An overview: geography and population
The Republic of Turkey is situated at the geographic crossroads of Europe and Asia. Turkey shares European borders with Greece and Bulgaria and neighbors Syria, Iraq, Iran, Azerbaijan, Armenia and Georgia in Asia. It is surrounded by seas on three sides. The Black Sea forms its northern coastline and links Turkey with Southeastern Europe, Russia and the Caucasus. The Aegean Sea borders its western coastline and channels through Europe. The Mediterranean Sea borders its southern coastline and ties Turkey with the Middle East and North Africa.
Turkey is also positioned at the intersection of strategic trade routes on three continents. Istanbul is a major regional air hub connecting passengers within a four-hour flight radius to capital cities in Europe, Western and Central Asia, the Middle East and Africa.
Turkey is a member of the OECD, WTO and NATO and has been a European Union accession candidate since 2005.
Turkey is home to the second largest population in Europe. According to TURKSTAT, the population of Turkey in 2018 is approximately 82 million people. Nearly three quarters of the population is between the ages 15 to 64, with a median age of 32, ten years lower than that of the European Union.
A largely free-market economy with a combination of traditional agriculture, modern industry and a dynamic services sector, Turkey’s economy is one of the largest in Europe and the MENA region. The IMF World Economic Outlook Database currently ranks Turkey as having the 17th highest GDP in the world as measured according to purchasing power parity.
Often viewed by investors as having a large, skilled and cost-effective workforce, the OECD ranks Turkey as the third largest labor pool among European Union member countries.
According to Ministry of Finance data, agriculture, industry and services are all key components of the Turkish economy, contributing roughly 3.3 percent, 22.2 percent and 66.4 percent respectively of the GDP. Manufacturing is driven by strong sectors such as automotive, textile and consumer goods. Turkey’s automotive industry is the 14th largest producer in the world. The services industry is driven by the financial services, telecommunications, construction, tourism and healthcare sectors. In particular, the real estate and construction sectors have been a strong target of foreign investment.
Turkey’s growing economy and the increasing demand for energy, which cannot be met by domestic energy resources, has resulted in a dependency on energy imports, primarily oil and gas. According to the International Energy Agency up to 87 percent of the oil resources and 99 percent of the gas resources used in Turkey are imported.
Approximately 25 percent of Turkey’s energy needs are met by its own resources notably hard coal, lignite reserves and hydro. In recent years, dependency on fuel imports and environmental concerns have led to a focus on renewable energy sources such as wind, solar and geothermal. In addition, integration of nuclear power into the Turkish energy mix has become a key aspect of the country’s plans for economic growth. Construction of the first of three planned nuclear power plants—the Akkuyu facility on the Mediterranean coast—began in April 2015.
Liberalization of the energy market, through privatization of production and distribution assets as well as market deregulation, has created significant investment opportunities in almost all components of the value chain for electricity, natural gas, oil and coal.
Turkey is a critical energy corridor facilitating the trade of oil and gas between the world’s crucial suppliers in Western Asia and the large consumer market in Europe. Several large pipeline projects are in operation or under development. Of significance are the Baku-Tbilisi-Ceyhan (BTC) crude oil pipeline which runs from the Caspian Sea to the Mediterranean passing through Azerbaijan, Georgia and Turkey, and the Trans-Anatolian Natural Gas Pipeline (TANAP) which will run from Azerbaijan through Turkey to Europe.
Investment figures to date
According to the World Bank, the total volume of Foreign Direct Investment (FDI) in Turkey exceeded US$144bn in the past decade. This is a remarkable increase considering that total FDI between 1974 and 2004 was US$19bn. In 2016, total FDI in equity capital amounted to US$6.9bn with 64 percent made via European countries and 29 percent made via Asian countries. The industrial sector accounted for 38 percent of FDI while the services sector accounted for 61 percent.
According to Central Bank data covering the period between 2002 and 2018, services (banking, insurance, telecommunications, wholesale and retail trade, etc.), manufacturing (food, beverages and tobacco, chemicals, computers electronic/electrical equipment, etc.) and energy have been the most attractive sectors for foreign investment.
There are three general categories of taxes in Turkey: income taxes, taxes on wealth and taxes on expenditure. In addition, there are social security contribution requirements for both employers and employees.
Income taxes are applicable to real persons as well as corporations. While the corporate tax rate is flat, personal income tax is levied at progressive rates on an individual’s annual taxable income. As of the date of this publication, the corporate tax rate in Turkey is 22 percent and the highest rate for personal income tax is 35 percent.
Taxes on wealth include real property tax, motor vehicles tax, inheritance tax and gift tax. Real property tax ranges between 0.1 percent and 0.6 percent of the registered value of the real property. The rate of motor vehicles tax depends on the age and engine capacity of the vehicle. Inheritance and gift taxes are levied at a rate of 1 percent to 30 percent.
Taxes on expenditures include value added tax (VAT), special consumption tax, stamp tax and banking and insurance transaction tax (BITT). Unless there is a specific exemption, VAT is levied at a rate that varies between 1 percent and 18 percent on the purchase (including importation) of various goods and services. Special consumption tax applies to the sale of certain goods such as alcohol and tobacco. Please see Section V, Sub-section G for further details on taxes.
Social security contributions are calculated on the basis of monthly wages and are paid jointly by the employer and the employee. As of the date of this publication, the employer’s share is 22.5 percent and the employee’s share is 15 percent of monthly gross earnings, including salaries and bonuses, where gross earnings are capped at a monthly amount (currently 19,188 Turkish Lira). In addition, employers and employees are required to make contributions of 2 percent and 1 percent, respectively, of the employee’s gross salary to the unemployment insurance fund.
Turkey has several investment incentive programs which provide benefits and exemptions from one or more types of taxes. Eligibility for an incentive program depends upon the scale, geographical location and strategic nature of an investment.
The Parliament is the primary competent authority that imposes, amends and revokes tax obligations. The Parliament may also delegate to the President the right to set the rate, within the range specified by the relevant tax law. The Ministry of Finance implements tax laws and regulations.
Turkey is party to double-taxation treaties with many countries. These treaties prevent double taxation and allow cooperation between Turkey and other applicable tax authorities. Please see Section III, Sub-section B regarding Turkey’s international treaties.
Based on the official foreign exchange bid prices published by the Central Bank, as of September 30, 2019, exchange rates for the Turkish Lira are as follows:
5.64 Turkish Lira = 1 US$
6.16 Turkish Lira = 1 €
6.93 Turkish Lira = 1 £
The Turkish constitutional structure has operated within a multi-party system for 73 years.
The first constitution of the Republic of Turkey was adopted in 1924 and the current constitution dates to 1982. Although Turkey initially adopted many of its legal codes from Switzerland, France and Italy, in recent years, in conjunction with the country’s European Union accession process, both the Constitution and legal codes have undergone significant amendments. Please see the “Recent Constitutional Amendments” below for information on the scope of the latest constitutional amendments.
The Turkish constitutional system is based on the separation of powers. The Constitution provides for a single legislative body, the Parliament, an executive branch comprised of the President, and an independent judiciary represented by a multi-layer court system divided into civil, criminal and administrative authorities.
The legislative power of the state is vested in the Parliament which is comprised of 600 members. Using a closed list system, voters do not cast ballots for a candidate but rather for a political party based on a candidate list presented by the political party. Seats in Parliament are proportionally allocated to political parties gaining 10 percent or more of the national electoral vote. Members of Parliament represent the entire nation and serve five-year terms. The Parliament is vested with powers to adopt and repeal laws, debate and adopt legislative proposals on state budget, print money, ratify international treaties and declare war.
The executive branch is the Presidency. The President is elected by direct national vote for a five-year term with the possibility of being re-elected for a second five-year term. The President is the head of state and has the power to veto legislation on constitutional grounds. A presidential veto may be overridden by the Parliament through the adoption by a simple majority of parliamentary members of the proposed law for a second time and without amendment.
The Turkish judiciary is an independent body of the public administrative system. The overarching structure of the judiciary is a multipartite system embodying two distinct court systems: general courts (including civil, commercial, criminal, labor and family courts), and administrative courts. In the general and administrative judiciary there are courts of first instance, appellate courts (istinaf mahkemeleri) and high courts. The high court is known as the High Court of Appeals (Yargıtay) in the general jurisdiction and the Council of State (Danıştay) in the administrative jurisdiction. The highest court for constitutional review and adjudication is the Constitutional Court of Turkey (Anayasa Mahkemesi).
Turkish courts’ review of a dispute is solely focused on establishing the facts of the dispute and applying the provisions of the relevant code to those facts. Both the fact-finding and legal analysis functions are carried out by a judge who, in practice, often appoints panels of expert witnesses to submit reports to the court. There is no jury system. Unlike in common law systems, the role of the judge does not expand to law-making. Assuming the absence of an applicable statutory provision, judges establish applicable rules on a case by case basis. This authority does not extend to criminal law cases.
As a general rule, court precedents are guiding but not binding on other courts (in other words, the stare decisis principle in common law jurisdictions does not apply in Turkey). However, decisions of the plenary sessions of the High Court of Appeals and the Council of State which address conflicting applications of the law from different chambers thereof establish precedents that are binding on all relevant courts.
Recent constitutional amendments
The constitutional amendments approved through a public referendum held on April 16, 2017, include comprehensive revisions to the Turkish governmental system, replacing the dual-structured executive branch with a presidential system.
The amended Constitution grants broader executive powers to the President through consolidating the authorities of the now-defunct Council of Ministers, including those of the Prime Minister, in the President’s office. The President has the right to issue presidential decrees (cumhurbaşkanlığı kararnamesi) to undertake activities whose approval is not, for whatever reason, sought from Parliament, e.g., a unilateral declaration of a state of emergency or to call for early elections. The President also has the right to propose an annual budget to the Parliament. If the Parliament does not ratify the President’s proposed annual budget, it may adopt a provisional budget. Failing passage of a provisional budget, the prior year’s budget, adjusted using a revaluation ratio, will automatically become law.
Under the amended Constitution, the Council of Ministers ceased to exist, and Parliament no longer has the power to appoint or dismiss any executive office. Rather, Parliament may, with the approval of three-fifths of its members, call for early elections.
The amended Constitution also: (i) abolished the military judiciary, (ii) revised the structure of the Constitutional Court and (iii) removed the concept of by-laws (tüzük) that were issued by the Council of Ministers upon review of the Council of State.
Sources of law
Turkey is a civil law jurisdiction. The legal system is based on comprehensive legal codes (laws) that specify the rules necessary to accommodate public order. Duly ratified international treaties also carry the force of law. The provisions of a treaty become applicable when the Parliament enacts a law announcing the entry into and execution of the relevant treaty.
Below is an explanation of the legal hierarchy under the current Constitution and is intended to be read with the sub-section “Recent Constitutional Amendments” above.
Laws may only be enacted by the Parliament, not by courts. However, since laws are not always sufficient to accommodate the daily needs of society, administrative authorities are empowered to issue secondary legislation containing more technical, in-depth rules relating to the implementation of a law.
The legal hierarchy in Turkey may be generally stated as follows:
- first, the Turkish Constitution;
- second, international treaties that are duly ratified by the Parliament and relating to fundamental rights and freedoms;
- third, statutory laws, presidential decrees and other international treaties duly ratified by the Parliament;
- fourth, regulations and ministerial communiqués.
While not expressly stated in the Turkish Constitution, this legal hierarchy reflects widely-accepted scholarly views on the general principles of the Turkish Constitution.
Turkey’s fundamental laws are largely based on other major continental European legal systems. For instance, the Turkish civil law system incorporates elements of Swiss law, the Turkish commercial law is largely based on German law, the Turkish administrative law bears similarities to French law and the Turkish criminal code bears similarities to Italian law. The fundamental laws currently in effect in Turkey are:
- The Civil Code governing the general rules and principles applicable to individuals and legal entities residing or incorporated in Turkey, as well as their general dealings with each other (such as family law);
- The Code of Obligations regulating the rights and obligations (contractual or non-contractual) of private persons vis-à-vis each other;
- The Commercial Code regulating commercial undertakings, companies, negotiable instruments, maritime law and insurance agreements;
- The Labor Law governing the rules between the employee and the employer;
- The Criminal Code governing offenses, penalties which might be imposed for these offenses and related general provisions;
- Administrative law is composed of various laws regulating the functions of the governmental bodies and their relationship with individuals and legal entities.
In addition to these fundamental laws, there are non-sectoral laws (such as competition or environmental law) and sectoral laws (such as banking, capital markets or energy) that form an important part of the business landscape. The main regulatory entities with rule-making and implementation authority are the various ministries and separate regulatory agencies created to supervise certain activities – including the BRSA, the Capital Markets Board, the EMRA and the Competition Authority. These regulatory agencies are independent, administratively and financially autonomous public institutions.