Contracts based on foreign currency under Turkish Law: To conclude or to not conclude?

Author: Banu Bozkurt Bozabalı


Decision no. 85: Interdiction

The Decision no. 85 (hereinafter referred as Decision 85) on the modification of the Decision no. 32 on the Protection of the Value of Turkish Lira dated 7 August 1989(hereinafter referred as Decision no.32) have amended the terms and conditions of the determination of the value of some contracts concluded between Turkish resident real persons and/or legal entities on the basis of foreign currency. 

Banu Bozkurt Bozabalı

More concretely; according to article 1 of Decision 85, the value of the contracts of purchase and sale of moveable and property assets; the contracts of rent of moveable and property assets including rent a car and financial rent; financial leasing contracts; contracts of employment; contracts of service and the contracts of work that are concluded between the real persons and/or legal entities resident in Turkey could not be determined on foreign currency or could not indexed to a foreign currency. 

Accordingly, article foresees two conditions for interdiction of concluding the value of the contract on foreign currency or indexed on foreign currency: the contracts should be the types of contracts cited in the article + the contract should be concluded between Turkish resident real persons and/or legal entities. 

Furthermore, the article also gives possibility to the Ministry of Finance and Treasury to determine exception on the interdiction. 

Second article of Decision 85 stipulates the retroactive effect of the interdiction. In other words; according to second article of Decision 85, even though the contracts cited in the first article have been concluded previously; they should be reevaluated by the parties in 30 days after the entry into vigor of the Decision 85. 

Decision 85 entered into vigor on the day of its issuance; more concretely on 12 September 2018.

Communiqué no. 2018-32/51: Exceptions

After the entry into vigor of Decision 85, Turkish trade market started to wait the issuance of the communiqué regulating the exceptions of the interdiction brought by Decision 85. 

The Communiqué no. 2018-32/51 (hereinafter referred as Communiqué) was issued and entered into vigor on 6 October 2018. 

Communiqué issued by the Ministry of Finance and Treasury has rearranged the abrogated article 8 of the old Communiqué related to Decision 32 dated 28.02.2008 (hereinafter referred as Old Communiqué). 

The rearranged article 8 of the old Communiqué has entitled as “Foreign Currency based and indexed Contracts 

Rearranged article 8 that is stipulated under first article of the Communiqué has 25 paragraphs.

According to the first paragraph of the rearranged article 8 the value and other related payment of the contracts of sale concluded between the Turkish resident real persons and/or legal entities of the property assets situated in Turkey could not be determined on foreign currency or indexed to foreign currency. 

The second paragraph of the article stipulates the same interdiction for the contracts of rent of the property assets. 

According to third paragraph, the value and other related payment of the contracts of employment between the Turkish resident real persons and/or legal entities could not be determined on foreign currency or indexed to foreign currency except those that would be executed or performed in a foreign country. More concretely, the article gives possibility to the parties of the contracts of employment to determine the value of the contract on foreign currency basis or indexed it to the foreign currency if the place of execution of the contract is situated outside Turkey. Therefore, if a party of the employment contract would be performed outside Turkey; according to the stipulation, it would be possible to determine the value of the contract on foreign currency or indexed the foreign currency for only this party; not for the totality of the agreement. 

The fourth paragraph of the article forbids the determination of the value of the contracts of services, agency/brokering and carriage on foreign currency or indexed to foreign currency. Therefore, the paragraph stipulates a group of exception under 4 subparagraphs. Accordingly; the value and other related payment of the contract of services concluded with and/or between the persons that are not Turkish citizens; the contracts of exportation, transit trade, sale and delivery classified as exportation and the contract of service concluded for the services and activities aiming the earning of foreign currency; the contract of services of Turkish residents that would be performed in a foreign country; contract of electronic communication started in Turkey but ended in a foreign country or started in a foreign country and ended in Turkey could be determined on foreign currency of indexed to foreign currency. In accordance to this article; it is not possible to determine the value of the contracts of carriage of coastal shipping on foreign currency or indexed on foreign currency. Therefore, the value of the contract of organization of a carriage from or to a foreign country from or to Turkey concluded by Turkey’s based freight forwarder or Turkish resident real persons or legal entities might be determined on foreign currency of indexed to foreign currency. 

The fifth paragraph forbids the determination of the value of the contracts of work on foreign currency or indexed foreign currency with one exception. Accordingly, only the value and other related payment of the contracts of construction, restoration and maintenance of the Turkish vessels (that are described as vessel according to the Code of Turkish International Ship Registry) might be determined on foreign currency or indexed to foreign currency. 

Sixth paragraph of the article gives possibility to determine the value and other related payment of the contracts of sale of the moveable assets on foreign currency or indexed foreign currency apart from the contracts of sale of the vehicles including engineering equipment. More concretely, the value of the contract of sale of a Turkish registered vessel to a Turkish resident real person or legal entities should be determined on Turkish Lira. 

Seventh paragraph of the article stipulates to determine the value and other related payment of the contracts of rent of the moveable assets on foreign currency or indexed currency apart from the contracts of rent of the vehicles including engineering equipment as stipulates in the sixth paragraph. Therefore, the value of the contract of rent of a Turkish registered vessel to a Turkish resident real person or legal entity should also be determined on Turkish Lira. 

Eighth paragraph allows determining the value and other related payment of the contracts related to the software (license, sale, service etc.) produced in a foreign country, concluded between Turkish resident real persons and/or legal entities, on foreign currency or indexed to foreign currency. 

Ninth paragraph gives possibility to determine the value and other related payment of the financial leasing contracts of the Turkish registered vessel on foreign currency or indexed to foreign currency. 

The tenth paragraph; by following its predecessor, gives also possibility to determine some other leasing contracts value in relation with article 17 and 17/A of the Decision no.32 on foreign currency or indexed to foreign currency. 

According to eleventh paragraph, it is possible to determine the value and other related payment of the employment agreement of foreign citizens resident in Turkey on foreign currency or indexed to foreign currency. 

Twelfth paragraph opens a possibility for state institutions and organizations including Turkish Armed Forces Foundation to conclude contracts on the basis of foreign currency or indexed foreign currency except from the contracts of sale and rent of property assets. 

In accordance with the thirteenth paragraph, regarding the execution of the tenders, agreements or international agreements having state institutions and organizations as party; the subcontractors might conclude contracts with third parties on the basis of foreign currency or indexed foreign currency except from the contracts of sale and rent of property assets and contracts of employment. 

Regarding the fourteenth paragraph, the contracts stipulated in the Code on the Regulation of Public Financing and Debt Management; the banks might determine the value and other related payment of the contracts on the basis of foreign currency or indexed foreign currency. 

According to fifteenth paragraph, in accordance with the Code on Capital Market, but within the exception of the Decision no. 32 on the Protection of the Value of Turkish Lira dated 7 August 1989, the capital market instruments might be produced on the basis of foreign currency and other related transactions to these instruments as exportation, purchase, sale might be determined on the basis of foreign currency. 

Paragraph sixteenth opens a possibility on the determination of the value and other related payment of the contracts of employment and services of the foreign persons and legal entities Turkey’s based agency, branch, office, contact office and foreign companies. A company, whose 50% or more shares is owned directly or indirectly by a foreign real person or legal entity is classified as foreign enterprise. 

Paragraph seventeenth stipulates the contracts related to air carriage. Accordingly, the commercial air carrier companies; the maintaining companies of air vessels and their related parts and accessories; the grounding services licensed public or private companies and the companies whose 50% or more shares are owned by these companies might conclude agreements on the basis of foreign currency or indexed to foreign currency except from the contracts of employment, sale and rent of property assets.

According to paragraph eighteenth, if the value and other related payments of a contract may not be determined on foreign currency or indexed to foreign currency; the negotiable instruments issued on the basis of such contract may not also be issued on the basis of foreign currency or indexed to foreign currency. 

The contracts whose values are indexed to the price of valuable minerals and/or commodities determined or indexed to foreign currency in international markets are classified as foreign currency indexed contracts in accordance with the Decision no. 32 on the Protection of the Value of Turkish Lira according to nineteenth paragraph of the article.

Paragraph twentieth stipulates that the Turkish resident real person or legal entity’s foreign branch, agency, office, contact office, funds and company would be accepted as Turkish resident in the application of this article. A company would be accepted as Turkish resident company if 50% or more of its shares is owned by the Turkish resident real person or legal entity. Accordingly, the value of a contract of sale of a foreign registered vessel to a company whose 50% or more shares are owned by a Turkish resident should be determined in Turkish Lira. 

Paragraph twenty-fourth stipulates how to convert the foreign currency to Turkish Lira in case of the lack of the agreement between the parties. Accordingly, if the parties may not come to a mutual agreement on the convertibility rate of the foreign currency; the effective sale rate of the Central Bank of Turkey on 02.01.2018 would be accepted as the convertibility rate. 

Summarizing Chart

Contracts That Could Not Be Concluded on the Basis of Foreign Currency or Indexed to Foreign Currency

  • Contracts of Sale of Property Assets
  • Contracts of Rent of Property Assets
  • Contracts of Employment (with some exceptions)
  • Contracts of Service (with some exceptions)
  • Contracts of consultancy, agency and carriage (with some exceptions)
  • Contracts of Work (with some exceptions)
  • Contracts of Sale and Rent of Vehicles and Engineering Equipment

Contracts That Could Be Concluded on the Basis of Foreign Currency or Indexed to Foreign Currency

  • Contracts of Employment that would be performed in a foreign country
  • Contracts of Employment concluded with a Party that is not Turkish citizen but resident
  • Contracts of Employment concluding with a Turkey’s based agency, branch, office, contact office and company of a foreign country resident real person or legal entity. (Company’s 50% or more shares should directly or indirectly been owned by foreign country resident real person or legal entity)
  • Contracts of Service concluded with a Party that is not Turkish citizen but resident
  • Contracts of service regarding to perform exportation, transit trade, sale and delivery classified as exportation 
  • Contracts of Service of a Turkish Resident performed in foreign country
  • Contracts of Service related to electronic communication started in Turkey, ended in a foreign country or started in a foreign country, ended in Turkey
  • Contracts of Sale, License and Service related to the software technologies produced in foreign country
  • Contracts of Service concluding with a Turkey’s based agency, branch, office, contact office and company of a foreign country resident real person or legal entity. (Company’s 50% or more shares should directly or indirectly been owned by foreign country resident real person or legal entity)
  • Contracts of Work on the construction, restoration and maintenance of a Turkish registered vessel
  • Contracts of Financial Leasing of Turkish registered vessel
  • Other Financial Leasing Contracts concluded in relation to Article 17 and 17/A of Decision no.32
  • Contracts of Rent of Vehicles including Engineering Equipment concluded before 13.09.2018
  • Contracts Concluded By or With a State Institutions and Organizations including Turkish Armed Forces Foundation (except contracts of sale and rent of property assets)
  • The Subcontractors contracts with third parties aiming to execute the tenders, agreements or international agreements having state institutions and organizations as party
  • The Contracts concluded by the Banks in conjunction with the Code on the Regulation of Public Financing and Debt Management
  • The Production, Exportation, Purchase, Sale and Other Related Transactions of the Capital Market Instruments in accordance with the Capital Market Regulations. 
  • Contracts Concluded by Turkish Based Commercial Airline Companies
  • Contracts Concluded by the Companies giving Services of Technical Maintenance to the Air Vessels, their Engines and Other Related Parts and Accessories 
  • Contracts Concluded By or With Grounding Services Licensed Public or Private Company and the company whose 50% or more shares are owned by this company

     

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