Exceptions to the Prohibition to Sign Foreign Currency Denominated/Indexed Contracts in Turkey

On October 6, 2018, the Ministry of Treasury and Finance issued the exceptions to the prohibition to sign foreign currency denominated/indexed contracts (the “Exceptions Communiqué”).

On September 13, 2018, the Decree No. 32 regarding the Protection of the Value of Turkish Currency (the “Decree No. 32”) was amended by the Decree No. 85 (the “Decree No. 85”), which provided that the contract amount and the payment obligations under all sales and rental agreements on movable and immovable property (including vehicle rentals and financial leasing), employment contracts, service contracts and contracts for works, to the extent they are executed between Turkish residents, cannot be denominated in or indexed to foreign currencies.

The Exceptions Communiqué provides several exceptions to the prohibition to sign contracts in a foreign currency. Among others, the contracts executed between the contractors and third-parties (other than the immovable sale, immovable lease and employment contracts) are exempted on the condition that such contracts are signed for the performance of tenders, agreements and international agreements which public authorities and organizations are party to and are in foreign currency or foreign currency indexed. Therefore, the implementation/project agreements and sub-contracts, such as the EPC and O&M contracts, signed within the scope of build-operate-transfer (BOT) and other public-private partnership (PPP) projects in the transportation, energy and healthcare sectors are exempt from the prohibition to sign foreign currency denominated/indexed contracts.

The Exceptions Communiqué also provides the following principles and exceptions as regards the prohibition brought by the Decree No. 85:

The persons residing/domiciled in Turkey, for the immovable sale contracts, regarding the immovables in the country including the free-trade-zones, to be executed between them including the residential building and roofed workplace contracts, cannot determine the contract amount and other payment obligations arising thereunder in foreign currency or foreign currency indexed.
The persons residing/domiciled in Turkey, for the immovable lease contracts, regarding the immovables in the country including the free-trade-zones, to be executed between them including the residential building and roofed workplace contracts, cannot determine the contract amount and other payment obligations arising thereunder in foreign currency or foreign currency indexed.
The persons residing/domiciled in Turkey, for the employment contracts to be executed between them except for those to be performed in abroad, cannot determine the contract amount and other payment obligations arising thereunder in foreign currency or foreign currency indexed.
The persons residing/domiciled in Turkey, for the service contracts to be executed between them including the consultancy, agency and transportation contracts, cannot determine the contract amount and other payment obligations arising thereunder in foreign currency or foreign currency indexed, except for the contracts specified below:
a) the service contracts that persons, without a citizenship connection with the Republic of Turkey, are parties to,
b) the service contracts executed within the scope of the export, transit trade, export sales and deliveries and foreign exchange earning services and activities,
c) the service contracts executed within the scope of the activities to be performed, in abroad, by the persons residing/domiciled in Turkey,
d) the service contracts with respect to electronic communication initiated in Turkey and terminated in abroad and initiated in abroad and terminated in Turkey, executed by the persons residing/domiciled in Turkey.
The persons residing/domiciled in Turkey, for the construction contracts to be executed between them except for the construction, repair and maintenance contracts on shipbuilding as defined under the Turkish International Ship Registry Law dated 16 December 1999 and numbered 4490 and the Law regarding the Amendment on the Statutory Decree numbered 491, cannot determine the contract amount and other payment obligations arising thereunder in foreign currency or foreign currency indexed.
The persons residing/domiciled in Turkey, for the movable sale contracts (other than the vehicle sale contracts including the construction equipment sale contracts) to be executed between them can determine the contract amount and other payment obligations arising thereunder in foreign currency or foreign currency indexed.
The persons residing/domiciled in Turkey, for the movable lease contracts (other than the vehicle sale contracts including the construction equipment sale contracts) to be executed between them can determine the contract amount and other payment obligations arising thereunder in foreign currency or foreign currency indexed.
The persons residing/domiciled in Turkey, for the sale contracts within the scope of information technologies regarding the software developed in abroad and the license and service agreements regarding the hardware and software, to be executed between them, can determine the contract amount and other payment obligations arising thereunder in foreign currency or foreign currency indexed.
For the financial leasing and leasing contracts with regards to the ships as defined under the Turkish International Ship Registry Law numbered 4490 and the Law regarding the Amendment on the Statutory Decree numbered 491, the contract amount and other payment obligations arising thereunder can be determined in foreign currency or foreign currency indexed.
The contract amount of the financial leasing contracts, to be executed within the scope of Articles 17 and 17/A of the Decree No. 32, can be determined in foreign currency.
For the employment contracts to which persons residing/domiciled in Turkey, without a citizenship connection with the Republic of Turkey, the contract amount and other payment obligations arising thereunder can be determined in foreign currency or foreign currency indexed.
For the contracts executed by the public authorities and organizations and Turkish Armed Forces Foundation companies, and except for the immovable sale and immovable lease contracts, the contract amount and other payment obligations arising thereunder can be determined in foreign currency or foreign currency indexed.
The contract amount and other payment obligations arising from the contracts executed between the contractors and third-parties (other than the immovable sale, immovable lease and employment contracts) can be determined in foreign currency or foreign currency indexed on the condition that such contracts are signed for the performance of tenders, agreements and international agreements which public authorities and organizations are party to and are in foreign currency or foreign currency indexed.
For the contracts, which the banks are party to, regarding the transactions performed by the Ministry of Treasury and Finance within the scope of the Public Financing and Debt Management Regulating Law dated 28 March 2002 and numbered 4749, the contract amount and other payment obligations arising thereunder can be determined in foreign currency or foreign currency indexed.
Save for provisions of the Decree No. 32, the issuance, export, sale-purchase of the capital market instruments (including the foreign capital market instruments, depositary certificates and foreign investment fund shares) can be performed in foreign currency and the liabilities with respect to the performed transactions can be determined in foreign currency under the Capital Markets Law numbered 6362 and with respect to the regulations made thereunder.
For the service and employment contracts, which the companies in the free-trade-zones with respect to their activities therein are party to and, as to the persons residing/domiciled outside Turkey; their branch, representation office, office, liaison office and companies in Turkey that those persons have directly or indirectly %50 and more shareholding are party to, the contract amount and other payment obligations arising thereunder can be determined in foreign currency or foreign currency indexed.
The commercial airline entities residing in Turkey and performing the passenger, cargo or mail transport activities; the companies providing technical maintenance services for air transport vehicles, engines and components and parts of those; the public or private law legal entities which have obtained the operation license or have been authorized to perform ground-handling services in the airports within the scope of the civil aviation legislation and the enterprises and companies established by such entities and the partnerships in which those entities have at least 50% direct or indirect shareholding, can execute contracts with the persons residing/domiciled in Turkey, except for the immovable sale, immovable lease and employment contracts, in foreign currency or foreign currency indexed.
For the commercial papers to be issued within the scope of the contracts of which the contract amount and other payment obligations arising thereunder cannot be determined in foreign currency or foreign currency indexed under this article, the amount cannot be determined in foreign currency or foreign currency indexed.
The contracts indexed to the precious metals and/or commodities that the price was determined in foreign currency and/or indirectly indexed to the foreign currency in international markets shall be considered as contracts indexed to the foreign currency under the sub-paragraph (g) in Article 4 of the Decree No. 32.
As to the persons residing/domiciled in Turkey; the branch, representation office, office, liaison office, operated or managed funds, companies that those persons have %50 and more shareholding and companies directly or indirectly owned by those persons, which are located in abroad, shall be considered as being resident/domiciled in Turkey under the sub-paragraph (g) in Article 4 of the Decree No. 32.
The contracts, that are exempted under this article yet already been executed before the entry into force of the Provisional Article 8 of the Decree No. 32, shall also be exempted from the scope of the relevant provisional article.
The vehicle lease contracts including the construction equipment lease contracts, which have been executed before the entry into force of the Provisional Article 8 of the Decree No. 32, shall be exempted from the relevant provisional article.
For the contracts of which the contract amount and other payment obligations arising thereunder cannot be determined in foreign currency or foreign currency indexed under this article, the amounts thereunder are required to be re-determined by the parties in Turkish Lira currency within the scope of the Provisional Article 8 of the Decree No. 32.
For the contracts of which the contract amount and other payment obligations arising thereunder cannot be determined in foreign currency or foreign currency indexed under this article, in case the parties cannot reach an agreement in the re-determination of the amounts in Turkish Lira currency within the scope of the Provisional Article 8 of the Decree No. 32, the amounts in the contracts already indicated in foreign currency or foreign currency indexed shall be determined, over the effective selling-rate of the Central Bank of the Turkish Republic on 2 January 2018, considering the CPI monthly exchange rate determined for each month by the Turkish Statistical Institute in the period starting from 2 January 2018 until the renewal date. For the residential building and roofed workplace contracts executed before the entry into of the Provisional Article 8 of the Decree No. 32, the amounts already indicated in foreign currency or foreign currency indexed shall be determined in Turkish Lira currency for a period of two years in accordance with the first paragraph above. However; in case the parties cannot reach an agreement in the determination of the rental amount already indicated in Turkish Lira as per the relevant paragraph for a period of one year from the termination of the rent-period for the year when the amount was indicated in Turkish Lira, the amount shall be determined and increased considering the CPI monthly exchange rate determined for each month by the Turkish Statistical Institute in the period starting from the determination date until the termination of the rent-period for the year when the amount was indicated in Turkish Lira. In case the rental amount for the subsequent year is in Turkish Lira and the parties cannot reach an agreement in the determination, such amount shall be determined by increasing the rental amount of the current rental amount in the previous year considering and the CPI monthly exchange rate determined for each month by the Turkish Statistical Institute and the rental amount determined in Turkish Lira shall be effective for a period of two years set out under this paragraph. This paragraph shall not be applicable for the collected or due receivables under the contracts where the contract amount and other payment obligations arising thereunder cannot be determined in foreign currency or foreign currency indexed as per this article.
In case the parties exempted under this article, through a mutual agreement, prefer the determination of the contract amount in Turkish Lira currency in the new or existing contracts, the contract amount shall be determined in the Turkish Lira currency.

^{This information is provided for your convenience and does not constitute legal advice. It is prepared for the general information of our clients and other interested persons. This should not be acted upon in any specific situation without appropriate legal advice. This information is protected by copyright and may not be reproduced or translated without the prior written permission of Ergün Avukatlık Bürosu.}