SEE); (ii) wholly-owned subsidiaries of SEEs; and, (iii) joint ventures with other private parties and privately-owned or contracted enterprises with equity participation of the state through SEEs or their subsidiaries.,

Turkey has created an effective structural environment through the implementation of the principles of free trade. Opportunities to invest in Turkey are particularly attractive in the framework of Turkey's ongoing privatisation programme. The liberalisation of the economy and cooperation with the European Union have allowed Turkey to improve the strength of its competition in the market and produced a more secure and accessible environment, not only for local but also foreign investors. The aim of privatising state-owned enterprises has been to create a free, accessible and competitive market, and the portfolio of privatisation has managed to reach most state-owned entities, such as Turk Telekom (telecommunication), Tupras (petroleum refining), Petkim (petrochemicals production), THY (Turkish Airlines) and Tekel (alcohol and tobacco monopoly).

Turkey's foreign investment policy has changed from a screening system to a monitoring system; the undersecretariat of the treasury will collect data on foreign investments and determine the foreign investment policy of Turkey. Foreign investors' concerns will be determined in this way and will be used to underpin new policies.

Turkey has been a member of the World Trade Organization (WTO) since 1995. The country's commitment to integrating regional and international trade norms can be seen in its participation in and membership of various organisations, including the Economic Cooperation Organization (ECO), the United Nations Conference on Trade and Development (UNCTAD), the Organization of the Black Sea Economic Cooperation (BSEC), the World Customs Organization (WCO), the International Chamber of Commerce (ICC), and D-8.

Bilateral, regional and multilateral agreements have been executed in international and transnational investment projects to improve the markets and to attract foreign investors by providing a secure and reliable environment.

A work in progress

Even though its strategic cold-war location between hostile blocks has become less important, Turkey now has much to offer as an economically and politically sound base at the heart of the world's most rapidly expanding markets. Foreign investors have already made sizeable investments in various sectors in Turkey such as agribusiness, food, textiles, machinery, automotives, chemicals, electronics, cement, tourism, and banking. Turkey, still a work in progress, has made enormous improvements in its legislation, heralding in a new era for the Turkish economy.


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Volkan Hidayetoglu
Hidayetoğlu & Co

About the author

Volkan Hidayetoglu has 20 years' experience as in-house counsel at Sabanci Holding, the leading conglomerate in Turkey and as a partner at Hidayetoglu & Co. He focuses on energy projects, M&A and privatisation transactions and capital markets and banking projects (including securitisation transactions of over $5 billion). Hidayetoglu has advised all major corporations and banks in Turkey, Europe and the US and governmental agencies including the Privatisation Administration and the Ministry of Energy. He holds an LLM (with merit) from the University of London, an MA from Marmara University and an LLB from Istanbul University (top graduate).