Turkey promulgates further rules on FX-denominated or indexed agreements

Introduction

The Ministry of Treasury and Finance (the "Ministry") issued a set of exemptions relating to the restrictions on foreign currency-denominated or indexed agreements.

As explained in our previous publication, on September 13, 2018, the Turkish Presidential Decree No. 85 (the "Amendment") amending the Decree No. 32 on the Protection of the Value of the Turkish Currency (the “Decree No. 32”) was published in the Official Gazette. The Amendment required that the agreement price and other payment obligations arising from certain agreements between Turkish residents¹ cannot be denominated in, or indexed to, foreign currency. The Ministry was authorized to provide exemptions to these restrictions, which were announced and published under a communiqué dated October 6, 2018 (the "Communiqué").

General

While the Communiqué provides further guidance on the categories of agreements to which the restrictions will apply, it also introduces some sector and entity-specific rules.

While reading this legal update, please consider the following

• As a general rule, the restrictions apply to Turkish residents. In other words, where at least one of the parties is not deemed to be resident in Turkey, the restrictions do not apply. Note that there are certain exemptions to this general rule, including those that apply to subsidiaries, branches and liaison/representative offices of foreign entities or foreign citizens (even if they are Turkish resident) as further detailed below.
• Sale and lease of movable assets, which was originally a restricted category of transaction under the Amendment, is now free of the restrictions with only a few exceptions.
• The Communiqué strictly prohibits the use of foreign currency in real estate sales and leases between Turkish residents (and if the real estate is located in Turkey). While the Communiqué introduces certain exemptions to other categories of transactions (e.g. employment agreements and service agreements), no exemptions apply to the real estate transactions.
• The Amendment had provided that the conversion from foreign currency to Turkish Lira would have to be completed by October 13, 2018. The Communiqué does not amend this deadline.
• The Amendment or the Communiqué does not provide for specific penalties for non-compliance. The Law No. 1567 on the Protection of the Value of the Turkish Lira (the “Law”) stipulates administrative monetary fines for non-compliance with the Law and the secondary legislation promulgated thereunder (including the Decree No. 32 and presidential decrees). Depending on the non-compliance, fines may be a fixed amount or proportionate to the non-compliance in question.
• We expect further guidance on the implementation of the Communiqué.

Restricted agreements and transactions

Sale or lease of real property. Payment and other monetary obligations arising from the sale or lease of immovable property located in Turkey (including its free zones) and between Turkish residents cannot be denominated in, or indexed to, foreign currency.

Sale or lease of movable property. The Amendment had listed the agreements for the sale or lease of movable property and leasing agreements executed between Turkish residents as part of the restricted transactions (subject to exemptions).

Under the Communiqué, agreements for the sale or lease of movable property can be denominated in, or indexed to, foreign currency other than those executed for the sale or lease of vehicles including construction vehicles.

In addition

1. Financial lease agreements. These agreements can be FX denominated if allowed under the Decree No. 32's rules applicable to FX borrowings and also under the Capital Movements Circular of the Central Bank of the Republic of Turkey (the "Central Bank"). The Communiqué explicitly states that the financial lease agreements for ships can also be FX denominated or indexed.
2. Software. Agreements executed between Turkish residents in relation to the sale of software developed abroad can be FX denominated or indexed.
3. Capital market instruments. The restrictions do not apply to the issuance and sale of capital market instruments (including depository receipts and foreign investment fund units), subject to the capital markets and foreign exchange rules and regulations.

Employment agreements. Payment and other monetary obligations arising from employment agreements between Turkish residents cannot be denominated in, or indexed to, foreign currency, except for those agreements

4. Relating to work to be performed outside of Turkey
5. Executed with Turkish residents who are not Turkish citizens
6. Executed by branches, representative offices, liaison offices of foreign entities
7. Executed by Turkish companies in which a foreign individual/legal entity directly or indirectly holds 50 per cent or more of the capital
8. Executed by companies in free trade zones, and only in relation to their activities in the free trade zone.

Service agreements. Payment and other monetary obligations arising from service agreements (including consultancy, agency and transportation services) between Turkish residents cannot be denominated in, or indexed to, foreign currency, except for those agreements

1. Where one of the parties is not a Turkish citizen
2. Made in connection with export, transit trade, sales and export deemed deliveries and FX generating services and activities
3. Relate to the activities of Turkish residents conducted abroad
4. Executed between Turkish residents regarding electronic communication that is initiated in Turkey and concluded abroad (and vice versa)
5. Relating to software or hardware produced abroad
6. Listed in items (iii)-(v) of the "Employment agreements" section.

Contracts of work, including construction agreements. Contracts of work (eser sözleşmesi) executed between Turkish residents cannot be denominated in, or indexed to, foreign currency except for those relating to construction, repair and maintenance of ships.

Sector and entity-specific rules

Public institutions. The restrictions have been eased for certain public institutions as follows

1. Agreements executed by public institutions and subsidiaries of the Turkish Armed Forces Foundation (Türk Silahlı Kuvvetlerini Güçlendirme Vakfı) (such as Aselsan, producer of defense electronic systems or Roketsan, weapons manufacturer and defense contractor), other than those for the sale or lease of real property can be denominated in, or indexed to, foreign currency.
2. Agreements executed between contractors and third-parties under the foreign currency denominated or indexed tenders or agreements launched/executed by public institutions or for the performance of international treaties can also be denominated in, or indexed to, foreign currency. Agreements for the sale or lease of real property or employment agreements are still subject to the restrictions (i.e. they cannot be denominated in, or indexed to, foreign currency).

Public financing. Those agreements to which banks are a party and which are executed in relation to the transactions to be carried out under the Law on Public Financing and Regulation of Debt Management numbered 4749 can be denominated in, or indexed to, foreign currency.

• Aviation sector. The following entities are also exempt from the restrictions (except for the sale or lease of real property and employment agreements)

1. Passenger, freight or cargo airlines established in Turkey
2. Maintenance companies providing technical assistance to air transport vehicles and their components
3. Ground handling service companies (public or private) and their undertakings or companies where they hold at least 50 per cent of the share capital (directly or indirectly).

Conversion into Turkish Lira

If an FX denominated or indexed agreement does not fall within the scope of the above exceptions, such agreement must be amended to be denominated in Turkish lira prior to the end of the 30-day period as was previously explained in our client alert (i.e. by October 13, 2018).

If the parties fail to agree as to how to convert, then the indicative selling rates of the Central Bank on January 2, 2018 will be used to convert the FX amounts into Turkish Lira. The converted amount will then be adjusted using the monthly Consumer Price Index ("CPI") rates determined for each month by the Turkish Statistical Institute for the period from January 2, 2018 to the conversion date.

The Communiqué provides for a different conversion rule for real property lease agreements. For those agreements executed before September 13, 2018, the amounts will be converted to Turkish Lira for a period of two years from the conversion date in accordance with the above paragraph. It also provides for an adjustment mechanism using the CPI rates for the following lease periods; however the language of the Communiqué is not very clear and prone to different interpretations. We expect some further guidance on real property leases.