Working Arrangements for Non-Resident Foreign
Companies' Turkey Operations Conducted through Local Individuals

Introduction

In our globalized world where trade has no borders, it is a usual
practice for companies to conduct operations in different countries, including
Turkey. Some foreign companies prefer having an establishment in Turkey, such
as a local subsidiary company, while conducting their operations in Turkey, whereas
some foreign companies prefer to stay as non-resident in Turkey and conduct
their operations in Turkey through local individuals. The main reason for
companies choosing the latter may be that the works that needs to be performed
in Turkey may require only a few individuals, thus having an establishment for
such a small business may be considered as a burden for the company.

In this article, some of the commonly preferred working arrangements
used by non-resident foreign companies for their operations in Turkey conducted
through local individuals are explained.

Commonly Preferred Working Arrangements

(1) Direct Employment by Foreign Company

The most straightforward working arrangement used by non-resident
foreign companies for their operations in Turkey conducted through local
individuals is execution of an employment agreement between the local
individual and the foreign company, i.e. direct employment by foreign company. There
is no legal provision under Turkish labor law that prevents a foreign company from
executing an employment agreement with an employee for performance of certain
works in Turkey.

Having the employee under the payroll of the foreign company while having
her/him stayed in Turkey is possible to the extent that regulations of the
country where the company is established allows to do so. However, when in such
a case, the employee cannot benefit any advantage or securities provided by
Turkish Social Security Institution ("SSI") as she/he will not be registered as
an employee (insured) with SSI. For this employee to be able to benefit from
medical care services in Turkey, there is a specific procedure to complete. The
employee should first obtain a document, evidencing her/his revenue from the
respective country's authorized body and convey it to public bodies authorized
by SSI in Turkey. Then, SSI determines the amount of premium to be paid for
providing general health insurance and herewith the employee may benefit the
health insurance.

The possibility of direct employment by foreign company must be examined
in light of the scenario where a dispute arises between the parties. In case a
dispute arises between the parties in the future and the employee initiates a
lawsuit against the employer (foreign company) before Turkish courts, two
issues are of significance: (i) the question of whether Turkish courts have
jurisdiction to hear such a case and (ii) the question of which law will be
applicable to the employment agreement.

Article 6(1) of Labor Courts Law No. 7036 ("Law No. 7036") provides that
in addition to the courts of the employer's residence, the courts where the
work is being performed have jurisdiction to hear the disputes connected to
labor relationships. In case of direct employment by foreign company, the employee
will perform the work in Turkey. Therefore, if the employee initiates a lawsuit
against the employer (foreign company) before the courts where the employee
performs the work, i.e. a Turkish court, based on Article 6(1) of Law No. 7036,
the court will conclude that it has jurisdiction to resolve the dispute. In
other words, Turkish courts will have jurisdiction in a possible lawsuit that
may be initiated by the employee against the employer in case of direct
employment by foreign company.

After establishing its jurisdiction, Turkish court will determine the
applicable law to the employment agreement for resolution of the dispute. The
applicable law to agreements containing a foreign element, such as the
employment agreement to be executed between the employee and the foreign
company, is determined pursuant to the provisions of Law on Private
International and Procedural Law No. 5718 ("Law No. 5718").

Article 27(1) of Law No. 5718 allows parties to choose the applicable
law to their employment agreement. Therefore the employee and the foreign
company can choose the applicable law to the employment agreement with a choice
of law clause. That being said, such a choice is respected "as long as the minimal protection that is
provided by the mandatory provisions of the law of the employee's habitual work
place are reserved". Thus mandatory provisions of the law of the employee's
habitual work place are seen as the "minimum
protection". Based on these it can be concluded that even if the parties
chooses the applicable law to the employment agreement in case of direct
employment by foreign company, the minimum protection provided by the mandatory
provisions of Turkish labor law must be regarded as a benchmark since these
will be seen as the "minimum standards"
that cannot be circumvented with the choice of law. Considering that almost all
provisions of Turkish labor law are deemed mandatory in nature, practically
Turkish labor law will be applied to the employment agreement. Article 27(2) of
Law No. 5718 provides that "In cases
where the parties have not designated a law, the law of the habitual work place
of the employee shall govern the employment agreement." Pursuant to this
provision, in case the parties do not choose the applicable law to their
employment agreement in case of direct employment by foreign company, Turkish
labor law as the law of the habitual work place of the employee will be applied
by Turkish courts.

As a result, it can be concluded that in practice, Turkish courts will
apply Turkish labor law to the employment agreement in a possible lawsuit that
may be initiated by the employee against the foreign company in case of direct
employment by foreign company.

(2) Liaison Office

Another working arrangement used by non-resident foreign companies for
their operations in Turkey conducted through local individuals is establishment
of a liaison office in Turkey and employ the relevant individual through the
liaison office. A company established under the laws of a foreign country may
open a liaison office in Turkey upon the conditions that; (i) all expenses of
the liaison office will be covered by the foreign currency brought from abroad,
(ii) no commercial activity will be undertaken by the liaison office, and (iii)
the liaison office will not generate any profits. In case a foreign company
establishes a liaison office in Turkey, the relevant liaison office should be
registered both with the tax office and SSI. Below elaborates on liaison
offices under Turkish law.

Companies established in accordance with the laws of foreign countries
are authorized to open liaison offices in Turkey upon the permit granted by the
Ministry of Economy, General Directorate of Incentive Implementation and
Foreign Investments ("FIGD") located in Ankara. Liaison offices established in
Turkey cannot engage in commercial activities. Liaison offices may engage in
the certain activities such as (i) market research, (ii) providing technical
support (providing trainings and technical support to distributors and
supporting services to manufacturing suppliers in order to increase their
quality standards), (iii) advertisement of products and services of the foreign
company, (iv) operation as a regional management office for the foreign company
(providing coordination and management services regarding activities such as
preparation of investment and management strategies, planning, advertisement,
sale, services following sale, brand management, financial management,
technical support, research and development, external supply, testing of newly
developed products, laboratory services, research and analysis, training of the
employees), and (v) representation and accommodation (representation of the
foreign company before relevant institutions and at relevant organizations,
coordination and organization of the business contacts of the foreign company's
authorized persons in Turkey, answering the office use needs of such persons).

Liaison offices, in their first applications, are granted operation
permits for 3 years at most. For term extensions, liaison offices are required
to make an application before the expiration of their permissions. However, the
permits obtained for market research or promotion of products or services of
the foreign company cannot be extended.

Liaison offices are not allowed to have a share capital. Liaison offices are represented by individual(s) to be
appointed via a certification of authorization issued in accordance with the
respective jurisdiction of the foreign parent company.

(3) Contractor / Service Provider

Execution of a service agreement with an individual or a company is
another working arrangement used by non-resident foreign companies for their
operations in Turkey conducted through local individuals. Below elaborates on
these two options.

(a) Service Agreement with an Individual

It is possible to execute a service agreement with an individual for the
performance of the works to be conducted in Turkey for the foreign company's
Turkey operations. The most important point regarding this working arrangement
is that the individual, who is party to the service agreement, is not an
employee of the foreign company; she/he is an independent contractor who
performs the services requested by the foreign company in return for a service
fee. In other words, there is not employment relationship between this
individual and the foreign company and the fee received by this individual is
only service fee, not wage. Therefore, rules of Turkish labor law will not be
applicable in case of execution of a service agreement with an individual.

(b) Service Agreement with a Company

It is also possible to execute a service agreement with a company for
the performance of the works to be conducted in Turkey for the foreign
company's Turkey operations. In this case, the service provider company will
provide the services specified in the agreement in return for a service fee.
Surely the service provider company will employ some employees for realization
of the services. However, there will be no employment relationship between
these employees and the foreign company. In other words, these employees will
remain as employees of the service provider company.

Conclusion

As explained above, there exist different working arrangements used by
non-resident foreign companies for their operations in Turkey conducted through
local individuals. While the working arrangement of having a liaison office
requires having an establishment in Turkey, other working arrangements, i.e.
direct employment by foreign company and execution of service agreement with an
individual or company, do not require any establishment. The foreign companies
are considered as employer in cases of direct employment by foreign company and
establishment of liaison office, whereas in case of execution of service
agreement the foreign company is only party to the agreement and not have the
status of employer. All of these working arrangements have advantages and
disadvantages compared to each other and choosing one depends on the specific
needs and commercial discretion of the relevant foreign company.

Authors: Gönenç Gürkaynak, Esq., Tolga Uluay and Bahadır Erkan, ELIG
Gürkaynak Attorneys-at-Law

(First
published by Mondaq on May 2, 2018)