2018 has been a turbulent year in the Turkish economy and by extension significant

changes has taken place in the Turkish foreign exchange rules which was mainly

triggered by the recent overshooting in the foreign exchange rates against

Turkish lira.

I.            GENERAL OVERVIEW

The Presidential Decree No. 85 published in the Official Gazette numbered 30534 and dated September 13, 2018 has introduced a significant amendment in the Decree No. 32 on the Protection of the Value of Turkish Currency ("Decree No. 32") which took immediate effect on September 13, 2018 (“Effective Date”). Such amendments aimed to prohibit determination of contract price and other payables in or indexed to foreign currency in certain contracts to be concluded between residents in Turkey. The general rule introduced by this amendment stated that except for the circumstances determined by the Ministry of Treasury and Finance, no contract price or other contractual payment obligations arising from agreements between residents in Turkey in regards to the sale and purchase of movable and immovable properties, all kinds of movable and immovable leases including vehicle and financial leasing, leasing contracts as well as service, employment contracts and contracts of work can be determined directly in or indexed to foreign currency (“FX Restriction”). It is also required for the amounts determined in or indexed to foreign currency under these contracts which were executed before the Effective Date to be re-determined by the parties in Turkish Lira within thirty (30) days following the entry into force of the above provision, i.e. within thirty days following September 13, 2018 (“Compliance Period”).

The

Ministry of Treasury and Finance remained silent until October 6, 2018 in

respect of determination of the exemptions from this rule. Eventually, a

Communiqué has been published in the Official Gazette numbered 30557 and dated

October 6, 2018 amending Article 8 of the Communiqué re. Decree No. 32 on the

Protection of the Value of Turkish Currency (“Communiqué”) whereby exemptions were determined. While players in

the market were in the process of compliance or already completed their

compliance actions, another amendment was made in the exemptions as published

in the Official Gazette numbered 30597 and dated November 16, 2018 which

coincided to a date after the Compliance Period. Among these amendments are

also references and new exemptions granted for the agreements executed prior to

the Effective Date.

Certain

highlights from Article 8 of the Communiqué (as amended) which set out

clarifications and exemptions on the FX Restriction are covered below.

II.

          ARRANGEMENTS SUBJECT TO THE FX RESTRICTION

Below arrangements cannot

include contract prices and

other payment obligations in or indexed to foreign currency:

- Sales

and lease agreements among residents of Turkey regarding domestically located

immovable;

-Employment

agreements among residents of Turkey, other than those that will be performed

abroad and to which seamen are a party;

Service

contracts among residents of Turkey, including consultancy, intermediation and

transportation; except for those listed below:

a)service contracts to which non-citizens are a party,

b)service contracts that are made within the scope of

export, transit trading, sales and deliveries that are considered as exports,

as well as services and activities that gain foreign exchange,

c)service contracts that are made within the scope of

activities of residents of Turkey to be carried out abroad, and

d)service contracts among residents of Turkey starting

in Turkey, ending abroad; starting abroad, ending in Turkey and starting

abroad, ending abroad.

III.          ARRANGEMENTS EXEMPTED FROM THE FX RESTRICTION

Below arrangements are

exempted from the FX Restriction; i.e. may include contract prices and other payment obligations in or

indexed to foreign currency:

-Immovable

lease contracts and immovable sales contracts to which non-Turkish citizens

residing in Turkey as well as (i) branches, representation offices, offices,

liaison offices of non-residents, (ii) companies in which non-residents

directly or indirectly have a fifty per cent or more shareholding or joint

control and/or holds control, and (iii) companies located in free zones (within

the scope of their activities) are a party as the buyer or lessee;

-Immovable

lease contracts regarding leasing of accommodation facilities certified by the

Ministry of Culture and Tourism with an aim of operation;

-Immovable

lease contracts for the lease of duty-free sales stores;

-Contracts

for work products (independent contractor) among residents of Turkey which

involve costs in foreign currency;

-Contracts

among residents of Turkey concerning sales and lease of movables, except for

sales and lease of vehicles (contracts re. lease of vehicles and

merchandising of vehicles for the purposes of passenger transport, which were

executed prior to the Effective Date);

-Sales

agreements among residents of Turkey concerning software produced abroad within

the scope of information technologies and license and service agreements

concerning hardware and software produced abroad;

-Financial

leasing contracts regarding vessels (Financial leasing contracts executed

regarding movable and immovable which were executed prior to the Effective Date);

-Financial

leasing contracts to be entered into within the scope of Articles 17 and 17/A

of the Decree No. 32;

-Generation,

issuance, purchase and sales of capital market instruments (including foreign

capital market instruments and depository receipts and foreign investment fund

shares) within the framework of Capital Markets Law and relevant regulations;

-Employment

agreements to which non-citizen residents are a party;

-Employment

agreements and service contracts to which (i) branches, representation offices,

offices, liaison offices of non-residents, (ii) companies in which

non-residents directly or indirectly have a fifty per cent or more shareholding

or joint control and/or holds control, and (iii) companies located in free

zones (within the scope of their activities) are a party as the employer or

service recipient.

IV. CONVERSION OF NON-COMPLIANT ARRANGEMENTS

It should be noted that it is compulsory for contract

prices except for the ones allowed under the exemptions to be re-determined by

the parties in Turkish currency. In case the parties fail to reach an agreement

in re-determining the same; the prices shall be determined by first calculating

the Turkish currency equivalent based on Turkish Central Bank’s effective

selling rate on 2/1/2018, and increasing the same on the basis of consumer

price index (CPI) monthly variation rates from the date of 2/1/2018 to the date

of re-determining of the prices. However, this shall not apply to deposits paid

within the scope of immovable lease agreements. Further requirements are also

introduced for contract values of immovable lease contracts executed before the

Effective Date.

V. FINAL NOTES

There are also (i) further exemptions that are

introduced for certain contracts to which governmental institutions, banks, airline

operators and their service providers are a party, as well as (ii)

clarifications regarding branches and liaison offices located abroad. Further,

the amounts under negotiable instruments that will be issued within the scope

of contracts subject to above restrictions may also not be agreed based on or

indexed to foreign currency, save for those issued prior to the Effective Date.

On the other hand, the contracts in which price is indexed to precious metals

and/or commodity whose price is designated in foreign currency in international

markets and/or in which price is indirectly indexed to foreign currency shall

also be considered as foreign currency-indexed contracts.  However, in the

contracts regarding transportation activities, indexation can be made to fuel

oil prices.

In the initial amendment to Article 8 of the

Communiqué a right was granted to the parties which are eligible for an

exemption to request that the new contracts be mutually arranged in Turkish

currency or that the amounts in the existing contracts be re-agreed in Turkish

currency. However, with the latest amendment in the Communiqué such right has

been abolished.

Bearing in mind that the exemptions are set out based

on two general criteria namely (i) qualification of the parties and (ii)

subject-matter of the agreements, in the considerations of eligibility for

exemption, it is important to make accurate identification and evaluations on

the subject-matter of and parties to each specific arrangement.

As for the sanctions, an administrative fine in the

approximate range of TRY 6,300-55,000 (as updated in accordance with revaluation

rates) shall be separately imposed on each party who fail to comply with the FX

Restriction. In the event of repetition of violation, such administrative fines

shall be imposed as doubled.

(This article was originally

published on the website of Diri Legal on 16 November 2018: www.dirilegal.com)