Publications
PROHIBITION OF CONTRACTS IN FOREIGN CURRENCY and EXCEPTIONS OF IT UNDER TURKISH LEGISLATION
Presidential Decision No. 85 on Prohibition regarding Determining the Payment Obligations in Foreign Currency
In response to the ongoing increase in foreign exchange rates in Turkey, consecutive changes were made to the legislation regarding foreign currency in 2018. Firstly, with the Decision No. 2018/11185 published in the Official Gazette on January 25, 2018, titled "Amendment to the Decision No. 32 on Protection of the Value of Turkish Currency" , it was prohibited for residents of Turkey who do not have foreign exchange income to use foreign currency loans. After that, on September 4, 2018, with the Directive No. 2018-32/48 regarding the export proceeds, an obligation was introduced to bring foreign export proceeds into Turkey and convert them into Turkish lira. Finally, with the Presidential Decision No. 85 published in the Official Gazette on September 13, 2018, a single paragraph was added to the Decision No. 32 , bringing many transactions in the market within the scope of the foreign currency ban in a single day.
"The Decision No. 32 on Protection of the Value of Turkish Currency," published in the Official Gazette on August 11, 1989, aims to protect the value of the Turkish lira by restricting transactions conducted in foreign currency and the use of foreign currency. The procedures and principles of the Decision No. 32 are regulated in the Treasury and Finance Ministry's Directive No. 2008-32/34 . The exceptions to the foreign currency ban, introduced by Article 4 of Presidential Decision No. 85, were determined by the Ministry through the Directive No. 2018-32/52 . Additionally, the Ministry has created a Frequently Asked Questions section on its website regarding contracts in foreign currency
In 2018, after the amendment of the Decision No. 32, Article 4th states that in contracts among residents of Turkey, including transactions of real estate and chattel, all kinds of rental agreements regarding real estate and chattel including vehicles and financial leasing, as well as contracts for leasing, work, services, and construction, the contract price and other payment obligations cannot be determined in foreign currency or indexed to foreign currency (prohibition of contracts in foreign currency). This prohibition applies only to contracts between residents of Turkey. If any of the parties is not a resident of Turkey, the prohibition on contracts in foreign currency does not apply.
Considering the definitions stated in the Decision No. 32 is important for determining the scope of the prohibition. A resident of Turkey, as defined in Article 2nd, Section b of the Decision No. 32, refers to individuals and legal entities with legal residence in Turkey, including Turkish citizens working, self-employed, or having independent businesses abroad. If a person is domiciled in Turkey, even if their activities are conducted abroad (such as branches, representative offices, offices, liaison offices, managed funds, or fifty percent or more ownership in companies), they are considered to be resident in Turkey for the implementation of Presidential Decree No. 85. However, this provision does not apply if the contract is performed outside of Turkey. Finally, contracts that are not explicitly mentioned in Presidential Decision No. 85 or exempted from the prohibition through the Treasury and Finance Ministry's Directive No. 2018-32/52 are not subject to the prohibition on contracts in foreign currency.
According to Paragraph 22 of Article 8th of the Directive No. 2008-32/34, contracts that are indexed to precious metals and/or commodities whose prices are determined in foreign currency in international markets, or indirectly indexed to foreign currency, are considered as contracts indexed to foreign currency.
The exceptions to the prohibition on contracts in foreign currency are specified in the Directive No. 2018-32/52 by categorizing different types of contracts and in a limited number. For foreign entities operating through branches, representative offices, offices, liaison offices, or having direct or indirect ownership of fifty percent or more, as well as for companies in free zones where they act as buyers, tenants, service recipients, or employers, there is a common exception provided for the relevant types of contracts.
a) Amendments to Chattel Sales Contracts
Except for those related to vehicles, in chattel sale agreements entered into between residents of Turkey, the contract price and other payment obligations can be determined in foreign currency or indexed to foreign currency. However, with the amendment made by the 2022-32/66 Directive published in the Official Gazette dated 19.04.2022 the following sentence has been added: "However, it is mandatory that the payment obligations related to the contract shall be fulfilled and accepted in Turkish currency.".
With this amendment, in chattel contracts concluded between residents in Turkey, the contract price and other payment obligations can still be determined in foreign currency or indexed to foreign currency. But payments must be made and accepted in Turkish currency. The Directive does not provide any clarification regarding the exchange rates to be considered for payments. These changes came into effect as of April 19, 2022.
According to the press release issued by the Ministry, it is stated that the term "movable" mentioned in the Directive encompasses all kinds of goods and items that do not fall within the definition of real estate. Regarding the performance of chattel sales contracts executed before April 19, 2022, it is noted the payment obligations within the scope of foreign currency-denominated negotiable instrument that were in circulation before the effective date of the Directive doesn’t need to be fulfilled and accepted in Turkish currency .Also, the payment obligations within the scope of invoices issued before April 19, 2022, doesn’t need to be fulfilled and accepted in Turkish currency.
b) Chattel Sales Contracts Executed in Free Zones
Regarding the inquiries about chattel sales transactions to be conducted by companies operating in free zones, the Customs Circular No. 2022/212 dated 8th July 2022 clarifies the applicable practices for these companies. Free zones are areas within the borders of a country that are subject to special and advantageous Directives for commercial activities. According to the Circular, companies operating in free zones and considered as resident in Turkey are not allowed to fulfill or accept payment obligations in foreign currency for chattel sales contracts entered into with a company resident outside the free zone but within the borders of Turkey. Companies operating in free zones and having legal residence in Turkey are considered as residing within Turkey and are subject to the application of paragraph (g) of Article 4 of Decision No. 32, which prohibits contracts in foreign currency.
However, companies that have no legal residence in Turkey and solely operate within the free zone are considered as being located outside. Additionally, the second paragraph of Article 6 of the Free Zones Law No. 3218 states that "Legislation regarding customs and foreign exchange obligations shall not be applicable in these zones." Therefore, the transactions conducted by companies operating within the free zone, both within the free zone and with companies located outside, fall outside the scope of paragraph (g) of Article 4 of Decision No. 32 (prohibition on foreign currency contracts). As a result, it is not possible for companies operating in the free zone and considered as resident in Turkey to fulfill or accept payment obligations in foreign currency for chattel sales contracts entered into with a company resident outside the free zone but within the borders of Turkey.
c) Exception Added to Service Contracts
Individuals resident in Turkey are unable to determine the contract price and other payment obligations in foreign currency or indexed to foreign currency in contracts other than those specified in the 2018-32/52 Directive, including service contracts such as consultancy, brokerage, and transportation. On January 30, 2021, an additional exception was introduced through the amendment of the relevant provision with Directive No. 2021-32/59 , stating that accommodation service contracts to be made by individuals resident in Turkey at accommodation facilities certified by the Ministry of Culture and Tourism are now exempt from this rule.
2) Use of Foreign Currency Loans
Decision No. 32 also includes provisions regarding the use of foreign currency loans, both domestically and internationally. Changes regarding loans to be used domestically and abroad were made through the "Decision on Amending Decision No. 32 on the Protection of the Value of Turkish Currency" published in the Official Gazette on January 25, 2018, with the number 2018/11185. Article 11 of the Directive No. 2008-32/34 contains the procedures and principles regarding loans to be obtained from abroad under the title "Loans". As a general rule, loans must be obtained through banks, and exceptional cases where loans are not required to be obtained through banks are also listed in the same article. The relevant article has been amended by Directive No. 2018-32/46 , specifying the “loan balance” and “foreign currency income amounts” that the borrower must meet.
In the current version of Decision No. 32, the principles regarding foreign currency loans are regulated under two separate articles titled "loans obtained from abroad" and "loans obtained domestically." Under the previous Directives, Turkish residents were allowed to obtain loans from abroad and use them through banks. However, with the recent changes, restrictions have been introduced for Turkish residents without foreign currency income to obtain loans from abroad. According to the current Directive, Turkish residents without foreign currency income will not be able to obtain loans from abroad. However, Article 17, Paragraph 3 of Decision No. 32 provides exceptions under seven headings, allowing the use of foreign currency loans without the requirement of foreign currency income. The exception "foreign currency loans to be used by Turkish residents with a loan balance of 15 million US dollars or more at the time of usage" has been added. Turkish legal entities without foreign currency income will only be able to use foreign currency loans if they meet one of these exceptions.
The definitions of "foreign exchange income" and "loan balance" have been included in the "Definitions" section. "Foreign exchange income" refers to the income derived from export, transit trade, sales and deliveries considered as exports, and foreign exchange-generating services and activities as defined in the relevant legislation. “Loan balance" represents the total outstanding amount of cash foreign currency loans obtained domestically and internationally.
According to the decision of the Banking Directive and Supervision Agency (BDDK), companies with foreign currency holdings exceeding 15 million TL and whose cash foreign currency assets exceed 10% of their balance sheet (either total assets or net sales) were not allowed to borrow in Turkish Lira (TL). However, with the BDDK's decision numbered 10389 dated 21.10.2022, these values have been updated to 10 million TL and 5% respectively.
Individuals and entities residing in Turkey with foreign currency income can still access foreign currency loans by undergoing checks by the bank and adhering to certain limitations. If the borrower's credit balance at the time of borrowing is below 15 million USD, the total of the desired loan amount and the existing credit balance should not exceed the total foreign currency income of the past three years. With the Directive numbered 2018-32/46, banks, financial leasing companies, factoring companies, and financing companies are now exempted from the ban on using foreign currency loans. These institutions can obtain loans from abroad in accordance with the relevant legislation.
With the new Decision numbered 2018/11185, the usage of foreign currency-indexed loans from abroad by individuals residing in Turkey has been prohibited. Under the previous Directive, resident individuals in Turkey were allowed to use foreign currency loans or loans indexed to foreign currency under certain circumstances, both domestically and internationally. However, with the recent changes, the usage of foreign currency loans by individuals has been banned.
Relevant restrictions on foreign exchange transactions have been imposed in Turkey to control the exchange rate and prevent capital outflows in recent years. These restrictions aim to maintain economic stability, particularly in cases of excessive volatility in financial markets or a significant depreciation of the currency. By implementing these measures, the authorities seek to ensure the preservation of economic stability.
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Nazli
OZKUL
Deniz
KAFKASLIOGLU
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