Protection of foreign investments
Foreign investments are protected by the Turkish Constitution, the Foreign Direct Investment Law and other related regulations. In the international context, Turkey is party to 77 bilateral investment treaties on the protection and promotion of investments and 85 double taxation treaties, as well as several treaties regarding customs union, free trade, multilateral investments, protection of social security rights and agreements concerning alternative dispute resolution methods.
Investment Office of the Presidency and the Coordination Council for the Improvement of Investment Environment are the two major institutions that promote inbound foreign investment.
With the exception of certain limited areas, described in more detail below, foreign investors are on an equal footing with Turkish investors.
The applicable legislation defines "foreign investor" as foreign individuals, foreign entities and non-resident Turkish citizens making a foreign direct investment into Turkey. “Foreign direct investment” includes assets of foreign or domestic origin that are used to establish a new company or branch or to acquire shareholding in a Turkish company. Assets of foreign source may include cash capital, corporate securities (excluding government bonds), machinery, equipment or intellectual property. Assets of domestic origin may include profits, receivables or natural resource exploration rights.
Below are some of the exceptions to the equality principle between foreign and domestic investors:
- Foreign ownership in a media company may not exceed 50 percent.
- Certain maritime activities (e.g., the transportation of passengers and cargo between Turkish ports) are reserved for Turkish individuals and entities.
- There are certain restrictions on real estate acquisition by foreign individuals or entities and Turkish companies with foreign capital. Please see “Property Rights” for further details.
- Certain professions, such as the practice of law or medicine, have restrictions for non-Turkish individuals or entities. In addition, the issuance of work permits for foreign employees in any sector is subject to certain conditions. Please see ”Labor Law” for further details.
- Foreign real and legal persons may only found or participate in private, secondary education institutions in which non-Turkish citizen students are enrolled; they may not establish or participate in higher education institutions.
Subject to the above, domestic legislation provides the following minimum standards of protection to foreign investors:
Equal treatment with domestic investors
Foreign investors may not be subject to a more burdensome treatment than a Turkish national merely due to their nationality.
Expropriation and nationalization
Assets and enterprises owned by a foreign or domestic investor may not be expropriated or nationalized without due process or just compensation.
Expropriation and nationalization may only take place if required by the “public interest” as determined by the relevant administrative body. The applicable administrative body would depend on the nature and scale of the investment and may include the board of governors of a city or province, a ministry or the Office of the President. The decision of an administrative body is subject to judicial review.
Following an expropriation decision the administrative body and the owner of the property may agree on the amount of compensation. Failing such agreement the Court of First Instance determines the value of expropriated assets and the terms of payment.
Expatriation of proceeds
Investors are allowed to transfer abroad, through banks or financial institutions, proceeds, including net profits, dividends, returns from sales, liquidation and compensation payments, any amounts payable in return of a management agreement, as well as capital and interest payments of loans, from operations and transactions in Turkey.
Obligations of foreign investors under the Foreign Direct Investment Legislation
Foreign investors having a subsidiary, branch or liaison office in Turkey have certain notification obligations. For instance, companies and branches must notify the Ministry of Industry through an online platform, the Electronic Incentive Application and Foreign Investment Information System (E-TUYS) about any changes in foreign ownership in their share capital. This notification requirement is generally included as a post-closing item in mergers and acquisitions transactions.
Liaison offices are under a similar obligation to notify their activities and are also subject to audits by the Ministry of Industry to determine if their activities are in compliance with their permit and applicable legislation.
Turkey is party to several international treaties for the protection and promotion of foreign investment. These international treaties have the force of law once they are ratified by the Parliament. According to UNCTAD data, there are 77 bilateral investment treaties signed and ratified by Turkey and have the force of law. Turkey is also party to numerous double taxation treaties.
Turkey’s bilateral investment treaty and double taxation treaty counterparts include almost all OECD and European Union countries, including the United States, Russia, China, Germany and the United Kingdom.
Bilateral investment treaties provide certain investment protections to foreign investors that are above and beyond the protections already provided under domestic law. Turkey does not have a standard bilateral investment treaty template therefore specific provisions vary depending on a treaty’s counterparty nation. However, the substantive investment protection rights typically granted are as follows:
- International Arbitration: The host country consents to dispute resolution by international arbitration so that the foreign investors are not obligated to legal recourse in the host country’s local courts.
- Most-Favored-Nation: Provides treatment to all foreign investors no less favorable than the best treatment that the host state accords to any foreign investor under a bilateral investment treaty, in effect expanding the scope of bilateral protection to include the rights negotiated by other most-favored-nations.
- National Treatment: Provides foreign investors with treatment no less favorable than the host state provides to investors of its own state.
- Expropriation: The host state guarantees to provide the investor with the full and fair value of an expropriated investment.
- Expatriation of Profits: The host state guarantees that the investor may freely transfer its profits, dividends, compensation payments, etc. overseas through banks.
- Fair and Equitable Treatment: The host state has an obligation to offer a stable and predictable legal framework, due process, transparency and consistency without discrimination.
- Full Protection and Security: The host state has an obligation to prevent physical destruction of the investment.
Other than bilateral treaties, Turkey is party to a number of multilateral investment agreements including the following:
- ICSID Convention: In force since 1966 and ratified by 154 states, this convention permits settlement of certain investment disputes through arbitration administered by ICSID, an institution organized under World Bank Group. Either the investment contract or the underlying investment treaty must provide for ICSID jurisdiction in order for investors to use this recourse.
- The Energy Charter Treaty: In force since 1998, ratified by 50 states, the European Union and the Euratom, the treaty provides for inter-governmental cooperation and substantive protection of foreign investments (similar to those protections described under bilateral investment treaties) in the energy sector.
- Organisation of Islamic Cooperation Investment Treaty: In force since 1986 and ratified by 57 states, it provides for principles for the promotion of capital transfers among member states as well as the protection of investments.
Bilateral investment treaties give foreign investors the option of recourse to Turkish local courts or international arbitration. They often include an option to arbitrate under the ICSID Convention, however, arbitration under the UNCITRAL Rules or the ICC Rules of Arbitration are also commonly used. According to ICSID data, Turkey is mainly a party to investment-related disputes concerning the energy, telecommunications and construction sectors.
The ICSID Convention also provides a specific mechanism for the enforcement of arbitral awards. Under the ICSID Convention member states must recognize an ICSID award as binding and enforce the award’s monetary obligations as if it were a final judgment of a court in that state. The Energy Charter Treaty also provides specific rules for enforcement.
Turkey is party to the New York Convention, which requires domestic recognition and enforcement of foreign arbitral awards. Turkey has made two reservations to the applicability of the New York Convention: (i) the award should be given in a member state and (ii) the subject matter of the dispute should be, as interpreted under Turkish law, of a commercial nature.
Turkey also has its own domestic law, namely the International Private and Procedure Law, that governs the enforcement of foreign arbitral awards and foreign court decisions.
Both the New York Convention and the International Private and Procedure Law excuse enforcement in cases involving invalid arbitration agreements, violations of due process rights or excess of authority by the arbitral tribunal or of the scope of the arbitration agreement.
In addition, both pieces of legislation excuse enforcement if enforcement of arbitral awards and foreign court judgments would violate the “public policy” of Turkey. The concept of public policy is not expressly defined and is left for interpretation by courts in line with, but without being bound by, Supreme Court of Appeals precedents. In general, constitutional rights, fundamental legal principles, international legal instruments pertaining to basic rights, commonly accepted ethical values, the standard of honesty and good faith and public health and safety are considered to be public interest matters. The Supreme Court of Appeals in past decisions has also interpreted customs and tax laws as being part of public policy.
Final judgments of foreign courts regarding private law matters may be enforced or recognized by Turkish Courts of First Instance in accordance with the provisions of the International Private and Procedure Law. Turkish law requires (i) reciprocity between Turkey and the state where such decision was taken, arising from a law, bilateral agreement or court practices, (ii) that the judgment does not relate to any matter that falls within the exclusive jurisdiction of Turkish courts (e.g., a matter relating to the ownership of a real property located in Turkey) and (iii) that due process has been observed and enforcement would not violate public policy.
Istanbul Arbitration Centre (ISTAC)
Fully operational since 2016, ISTAC was established to make Istanbul an arbitration hub in the MENA and CEE regions. With rules comparable to internationally-accepted arbitration platforms such as the ICC, ISTAC offers dispute resolution services to all contracting parties, including for disputes involving a “foreign element,” without any membership requirements. Unless otherwise selected by the contracting parties, the seat of arbitration under ISTAC rules is Istanbul.
Parties may also select the language for arbitration and determine the number of the arbitrators. ISTAC rules provide for “fast-track” arbitration, which enables the issuance of an award within three months by a single arbitrator. They also allow for an “emergency arbitrator” concept, designed for parties in need of urgent interim measures that cannot await the arbitrator(s) to take office.