Ercüment Erdem Att. Ecem Cetinyilmaz

Foreign Currency Payment Ban

September 2018

Introduction

The following paragraph (g) has been added to Article 4 of Decree No. 32 on the Protection of the Value of the Turkish Currency (“Decree”) by President’s Resolution No. 85, published in the Official Gazette dated 13 September 2018, and numbered 30534: “Turkish residents, except for certain cases determined by the Ministry, cannot determine a contract price and other payment obligations arising from the contract to be in foreign currency, or in a manner indexed to a foreign currency, in contracts for the sale and purchase of movable and immovable properties, all kinds of movable and immovable property lease contracts, including vehicle and financial leases, leasing contracts, employment contracts, contracts of service, and independent contractor contracts.”

The following Provisional Article 8 has also been added to the same Decree: Within thirty days from the effective date of Article 4/(g) of this Decree, the amounts stated in the said Article, and determined in foreign currency in previously executed contracts, shall be re-determined by the parties to be in Turkish currency, except in cases determined by the Ministry.”

These amendments entered into force on 13 September 2018, the date of publication of President’s Resolution No. 85. The Communiqué (Communiqué No. 2018-32/51) regarding the Amendment of the Communiqué on Decree No. 32 on the Protection of the Value of the Turkish Currency (Communiqué No. 2008-32/34) (“Communiqué”) published by the Ministry of Treasury and Finance (“Ministry”) in the Official Gazette dated 6 October 2018 and numbered 30557 clarified certain issues introduced by the Decree and provided for various exemptions.

This Newsletter article explains the contracts within the scope of Article 4/g of the Decree, and the effects thereof on the existing contracts.

Contracts of Turkish Residents amongst Themselves

The paragraph added to the Decree brings restrictions to contract prices and other payment obligations in the contracts of “Turkish residents” entered into “amongst themselves.” Pursuant to paragraph (20) of the Communiqué, Turkish residents’ branches, offices, representative offices and liaison offices located abroad, overseas funds operated or managed by Turkish residents, overseas companies in which Turkish residents have 50% or more ownership, and overseas companies that are directly or indirectly under the ownership of Turkish residents, shall be deemed to be “Turkish residents” within the scope of Article 4/g of the Decree.

Contracts within the Scope of the Decree and Exemptions

It is stated under the Decree that the contract price and other payment obligations arising from the contracts that are within the scope of the Decree cannot be made in foreign currency, nor in any manner indexed to foreign currency. Accordingly, the Decree covers not only the contract price, but also any interest, damages for delay, penal clauses, and all kinds of indemnity obligations applicable to the relevant contracts. In addition, pursuant to Article 8/18 of the Communiqué, amounts on the negotiable instruments (kıymetli evrak) to be issued within the scope of the contracts covered under the Decree cannot be denominated in foreign currency.

Pursuant to Article 8/19 of the Communiqué, contracts indexed to precious metals and/or commodities, the values of which are determined in foreign currency in international markets, and/or contracts indexed indirectly to foreign currency, are deemed as contracts indexed to foreign currencies within the scope of Article 4/g of the Decree.

The contract types covered by the Decree are: (i) purchase and sale contracts of movable and immovable properties; (ii) all kinds of movable and immovable property lease contracts, including vehicle and financial leases; (iii) leasing contracts; (iv) employment contracts; (v) contracts of service; and (vi) independent contractor contracts.

Contracts within the scope of the Decree are summarized in terms of contract types and contracting parties under the tables, below, in view of the exemptions introduced by the Communiqué:

Restrictions and Exemptions in terms of Contract Types

Contract Type

Is Foreign Currency or Foreign Currency Indexed Contract Allowed?

Exemptions

Immovable sale and lease contracts (immovable properties located in Turkey including free zones) (including residential premises and roofed workplaces)

Not allowed

  • Please see Table “Restrictions and Exemptions in terms of Contracting Parties”

Employment contracts

Not allowed

  • Employment contracts to be performed abroad
  • Please see Table “Restrictions and Exemptions in terms of Contracting Parties”

Service contracts (including consultancy, intermediary and transportation contracts)

Not allowed

  • Service contracts made within the scope of export, transit trade, sales and deliveries that qualify as exports and foreign currency generating services and activities
  • Service contracts made within the scope of Turkish residents’ activities conducted abroad
  • Service contracts concerning electronic communications starting in Turkey and ending abroad, and starting abroad and ending in Turkey
  • Please see Table “Restrictions and Exemptions in terms of Contracting Parties”

Independent contractor contracts

Not allowed

  • Independent contractor contracts made for the construction, repair and maintenance of ships that are defined under Law No. 4490
  • Please see Table “Restrictions and Exemptions in terms of Contracting Parties”

Movable sale and lease contracts

Allowed

  • Vehicle sale and lease contracts including construction vehicles
  • Please see Table “Restrictions and Exemptions in terms of Contracting Parties”

Sales contracts for software produced abroad within the scope of information Technologies as well as license and service contracts for hardware and software

Allowed

N/A

Leasing (financial lease contracts)

Not allowed

  • Leasing contracts for ships as defined under Law No. 4490
  • Leasing contracts made within the scope of Articles 17 and 17/A of the Decree
  • Please see Table “Restrictions and Exemptions in terms of Contracting Parties”

Issuance, purchase and sale and related transactions of capital markets instruments within the scope of the capital markets legislation (including foreign capital markets instruments, depository receipts and foreign investment fund shares)

Allowed

N/A

 
Restrictions and Exemptions in terms of Contracting Parties

Contracting Party

Is Foreign Currency or Foreign Currency Indexed Contract Allowed?

Exemptions

Contracts to which branches, offices, representative offices and liaison offices of foreign companies located in Turkey, companies located in Turkey in which foreigners have a 50 % or more direct or indirect shareholding, and in respect of their free zone activities, companies located within free zones are parties

Allowed

  • Immovable sale and lease contracts
  • Vehicle sale and lease contracts including construction vehicles
  • Independent contractor contracts

Contracts to which Turkish residents who are not Turkish citizens are parties

Allowed

  • Immovable sale and lease contracts
  • Vehicle sale and lease contracts including construction vehicles
  • Independent contractor contracts

Contracts to which public institutions and organisations as well as Turkish Armed Forces Foundations companies, are parties

Allowed

  • Immovable sale and lease contracts

Contracts executed by contractors within the scope of performance of tenders, agreements and international conventions, which public institutions and organizations are parties, provided that such tenders, agreements and international conventions are in a foreign currency or indexed to a foreign currency

Allowed

  • Immovable sale and lease contracts
  • Employment contracts

Contracts to which banks are parties, related to the transactions concluded by the Ministry within the scope of Law on Public Financing and Debt Management No. 4749

Allowed

N/A

Contracts to which Turkish resident commercial airway enterprises engaged in passenger, cargo and mail carriage, companies providing technical maintenance services with respect to aircrafts, their motors, parts and accessories, public and private establishments having license for providing ground services in airports within the scope of civil aviation legislation, enterprises and companies established by the foregoing establishments and companies in which the foregoing establishments hold more than 50% of the shares are parties

Allowed

  • Immovable sale and lease contracts
  • Employment contracts


Existing Contracts

The Decree covers not only contracts that are made after the effective date of the Decree, but also all existing contracts. Pursuant to provisional Article 8 of the Decree, within 30 (thirty) days from 13 September 2018, the effective date of the Decree, the amounts determined in foreign currencies under existing contracts shall be re-determined by the parties as Turkish currency, except in cases determined by the Ministry. The obligation to re-determine foreign currency amounts shall not apply to already collected receivables, or to receivables that are due, but which have not yet been collected. As an exemption to the re-determination obligation, pursuant to Article 8/22 of the Communiqué, vehicle lease contracts, including construction vehicles that have been executed prior to entry into force of provisional Article 8 of the Decree are exempt from the said Article.

Although the Decree is silent as to how the parties will convert to Turkish currency, this issue is clarified in Article 8/24 of the Communiqué. Accordingly, upon failure of the parties to come to an agreement while re-determining the Turkish currency amounts, the foreign currency amount shall be converted to Turkish currency from the indicative effective selling exchange rate of the Central Bank of Turkey announced on 2 January 2018, and the converted amount shall be increased based on the monthly exchange rate of the consumer price index rate (TÜFE) determined by the Turkish Statistical Institute for each month (“TÜFE”), applicable from 2 January 2018 until the re-determination date.

Article 8/24 of the Communiqué introduces a special rule for existing residential premises and roofed workplace lease contracts. Accordingly, foreign currency amounts that are the subject of such contracts shall be re-determined based on the calculation method described, above, for a period of two years. In the event of parties’ disagreement as to the rental amount for the following rental term, TÜFE shall apply to the re-determined amount, and the resulting amount shall be applicable for one year as of the end of the rental term in which the re-determination is made. For the next rental term, in the event of the parties’ disagreement, again, TÜFE shall apply to the last re-determined amount, and shall be applicable until the end of the two-year term as of the date of the first re-determination.

Sanctions for Non-Compliance with the Decree

In accordance with Article 3 of the Law on the Protection of the Value of Turkish Currency (“Law”), those who violate the obligations laid down by the general and regulatory rulings of the Decree and the President shall be subject to an administrative fine between TRL 3,000 and TRL 25,000. As per Article 17/7 of the Law of Misdemeanours, administrative fines shall be increased each year in accordance with the re-appraisal rates, making the fines applicable in 2018, varying between TRL 5,631 and TRL 46,964.

In addition to the administrative fine to be imposed, for the periods between the date of the violation and the date of collection, a delay interest shall apply at the rate of delay increase to be determined according to the Law on Collection Procedure of Public Receivables. On the other hand, in the event of a repetition of crimes that constitute contradiction to the Decree, and to the other regulations, the penalties shall be doubled.

In addition to the administrative fines stipulated under the Law, as per Article 21 of the Decree that deals with issues concerning supervision, natural persons and legal entities in Turkey must present documents and registers, and provide information requested by the competent authorities and supervisory staff for the purposes of auditing of the matters within the scope of the Decree. Pursuant to the related Article, the Ministry is authorized to, partially or completely, temporarily or permanently, suspend the activities of natural and legal persons who violate this obligation, or to collateralize the subsequent transactions, to record such collaterals as revenue to the Treasury, partially or wholly, if necessary, or to remove the collateral in the event of just cause and/or force majeure.

Conclusion

Commencing 13 September 2018, except for the cases determined under the Communiqué, comprehensive restrictions have been introduced to Turkish residents’ entitlement to determine contract prices and other payment obligations arising from contracts that are in foreign currencies, or in a manner indexed to foreign currencies in contracts for the sale and purchase of movable and immovable properties, all kinds of movable and immovable property lease contracts, including vehicle and financial leases, leasing contracts, employment contracts, contracts of service, and independent contractor contracts.

Within a period of 30 days as of 13 September 2018, the effective date of the Decree, the amounts determined in foreign currency under the existing contracts shall be re-determined by the parties to be in Turkish currency, except in cases determined by the Ministry. The Decree covers not only contract prices, but also any interest, damages for delay, penal clauses, and all kinds of indemnity obligations applicable to the relevant contracts. The calculation method for the conversion to Turkish currency in the event of parties’ disagreement is described in the Communiqué.

In the event of violation of the prohibition of determining payment obligations in foreign currencies, or in a manner indexed to foreign currencies, in addition to an administrative fine applicable per contract, contracts made within this scope are subject to the supervision of the Ministry and, if the documents requested by the Ministry are not provided, the activities may be partially or completely suspended.