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)