110815 hsbc doing business in turkey

7/31/2019 110815 Hsbc Doing Business in Turkey

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Doing business in Turkey

This publication is

a joint project with


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Executive summary 4

Foreword 6

Introduction Doing business in Turkey 8

Conducting business in Turkey 14

Taxation in Turkey 20

Audit and accountancy 32

Human Resources and Employment Law 34

Trade 38

Banking in Turkey 40

HSBC in Turkey 42

Country overview 44

Contacts 46

Disclaimer

This document is issued by HSBCBank A.S. (the Bank) in Turkey.It is not intended as an oer orsolicitation or business to anyonein any jurisdiction. It is not intendedor distribution to anyone locatedin or resident in jurisdictions whichrestrict the distribution o thisdocument. It shall not be copied,reproduced, transmitted or urtherdistributed by any recipient.

The inormation contained inthis document is o a generalnature only. It is not meant tobe comprehensive and does notconstitute nancial, legal, tax orother proessional advice. Youshould not act upon the inormationcontained in this publication withoutobtaining specic proessionaladvice. This document is producedby the Bank together withPricewaterhouseCoopers (PwC ).Whilst every care has been takenin preparing this document,neither the Bank nor PwC makesany guarantee, representation orwarranty (express or implied) asto its accuracy or completeness,

and under no circumstances willthe Bank or PwC be liable or anyloss caused by reliance on anyopinion or statement made in thisdocument. Except as specicallyindicated, the expressions oopinion are those o the Bank and/or PwC only and are subject tochange without notice.

The materials contained in thispublication were assembled inNovember 2010 and were based onthe law enorceable and inormationavailable at that time.

Contents


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A member o the G-20, Turkeywas the worlds 16th largesteconomy in 2010. Poweredby private consumptionand supported by robustmacroeconomic policyramework, the Turkish economyhas expanded substantially overthe past decade. The countrysaw a 187% increase in GDPbetween 2002 and 2007,while annual average economicgrowth over the same period

was 7%.

Increasing stability, thanks torestructuring o the bankingsector and enorcement o tightscal policy in the wake othe 2001 crisis, as well as thepublic administration reorm,the EU accession process (inaddition to the customs unionwith the EU) and attractive taxregimes, have made Turkey amagnet or oreign investment inrecent years. The global nancialcrisis did impact investmentinfows in 2009 but, GDP growthrebounded in 2010, reaching arecord high o 8.9%.

Indeed, the economy remainsvigorous. Infation is currentlyin single gures and publicdebt is below 50%, althoughchallenges remain in theorm o Turkeys sizeablecurrent account decitand geographic inequalityin wealth distribution.

Many economists orecastthat over the next decadeTurkeys growth will match

or exceed that o any countryexcept China and India.Others predict it couldbecome the worlds tenthbiggest economy by 2050.

These actors, togetherwith Turkeys advantageousgeographical position, young,rapidly growing populationand ever-increasingly qualiedworkorce, mean it is likelyto remain an attractive targetor investment well intothe uture. Its key sectors(including construction,automotive, energy andutilities, transportation andlogistics, healthcare andbanking) are thereore likelyto continue to grow. Otheractors attracting investorsto Turkey can be summarisedas ollows:

TheTurkishlegalframework

oers a level playing eld tooreign investors and domesticcompanies. Foreign ownershipis unrestricted, with no pre-entry screening requirements.

Foreigninvestorsmayfreelystart up businesses incompany, branch oceor liaison oce orms.

Issuessuchastransferpricing

and thin capitalisation areormally regulated and classiedin line with Organisation orEconomic Co- operation andDevelopment (OECD) guidelinesand worldwide applications,allowing international businessesto comply with the local policieswith a relative ease.

TurkeyhassignedaCustoms

Union Agreement with theEU and customs practicesare in line with World TradeOrganization member countries.

Executive summary


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With its population o 74 m,Turkey is the 16th largesteconomy in the world in termso GDP size and the populationo Istanbul alone is largerthan that o 19 EU countries.More than hal o the Turkishpopulation are below the ageo 28 and the country hasthe ourth largest number oFacebook users in the world,highlighting a avourabledemographic prole and unique

growth potential. This youngpopulation is one o theprinciple reasons behind theast growth o the Turkisheconomy over the past decade.Turkeys GDP growth in 2010outpaced the US and all othe EU, putting it alongsidethe worlds astest growingemerging economies. FDIinfows to the country remainhigh, reaching US$8.9 bnin 2010.

In the atermath o the globalcrisis, the importance oemerging market economieshas been emphasised andgrowth levels in theseeconomies are likely tooutpace those o thedeveloped world or theoreseeable uture. At HSBC,we are very well positionedto the sustained growthand emergence o theTurkish economy.

HSBCs global ootprintextends to 87 countries andterritories around the world andthis global connectivi ty, coupledwith our talented team and

local know-how, make usvery well suited to providethe unique set o servicesrequired by our customers.The wide global reach o HSBCsupports the demands o anincreasingly inter-linked world,including those related toTurkeys strategic locationin major energy corridorsbetween the East and West.

In 2010 we celebrated our

20th anniversary in Turkey andin this time we have built a verysuccessul bank with a networko 334 branches in 62 citiesthat serve over 3 m customers.Our 20th year in Turkeywas marked with awardsor the Best Debt House inTurkey and Best CorporateInternet Banking in Turkeyrom Euromoney and GlobalFinance respectively, urtherdemonstrating the successo our business.

In order to provide the bestservice to our customersand business partners,HSBC, in collaboration withPricewaterhouseCoopers,has produced the Doingbusiness in Turkey guideto help you gain valuable insightabout the Turkish market andthe wide range o nancialservices and investmentopportunities that exist.

On behal o HSBC, I would liketo take this opportunity to wishyou success in your businessesin Turkey and beyond.

ForewordMartin SpurlingChie Executive OcerHSBC Turkey


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Driven by private consumptionand supported by a stablemacroeconomic policyramework, the Turkisheconomy has grownsignicantly since the countryemerged rom the 2001nancial crisis. Between2002 and 2008, Turkeys GDPexperienced an annual averagegrowth o 5.8%, versus 1.8%in the EU. Due to global turmoilin 2009, Turkeys GDP declined

to US$614 bn, but reboundedin 2010, reaching US$729 bnand making Turkey the 16thlargest economy in the world.

Restructuring o the bankingsector, monetary disciplinebased on independenceo the Central Bank and afoating exchange rate regime,tight scal policy, publicadministration reorm, andthe EU accession process withreorm packages enacted bythe Parliament all contributedto the transormation o thecountry ater the 2001 crisis.

Foreign Direct Investment(FDI) infows to Turkeydeclined in 2009 rom a higho US$22 bn in 2007. FDIremained low in 2010 atUS$8.9 bn, although thiswas sucient or Turkeyto be ranked 15th globally.

Since the 2001 crisis theeconomy has been buoyant.It remains two notches belowinvestment-grade credit rating

but infation is in single guresand the economic outlook ispromising. Public debt is below50%. Turkey is knocking onthe door o the BRICs club oemerging giants and today itis perceived as Europes BRICor the China o Europe. Someeconomists suggest that overthe next decade, Turkeysgrowth will match or exceedthat o any country exceptChina and India. Others predictit could become the worlds10th biggest economy by 2050.

Key attractions o Turkey

Turkeyislocatedataclose

proximity to Europe (two-threehours fight to major Europeandestinations), the Middle Eastand the Caucasus. Turkeybenets rom its location asa bridge between Europe andAsia. It also acts as an energycorridor connecting thesetwo continents.

Turkeyenteredacustomsunion with the EU in 1996and has been an EU accessioncandidate since 2005. Thishas resulted in the expansiono trade relations with Europe,which now accounts or 44%o Turkeys oreign trade.

Turkeyoffersanaccessible,

skilled and cost-eectiveworkorce, providing the ourthlargest labour orce amongstEU members and accessioncountries. It boasts a largepopulation o over 74 m people,with an average age o 29, over adecade lower than the EU gure.

TheTurkishgovernment

provides various tax andnon-tax incentives to oreigninvestors, in line with thoseprovided to domesticcompanies. These includecustoms and VAT exemptionson various imported or locallydelivered goods, includingmachinery and equipment,as well as priority regionsoering incentives such asree land and energy support.Investors are also able to

benet rom R&D supportand market research withthe aim o encouragingexports and increasing thecompetitiveness o rmsin international markets.

TheTurkishgovernment

has also introduced fexibleexchange rate policies andliberal import regulations inorder to promote and sustainoreign investment.

Inrecentyears,Turkishbanks

have taken an increasinglylarge role in nancing projectnance deals, beneting inmany cases rom increasinglyliquid balance sheets.

TheTurkishlegalframework

oers a level playing eld tooreign investors and domesticcompanies. Foreign ownershipis unrestricted, with no pre-entry screening requirements.

Anewcommercialcodenr.

6102 is currently publishedin the Ocial Gazette on14 February 2011. The Codeaims to integrate the localapplications with EU law,improve transparency, protectminority rights and strengthencorporate governanceprinciples. The new TurkishCommercial Code comes intoeect rom 1 July 2012.

Challenges are important

WhileTurkeydidnothavea

subprime mortgage issue, likeother emerging markets, it was

IntroductionDoing business in Turkeyaected by the ongoing globalcredit turmoil (i.e. increasingCPI due to rising oil and oodprices). During the peak o theglobal crisis in 2009, the TurkishCentral Banks prime lendingrate was as high as 16.75%,compared with 6.25% inJuly 2010.

Thereisasplitbetweentheeast and the west o thecountry; economic development,

investment opportunities,inrastructure and skilled staare concentrated in the west.

AlthoughTurkeyismoving

towards adopting InternationalFinancial Reporting Standards(IFRS), this is still a workin progress. In practice,accounting standards varyrom company to company.

Turkeysuffersfromrising

energy prices. Up to 90% o itsoil and 97% o its gas resourcesare imported rom Russia andthe Middle East.

Thecountryscurrentaccount

decit is large. In recent years ithas been comortably nancedby oreign direct investment,but long term this could lead(as it has in the past) to infationand currency instability.

Inspiteofinterestratesswitly shrinking down torecord low levels, they arestill high in comparison tomost European countries.


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Between2002and2008, the Turkish constructionsector experienced a signicantcompound annual real growtho 6.3%, higher than TurkeysGDP growth in the sameperiod. In 2010 expenditurein the construction sectorincreased by 17.1%, withrespect to the same term inthe previous year. Key driversinclude increased housingneeds, eased housing credits

allowing people to upgradetheir homes, an increase in thenumber o large-scale Turkishcontracting rms, and thegrowth o the building materialssector. Turkey is currentlya market leader in terms ocement exports and is in strictcompetition with Egypt to bethe ruling cement producer othe whole Mediterranean basin.Turkeys crude steel productionin 2010 reached 29.1 m tonnes,a growth o 15.2% over theprevious year. Accordingly,Turkey is ranked tenthworldwide or unprocessedsteel production.

Theautomotiveindustryisvery

important. At present, Turkey isthe largest producer o busesin Europe. It is also responsibleor more than 7% o Europesmotor vehicle production.Turkeys automotive expor tsgrew by 20% in 2010, reachingUS$15.9 bn. The total numbero vehicles produced was inthe region o 1.094 million in2010. More than hal o the

Key industries in Turkey

Travelandtourismisoneo Turkeys most dynamicindustries. This industrydeed the economic crisis in2009, and is booming in 2010,largely on the back o the ArabSpring, with Turkey benetingrom decreased tourism to itsMiddle Eastern neighbours.Tourist numbers in the rst vemonths o 2010 were already

up 14.56% over January-May2010. The depreciation o theTurkish lira (TL) against theUS dollar, as well as generallycompetitive prices, madeTurkey a avourable destinationor oreign tourists. Turkeywas visited by 27.3 m and28.5 m tourists in 2009 and2010, respectively. With thisnumber o tourists, Turkeywas ranked the seventhmost-visited country in theworld. However, while touristnumbers continue to increase,revenue has shrunk, droppingrom US$21.3 bn in 2009to US$20.8 bn in 2010. Thetourism sector aims to reachthe top ve countries in theworld in terms o both touristnumbers and tourism revenueby 2023.

Textilesandclothingisoneof

the most important industrieso the Turkish economy andthe countrys oreign trade.These industries have an annualproduction value o US$14.6 bnand had a 13% share in total

vehicles produced in Turkey arepassenger cars. Passenger carsand trucks account or morethan 90% o the total numbero vehicles produced. Turkeyanticipates becoming the thirdlargest producer o motorvehicles in Europe by 2015.

Atpresent,Turkeysenergy

and utilities sector is attractingsignicant interest romoreign investors, ollowing the

split o Turkeys main energyprovider into many regionalcompanies. The governmenthas been privatising thesecompanies, providing signicantopportunity or investment,however, there is some publicopposition. The governmentplans to complete the sell o odistribution companies by theend o 2010. It should be notedthat the share o private sectorinterest in electricity distributionwas only 20.1% in 2008.Additionally, Turkey wants togenerate 5% o its electricityrom nuclear energy by 2020while the share o renewableenergy by 2023 is targeted at20%. Currently, hydropoweraccounts or approximatelyone-third o the electricitygenerated in Turkey. Thecountry is heavily reliant onimported uel supplies or theremainder o its power needs.

TheTurkishElectricity

Transmission Companyestimates that Turkeys demandor electricity will increase at an

export volume in 2010. Thereare more than 35,000 textileand clothing companies inTurkey and the country isa major player in the worldclothing industry. The Turkishclothing industry is the second-largest supplier to the EU. Ithas a share o 4.6% in globalwoven clothing exports andranks in the top ve exportingcountries worldwide. TheTurkish textile and clothing

industry is competitive on aglobal scale thanks to its highquality and wide product range.

Sincethestartofthenew

millennium, in particular,Turkey has attracted oreigndirect investment. This positiveeconomic development waselt more intensely in certainindustries retail in particular.The Turkish retail industry stilleatured a traditional structureuntil the beginning o the2000s; its modernisationperiod then began and gainedmomentum, with a tremendouspositive eect on the nationaleconomy. According to PlanetRetails report, consumerexpenditure in Turkey isexpected to rise to 948 bnTurkish lira in 2013. Retail sales,which stood at 23 bn Turkishlira in 1998, grew to 128 bnTurkish lira in 2003, 329 bnTurkish lira in 2008, and 317bn Turkish lira in 2009. In linewith rising GDP, retail salesare expected to reach 448 bnTurkish lira in 2013.

annual rate o 6.0% between2009 and 2023. Thereore,the government is looking orinvestment in this industry. Thetotal amount o investments tobe made to meet the energydemand in Turkey until 2023 isestimated at around US$130 bn.

Sincetransportationand

logistics is one o the mainpillars o both national andinternational trade, the Turkish

government is making ongoinginvestments to create a newinrastructure. According toStrategic Plan 2009-2013by the Ministry o Transportation,highways are given the utmostimportance and will be subjectto an important amounto investment.

Despitetheuncertainties

caused by its being in atransition period, the Turkishhealthcare sector oers greatopportunities or the privatesector, which is orecast tobe a signicant contributor ogrowth going orward. A totalo 13 signicant deals tookplace between 2007 and 2009in the healthcare industry,with a total announced dealvalue exceeding US$ 850 m.Financial and strategicinvestors search or investmentopportunities in the Turkishhealthcare market due togrowth prospects and thegrowing number o people whocan aord private healthcare.

TLinterestrateshave

decreased consistently sinceSeptember 2008 due to aseries o rate cuts by theCentral Bank (CBT). As a resulto the macro uncertainties andincreasing credit risk ater thecredit crisis, banks are reluctantto refect the CBTs rate cutsto their loan rates as ast asthe decrease in the cost odeposits. Given the maturitymismatch on banks balance

sheets with deposits havingone and hal month maturityversus an average o one yearasset duration, the decline ininterest rates helped to improvethe Banks net interest marginin the past 2 years. Strongasset structure and high CAR(Capital Adequacy Ratio) dueto the close monitoring o therequlatory bodies, resultedin Turkeys banks being in asecure position in the nancialcrisis. Soundness o the Turkisheconomy and the nancesector has been proved duringthe nancial crisis, and thenancial sector has acted as thegrowth engine o the econo my.

Onthebackoftherecovery

in economic activity in 2010,infation has increased and isorecast to be 6.9% at year-end2011, above the target o 5.5% .The CBT has decreasedone-week repo rate (the policyrate) to a rare low o 6.25% inJune 2011.


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Additionally,thefactthat

maturities o liabilities areshorter than those o assetsin the Turkish banking sectorexposes the sector to liquidityand interest rate risk, whichincreases the sensitivity othe banking system to shocks.In this regard, starting romthe year 2011, the Turkishlira required reserve ratio,which is currently at 6%, isdierentiated according to the

maturity structure o depositsand set as higher or short-termmaturities and lower orlong-term maturities.

Inthisrespect,alowerinterest

rate, combined with higherrequired reserve ratios wouldserve as a more eectivepolicy mix. Moreover, withregard to policy measures to

enhance nancial stability,it will be useul to dierentiatethe required reserve ratiosor dierent maturities o TLdeposits in order to encouragelonger-term unding and towiden the scope o thereserve requirements.

Themainchallengeforthe

Turkish Banking Sector isthe decreasing interestmargins due to the rate

cuts by CBT. In a low interestrate environment, banks ocuson commission generation.Volume growth, expandinginsurance and assetmanagement businesses,and the introduction o newnancial instruments will bethe main trends in thisenvironment in the year 2011.

Incentives orForeign Investors

The Turkish governmentprovides investment incentives so-called State Aid in orderto eliminate inter-regionaleconomic imbalances, toacilitate a larger capitalcontribution by the public andoreign investors to the capitalbuild-up o the country and alsoto support activities that have a

positive eect on employment.The investment incentivesscheme is continuouslybeing amended to encourageinvestments in manuacturingand services, the energy sectorand exports. Local and oreigninvestors have equal access toinvestment incentives. Generallyspeaking, state aid can beclassied as either a tax or a

non-tax incentive. The principalprerequisite or benetingrom state aids is to obtain anInvestment Incentive Certicate(IIC) which is granted toinvestors or their investmentsby the Undersecretariat orthe Treasury.

Turkish investment incentivelegislation is ormed o threeseparate types o incentives:

1.General investmentincentive regime.2. Incentives or large-scale

investments.3.Region and sector-based

incentives.

The graph opposite illustratesthe FDI net infows o Turkeyaccording to the World Bank:

25,000,000,000

20,000,000,000

15,000,000,000

10,000,000,000

5,000,000,000

0

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

FDI net infows o Turkey


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The Turkish legal rameworkoers a level playing eld tooreign investors and domesticcompanies. Foreign ownershipis unrestricted, with no pre-entry screening requirements.Since 2003, oreign investmenthas been regulated in a moreliberalised manner underForeign Direct Investment LawNo.4875. Under this law oreigninvestors may reely start upbusinesses in company, branch

oce or liaison oce orms.Law No. 4875 has signicantlysimplied the establishmentprocess or all business orms.The incorporation process othese types o companies is asimple procedure and normallydoes not take more thanour weeks.

Companies established byoreign shareholders areentitled to all the rights availableto Turkish companies underthe Turkish Commercial Code(TCC). However, commercialactivities and/or ratio ooreign shareholding o suchcompanies, particularly thoseoperating in the civil aviation,maritime transport, media,etc. sectors are currentlyrestricted and acquisitiono ownership and/or limitedreal rights on real estate byreerred companies are subjectto pre-evaluation by therelevant authorities.

It should be noted that theTurkish Parliament has approvedthe New Turkish CommercialCode (the New TCC), on13/01/2011 and it has beenpublished in the Ocial Gazetteon 14 February 2011. The NewTCC has introduced variousdierent provisions and newlegal concepts to the existinglegislation. Although the NewTCC is to be entered into orceas o 12/07/2012, the signicant

changes introduced by this codein term o business ormationstructures have been pointedout in this section.

Business FormationStructures

Foreign investors that needto have a physical presencein Turkey may choose betweena company, branch and liaisonoce at the ormation stage.

Conducting business in TurkeyForms o business

Company

A company is an incorporatedentity with a legal statusseparate and distinct romits owners that allows it to sueand be sued in its own name.The TCC provides severalcompany structures in Turkey:joint stock companies, limitedliability companies, collectivecompanies, partnerships limitedby shares and cooperative

associations. The legaldierences between thosecompany structures mainlyconcern the allocation oliability and the legal ormo the entity. However, largelydue to the avourable positionconcerning the liabilities borneby shareholders, joint stockcompanies and limited liabilitycompanies are the corporatestructures in Turkey mostcommonly chosen by oreigninvestors, along with the otherbusiness setup orms o branchoces and liaison oces.

Two types o companies,namely joint stock companies(JSC) and limited liabilitycompanies (LLC), are thosein which shareholders arenot liable or the debtso the company in termso their personal assets.There are some basicdierences between thesetwo types o companies.


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Setting up a business

An LLC can be incorporatedby at least two individuals orcorporations and the numbero the shareholders cannotexceed 50, while a JSC canbe incorporated by at leastve individuals or corporations.A JSC can issue debentures,while a LLC is prohibited romdoing so. A JSC can go publicwhile a LLC cannot oer itsshares to the public. A statutoryauditor is required or a LLC,

only i and when it has morethan 20 partners, while it isrequired or a JSC regardlesso number o shareholders.

According to the New TCC,on the other hand, both JSCsand LLCs can be incorporatedby one individual or corporation.Furthermore, The New TCCoers a undamental systemchange with a reormistunderstanding and acontemporary evolution inthe auditing o JSCs and LLCs.

In this sense, instead o astatutory auditing mechanism,

independent auditing has beenestablished by the New TCC.In other words, JSCs andLLCs are vested with theobligation or their nancialstatements to be auditedby independent audit rmspursuant to International andTurkish Accounting Standards.It should be noted that auditunder the New TCCs system,as opposed to the current TCC,is not limited to the audit o asingle capital stock company;

it also includes the audit ogroups o companies. Moreover,an unaudited nancialstatement shall be legally nulland void as per the New TCC.

There is a legal provisionregarding the collection opublic receivables stating thati such receivables pertainingto the last ve years cannotbe collected rom LLCs, suchreceivables can be collected

rom the personal propertyo its shareholders in theratio o their share, whereasshareholders o JSCs do nothave any personal liabilityagainst debts o theircompanies.

It has been observed that,in some cases, having theorm o a JSC may haveadvantages when comparedto a LLC rom the commercialpractice perspective. Financialinstitutions usually nd theJSC structure more reliableand prestigious when theyare acting as creditors.

Furthermore, in certain tenders,ormation in the orm o JSCmight be required in order toqualiy as a b idder. Moreover,in certain elds o business(e.g. nance) it is obligatoryto use the JSC type.

Branch

A branch is a legal entityregistered with the TradeRegistry and representedby a representative/branchmanager. Even though a branchhas separate capital, whichis allocated by the head oce,it may not have a sep aratearticles o association andconsequently must act withinthe same eld o activity

as that o its head oce.Even though the branch isdependent on its head ocein internal relations, it mayact independently and tradein its own account in externalrelations. It is considered tohave separate tax personalitythan that o its head oce.

A branch should be representedby a representative/branchmanager with ull authority,who is residing in Turkey.To this end, either a Turkishcitizen or a oreigner who haswork and residence permitsmay be appointed branch

representative. However, therepresentatives o legal entitylicensees having ull authorityto manage and representthe entity have to be Turkishcitizens. Every branch shalluse the parent company nameby indicating that it is a branch.The branch model is morerequently used, especially inbanking, and in certain eldso business (e.g. brokerage,portolio management, etc.)it is not allowed.

Liaison Ofce

A liaison oce, oten alsocalled representative oce,is primarily established toprovide preparatory andauxiliary services. (i.e. gatheringinormation on the Turkisheconomy, customers, suppliersand competitors); perormingsurveys on markets andthe activities o distributors,agents or licensees; ollowing

developments and changesin the local regulations and(i necessary) lobbying;surveying the possibilityo establishing a branchor incorporation in Turkey,providing inormation relatingto the activities o the headoce and representing itsproducts to suppliers orcustomers as long as this doesnot constitute active solicitation,etc. or its head oce. It isprohibited rom carrying outany kind o commercialactivities in Turkey.

Liaison oces may not act or

prot, although they are entitledto employ liaison ocers andrent oce accommodation,their activities are curtailedwith certain limits. A liaison,oce cannot issue any invoicesand cannot negotiate contractswith potential customersin a binding manner onbehal o its head oce. Assuch, they are deemed ascommercial activities and/ora materially internal elemento a commercial activity.

Liaison oces are grantedoperation permits o threeyears at most. For extensions,successive extensions o amaximum o three years eachmay be granted by taking intoconsideration the activitieso previous years and plansand objectives or the uture.Liaison oces o banks areregulated by the BankingRegulation and SupervisionAgency (BRSA) and are subject

to special rules and reportingrequirements determinedby BRSA.

Registration Formalities

Company

In order to establish eithera JSC or LLC, all documentationregarding the incorporation shallbe notarised and translatedinto Turkish, the incorporationshall be registered beore theTrade Registry correspondingto the companys headquartersand registered beore thecorresponding Tax Oce

in order to obtain a taxnumber and thereore enablethe company to conductcommercial activities. TheForeign Investment Directorate(FID) shall be notied withrespect to the establishmento the company. The minimumcapital requirement or anLLC is TRY5,000 while aJSC shall be established withminimum capital o TRY50,000.Special rules apply or certainelds o business (e.g.banks, brokerage, portoliomanagement, insuranceleasing, nancing, assetmanagement companies, etc.).

The New TCC introducesadditional procedures orcompany establishmentprocedures. In this respect,a JSC or LLC shall be deemedas established when thearticles o association arenotarised. However, a JSCor LLC shall have a legalpersonality upon the registrationormalities realised beorethe Trade Registry.


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At this point, the New TCCregulates that the ounderso a JSC or a LLC shall preparea Founders Declaration inwhich they should declare theresources o companys capital,the reasons or such capitalresource subscriptions, materialundertakings given by thecompany and benets grantedto ounders. In addition to thisdeclaration, an audit report tobe issued by an auditor should

be provided by the oundersbeore the Trade Registryconcerning the establishmentprocedure. For medium- andsmall-sized JSCs that are notpublicly held, this report maybe issued by one sworn auditoror certied public accountant.

According to the New TCC,the minimum capitalrequirement or JSCs isregulated as TRY50,000.Furthermore, since the NewTCC enables the non-publiclyheld JSCs to have registeredcapital system, the initial capitalrequirement or such JSCs

is accepted as TRY100,000.Finally, the minimum capitalrequirement or LLCs isTRY10,000 as per theNew TCC.

Branch

In order to set up a brancho a oreign company in Turkey,the approval o the Ministryo Industry o Commerce othe Republic o Turkey (theMinistry) has to be obtained.Aterwards a registration

shall be made with the TradeRegistry, where the branchoce is located and the taxoce, as well. Furthermore,the FID shall be notied withrespect to the establishmento the branch oce, withina certain period. There is nominimum capital requirementor branches. In practice, headoces allocate a minimum oUS$1,000 as the branch capital.Special rules apply or certain

elds o business (e.g. banks).

Liaison Ofce

In order to realise the liaisonoce establishment, anapplication shall be madeto the FID. The establishmentpermit can be granted orup to a period o three yearsand can be extended at theexpiration. However, the FIDhas the right to terminate theestablishment permit o theliaison oce whenever anykind o breach o the legislationis ascertained. Applicationso oreign companies to

establish liaison oces, so asto operate in sectors subjectto special legislation, will beassessed by authorities andinstitutions authorised by therelated special legislation.For instance, BRSA rulesapply or banks which set orthcertain approval requirementsat the establishment stage.Ater the completion o theestablishment procedure, anapplication shall be made to therelevant tax oce. There is nooreign capital requirement inestablishing a liaison oce.

Ongoing fling requirements

Branches shall submit tothe FID the inormation antheir capital and operations,in accordance with the FDIOperations Data Form, on anannual basis, at the latest bythe end o May every year andinormation on the paymentsmade to their equity accounts,in accordance with the FDICapital Data Form, within one

month ollowing the payment.

According to the New TCC,the branch manager o aoreign entity shall announcein the Turkish Trade RegistryGazette the branchs nancialstatements, summaries othe nancial statements andannual reports belonging toits parent company and theholding company (i any), within6 months as o the relevantapprovals required as per thenational law applicable to theparent company are obtained.

Liaison oces shall send the

Data Form or Liaison OceActivities to the FID everyyear, at the latest by the endo May, so as to inorm theFID about their activities oprevious years. Documentscertiying that the previousyears expenses o the ocehave been covered by oreigncurrency transerred romabroad, have to be enclosedas well. Special lingrequirements apply or banks.

Repatriation o Proft

There is no restriction onTurkish subsidiaries repatriatingprots, except or certain legalreserve requirements and taxes.A branch may also repatriatethe prots to the parentcompany, subject to taxation.

Liability

Company

The directors o a LLC andthe members o the Boardo Directors (BoD) o a JSCare not personally liable orthe transactions and contractsconcluded on behal o thecompany. They shall be,however, jointly and severallyliable towards the company,shareholders and the creditorso the company i the paymentsmade by shareholders onaccount o the price o sharesare not exact or, the dividendsdistributed and paid arectitious or, the books to bekept in accordance with thelaw are non-existent or kept

irregularly or, the resolutionso the general meeting are notexecuted properly or, the otherduties incumbent on themin accordance with the lawor the articles o associationare not ullled intentionallyor through neglect.

In LLCs, the shareholdersare liable or public debts.A non-shareholder directoro a LLC is not personallyliable unless the public debtoccurs due to his ault. InJSCs the members o theBoD have the objectiveliability or public debtswhich means that it is theirobligation to prove that theyare not aulty or negligent, aswell as that the public debts

did not occur due to theirintentional ault or negligence(causality). This responsibilityo the members o the BoDis considered as a secondaryresponsibility which meansthat the government shoulddemand its receivables romthe company rst. I theycannot collect its receivablesrom the company, thenthe government wouldhave the right to demandits receivables rom themembers o the BoD. I themembers o the BoD pay thereceivables, although they arenot responsible or the public

debts, then they have theright o recourse againstthe company.

Although the circumstancesleading to liability or a BoDmember or a LLC directorare almost the same underthe New TCC, the severalliability o such persons areabolished and BoD membersand LLC partners are to beliable in proportion o theirault or negligence.

Branch and Liaison Ofce

The rights and liabilities arisingout o the activities o a branchoce/liaison oce belong tothe parent company. In general,the parent company will beliable towards third partiesor the transactions realisedby the branch/liaison ocein Turkey. In principle, in casethe branch/liaison ocerepresentative misuses his/

her authorities, the parentcompany would be responsibletowards a bona de third party.In case o tort, the branch/liaisonoce representative would bepersonally liable to third parties.


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Corporate Income Tax

Corporate income, as adjustedor exemptions and deductionsand including prior year losses(tax losses may be carriedorward or ve years butlosses may not be carriedback) is subject to corporateincome tax at a rate o 20%,irrespective o the legal orm(i.e. JSC, LLC, branch oce).

Dividend distributions toindividual and non-residentcorporate shareholders aresubject to withholding tax(WHT) at a rate o 15%.This rate may be reduced ororeign shareholders i a taxtreaty is present. Please notethat dividend distributions toresident entities and brancheso non-resident entities are notsubject to dividend WHT. Fornon-resident entities operatingin Turkey (i.e. branches,other type o permanentestablishments such aspermanent representatives/agents) WHT will only be

applicable on the portion o theprot that is transerred to theheadquarters/principal, in otherwords repatriated rom Turkey.The rate o WHT is 15% butcan be reduced by a tax treaty.

Corporate Residence

According to Turkish taxlegislation, corporate incometaxation diers signicantlybased on the taxpayersplace o residence. I boththe legal and the business

headquarters o a companyare located outside Turkey,the company is regarded as anon-resident entity. I either othem is located within Turkey,the company is regarded asa resident entity. Residententities are subject to taxon their worldwide income,whereas non-resident entitiesare taxed solely on the incomederived rom activitiesin Turkey.

Advance CorporateIncome Tax

Corporations are required topay advance corporate incometax based on their quarterlyprots at the rate o 20%.Advance corporate incometaxes paid during the tax yearare oset against the ultimatecorporate income tax liabilityo the company, which isdetermined in the related yearscorporate income tax return.The balance o advance tax canbe reunded or used to o setother tax liabilities.

Tax Returns

Resident and non-residententities having a permanentestablishment in Turkey areobliged to le annual corporateincome tax and quarterlyadvance corporate income taxreturns (on a calendar yearbasis unless permission to thecontrary is specically obtainedrom the Ministry o Finance).

Taxation in TurkeyCorporation Income Tax

The last date o submission othe corporate income tax returnis the 25th o the ourth monthollowing the scal year end.The advance tax return shouldbe submitted at the latest bythe 14th o the second monthollowing the quarter period.

Payment o Tax

Corporate income tax mustbe paid by 30 April o the year

o ling; taxable income isdeclared on a quarterly basisas advance tax on the 14th othe second month ollowingeach quarter, and is payable onthe 17th o the same period.Advance corporate tax paidis oset against the nalcorporate tax calculated in theannual tax return.

Legal Reserves

Under the Turkish CommercialCode, Turkish companies arerequired to set aside rst andsecond level legal reserves outo their prots. Please note that

a branch is not subject to thelegal reserve requirements.

First-levellegalreserves

Joint stock and limitedcompanies are required to setaside 5% o their net protseach year as a rst-level legalreserve. The ceiling on the rst-level legal reserves is 20% othe paid-up capital. The reserverequirement ends when the20% o paid-up capital levelhas been reached.

Second-levellegalreserves

The second-level reservescorrespond to 10% o protsactually distributed ater thededuction o the rst-level legalreserves and the minimumobligatory dividend pay-out(5% o the paid-up capital).Second-level legal reservesamount to approximately 1/11tho the prot to be distributed.There is no ceiling or secondlegal reserves and they are

accumulated every year.

According to the TurkishCommercial Code, i the legalreserves exceed 50% o thepaid-up capital, they shall beused to cover losses, maintainbusiness activities in the caseo poor business conditions,prevent unemployment oroset the negative eectso unemployment.

Calculation o CorporateIncome Tax Base

Deductibleexpenses

In principle, general expenses

incurred or the generation andmaintenance o commercialincome are allowed asdeductions or corporateincome tax purposes.

Deductible expenses, inter alia,include the ollowing:

Start-upcosts(thesecosts

are to be either expensed orcapitalised at the discretiono the taxpayer);

Previousyearslosses,provided

that they have not been carriedorward or more than veyears (on the condition thatloss corresponding to each yearis specied in the corporateincome tax return);

Allofthedonationsmadefor

construction o dormitories,nursery schools, rest homesand rehabilitation centres,subject to certain conditions;

Lossesincurredinforeign

jurisdictions (subject tocertain conditions);

Depreciationofxedassets;

Depreciationandexpenses

o company cars provided toemployees (Please note thatcompany cars are not subjectto income tax as they areclassied as ringe benetsto employees);

Socialsecuritycontributions;

Compensationpaidorlosses

incurred in line with contractsor court rulings, provided thatthey are related to thebusiness; and

Travelandaccommodation

expenses related to, andcommensurate with, thevolume o business.


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In addition to the interest paidor accrued, oreign exchangelosses and other similarexpenses calculated overthe loans that are consideredas thin capital are treated asnon-deductible or corporateincome tax purposes. Theinterest paid or accrued andsimilar payments on thin capitalare reclassied at the endo the relevant scal year asdividend distributed rom the

perspective o the borrowerand as dividend received romthe perspective o the len der,and as repatriated prot ornon-resident taxpayers.

TransferPricing

Corporate income tax lawincludes transer pricingregulations which are adoptedrom the OECDs guidelines.I a taxpayer enters intotransactions regarding thesale or purchase o goods andservices with related parties,in which prices are not set inaccordance with the armslength principle, the related

prots are considered to bedistributed in a disguisedmanner through transerpricing. Such disguised protdistributions through transerpricing are not accepted as tax-deductible or corporate incometax purposes. The methodsprescribed in the law are thetraditional transaction methodsdescribed in the OECDstranser pricing guidelines.

Anti-Tax Haven Provisions

All sorts o payments madeto corporations (includingbranches o residentcorporations) that areestablished or operational incountries which are regardedby the Turkish Council oMinisters to undermine airtax competition due to taxand other practices, may besubject to taxation in Turkey

at a rate o 30% irrespectiveo whether the payments inquestion are subject to tax ornot, or the corporation receivingthe payment is a taxpayer ornot. However, there are certainexemptions. Moreover, aso today, the Turkish Councilo Ministers has not yetdetermined which countriesreceiving payments shall beconsidered as tax havens.

Treatment o GroupCompanies Entities

Consolidation o the accountso group companies entities

or tax purposes is not allowedin Turkey, since each companyentity is regarded as a separatetaxpayer unit or tax purposesin Turkey.

Controlled ForeignCorporation Rules

Corporations establishedabroad and controlled directlyor indirectly 50% or more bytax-resident companies andreal persons by means oseparate or joint participation

in the capital or dividends orvoting rights are consideredto be CFCs, provided that theconditions below are ullled:

25%ormoreofthegross

revenue o the oreignsubsidiary must be composedo passive income;

TheCFCmustbesubjecttoan

eective income tax rate lowerthan 10% or its commercial

prot in its home country; andGrossrevenueoftheCFC

must exceed the equivalento TRY100,000 in a oreigncurrency in the related period.

The CFCs prorated protwould be included in thecorporate income tax baseo the controlling residentcorporation at the rate o theshares controlled, irrespectiveo whether it is distributed ornot, in the scal period coveringthe month o closing o theaccording o CFC.

The Control rate is consideredas the highest rate owned inthe related scal period.

The CFCs prot that hasalready been taxed in Turkeyas per this article will not besubject to additional tax inTurkey in the event o dividenddistribution; whereas theportion o the prot distributedthat had not been previouslytaxed in Turkey will be subjectto taxation.

Non-deductibleexpenses

In general, non-deductible itemsare limited to those types oexpenditures that either cannotbe properly documented orthat are regarded as abuses inrespect to business-relatedor business-promoting criteria(e.g., excessive entertainment,representation and travelexpenses). Needless to say,disallowable expenses increasethe corporate income tax

burden o companies since suchexpenses are not eligible ordeduction rom the corporateincome tax base. Disallowableexpenses, inter alia, can belisted as ollows:

Interests,foreignexchange

losses and other nancialexpenses on capital and on loansthat are regarded as thin capital;

Finesandpenaltiesandother

indemnities arising rom thebreach o the tax laws;

Legalreserves;

Donationstofoundations(that are granted a taxexemption by the Council oMinisters) or to governmentinstitutions exceeding 5%o corporate prot;

Expensesrecordedthrough

severance pay provisions(Severance pay shall beaccepted as tax deductibleonly when actual paymentsare made to employees);

Theportionofexpenses

incurred that is consideredbeing in violation o transerpricing regulations; and

Theportionofexpenses

incurred that is consideredbeing in violation o thincapitalisation rules.

Depreciation methods

Fixed assets acquired ater

1 January 2004, are subject todepreciation over rates to bedetermined by the Ministry oFinance, based on their useullie. Note that rates announceddier rom 2% to 33%. Fixedassets acquired beore1 January 2004 are depreciatedunder the previous rules, inwhich the maximum rateapplicable was 20% per year.

Depreciation may be calculatedby applying either the straight-line or declining-balancemethod, at the discretion o thetaxpayer. All tangibles, exceptor land, and intangible assets

are depreciable over a minimumo ve years. Under the previousrules, buildings were anexception and were depreciatedat a rate o between 2% and10% per year, over a minimumo ten or ty years, dependingon the type o building.

Generally, assets are consideredto be placed in service whenthey are capitalised and readyor use. The applicable rateor declining-balance methodis twice the rate o straight-

line method. However, themaximum applicable rate ordeclining-balance method is50%. On the other hand thedeclining balance methodcannot be used or someitems. For example, goodwill isdepreciated within ve years inequal instalments and leaseholdimprovements are depreciatedover the rental period at afat rate.

Related-party Transactions

In principle, transactionsbetween related parties mustbe carried out on an armslength basis. There are specicrules in this respect in Turkishtax legislation, as explained indetailed below.

ThinCapitalisation

According to the thincapitalisation regulation,i the ratio o the borrowingsrom shareholders or rompersons related to theshareholders exceeds threetimes the shareholders equity

o the borrower company atany time within the relevantyear, the exceeding portiono the borrowing will beconsidered as thin capital.Excluding loans receivedrom credit institutions thatprovide loans only to theirrelated companies, the loansreceived rom related banksand similar institutions alonewill not be considered thincapital until the amount o theborrowing exceeds 6 timesthe shareholders equity.


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Taxes that the CFC pays overits prot in the related oreigncountry will be oset rom thetax calculated or the sameincome in Turkey.

Tax incentives

The major corporate incometax incentives available areas ollows:

Participationexemption

fordividends There is an unconditionalcorporate tax and dividendWHT exemption or dividendincome that the Turkish residentcompany and/or Turkishpermanent establishment oa oreign company receivesrom another Turkish residentcompany, except investmentunds and companies. Ia Turkish company has ashareholding in a oreigncompany, dividend income canbe exempted rom corporateincome tax but subject tocertain pre-conditions.

Capitalgainsexemption A corporate tax exemption is

applicable or 75% capital gainsgenerated rom the sale oparticipation shares in a Turkishresident company, and/or realproperty that is held or at leasttwo years, as long as suchexempted gain is reserved inspecial reserve account withinthe equity and not distributedor ve years. 100% o capitalgains rom the sale o oreignparticipation shares by an

In general, activities suchas manuacturing, storage,packing, general trading,banking, and insurance andtrade, may be perormed inTurkish ree trade zones.Goods moving betweenTurkey and the zones aretreated, or all purposes, asexports or imports. However,operations within the zonesare subject to the supervisiono the zone management (and

customs authorities), to whomregular activity reports mustbe submitted. Consequently,there is a requirement orzone users to maintain ullaccounting records (in Turkish)with respect to their activities.These accounting requirementsextend to inventory records.Customs duty is levied on anyunexplained inventory lossesas though the goods had beenimported into the country.

The right to operate in aree zone is conerred by anoperating licence obtainedrom the Undersecretariat or

Foreign Trade, which reviewsthe application or conormitywith the objectives andtypes o activity speciedby the Economic AairsCoordination Council.

Research and development(R&D) activities

In the last decade, the TurkishParliament has enactedseveral regulations to provideincentives or research and

international Turkish holdingcompany can also be exemptedrom corporate income taxexemption, but subjectto certain pre-conditions.

Investment incentives

The Turkish governmentprovides investment incentives(state aids) to eliminate inter-regional economic imbalance,acilitate a larger capital

contribution by public andoreign investors to the capitalbuild-up o the country andsupport activities that have apositive eect on employment.Generally speaking, state aidcan be classied as either atax or a non-tax incentive.

The principal prerequisiteor beneting rom stateaid, except the investmentallowance, is to obtain anInvestment IncentiveCerticate (IIC). The IICis a document granted toinvestors or their investmentsby the Undersecretariat or

the Treasury. It allows utilisationo the said benets. The importo machinery and equipment(excluding raw materials,intermediate and operatingproducts) is exempt romcustoms duty and ResourceUtilisation Support Fund (RUSF)payments. In addition, a VATexemption is also applicableon the importation o eligiblemachinery and equipment.According to investmentincentive legislation, in order

development (R&D) activitiesin Turkey. The three primaryR&D incentives includesignicant advantages grantedto investors planning R&Dactivities in science, sotwareand technology in specialzones known as techno-parks, cash subsidies romthe Scientic and TechnologicalResearch Council o Turkey(TB TAK) and corporate taxdeductions. In April 2008, a

new R&D law was enactedto broaden incentives. Oneo the objectives o the lawis to attract oreign investorswith signicant R&D activitiesabroad to invest in Turkey,by enabling non-residentcompanies with a subsidiaryor branch in Turkey to benetrom R&D tax incentives.The main incentives introducedby the new R&D law were:

R&D deduction

All eligible innovation andR&D expenditures made intechnology centres or R&D

centres, which must employat least 50 ull-time equivalentR&D personnel, or R&D andinnovation projects supportedby oundations establishedby law or international undscan be deducted rom thecorporate income tax baseat a rate o 100%. The sameexpenditures can also becapitalised and expensedthrough amortisation over veyears in the case o successulprojects, whereas the R&D

to obtain an IIC, the minimumamount o total investmentshould be at least TRY1,000,000.(For the investments in someless developed areas minimumamount o total investmentshould be at least TRY 500,000.)

The advantages o an IIC canbe summarised as exemptionrom customs duty, RUSFand VAT.

On the other hand, rom anincome tax perspective, thelegislation related to investmentincentives has changedsubstantially.

There are six maincomponents o the newinvestment regulation:

1. Reduced corporate tax rate.2. VAT exemption.3. Exemption or social

security premium(employers portion).

4. Customs duty exemption.5. Interest support.6. Allocation o land or

investments.

Free trade zone

Free trade zones are specialsites that lie geographicallywithin the country, but aredeemed to be outside thecustoms territory. In theseregions, the normal regulationsrelated to oreign trade andother nancial and economicareas are either inapplicable,partly applicable or supersededby new regulations.

expenditure on ailed projectscan be expensed immediately.

Companies with separate R&Dcentres employing more than500 R&D personnel can, inaddition to the aorementioneddeduction, deduct hal o anyincrease in R&D expendituresover similar money spent in theprevious period.

Any unutilised R&D deduction

can be carried orward oran unlimited period o time,indexed to the revaluation rate,which is an approximation othe infation rate.

Income tax exemption

80% o the salary incomeo eligible R&D and supportpersonnel is exempt romincome tax. However, thisrate is increased to 90%or personnel with adoctorate degree.

Social security premium support

The Ministry o Finance willpay hal the employer portiono social security premiumsor R&D and support personnelor ve years.

Stamp tax (stamp duty) exemption

Documents prepared in relationto R&D activities are exemptrom stamp tax.


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Exemptions

Income generated rom theollowing transactions isexempt rom BITT, such as:

Incomegeneratedfromthe

transactions carried out byTurkish resident banks withtheir branch oces or agentsand the transactions carriedout in between those branchoces and agents;

Incomegeneratedfromthe transactions carried out inbetween Turkish branch ocesor agents o non-resident banks;

Couponandinterestincomeof

tax exempt bonds and bills;

Thecashobtainedbythe

bank rom its client and totallytranserred to a third-partyservice provider or the purposeo making a service eepayment on behal o the client;

Thedividendsobtainedby

banks, insurance companies

and bankers rom theirindustrial subsidiaries;

Theportionofdividends

obtained by banks, insurancecompanies and bankers romtheir subsidiaries, which alsoqualiy as bank, banker orinsurance company, arisingrom the transactions overwhich BITT has alreadybeen calculated;

Feescalculatedbasedon

export transportation and lieinsurance policies, agriculturalinsurance policies orun-harvested agriculturalproducts, cattle and herd andnuclear risk insurance policies;

Thecommissions,premiums

and analogous ees obtainedor transactions regardingreassurance andretrocession; and

Theincomegeneratedfrom

arbitrage transactions andtrading income generated bybanks and nancial companiesoperating in Turkey on derivativecontracts perormed in theTurkish exchange markets.

Declaration and Paymento BITT

Taxpayers must le and submittheir returns to the local taxoce within 15 days o the endo each month. BITT paymentsare made at the same date asthe submission o tax returns

to the relevant tax oce.

Resource Utilisation SupportFund (RUSF)

The loans provided by banksand consumer nancingcompanies operating in Turkeyand by overseas companiesare subject to the RUSF lev y.

The RUSF rates applicableto loans are as ollows:

forloansprovidedbyTurkish

Banks and nancial institutions

15% or consumer loans(only to real persons ornon-commercial purposes)

0% or other loans;fortheloansobtainedby

Turkish banks and nancialinstitutions rom abroad 0%;

fortheloansobtainedfrom

oreign companies 3%; and

forimportpayments(via

acceptance credit, deerredpayment letter o credit orcash against goods) 3%.

I the loan is denominated inTRY, RUSF, is calculated overthe interest amount. RUSF iscalculated over the principali the loan is denominated ina oreign currency

Please note that certain loantransactions are exempt romRUSF, such as oreign currencyloans obtained by Turkishresidents rom abroad with anaverage maturity o more thanone year.

Being considered as atransaction tax, BITT is onlyapplicable on the incomegenerated rom transactions.To this end, the generallyaccepted principle is thatincome that is not generatedrom a transaction, such asevaluation income, is notsubject to BITT. Furthermore,as BITT is applied on a pertransaction basis, netting oincome and loss rom dierent

transactions is not permissible.BITT applies at the time oaccrual regardless o theact that income (e.g. ee orinterest) is actually received.

Rates

The current rate o BITT is5% in general. However, theapplicable rate o BITT is1% or:

theincomearisingfromthe

deposit transactions betweenbanks and stock exchangemoney market transactions;

incomederivedfromrepoand reverse-repo transactionsand the sale o Treasury Bills,Government Bonds, indexedbonds and Turkish corporatebonds issued and sold in Turkeyprior to their maturity.

(BITT) regardless o thenature o the transaction.Likewise, the income generatedby insurance companies romboth insurance and non-insurance activities is alsosubject to BITT. Their incomerom nancial leasing underthe Financial Leasing Law isnot subject to BITT. On theother hand, the transactionalincome generated by bankers

operating in Turkey is subjectto BITT but only i it arisesrom nancing and/or nancialintermediation services (e.g.interest income o consumernance companies, brokerageees o brokerage houses).Thus, income generated romnon-nancial activities o thebankers, such as gains romdisposal o assets is not subjectto BITT. Their non-nancialtransactions may be subjectto VAT.

Withholding Taxes

There is no withholding taxon payments to residentcorporations by other residentcorporations, except or a 3%withholding tax on progresspayments to contractors, bothdomestic and oreign, withinthe scope o constructionwork spanning more thanone calendar year.

The local WHT rates are

as per the table above:

Banking and InsuranceTransactions Tax (BITT)

GeneralInformation In Turkey banks and insurance

companies are exempted romVAT. However, the incomegenerated by banks rom bothbanking and non-bankingactivities is subject to Bankingand Insurance Transactions Tax

Income derived by non-resident individual/

company without a PE in Turkey%

Rental rom immovable assets 20

Leasing o goods (within the scope o the conditions

regulated under Turkish Financial Leasing Law No. 3226)1

R oyalt ies ( e.g . on patent s, copy right s, licence , e tc .) 20

Proessional services 20

Premium services 5

Interest on loan arrangements 10

Interest income derived rom time deposits 15

Reverse-repo income 15

Wages and salaries 15-35


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Employers Obligations

In accordance with the existingregulations, Turkish residentemployers have a withholdingresponsibility in respect o thecompensation and benets thatthey provide to the employees.Accordingly, the income tax,social contributions and thestamp duty on the salarypayments must all be withheldon a monthly basis and paid

over to the relevant authoritiesby the employer, on behal othe employees.

Social Security Premiums

In principle, all individuals whowork in Turkey are required tobe covered by Turkish socialsecurity. On the other hand,since social contributions arecalculated over the gross salary(subject to a cap, at 15% orthe employee and 21.5% orthe employer. The cap currentlyapplies as TRY5,177.40 permonth between 1 January2011 and 30 June 2011, and

TRY5,440.50 per monthbetween 1 July 2011 and31 December 2011) on thelocal payroll, in practice, onlyindividuals who are paid ortaxed via a local payroll aresubject to these contributions.

However, oreign nationalswho are citizens o a countrywith which Turkey has signeda totalisation agreement (suchas the UK, Denmark, Germany,France, the Netherlands, etc.)can be exempted rom theTurkish social security scheme,i they remain covered bytheir home country schemesduring the Turkish assignmentand providing that they canpresent evidence by obtaining

a certicate o coverage romthe relevant authorities in theirhome countries.

Stamp Duty

Stamp duty currently appliesat the rate o 0.66% over thegross salary or individualsreceiving their income roma local payroll. For individualsling tax returns, this dutyis replaced with xed lingees currently amounting toTRY30.00.

Tax Residency

Liability to Turkish individualtaxation is based on thestatus o residency. Residentindividuals are deemed as ulltaxpayers and they are taxableon their worldwide income.Non-residents, on the otherhand, are classied as limitedtaxpayers and liable to Turkishtax only on their Turkishsource earnings.

As per Turkish Income Tax Law,an individual will be deemed astax resident:

iftheystayinTurkey

continuously or more thansix months in a calendar year(temporary departures are notconsidered as interruption); or

iftheirlegalresidenceis in Turkey.

I a oreign national meetseither o the two conditionsmentioned above, he wouldbe considered as tax resident

in Turkey.

The only exception to theaorementioned residency rule,provided under the same law,is or oreign nationals whostay in Turkey or more thansix months exclusively or theullment o a specic andtemporary assignment.

Tax Rates

There are two issued incometax taris, one or employmentincome and another or otherincome, which are subject toincome tax.

Administration o the regime

Not every employee orindividual is required to lea tax return in Turkey. Based

on the tax residency status,the salary payment structureo the employee as well asthe types, sources andamounts o his/her personalincome (under separatecombinations) or the year,it can be determinedthat theindividual is not required toreport their employment orpersonal income.

For individuals who would berequired to le a tax return, theannual Turkish tax return or theincome generated during eachcalendar year is due by25 March o the ollowing year

and the tax is payable in twoequal instalments in Marchand July.

Personal Income Tax

Legal residence: In the Turkish civil code, legal residence is dened as t he place whereone lives, with the intention o settling down. However, there is no guidance on howsuch intention is to be measured, nor are there any relevant rulings on the issue. Webelieve that i a oreign national purchases a home in Turkey and lives together withtheir amily, this could be considered as intention o settling down. Then again, eachindividuals status should be analysed based on a broader perspective o all theirpersonal circumstances beore an opinion could be ormed in this respect.

Taxable

income overNot over

Tax on loweramount

Percentageon excess

0 TRY9,400 0 15%

TRY9,400 TRY23,000 TRY1,410 20%

TRY23,000 TRY53,000 TRY4,130 27%

TRY53,000 And above TRY12,230 35%

Taxable

income overNot over

Tax on loweramount

Percentageon excess

0 TRY9,400 0 15%

TRY9,400 TRY23,000 TRY1,410 20%

TRY23,000 TRY80,000 TRY4,130 27%

TRY80,000 And above TRY19,520 35%

The tax rates and bracketsapplicable or personal incomeapart rom employment incomeearned in calendar year 2011are as ollows:

The tax rates and bracketsapplicable or employmentincome earned in calendaryear 2011 are as ollows:


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Capital duty

No duty is applied on sharecapital. However, there is acompulsory contribution tothe Competition Board equalto 0.04% o the capital amountcommitted when the companyis established. In the case osubsequent increases in capital,this 0.04% levy is applied onthe increased amount.

Stamp tax

Documents within the scopeo stamp tax are paperswhich are legally valid andexercisable, bearing a signature(or a sign replacing signature,or electronic signature) andprepared or the purpose oproving any legal subject. Inthis sense, stamp tax appliesto a wide range o documentsincluding written agreements.

Stamp tax rate on thetaxable papers is 0.825%,with an exception that thelease agreements are taxed

at 0.125%. Stamp tax iscalculated on the highestvalue stated or calculablerom the taxable paper oron the maximum amountstated on the paper. Thereis a cap o TRY1,251,383.40per agreement or 2011.

The Turkish tax system leviesvalue added tax on the supplyand the importation o goodsand services. The Turkish nameor Value Added Tax is KatmaDeger Vergisi, abbreviatedto KDV.

Liability or VAT arises:a When a person or entity

perorms commercial,industrial, agricultural orindependent proessional

activities within Turkey; andb When goods or services areimported into Turkey.

VAT is levied at each stageo the production and thedistribution process. Althoughliability or the tax alls on theperson who supplies or importsthe goods or services, the realburden o VAT is borne by thenal consumer. This result isachieved by a tax-credit methodwhere the computation o theVAT liability is based on thedierence between the VATliability o a person on his sales(output VAT) and the amount o

VAT he has already paid on hispurchases (input VAT).

VAT Registration

Any person or entity engagedin an activity within the scopeo the VAT Law must notiythe local tax oce where hisplace o business is located.I there is more than one placeo business, registration isperormed at the tax oce

that is authorised with respectto individual or corporateincome tax.

Please note that there is nosingle VAT registrationapproach in Turkey becauseit is not possible to registeronly or VAT purposes in Turkey.In order to register or VATpurposes, a oreign companyshould have a permanentestablishment (PE) in Turkey

and be obliged to register orall tax purposes (i.e. VAT,corporate income tax,withholding tax and stamp duty,etc.) to a tax oce in Turkey.

Tax Rates

The Turkish VAT systememploys multiple rates andthe Council o Ministers isauthorised to change the VATrates within certain limits.

Standard rate

The standard rate o VAT ontaxable transactions is set at10% in the VAT Law, but this

rate was increased to 18% aso 15 May 2001.

Reduced rates

For the deliveries and servicesmentioned in List No.1, 1%(e.g. agricultural products suchas raw cotton, dried hazelnutsand etc). For the deliveries andservices mentioned in List No.2,8% (e.g. basic ood stus,books and similar publications).

Exemptions

There are two basic orms oexemption under the TurkishVAT Law:

Exemption without credit

for previously paid VAT

In this orm, the input VATcannot be deducted orreclaimed but can only berecorded as a cost or an

expense. Transactions thatare subject to exemptionwithout credit or previouslypaid VAT are the supplyo goods and services orcultural, educational,recreational, scientic, socialand military objectives andcertain other categories.

Exemption with credit for

previously paid VAT

Certain transactions are nottaxable and at the same timethe taxpayer has the right toclaim a credit and a reund. Thismechanism operates under the

name exemption with creditor previously paid VAT and isissued principally or exports.

VAT Other Taxes


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All banks that operate in Turkeyare regulated and supervisedby the BRSA. According toBRSA regulations, banks mustbe audited by an independentaudit company and prepare anIndependent Audit Report ona quarterly basis. The totalperiod an independent auditorcan audit a Bank is eightsuccessive years with a cool-operiod o three years.

Entities that are quoted on theIstanbul Stock Exchange areregulated and supervised bythe Capital Markets Board(CMB). According to CMBregulations, quoted entitiesmust be audited by anindependent audit company andprepare an Independent AuditReport on a hal-yearly basis.The total period an independentauditor can audit a quotedentity is seven successiveyears with a cool-o period othree years (one-year cool-operiod or those audit rmsmeeting specied criteria).

Banks are required to presentquarterly nancial statementsaudited by an independentaudit rm according to TurkishFinancial Reporting Standards(which is almost the same asIFRS) and BRSA Regulationson Independent Audit. Quotedentities are required to presenthal-yearly nancial statementsaudited by an independentaudit rm according to TurkishFinancial Reporting Standardsand CMB regulations.

Non-quoted entities are notbound to prepare and issueTFRS nancial statements.Such entities generally keeptheir accounts in accordancewith Tax Procedures Law.However, with the New TCC,which will be in orce as o1 July 2011, preparing thenancial statements as per theTFRS and having independentaudit are dened as mandatoryapplications or all the entitiesregardless o whether they arequoted entities or not.

Banks must le their accountsaccording to the Uniorm Charto Accounts issued by theBRSA. Quoted entities must letheir accounts in accordancewith TFRS. An IndependentAudit Report or a bank or aquoted entity must be preparedaccording to the denedstructure o Turkish FinancialReporting Standards (TFRS).There is no such requirementor non-quoted entities.

Quarterly audited/reviewednancial statements o theBanks operating i n Turkey areposted on the BRSA website.Financial statements o theBanks and other entities quotedon the Istanbul Stock Exchange(ISE) are also publicly availableon the Public DisclosurePlatorm (www.kap.gov.tr).

Banks and quoted entities areobliged to pay miscellaneousees to regulatory bodies(e.g. BRSA, Capital MarketsBoard (CMB), Central Bank,etc.) depending on the natureo ling.

Accounts o banks and quotedentities need to be produced inTurkish Accounting Standardsand Turkish Financial ReportingStandards which are localversion o IAS and IFRS. Thereis no such requirement or non-quoted entities.

According to Banking Lawand also CMB regulations,maintaining local books and

records is a requirement andbooks and records need tobe maintained in the Turkishlanguage and in Turkish lira.

Audit and accountancy


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However, i the employmentrelationship is established oran indenite period, then thewritten employment contractbecomes obligatory one yearater the commencement othe relationship.

Under all circumstances,the employer, as a minimum,should provide the employeewith a sheet o workingconditions in writing thatspecies the ollowing details:

i.names and residenceaddresses o the employerand employee,

ii.date employment began,iii.salary and the ull benet

package granted,iv.hours o work, holiday pay

and entitlement, time o orsickness and pay, i they aredierent than regulated bythe TLL,

v. job title and job description,vi.whether the employment

relationship includes aprobationary period or not.

An employee is also entitledto receive a payslip with eachpayment o wages or salary.

Working Hours

In general, the duration owork may be a maximum o 45hours per week. This is appliedequally to the working days othe week. However, with theapproval o both parties, thenormal working hours maybe distributed unevenly overworking days provided that

The break periods shownopposite are the minimumentitlement, and should begiven without interruption.The break hours are notincluded in the working hours.

Annual Vacation

Employees shall be granted paidannual vacation or the periodsindicated below, i they haveworked or at least one year,including the probationary period.

Paid annual vacation maynot be less than 20 days oremployees 18 years o ageor younger and 50 years oage or older. These periods

may be increased byemployment contracts.

Maternity Leave

Pursuant to the TLL, emaleemployees are entitled totake maternity leave or aperiod o 16 weeks, i.e. eightweeks beore and eight weeksater giving birth. Upon theirrequest and subject to do ctorsapproval, emale employeesmay work until three weeksbeore giving birth.

the daily working hours do notexceed eleven hours on anyone working day.

Overtime

Pursuant to the TLL, overtimeis permitted over and above theworking hours xed by law, orreasons such as national interestor the particular requirementso the work or or increasingproduction. Overtime is denedin the TLL as the working hoursthat exceed 45 hours in a week.The approval o the employeeshould be obtained or overtime.In no event may the total periodo overtime in a year exceed270 hours.

In general, overtime paymentis calculated as the normalhourly rate plus 50%. Insteado getting extra payment, theemployee has the right to getree time, the amount o whichis set orth within the provisionso the TLL.

Break Hours

Towards the middle o theworking hours and accordingto local custom and workingrequirements, employees areentitled to a break o:

Human Resourcesand Employment Law

Employment relationships areregulated by the Turkish LabourLaw No.4857 (TLL).

The provisions o the TLLrule the general termsand conditions as well asthe statutory issues o anemployment relationship.

Moreover, besides the generalterms regulated by the TLL,the employment contract isthe most important tool oan employment relationshipeither by re-dening thegeneral terms o the TLLor by speciying the privateconditions o the relationship.

Employment Contracts

Employment contracts shouldbe in line with the TLL andshould not include provisionsagainst the undamental ruleso the TLL.

There are dierent typeso employment contractsregulated by the TLL. They are:

i.Employment contract witha denite period.

ii.Employment contract withan indenite period.

iii.Employment contract orpart-time employment.

I the employment contractis made or a denite periodor or a part-time employment,then it must be written assuch rom the beginning othe commencement o theemployment relationship.

I necessary, these periods maybe extended depending on thehealth o the employee and thespecial requirements o the job,subject to a medical report.

Female employees may, upontheir request, be granted unpaidleave or a period o up to sixmonths ollowing the 16-weekmaternity leave period. Thisperiod shall not be taken intoaccount in the calculation opaid annual vacation.

In addition, until the childreaches the age o one, theemale employee is entitledto one and a hal hours a dayor eeding.

Minimum Wage

For the period between1 July 2011 31 December2011, the minimum wage isgross TRY837,00 or employeeswho are older than 16.

Legal Holidays

29 October (Republic Day) is anational holiday and the holidaystarts on 28 October at 13:00.

23 April (National SovereigntyDay), 19 May (Youth Day) and30 August (Victory Day) arepublic holidays.

Festival o Ramadan (3.5 days)and the Festival o the Sacrice(4.5 days) are religious holidays.Every year the dates o theseholidays change according tothe Hegira Calendar.

1 January is the NewYear holiday.

1 May is Labour Day.

One day o the week should begiven to employees as holiday.

As per the Turkish Labour L aw,one weeks illness is legallyconsidered to be within worktime and, although not worked,this time shall be counted aswork days. In this case, theemployee should submit adoctors report to the employer.

Employees are also entitledto have 3 days paid leave ormarriage and in the case o theuneral o rst degree relatives.

Recruitment

Turkey is a large countryand there is a dierencebetween the geographicalregions in terms o the labourmarket. For the recruitmentprocess, most companies workwith the recruitment rms that

know the market and havea candidate pool.

Immigration PermitRequirements

Foreign national individuals tobe employed in Turkey needwork and residence permits inorder to be eligible to work andreside in Turkey.

Total Working

Hours a Day

Break Hours

(by minutes)

4 or less 15

4 to 7.5 (incl.) 30

More than 7.5 60

Length o

services

Holiday

Period (days)

1 to 5 years(incl.)

14

5 to 15 years 20

15 years andover

26


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conerences or the careerdevelopment o its members etc.

Termination o employmentor redundancy

As per Article 18 o the TLL,termination o the employmentcontract o an employee havingat least 6 months service withthe employer in a workplaceoperating with 30 or moreemployees should be basedon a valid reason relating toeciency or behaviour othe employee, or therequirements o the enterprise,workplace or the work. In suchtermination, severance andnotication payments are madeto the employee.

However, even being ully paidwith his/her legal rights, theemployee whose contract isterminated has the right to lea lawsuit against the employerwithin 1 month as o the dateo notication or termination othe contract i the reasons ortermination are not dened in the

notication or the employee is othe opinion that the consideredreason is invalid.

I the court decided thatthe termination is invalid orgroundless, the employeris obliged to re-employ theemployee within 1 month.The employer is obliged to paycompensation to the employeecorresponding to at least4 months salary, at most8 months salary, i he ails tore-employ the employee within

one month ater his/herapplication. The court shalldetermine the amount o suchcompensation. The salary andall other rights o the employeecovering at most 4 months ispaid to the employee or theperiod discontinued to work untilthe nal judgment o the courtis received. This amount is paidto the employee whether or notthe employer re-employs theemployee or not.

Severance Payment

In cases where theemployment contract o anemployee is terminated ater atleast one year by the employeror reasons other than caseswhich are incompatible withmorals and goodwill and similarcircumstances, the employershall pay the employee aseverance payment at therate o 30 days wages oreach ull year since the dateo employment. Payment shallbe made pro rata or a portiono a year.

Calculation o severance payshall be made based on thelatest salary drawn. However,the ceiling limit or severancepay is TRY2,731.85 or the rsthal o 2011.

Notifcation Payment

Pursuant to Article 17 othe TLL, both the employeeand employer are entitledto terminate employmentcontracts or an indeniteperiod by observing theollowing minimumnotication periods,depending upon the lengtho service o the employee.

The employer may terminatethe contract o the employeeby paying in advance thesalary o the employeecorresponding to the periodo notice. Any party ailing toull notication obligation is topay compensation, equivalentto the wage corresponding tonotication period.

Benefts

In Turkey, all benets apartrom the ones listed in theTLL are voluntary, and thebelow-listed ones are the mostcommon benets in practice;

Lunch.

Transportation.

Private Health InsurancePrivate Lie Insurance

and Pension.

Company car and phoneor managerial sta.

Stock option plans.

Private pension plans.

As per the recentannouncements o the workpermit authority, work permitapplications are to be nalisedwithin one month. This beingsaid, these newly introduceddurations are yet to be tested.

Due to the act that proessionalservices such as engineering,city planning and architectureare careully regulated, thework permit applications ororeign nationals holding oneo these degrees dier rom theregular work permit applicationsand take up to a year. As perthe recent changes in theimmigration legislation, suchindividuals might be grantedwith a pre-approval to work.

The ollowing evaluationcriteria or the work permitapplications have recentlybeen determined by theMinistry o Labour as ollows:

a local employment quota isintroduced (ve localemployees per oreign national);

a certain minimum amounto paid-in capital or gross salesor exports gures will need tobe met;

minimum salary levels rangingbetween T RY1,140.75 andTRY4,943.25 (to be revised inJanuary 2011) must be paid tooreign national employees; and

i the oreign individual is to bethe shareholder o the company,a requirement or a certain

minimum share and amounto capital share must be met.

Role o unions/collectivebargaining, etc.

According to the Union Law(UL), all employees workingunder an employmentagreement and aged 16 orabove are eligible to becomea member o a labour union.The employees below the ageo 16 can become a member oa labour union provided that thewritten consents o their legalrepresentatives are obtained.

As explicitly set orth in theUL, individuals are ree tobecome members o a labourunion. It is urther stated thatno one shall be orced tobecome or not to becomea member o a trade union.

According to Article 12 othe Collective BargainingAgreement, Strike andLockout Law, labour unionshave the right to sign collective

bargaining agreements withemployers provided that morethan hal o the total numbero the employees o thatemployer are members othe labour union.

As per Article 33 o the UL,labour unions are entitled toprovide certain benets andsupport to their memberssuch as legal aid or retirement,establishing library andsport grounds or the use othe employees, organising

Length o the

Employment

Notice

Period

Less than6 months

2 weeks

6 -18 mo nths 4 weeks

18 months-3 years

6 weeks

More than3 years

8 weeks


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Turkey has great strength inTrade due to its geographiclocation. Turkey has takenadvantage o a customs unionwith the European Union,signed in 1995, to increaseindustrial production orexports, while beneting romEU-origin oreign investmentinto the country.There is a deep traderelationship between Turkeyand the EU. Indeed, the EUranks as number one by arin both Turkeys imports andexports, while Turkey ranks 7thin the EUs top imports and 5thin export markets.

Main Turkish export markets in2010 were the EU (42.088 mo Euro), Russia, USA,Romania, United Arab Emiratesand Iraq. Machinery andtransport equipment dominateEU imports rom Turkey, bothaccounting or about 38%o the total. Other importantimports are miscellaneousmanuactured articles.

Imports into Turkey camerom the ollowing key markets:the EU (722 billions o USD aso 2010), Russia, China, USA,Iran and South Korea. Turkeyis one o the major exportpartners o EU with its shareo 4.5% o total EU exports.

In 2008, Turkeys exports andimports reached an all-timehigh; exports increased 23%,reaching US$132 bn, whileimports rose 19%, hittingUS$202 bn. During 2010, theyear ater the global nancialcrisis, Turkey managed tosecure US$113 bn o exportsand US$185 bn o imports.It should also be noted thatTurkey is expected to bethe highest growing OECDmember country between2011 and 2017, with an annualaverage growth rate o 6.7%.

Due to the implementationo the liberalisation processsince the 1980s, the Turkisheconomy has experienced aperiod o high growth. Foreigntrade, both in exports andimports, has grown rapidlyand notable changes in thestructure o exports havebeen observed. In thisregard, industrial productshave gained prominenceover agricultural products.

Turkey became a membero the World TradeOrganisation (WTO) in1995. Following this move,it nalised an agreement withthe European Union, enablingit to join the Customs Unionon 1 January 1996. Turkey is

also a member o the WorldCustoms Organisation andmainly ollows WTO and WCOprinciples. But to protect localbusinesses, some necessarymeasures are put in place bythe Authorities.

Customs

Turkey signed the CustomsUnion Agreement with the EUon 1 January 1996 and hasamended its customs codeand legislation in line withthose o the EU customs code.In that perspective, the generaloutline o Turkish customspractices are similar (speciallythe classication and dutyrates) to its EU counterparts.According to the CustomsUnion Agreement, with theexception o certain goodssuch as agricultural products,no customs tax is incurred onthe trade between Turkey andthe EU, as long as the goodsare imported to Turkey withan ATR movement certicateproving that the goods are

in ree circulation in the EU.(Please note that recently anew legislation has publishedor textile products that imposeadditional customs duty ontextile products imported romEU which are originated outsideEU.) Customs duty rates aremainly in line with the EUpractice (except the agriculturalproducts).

Trade

In 2010, approximately 67% oall Tax Revenues were collectedrom Indirect Taxes. The majorportion o Indirect Taxes areVAT and Excise. VAT collectedduring importation covered15% o all Tax Revenues. It isclear that most o the ta xes arecollected at Customs.

Free Trade Agreements

Turkey has Free TradeAgreements with the ollowingcountries: Albania, BosniaHerzegovina, Croatia, EFTAmember countries (Switzerland,Norway, Iceland andLiechtenstein), Egypt, Georgia,Israel, Macedonia, Montenegro,Morocco, Palestine, Georgia,Serbia, Chile, Tunisia and Syria.

Free Trade Agreement betweenTurkey and Lebanon is underapproval process.


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Types o bank accounts;

TRY-denominated and FX-denominated accounts:An account can be openedin TRY or in any currencyconvertible in Turkey.There are no limits on thenumber o FX-based accounts.

Saving and current accounts.

Setting up a bank account

In order to open a bank account,the only requirement is tohave a passport or certicateo residence or identicationpurposes, relevant addressproo document, tax IDnumber rom a local tax oceor oreigners ID number.

In order to open an accountor a company establishedabroad which is reerred roma HSBC Group Member, HSBCTurkey requires the ollowingdocumentation:

Articles o Association andamending supplements (i any);

Tur