TAXATION ADVANTAGES RELATED TO VENTURE CAPITAL INVESTMENT FUNDS

Abstract

Venture Capital Investment Funds (“VCIF”) are investment instruments designed to provide financing for innovative projects and encourage qualified investors to participate in capital markets. Regulations introduced under Turkish tax legislation aim to increase interest in VCIFs by offering various exemptions, exclusions, and incentives. These tax advantages include several facilitations, such as deducting amounts allocated to VCIFs from the tax base, exempting investment gains from taxation, and exempting agreements related to ventures from stamp tax. These regulations promote the support of innovative ventures, thereby contributing to both economic growth and sustainable development. This study will comprehensively examine the legal framework of VCIFs, the criteria for qualified investors, and the tax regulations.

Keywords: Venture Capital, Venture Capital Investment Funds, Qualified Investor, Tax Advantages, Tax Deduction, Tax Exemption, Capital Markets Law, Tax Procedure Law, Corporate Tax Law, Income Tax Law, Stamp Tax Law

Keywords: International Financial Center, International Arbitration, Dispute Resolution, Istanbul Financial Center

I. INTRODUCTION

In the Turkish capital market, VCIFs stand out as a specialized investment instrument designed to provide financing for innovative projects and direct qualified investors towards capital markets. These funds are exclusively open to qualified investors and offer significant tax advantages for both investors and portfolio management companies. Within the scope of this study, we will present a detailed analysis of the legal nature and management of VCIFs, the legal regulations regarding the qualifications required to invest in VCIFs, and the tax advantages granted to these funds.

II. VENTURE CAPITAL INVESTMENT FUNDS AND LEGAL FRAMEWORK

VCIFs are assets without legal entity, established for a certain term by portfolio management companies authorized by the Capital Markets Board (“CMB”) with an operating permit. These funds operate based on a bylaw and are formed with money or shares collected from qualified investors in exchange participation shares. They manage a portfolio consisting of assets and instruments specified in the Communiqué on Principles Regarding Venture Capital Investment Funds (III-52.4)1 (“VCIF Communiqué”) in accordance with the principles of fiduciary ownership on behalf of the shareholders.2

VCIFs do not have a legal entity. VCIFs possess legal entity strictly limited to trade registry procedures as outlined in Article 4, paragraph 5 of the VCIF Communiqué such as the establishment of the fund, trade registry procedures related to the fund (registration, amendments, cancellations, and corrections), as well as trade registry procedures of companies in which the VCIF will hold shares (establishment, capital increases, and share transfers). At this point, the ownership of the assets of VCIFs legally belongs to the portfolio management company, as the founder of the fund.3 However, this ownership, as stipulated in Article 52 of the Capital Markets Law numbered 6362 (“CML”), is based on the principle of fiduciary ownership. Fiduciary ownership entails the transfer of the management authority of the fund to the portfolio management company within the framework of the bylaws, ensuring that the management of the fund remains with the portfolio management company. Accordingly, portfolio management companies are responsible for the professional management of the portfolios formed with the assets collected from investors and for minimizing investment risks.4

III. INVESTOR ELIGIBILITY CRITERIA FOR VENTURE CAPITAL INVESTMENT FUNDS

Investors acquire participation shares, a capital market instrument that defines their rights and represents their contribution to the fund, in return for their investments in VCIFs. These participation shares not only signify the investors’ contribution in the assets of the VCIF but also establish a sui generis, contract-based relationship between the investors and the portfolio management company.5

Due to their high-risk, long-term, and low-liquidity nature, only qualified investors are eligible to hold participation shares in VCIFs.6 According to Article 3 of the VCIF Communiqué, the term “qualified investor” refers to individuals or entities defined in various regulations of the CMB regarding the sale of capital market instruments, as well as individuals holding an individual participation investor license. Accordingly, individuals licensed as individual participation investor, as defined in the Regulation on Individual Participation Capital7 (“Individual Participation Capital Regulation“), are also classified as qualified investors.8 Pursuant to Article 3 of the Individual Participation Capital Regulation, an individual participation investor is defined as a real person9 who transfers their personal assets and/or experience and knowledge to companies in the startup or growth stages. To obtain an individual investor license, at least one of the criteria specified under Article 11 of the Individual Participation Capital Regulation must be met.10 Additionally, in the Communiqué on the Sale of Capital Market Instruments (II-5.2)11, qualified investors are defined as professional clients and on-demand professional clients.12 The definition of a professional client is provided under Article 31 of the Communiqué on Principles Regarding the Establishment and Activities of Investment Firms (III-39.1)13 (“Investment Firms Communiqué”). According to this regulation, a professional client refers to a client who has the experience, knowledge, and expertise necessary to make their own investment decisions and evaluate the risks they undertake.14  On-demand professional clients, on the other hand, are clients who meet at least two of the conditions listed in Article 32 of the Investment Firms Communiqué and submit a written request to be classified as a professional client.15 The verification of whether an investor qualifies as a qualified investor is conducted by the portfolio management company prior to establishing the investor’s ownership of participation shares.16

In practice, following the determination that the investor meets the qualifications, an investor agreement is executed between the VCIF and the investor to formalize participation share ownership. According to the VCIF Communiqué, an investor agreement is defined as an optional agreement executed either individually or collectively, which regulates matters not covered in the bylaws, issue document, or fund issuance agreement.17 Since the VCIF Communiqué does not contain specific provisions regarding the content of the investor agreement, the parties are free to determine its terms within the framework of contractual freedom.

IV. TAX BENEFITS

The primary purpose of VCIFs is to attract investments and investors into high-risk, innovative ventures. This allows startup companies to achieve success and contribute to the economy of the country in which they operate. Through VCIFs, startup companies can access the capital they need, while investors have the opportunity to earn satisfactory returns on their investments due to the high growth potential of these companies. Many companies that are now industry leaders have grown through venture capital financing in today’s competitive business environment.18 Considering the economic contributions of companies of this scale, tax deductions, exemptions, and exclusions are applied in Türkiye, as in many other countries, to encourage venture capital investments and promote fund and partnership investments. These tax incentives are applied to both the earnings of VCIFs and the earnings of their investors, thereby fostering venture capital investments.  This study will examine the tax deductions, exemptions, and exclusions applied to VCIFs and their investors under the provisions of the Tax Procedure Law numbered 21319 (“TPL”), the Corporate Tax Law numbered 552020 (“CTL”), the Income Tax Law numbered 19321 (“ITL”), and the Stamp Tax Law numbered 48822 (“Stamp Tax Law”).

A. Advantages Regulated Under the Tax Procedure Law

Article 325/A of TPL stipulates that a venture capital fund may be allocated from the relevant period’s earnings or declared income for the purpose of contributing capital to venture capital investment partnerships established or to be established in Türkiye under the regulation and supervision of the CMB, or for purchasing VCIF shares. The article further states that the venture capital fund to be allocated cannot exceed 10% of corporate earnings or declared income and 20% of equity capital.23

The amounts allocated as venture capital funds for investment purposes can be temporarily held in a passive account. However, if no investment is made in VCIFs by the end of the year in which the fund amount was allocated, taxes not accrued on time will be collected along with interest for late payment.24

It is also important to emphasize that the relevant article stipulates that if the allocated fund amount is transferred to another account for purposes other than its intended use, withdrawn from the business, distributed to shareholders, transferred to the headquarters by limited taxpayers, or, in cases of business cessation, liquidation, transfer, or division, or if the VCIF participation shares are disposed of and the proceeds are not reinvested for the same purpose within six months, the relevant amount will become taxable in the period when such actions occur or when the six-month period expires.25

From the wording of the article, it is understood that the legislator aims to encourage investments in VCIFs that have not yet become operational. In line with this purpose, the article does not require the VCIFs in which the investment is made to be operational. This allows investors to allocate the relevant amounts for the funds even for funds that are yet to be established. Additionally, the opportunity provided by this regulation is available only to investors who keep books on the balance sheet basis. The allocation of the fund amount and its monitoring in a temporary account under liabilities is possible solely for taxpayers using the balance sheet accounting method.26

B. Advantages Regulated Under the Corporate Tax Law

1. Earnings of Venture Capital Investment Funds

Article 2 of the CTL recognizes funds subject to the regulation and supervision of the CMB as capital companies, stating that they are subject to corporate tax liability.27 Accordingly, it would generally be expected that the earnings of venture capital investment partnerships are subject to corporate tax. However, sub-subparagraph (3) of subparagraph (d) of paragraph five of Article 5 of the CTL exempts the earnings of VCIFs or their partnerships established in Türkiye from corporate tax.28 Since the term “earnings” in the text of the article is not limited in any way, all income derived by portfolio management companies, including those unrelated to portfolio management, is also exempt from corporate tax.29

2. Earnings of Investors

In addition to the exemptions and deductions granted to the earnings of VCIFs, sub-subparagraph (3) of subparagraph (a) of the first paragraph of Article 5 of the CTL stipulates that the profits arising from the participation shares of VCIFs, the income obtained from the refund of participation shares, and profit from the increase of value due to the appreciation of the participation shares are exempt from corporate tax.30

Furthermore, as mentioned in our explanations regarding the advantages regulated under the TPL, subparagraph (g) of the first paragraph of Article 10 of the CTL also allows the portion of the amounts allocated as a venture capital fund that does not exceed 10% of the declared income to be deducted from corporate earnings.31

3. Advantages Regulated Under the Income Tax Law

The dividends paid on participation shares of investment funds established in accordance with the CML are classified as income from securities capital in accordance with subparagraph (1) of the second paragraph of Article 75 of the ITL.32 Income arising from participation certificates, which are considered capital market instruments under the CML and related legislation and are owned by individuals or legal entities, is subject to withholding tax under the first paragraph of the temporary Article 67 of the ITL.

The income arising from these participation shares can be categorized as follows:

  • Income arising from the refund of participation shares to the fund (securities capital income),
  • Income arising from the sale of participation shares to third parties (value increase gains), and
  • Periodic income earned during the holding period of participation shares (securities capital income).33

In this context, the income derived by individuals from the refund of investment fund participation certificates or from the distribution of dividends by the fund, which are classified as capital market instruments under the CML and related legislation, is subject to withholding tax under the first paragraph of the temporary Article 67 of the ITL. Pursuant to the Council of Ministers’ Decision dated 23.07.2006 and numbered 2623734, this income is taxed at a 10% withholding tax rate. However, for income derived from participation shares of VCIFs held for more than two years, the withholding tax rate is applied as 0%.35

If withholding tax is applied to the income derived by individuals from VCIF participation certificates, such withholding constitutes final taxation. Therefore, full taxpayer individuals are not required to submit an annual declaration for this income. If an annual declaration is submitted for other types of income, the income derived from VCIF participation certificates will not be included in annual declaration. Additionally, limited taxpayers are not required to submit a separate declaration for this income either.

Furthermore, as mentioned in our explanations regarding the advantages regulated under the TPL, pursuant to paragraph 12 of Article 89 of the ITL, the portion of amounts allocated as a venture capital fund that does not exceed 10% of declared income can be deducted from the declaration.36

4. Advantages Regulated Under the Stamp Tax Law

Contracts related to venture capital investments are exempt from stamp tax under Article 9 of the Stamp Tax Law. These exemptions are listed in Table (2) annexed to the Stamp Tax Law, which explicitly includes “contracts exclusively related to venture capital investments made by venture capital investment partnerships and venture capital investment funds, as well as other documents issued in connection with such contracts.”. Accordingly, such contracts and related documents are exempt from stamp tax.37

V. CONCLUSION

VCIFs are a specialized investment model that enables qualified investors to manage their savings under professional management while providing innovative ventures with access to financing. The deductions, exemptions, and exclusions provided for VCIFs under various regulations, including the TPC, CTL, ITL, and STL, play a significant role in promoting these funds.

The primary purpose of these regulations is to facilitate the transfer of capital to venture companies, given their substantial potential to contribute to the economy of the country in which they operate. Additionally, the aim is to direct investors toward these areas and promote entrepreneurship, thereby encouraging economic growth and job creation. The tax incentives provided enhance the attractiveness of VCIFs for both investors and entrepreneurs, making it easier for ventures to access financing and contributing to the development of innovative economies.

References

  1. The Official Gazette dated 01.01.2014 and numbered 28870 ↩︎
  2. Communiqué on Principles Regarding Venture Capital Investment Funds (III-52.4) m.4 ↩︎
  3. Erva Cavide Yurttadur, Girişim Sermayesi Yatırım Fonları, 2024, p. 37 ↩︎
  4. Yurttadur, op. cit, p.39 ↩︎
  5. Yurttadur, op. cit., p.61 ↩︎
  6. Tuğçe Aydoğan Çete, Girişim Finansmanında Girişim Sermayesi Yatırım Fonlarının Rolü ve Önemi, 2021, p.75 ↩︎
  7. The Official Gazette dated 15/2/2013 and numbered 28560 ↩︎
  8. Communiqué on the Sale of Capital Market Instruments.(III-52.4) Article 3 ↩︎
  9. Regulation on Individual Participation Capital Article.3 ↩︎
  10. Regulation on Individual Participation Capital Article.11 ↩︎
  11. The Official Gazette dated 28.06.2013 numbered 28691 ↩︎
  12. Communiqué on the Sale of Capital Market Instruments. (II-5.2) Article 4 ↩︎
  13. The Official Gazette dated 17.12.2013 and numbered 28854 ↩︎
  14. Communiqué on Principles Regarding the Establishment and Activities of Investment Firms (III-39.1) Article 31 ↩︎
  15. Communiqué on Principles Regarding the Establishment and Activities of Investment Firms (III-39.1) Article 32 ↩︎
  16. Communiqué on the Sale of Capital Market Instruments (II-5.2), Article 7 ↩︎
  17. Communiqué on Principles Regarding Venture Capital Investment Funds (III-52.4), Article 3 ↩︎
  18. Yurttadur, op.cit, p. 111 ↩︎
  19. Official Gazette dated 10.01.1961 and numbered 10703 ↩︎
  20. Official Gazette dated 21.06.2006 and numbered 26205 ↩︎
  21. Official Gazette dated 06.01.1961 and numbered 10700 ↩︎
  22. Official Gazette dated 11.07.1964 and numbered 11751 ↩︎
  23. Tax Procedure Law (TPL) Article 325/A ↩︎
  24. Tax Procedure Law (TPL) Article 325/A ↩︎
  25. Tax Procedure Law (TPL) Article 325/A ↩︎
  26. Mehmet Yüce, Bursa Bilanço, Issue 144, Vergi Mevzuatımız Açısından Girişim Sermayesi Fonu, 2013, p. 68 ↩︎
  27. Corporate Tax Law (CTL) Article 2 ↩︎
  28. Corporate Tax Law (CTL) Article 5 ↩︎
  29. Research Assistant Yaren Yitkin, Ticaret ve Fikri Mülkiyet Hukuku Dergisi, Vol. 10, Issue 2, Girişim Sermayesi Yatırımları Bakımından Kişi ve Kurumların Vergilendirilmesi, 2024, p. 344 ↩︎
  30. Corporate Tax Law (CTL) Article 5 ↩︎
  31. Corporate Tax Law (CTL) Article 10 ↩︎
  32. Income Tax Law (ITL) Article 75 ↩︎
  33. Republic of Türkiye Revenue Administration, Private Ruling dated 15.12.2020 and numbered 934609. ↩︎
  34. Council of Ministers’ Decision dated 23.07.2006 and numbered 26237, Article 1 ↩︎
  35. Yurttadur, op.cit, p.110 ↩︎
  36. Income Tax Law (ITL) Article 89 ↩︎
  37. Stamp Tax Law Article 9 ↩︎

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INTERNATIONAL FINANCIAL CENTERS AND ARBITRATION

Abstract

In today’s ecosystem, the ability of capital to easily move between countries has elevated goods, services, and capital markets from a national level to a global scale. One of the consequences of this globalization is that international investors are required to operate under different legal systems and judicial mechanisms in each country where they conduct business. As a significant alternative in international financial practice, there are various institutions established for the resolution of disputes through arbitration.

In this study, firstly, the significance of arbitration in the field of international finance and the reasons for its preference will be examined. Subsequently, the arbitration institutions established in major international financial centers in the Middle East and Asia will be analyzed. In the final section, based on this analysis, we evaluate whether a structure similar to those found in other international financial centers can be established at the Istanbul Financial Center (“IFC”) in our country.

Keywords: International Financial Center, International Arbitration, Dispute Resolution, Istanbul Financial Center

I. INTRODUCTION

The world’s leading financial centers, with their status as being judicial domains independent of the jurisdiction of the country they are located in, provide investors an alternative other than being subject to the host country’s judicial system through private and independent courts established within their frameworks and specialized arbitration institutions. Investors, in turn, favor arbitration over other dispute resolution methods in international investment and trade activities, as it offers a mechanism where they are equally represented.

The primary expectations of the investors from international arbitration are the resolution of disputes in a swift and cost-effective manner, reaching an acceptable outcome, and the existence of a system that ensures the enforceability of decisions.

II. THE IMPORTANCE OF ARBITRATION IN THE FIELD OF INTERNATIONAL FINANCE

According to the Report on Financial Institutions and International Arbitration1 (“Report”) published by the Financial Institutions and International Arbitration Task Force of the International Chamber of Commerce (“ICC“) Commission on Arbitration and Alternative Dispute Resolution on November 24, 2016, financial institutions that prefer to litigate in local courts within major financial centers such as London, New York, Hong Kong, and Frankfurt are increasingly open to the use of international arbitration for cross-border banking and financial disputes due to the changing and increasingly stringent regulatory environment, globalization, and the growing participation of parties from emerging markets in international finance.

The Report indicates that financial institutions tend to prefer arbitration in the following circumstances:

  • When the transaction is significant and particularly complex;
  • When confidentiality is a concern;
  • When the counterparty is a state-owned entity;
  • When the counterparty is located in a jurisdiction where the recognition of foreign court judgments is problematic, or where the enforcement of an arbitration award may be more straightforward.

One of the most fundamental challenges for financial institutions to date has been the country where the counterparty with whom they have a contractual relationship is located or the country where their assets are situated. Since, the enforcement of an arbitration award will need to be sought in that country. At this point, it will be enlightening to examine the core advantages that international arbitration can offer to financial institutions.

The increasing complexity of financial transactions and the generally technical nature of disputes related to financial services have become significant factors in the preference for expert arbitrators, arbitration institutions, and rules designed to resolve complex financial disputes. Therefore, the ability of the parties to choose expert arbitrators with sector expertise and experience is cited by financial institutions as a key advantage of arbitration, as opposed to concerns that the national court may lack expertise to deal with complex financial products.

Another advantage, particularly in commercially sensitive areas such as advisory services, and mergers and acquisitions, is the confidentiality and privacy offered by arbitration. Unlike court cases, arbitration hearings are not open to the public, and the parties can agree that the arbitration award and documents resulting from the arbitration should be confidential.

In addition to all this, when a party from an emerging market is involved, the biggest advantage that international arbitration has over national court litigation is related to enforcement. Indeed, arbitration awards are generally more easily enforceable internationally than foreign court decisions, under the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”). Therefore, if the seat of the arbitration court is in a state party to the New York Convention, the award can be enforced in any of the other signatory states.

III. ARBITRATION INSTITUTIONS IN INTERNATIONAL FINANCIAL CENTERS

A. Dubai International Arbitration Centre

The Dubai International Financial Centre (“DIFC”) was designed as an independent financial-free zone to provide a legal and regulatory framework to create a safe environment for growth, progress, and economic development across a broad region, primarily in the United Arab Emirates (“UAE”). All businesses registered in the DIFC are subject to the DIFC laws (“DIFC Laws”), which govern the daily operations of firms and individuals in the DIFC.

Since its establishment in 2004, the DIFC Administration has introduced a wide range of civil and commercial DIFC Laws. One of these is the DIFC Arbitration Law, which was introduced in 2008 and amended in 2013. In case the parties agree that any dispute between them will be resolved by arbitration and specify the DIFC as the seat of arbitration, the arbitration provisions of the UAE Civil Procedure Code do not apply. Where the DIFC is the seat of arbitration, all aspects of such arbitration are governed by the DIFC Arbitration Law. Unlike the arbitration provision of the UAE Civil Procedure Code, the Arbitration Law is an English language law.

Prior to Dubai Law No. 34, which came into force in 2021, DIFC’s own arbitration institution was the DIFC-LCIA Arbitration Centre, which was established in 2007 as a joint venture between DIFC and the London International Arbitration Centre (“LCIA”) and was governed by the DIFC-LCIA Arbitration Rules. However, with Dubai Law No. 34, DIFC-LCIA was abolished and subsequent arbitrations were begun to be administered by the Dubai International Arbitration Centre (“DIAC”). DIAC has a branch in DIFC, one of the leading financial centers in the Middle East, Africa and South Asia.

DIAC was established in 1994 as the Commercial Conciliation and Arbitration Centre, an initiative of the Dubai Chamber of Commerce and Industry. Then, by Dubai Decree No. 10 dated 2004, it was renamed the Dubai International Arbitration Centre. Since September 2021, DIAC is no longer an initiative of Dubai Chambers, and has a three-tiered structure consisting of a board of directors, an arbitration tribunal and an administrative body.

DIAC has a portfolio of experienced arbitrators from six continents and with a variety of legal and industry backgrounds. Dispute resolution methods cover a variety of sectors including real estate, engineering and construction, corporate and commercial, finance and investment, logistics, energy, oil and gas.

As part of Dubai’s efforts to consolidate its position as an international dispute resolution hub, DIAC has introduced new Arbitration Rules in 2022. DIAC’s 2022 Arbitration Rules promote speed, efficiency and sustainability of proceedings. Under the 2022 Arbitration Rules, DIFC is the default seat of arbitration for DIAC, and the DIFC Arbitration Law applies to arbitration proceedings.

B. International Arbitration Centre (Astana)

The Astana International Financial Centre (“AIFC”) is one of the most important financial centers in the Eastern Europe and Central Asia region. The AIFC is an independent jurisdiction that began operating in 2018. The International Arbitration Centre (“IAC”) provides an economical and expeditious alternative to court litigation to resolve civil and commercial disputes at the AIFC. It considers disputes that the parties have agreed to be resolved by arbitration.

It has its own procedural rules modelled on international practice. It has a panel of international arbitrators and mediators with many years of experience in arbitration and mediation in commercial law, including trade, construction, oil and gas, financial services, banking, energy, Islamic finance, intellectual property and insurance. The IAC is also an appointing authority, appointing arbitrators and mediators from its panel for arbitrations and mediations conducted at the IAC or elsewhere.

The IAC offers parties flexibility in choosing the rules and procedures they wish to use to resolve their disputes at the IAC. Parties may agree that the IAC:

  • Administer arbitration under the IAC Arbitration and Mediation Rules. (These rules include procedures for expedited arbitrations, appointment of emergency arbitrators, and resolution of investment treaty disputes.);
  • Administer arbitration under the United Nations Commission on International Trade Law (“UNCITRAL”) Arbitration Rules or special arbitration rules.
  • Administer mediation under the IAC Arbitration and Mediation Rules or special mediation rules.
  • Provide other alternative dispute resolution methods.

The IAC has an e-Justice system that allows parties to file cases electronically from anywhere in the world without the need to be physically present at the IAC premises. Video hearings take place when an arbitrator or mediator determines that an in-person hearing or meeting is not necessary or appropriate.

C. Abu Dhabi Global Market Dispute Resolution Hearing Centre

Abu Dhabi Global Market (“ADGM”) is one of the world’s leading international financial centers, located in the capital of the UAE. ADGM was established in 2013 as a financial free zone with its own civil and commercial laws in the Emirate of Abu Dhabi, under the Federal and Abu Dhabi legislation.

The ADGM Board of Directors enacted the ADGM Arbitration Regulation on December 17, 2015. This Regulation is based on the Model Law on International Commercial Arbitration published by UNCITRAL (“UNCITRAL Model Law”). The UNCITRAL Model Law is a widely recognized global standard for arbitration regulation. Judges of the ADGM courts can serve as arbitrators under the ADGM Arbitration Regulation.

The ADGM Dispute Resolution Hearing Centre (“DRHC”), established to support dispute resolution in the Middle East and North Africa region, is a center for arbitration hearings and mediations, providing services in line with international practices and equipped with advanced hearing facilities.

The DHRC has an arbitration framework based on the UNCITRAL Model Law and ADGM arbitration awards are internationally enforceable under the New York Convention. In addition, as an independent and impartial hearing venue, the DRHC can be booked by the parties regardless of the governing arbitration institution or seat of arbitration.

IV. STRUCTURES THAT CAN BE ESTABLISHED WITHIN THE ISTANBUL FINANCIAL CENTER

The IFC, which sets out to integrate with international markets in the field of finance and to provide an effective ecosystem and aims to become a global center, does not currently have an independent arbitration institution established within its own structure. In particular, within the scope of the realization of the goal of becoming a global financial center, the IFC can contribute to the realization of this goal by following the path followed by some other important international financial centers with the same goal in terms of dispute resolution and by establishing an internationally accepted, independent and impartial arbitration institution and specific arbitration rules to be applied to the arbitrations to be held.

In determining the arbitration rules to be applied, the arbitration rules that are applied and accepted internationally can be taken as a basis. In this way, the hesitation of the parties to be subject to rules that they do not know or are not familiar with can be prevented. Especially as stated under heading II above, when the tendency of financial institutions to prefer arbitration and the advantages provided by arbitration are taken into consideration, it is evaluated that an impartial and independent arbitration institution to be established and the arbitration rules to be implemented in the IFC can make a significant contribution to the IFC becoming a global financial center by increasing its attractiveness.

V. CONCLUSION

Considering the tendency of international financial institutions to resolve their disputes through arbitration and the advantages provided by arbitration, a special arbitration institution can be established within the IFC in order to increase the IFC’s attractiveness, as in some other important international financial centers. While the establishment of an arbitration institution within the IFC is not a necessity, it is evaluated that the establishment of the relevant arbitration institution will provide added value to the IFC in terms of the attraction it will provide for financial institutions to be located in the financial center within the scope of dispute resolution.

References

  1. https://iccwbo.org/wp-content/uploads/sites/3/2016/11/icc-financial-institutions-and-international-arbitration-icc-arbitration-adr-commission-report.pdf ↩︎
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BONDS IN THE CAPITAL MARKET AND BOND ISSUANCE IN PUBLICLY HELD JOINT STOCK COMPANIES

Abstract

Recent developments in global and local financial markets have led to significant changes in the methods companies use to meet their financing needs. In this context, bond issuance has gained prominence as a significant tool in corporate financing strategies and has garnered attention in capital markets. Bonds are debt instruments that companies issue with a commitment to repay the bondholders at a specified maturity date. Bond issuance is subject to specific procedures and conditions, and issuance limits are determined based on various parameters. The procedures to be followed and the application documents required for bond issuance by publicly held joint-stock companies (“PJSC”) vary depending on the issuance method/type. This study examines the legal nature of bonds, the issuance of bonds by PJSCs to meet their financing needs, and the procedures to be followed under capital markets law.

Keywords: Bond, Issuance, Capital Market, Debt Instrument, Publicly-Held Joint Stock Company, Capital Markets Board, Initial Public Offering

I. INTRODUCTION

The use of capital market instruments by companies to address their financing needs has become a common practice today. These instruments allow companies to obtain external funding when their internal resources are insufficient1.

Capital market regulations permit companies to secure financing through various instruments, including debt securities, derivatives, warrants, investment certificates, and other securities. Bonds are a key security employed by companies to meet financing needs through debt financing2.

II. THE CONCEPT OF BONDS AND THEIR LEGAL NATURE

Under the abrogated Turkish Commercial Code numbered 67623, bonds were defined as “debt instruments issued by joint stock companies with equal nominal values the same wording in order to borrow money.”4 Under the Turkish Commercial Code numbered 61025 (“TCC”), bonds are regulated under Article 504, but no explicit definition is provided. Instead, it is stated that bonds are debt instruments6.

Publications of the Capital Markets Board (“CMB”) define bonds as debt instruments issued by governmental entities or private sector companies to raise medium- and long-term funds through borrowing7. The CMB’s Communiqué on Debt Securities (VII-128.8)8 (“Communiqué”) defines bonds as “a debt instrument with a maturity of 365 days or more, issued and sold by issuers acting as debtors in accordance with the provisions of this Communiqué, containing a commitment to repay its nominal value to the investor on the maturity date or in installments until the maturity date.”9 Based on these definitions, a bond is a capital market instrument with a maturity of at least one year, issued by joint-stock companies to meet their funding needs through methods other than traditional borrowing, such as capital increases or bank loans10.

III. BOND ISSUANCE BY PJSCS

Bond issuance by PJSCs is subject to the provisions of the Communiqué. Article 4 of the Communiqué sets forth the regulations regarding the issuance of debt instruments. Accordingly, bonds can be issued through three methods: public offerings within the domestic market, private placements within the domestic market, and offerings for sale abroad. Private placements within the domestic market can be conducted in two ways: sales to qualified investors and allocated sales, provided that the nominal value per unit is at least TRY 100,00011. The Communiqué provides detailed regulations on the procedures and principles of bond issuance.

A. Decision of the Authorized Body

PJSC intending to issue bonds must adopt an issuance decision through its authorized body as specified in its articles of association. This decision must specify key details such as the type of bonds to be issued and the maximum issuance amount. Unless otherwise stipulated in the articles of association, the issuance decision is made by the general assembly. However, under the provisions12 of the Communiqué and the Capital Markets Law numbered 636213 (“CML”), the authority to issue bonds can be delegated to the board of directors through the articles of association14. Although the TCC permits the general assembly to delegate the authority to issue securities to the board of directors for a maximum period of fifteen months15, we believe this provision of the TCC is inapplicable to PJSCs due to their subjection to the CML and the presence of specific provisions within the CML and the Communiqué.

If the authorized body is the general assembly, and unless a stricter quorum is stipulated in the PJSC’s articles of association, the relevant provisions of the TCC regarding meeting and decision quorums will apply16. Accordingly, the meeting quorum requires the attendance of shareholders or their representatives holding at least one-quarter of the PJSC’s capital. The decision quorum is a simple majority of the votes present at the meeting17.

B. Application to the CMB and Required Documents

An application must be submitted to the CMB within one year of the date of the authorized body’s decision on bond issuance, made in accordance with the provisions of the Communiqué18.

The documents to be submitted to the CMB during the application process vary depending on the issuance method. For bonds to be issued through public offering within the domestic market, the documents listed in Annex-1 of the Communiqué must be submitted, whereas for bonds to be issued through private placement or for issuance abroad, the documents specified in Annex-2 must be provided19.

Article 4 of the CML requires the preparation and CMB approval of a prospectus for the public offering or listing of capital market instruments on a stock exchange20. Therefore, a prospectus must also be prepared for bonds to be issued through public offering. For private placements, an issuance document must be prepared.

In bond issuances conducted through public offering, PJSCs must apply to the CMB at least five business days prior to the designated sale date for each tranche during the validity period of the prospectus to obtain approval. For private placements, after obtaining the CMB-approved issuance document, PJSCs may proceed with the sales process within the issuance ceiling by applying to the Central Securities Depository (“CSD”) prior to the sale of each tranche21.

C. Dematerialized Issuance of Bonds and Notification to the CSD

Bonds must be issued in dematerialized form. Bonds issued within the domestic market must be reported to the CSD to enable the tracking of rights. For bonds issued abroad, issuance details must also be communicated to the CSD within three business days of the issuance22.

IV. LIMITATIONS ON BOND ISSUANCE

Article 9 of the Communiqué governs the issuance limits for debt instruments. As bonds are debt instruments, their issuance must comply with these limits. This limit is calculated based on the date of application to the CMB for the approval of the prospectus or issuance document.

This limit is calculated based on financial statements prepared in accordance with the CMB’s regulations on financial reporting for listed companies. Accordingly, the financial statements used to determine the issuance limit depend on the application date, as follows:

  1. For applications submitted between January 1 and March 15: the financial statements for the previous year or, if unavailable, the semi-annual financial statements for the prior year.
  2. For applications submitted between March 16 and August 15: the financial statement for the previous year.
  3. For applications submitted between August 16 and December 31: the interim semi-annual financial statements for the current year23.

The issuance limit, determined based on the above-mentioned financial statements, may not exceed five times the equity of PJSCs24.

V. CONCLUSION

Bonds, which are distinguished from other debt instruments by their nature as securities, are capital market instruments issued by companies to address specific financing needs through external funding, with a maturity of at least one year. While both the TCC and the CML include provisions on bonds and bond issuance, the Communiqué provides more detailed and specific regulations. PJSCs intending to issue bonds must comply with the provisions of the Communiqué and conduct the issuance process in accordance with the stipulated conditions.

Therefore, the decision regarding bond issuance must be made by the authorized body in accordance with the company’s articles of association, and an application must be submitted to the CMB. The issuance method (public offering or private placement) is crucial for the CMB application and the preparation of the required documents. The relevant documents listed in the annexes of the Communiqué, depending on the chosen issuance method, must be included in the application file.

The Communiqué establishes certain limits for bond issuance, which are calculated based on the financial statements required for the period in which the company applies for issuance. For PJSCs, this limit may not exceed five times their equity.

References

  1. Dr. Volkan Çelen, Prof. Dr. Hüseyin Hatemi’ye 80. Yıl Armağanı, Borçlanma Araçlarının Değişimi, 2018, pp.412-415 ↩︎
  2. Doç. Dr. Koray Demir, Özel Esas Sözleşme Değişiklikleri: Şarta Bağlı Sermaye Artırımı ve Esas Sermayenin Azaltılması, 2020, p.23 ↩︎
  3. Official Gazette dated 09.07.1956 and numbered 9353 ↩︎
  4. Abrogated Turkish Commercial Code, Article 420 ↩︎
  5. Official Gazette dated 14.02.2011 and numbered 27846 ↩︎
  6. Turkish Commercial Code (TCC), Article 504 ↩︎
  7. Capital Markets Board, Capital Market Instruments Booklet, 2024, pp.7-8 ↩︎
  8. Official Gazette dated 07.06.2013 and numbered 28670 ↩︎
  9. Communiqué on Debt Securities (VII-128.8), Article 3/m ↩︎
  10. Nihan Zeynep Aksan, Paya Dönüştürülebilir Tahviller, 2018, pp. 2-4 ↩︎
  11. Capital Markets Board, Capital Market Instruments Booklet, 2024, pp. 7-8 ↩︎
  12. Official Gazette dated 30.12.2012 and numbered 28513 ↩︎
  13. Capital Markets Law (CML), Article 31/3 ↩︎
  14. Communiqué on Debt Securities (VII-128.8), Article 5 ↩︎
  15. Turkish Commercial Code (TCC), Article 505 ↩︎
  16. Communiqué on Debt Securities (VII-128.8), Article 5 ↩︎
  17. Turkish Commercial Code (TCC), Article 418 ↩︎
  18. Communiqué on Debt Securities (VII-128.8), Article 6 ↩︎
  19. Communiqué on Debt Securities (VII-128.8), Article 6 ↩︎
  20. Capital Markets Law (CML), Article 4 ↩︎
  21. Communiqué on Debt Securities (VII-128.8), Article 6 ↩︎
  22. Communiqué on Debt Securities (VII-128.8), Article 8 ↩︎
  23. Prof. Dr. Burak Adıgüzel, Sermaye Piyasası Hukuku, 2022, pp. 160-163 ↩︎
  24. Communiqué on Debt Securities (VII-128.8), Article 9 ↩︎
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EXPORT OF FINANCIAL SERVICES WITHIN İSTANBUL FINANCIAL CENTER

Abstract

The provisions governing the management and operation of İstanbul Financial Center, as well as the activities conducted within and the incentives, discounts, exemptions, and exceptions related to these activities, are regulated by İstanbul Financial Center Law numbered 7412, and the İstanbul Financial Center Regulation, which outlines the procedures and principles for implementing the law. İstanbul Financial Center Law defines financial institutions and financial service exports, and establishes exemptions, discounts on taxes and other financial obligations applicable to financial institutions engaged in activities classified as financial service exports. The details of these matters, as regulated by the law and the regulation, constitute the subject of our study.

Keywords: Finance, Istanbul Financial Center, Export of Financial Services, Exemption, Exception, Financial Activities

I. INTRODUCTION

With İstanbul Financial Center (“IFC”), it is aimed to increase financial competitiveness on the international stage, contribute to the development and deepening of financial markets, products, and services, strengthen its integration with international financial and capital markets, and thus make IFC one of the leading global financial centers.

IFC aims to bring together a wide range of financial institutions and organizations, including banks, capital market institutions, participation finance companies, financial investment and portfolio management companies, and insurance companies, under a single platform. It seeks to promote sustainable and participatory approaches to all financial services, particularly in the field of international trade. IFC aims to enhance financial development by uniting local and global financial institutions. In this context, advantages such as tax reductions, exemptions and transaction facilities granted to institutions exporting financial services make IFC an attractive option on the international stage.

II. PRINCIPLES FOR RESPONSIBLE MANAGEMENT AND IMPLEMENTATION RECOMMENDATIONS

İstanbul Financial Center Law numbered 74121 (“Law“) and the İstanbul Financial Center Regulation2 (“Regulation“) mainly regulate the procedures and principles regarding the management and operation of IFC, application for certificate of participation (“Certificate“), issuance and cancellation of Certificate, leasing of the properties in IFC and various exemptions and advantages.

To benefit from the exemptions and other tax advantages outlined in Law, participants must obtain Certificate and operate within IFC office area. The Finance Office of the Presidency of the Republic of Türkiye (“Finance Office“) is authorized and responsible for evaluating Certificate applications, issuing Certificates to eligible applicants, rejecting ineligible applications, and suspending or canceling Certificates. Participants wishing to operate within IFC office area must apply to Finance Office. The application process is conducted electronically via IFC portal, which is established and managed by Finance Office.

Law stipulates that a “One-stop Bureau” shall be established to involve relevant departments of public organizations and institutions. This bureau aims to facilitate applications such as permits, licenses, approvals related to participants’ activities, as well as permits and approvals for their employees and dependents3. Once the participants complete the application process and obtain Certificate, they will be eligible to benefit from discounts, exemptions, and other tax advantages stipulated by Law and Regulation.

III. FINANCIAL INSTITUTIONS AND THE EXPORT OF FINANCIAL SERVICES IN IFC

According to Law, financial institutions eligible to operate within IFC include legal entities engaged in financial activities, their branches, liaison offices, representative offices and sovereign wealth funds4. Central Bank of the Republic of Türkiye, regulatory and supervisory institutions, banking and non-banking finance institutions, capital market institutions, financial investment firms and portfolio management companies operate within IFC5.

Financial services offered by organizations holding Certificate, provided that the services are ultimately utilized abroad by non-residents, are considered as financial service export6. Additionally, it is stipulated that derivative transactions conducted on their own behalf and account, acquisition or disposal of assets in their portfolios, and activities, services, and transactions transferring domestic residents’ savings abroad by financial institutions, shall not be considered as financial service exports.

Article 2 of Law defines the transactions eligible for financial services exports as “financial activities” and specifies these activities, services and transactions by reference to the relevant legislation:

• Purchase and sale of foreign exchange, coins, stocks, bonds, precious metals, precious stones and all kinds of goods and assets containing these materials, as well as commercial bills and payment instruments within the scope of Protection of the Value of Turkish Currency Law numbered 15677,

• Activities of pension companies, transactions of pension mutual funds and brokerage services under the Private Pension Savings and Investment System Law numbered 46328,

• Activities of deposit banks, participation banks, development and investment banks, banks established under special laws, and financial holding companies regulated by the Banking Law numbered 54119,

• Operations of entities establishing card systems, issuing cards and entering into merchant agreements under the Bank Cards and Credit Cards Law numbered 546410,

• Activities of insurance and reinsurance companies, intermediaries, actuaries and insurance experts operating in Türkiye in line with the Insurance Law numbered 568411,

• Activities of financial leasing, factoring, financing, and savings finance companies under the Financial Leasing, Factoring, Financing, and Savings Finance Companies Law numbered 636112,

• Issuance and public offering of capital market instruments, capital market activities, stock exchange transactions under the Capital Markets Law numbered 636213,

• Activities of payment institutions, electronic money institutions, and operations of payment services, payment, and securities settlement systems under the Payment and Securities Settlement Systems, Payment Services, and Electronic Money Institutions Law numbered 649314.

IV. ADVANTAGES PROVIDED TO FINANCIAL INSTITUTIONS EXPORTING FINANCIAL SERVICES

IFC participants benefit from various exemptions and advantages under Law. Many of these benefits are exclusive to financial institutions engaged in the export of financial services as defined by the Law.

A. Tax and Financial Liability Exemptions and Discounts

1. Corporate Tax Base Reduction

Provided that they are separately reported on the corporate tax return, 75% of the earnings obtained within the scope of financial service export activities will be deducted from the corporate income when determining the corporate tax base15. To encourage financial institutions to relocate to the IFC, this deduction rate will be applied at 100% for corporate earnings during the taxation periods from 2022 to 203116.

Additionally, pursuant to Article 10 of the Corporate Tax Law numbered 552017, institutions operating in IFC area and holding Certificate are entitled to deduct 50% of the income generated from the sale of goods purchased abroad without bringing them into Türkiye, or from intermediating in transactions involving the purchase and sale of goods abroad18. This deduction applies to the determination of the corporate tax base, provided that such income is separately reported in the corporate tax return. To benefit from this deduction, the income must be transferred to Türkiye by the deadline for filing the annual corporate tax return for the relevant fiscal period, and neither the seller nor the buyer involved in the intermediary transactions may be based in Türkiye.

2. Banking and Insurance Transactions Tax Exemption

Financial institutions that have obtained Certificate are exempt from bank and insurance transaction tax in terms of financial service export transactions and the profits derived from these transactions19.

3. Stamp Duty and Fee Exemption

Transactions related to financial service export activities conducted in IFC by financial institutions that have obtained Certificate are exempt from all kinds of fees, and the papers issued in relation to these transactions are exempt from stamp duty20.

Additionally, transactions concerning the leasing of immovable properties in IFC are also exempt from all kinds of fees, and the papers issued in relation to these transactions are exempt from stamp duty21.

Furthermore, financial activity fees, which collected from the headquarters and branches of financial institutions holding Certificate in IFC in accordance with the Fees Law numbered 49222, will not be collected for a period of five years starting from 28.06.2022, the effective date of Law23.

4. Income Tax Exemption on Employee Salaries

The net monthly salary paid to personnel employed by financial institutions holding Certificate is exempt from income tax as follows: %60 for personnel with a minimum of five years of professional experience abroad, and 80% for personnel with a minimum of ten years of professional experience abroad. This exemption is applicable to the salary income of personnel who have not worked in Türkiye during the three years preceding their employment at IFC24.

B. Choice of Law

Within the scope of the activities conducted at IFC, participants at IFC have the freedom to select the governing law for any transactions and contracts subject to private law, provided that such activities do not violate the legislation applicable to the participants25.

C. Bookkeeping in Foreign Currency and Language

Notwithstanding the provisions of the Turkish Commercial Code numbered 610226 and Tax Procedure Law numbered 21327, the Ministry of Treasury and Finance is authorized to regulate the participants to keep and issue their books and documents in foreign currency28.

Participants are not obliged to keep their transactions, contracts, letters of undertaking and account books in Turkish29.

Furthermore, Law stipulates that exceptions concerning bookkeeping in foreign currencies and languages, as well as the choice of law, shall also apply to regional treasury and financial management centers of participants operating actively in at least three countries30.

D. Employment of Foreign Personnel

Participants operating in IFC are permitted to employ foreign nationals who hold work permits issued by the Ministry of Labor and Social Security. The work permit applications for these individuals will be considered exceptional under Article 16 of the International Labor Law numbered 673531. During the application and evaluation process, certain exceptions under the mentioned law may be granted for the foreign employee32 such as exception from five to one rule.

V. CONCLUSION

IFC offers a range of advantages and exemptions that make it highly attractive for financial institutions to operate within the center. These benefits include tax incentives such as discounts on the corporate tax base, exemptions from banking and insurance transaction taxes, and exemptions from stamp duty and fees. Additionally, regulations provide further conveniences, such as income tax exemptions on employee salaries, the option to choose applicable law, and the ability to maintain bookkeeping in foreign currencies and languages. These comprehensive facilities position IFC as a global hub for financial institutions and represent a significant step towards enhancing Türkiye’s competitiveness in the international financial arena.

References

  1. Official Gazette (“OG”) dated 28.06.2022 and numbered 31880 ↩︎
  2. OG dated 07.07.2023 and numbered 32241 ↩︎
  3. Article 4 of Law ↩︎
  4. Article 2 of Law ↩︎
  5. Presidency of the Republic of Türkiye, About the Istanbul Financial Center (Access Date: 17.12.2024)
    https://www.cbfo.gov.tr/en/about-istanbul-financial-center ↩︎
  6. Article 5 of Law ↩︎
  7. OG dated 25.02.1930 and numbered 1433 ↩︎
  8. OG dated 07.04.2001 and numbered 24366 ↩︎
  9. OG dated 01.11.2005 and numbered 25983 ↩︎
  10. OG dated 01.03.2006 and numbered 26095 ↩︎
  11. OG dated 14.06.2007 and numbered 26552 ↩︎
  12. OG dated 13.12.2012 and numbered 28496 ↩︎
  13. OG dated 30.12.2012 and numbered 28513 ↩︎
  14. OG dated 27.06.2013 and numbered 28690 ↩︎
  15. Subparagraph (a) of Paragraph 1 of Article 6 of Law ↩︎
  16. Provisional Article 1 of Law ↩︎
  17. OG dated 21.06.2006 and numbered 26205 ↩︎
  18. Article 10 of Corporate Tax Law ↩︎
  19. Subparagraph (b) of Paragraph 1 of Article 6 of Law ↩︎
  20. Subparagraph (c) of Paragraph 1 of Article 6 of Law ↩︎
  21. Paragraph 3 of Article 6 of Law ↩︎
  22. OG dated 17.07.1964 and numbered 11756 ↩︎
  23. Provisional Article 1 of Law ↩︎
  24. Paragraph 2 of Article 6 of Law ↩︎
  25. Paragraph 3 of Article 7 of Law ↩︎
  26. OG dated 14.02.2011 and numbered 27846 ↩︎
  27. OG dated 10.01.1961 and numbered 10703 ↩︎
  28. Paragraph 1 of Article 7 of Law ↩︎
  29. Paragraph 2 of Article 7 of Law ↩︎
  30. Paragraph 4 of Article 6 and Paragraph 4 of Article 7 of Law ↩︎
  31. OG dated 13.08.2016 and numbered 29800 ↩︎
  32. Paragraph 1 of Article 8 of Law ↩︎
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PRINCIPLES AND CODES OF PRACTICE WITHIN THE SCOPE OF THE GUIDELINE ON PRINCIPLES FOR RESPONSIBLE MANAGEMENT IN PORTFOLIO MANAGEMENT

Abstract

Within the scope of the decision of the Capital Markets Board’s (“Board”) Decision Body dated 16.02.2024 and numbered 11/2551 (“Board Decision”), the Principles for Responsible Management (“Principles”) for mutual funds established by portfolio management company (“PMC”) have been regulated. The Principles, which consist of five main principles, encourage collective investment schemes and PMCs to determine policies to ensure the long-term sustainability of investee companies, taking into account environmental, social and governance factors. Within the scope of the decision of the Board Decision Body dated 21.11.2024 and numbered 60/16962, the reporting standard to be taken as a basis for reporting the practices regarding principles for responsible management by portfolio management companies has been determined and the “Guideline on Principles for Responsible Management” (“Guideline”) has been prepared in order to include all relevant regulations, including the reporting standard, in a separate guideline. In this study, the Principles included within the scope of the Guidelines, implementation recommendations and codes of practice related to the Principles are analyzed.

Keywords: Principles for Responsible Management, Guideline on Principles for Responsible Management, Principles for Responsible Management Policy, Portfolio Management Company, Environmental-Social and Corporate Management

I. INTRODUCTION

After the 2008 economic crisis, in many countries around the world, detailed regulations were introduced under the name of “stewardship codes”, which can be defined as oversight principles for the companies in which institutional shareholders invest, in order for them to play a more active role in company management. In our country, regulations have been made in this context with the Board Decision published by the Board. In this regard, the Board has also published the Principles prepared based on the provisions of Articles 1, 54 and 128/2 of the Capital Markets Law No. 6362 (“Law”) and the Guideline containing the codes of practice of these Principles. The Guideline provides details on the Principles, recommendations on their implementation and codes of practice, aiming to achieve sustainable benefits.

II. PRINCIPLES FOR RESPONSIBLE MANAGEMENT AND IMPLEMENTATION RECOMMENDATIONS

In the portfolio management industry, responsible management is defined as the effective management of institutional investors’ relationships with publicly traded joint stock companies in order to create long-term value for their clients3. On the other hand, the Principles refer to the set of principles determined on the basis of the “Comply or Explain” principle for the responsible investment, management and supervision of the assets of the mutual funds established by the PMCs for the purposes of long-term value creation for all relevant shareholders and sustainable benefits for the economy, environment and society4.

With the Board Decision, regulations have been introduced in order to adopt policies to ensure the sustainability of companies in our country and the Principles have been announced. The Principles are divided into five topics and regulate the following issues. In addition, the Guideline published by the Board exemplify the approaches and methods that can be used in the implementation of the Principles for each principle.5

A. Monitoring Activities for Investee Companies

In order to accurately assess the performance of the investee companies and their long-term investment value, it is recommended that companies invested by PMCs should be regularly monitored. A system for monitoring activities can be established by taking into account factors such as the size of the investment and the nature of portfolio management.

B. Interaction Activities with Investee Companies

Within the scope of this principle, the determination of the strategy of the PMCs regarding the execution of interaction activities for the investee companies is addressed. In determining the relevant strategy, factors such as the investment strategy of the funds under management, the nature and size of the investment are taken into consideration. It is foreseen that it will be beneficial to increase communication activities with the investee company through methods such as communicating evaluations and suggestions directly to the officials of the investee company and using the general assembly meeting rights.

C. Cooperation Activities with All Relevant Shareholders

It is recommended that PMCs should be open to cooperating with other investors to increase their influence on the investee company and with all relevant shareholders to protect investor rights and interests.

D. Exercise of Voting Rights of Portfolio Assets Under Management

It is recommended that PMCs exercise their voting rights with respect to partnership shares and debt instruments in the portfolios under management and that due care and diligence is exercised in the exercise of voting rights. It is considered that the Principles for Responsible Management Policy (“Policy”) to be prepared by the PMC may also include measures to be implemented to prevent or manage conflicts of interest that may arise in the exercise of voting rights, appointment of proxies in the exercise of voting rights, the conditions under which partnership shares/debt instruments in the managed portfolios may be borrowed or lent, the situations in which the lent securities will be called for voting, and the principles on how lending may affect the voting activity.

E. Incorporation of Environmental, Social, Governance Factors into Policy

In order to promote the long-term performance and sustainable value creation of the investee companies, PMCs are expected to include in the Policy its strategy on key environmental, social and governance (“ESG”) factors, including climate change. In this context, it is recommended that PMCs consider the long-term performance and sustainable value creation of the investee companies, regularly monitor the business model and strategy of the investee companies and the impact of ESG factors on the long-term performance of the investee companies, analyze, monitor and evaluate ESG-related risks and opportunities, and consider ways to integrate these risks/opportunities into their investment processes.

On the other hand, as the climate crisis has emerged as a serious threat and the perspective of organizations and consumer demands have started to change, ESG has gained significant popularity in recent years. Profitability alone is not sufficient in terms of consumers’ expectations from companies, and there has been a demand for environmental and social issues to be given importance as well, and this issue has been in great demand by investors. Due to the changing environmental and social conditions around the world, the intensification of regulations and interventions in this area has forced organizations to include ESG in their business.

ESG, which plays an important role in the effort to increase the focus on sustainable and responsible investments together with environmental, social and governance criteria, is of great importance for investors who care about recycling resources, minimizing waste and protecting nature. As a result, investors invest in companies that commit to these practices, contributing both to the profitability of companies that adopt ESG and to the environment.

III. LEGAL ASSESMENT AND CODES OF PRACTICE OF THE PRINCIPLES

Principles for responsible management, for which regulatory efforts were made to strengthen corporate management after the 2007-2008 global financial crisis, first emerged in the United Kingdom in 20106. The Principles have been developed by capital market regulators, industry representatives and/or international organizations to ensure that assets managed by asset managers are managed to protect client interests. The Principles include rights such as participation in the management of the investee company, exercise of voting rights and close monitoring of its activities7.

As explained above, the Principles aim to enable investors to exercise their rights arising from shareholding effectively, and to increase their oversight and voice over the companies in which they invest. In addition to the classical legal rights arising from shareholding, such as the right to vote, monitoring the company’s objectives, transactions, investments and financial situation is also encouraged. For example, the Guideline provides investors with more comprehensive powers than conventional legal rights, with suggestions such as exercising the right to file an annulment action against general assembly resolutions, adding an item to the general assembly agenda, and preparing an annual report on the risks in the investee sector.

On the other hand, the regulation on the Principles is based on the “Comply or Explain” principle for the responsible investment, management and oversight of the assets of securities investment funds for the purposes of long-term value creation for all relevant shareholders and sustainable benefits for the economy, environment and society. In addition, it has stated that it is not mandatory for PMCs to create a Policy regarding the Principles organized within the framework of the “Comply or Explain” principle.

Codes of practice are regulated in detail under the fourth heading of the Guideline. According to this:

  1. In the event that the board of directors of a PMC decides to set a policy for all of the Principles in the management of the mutual funds established by the PMC, the decision and the Policy must be disclosed to the public on the Public Disclosure Platform (“PDP”) page of the PMC and all investment funds established by the PMC. In this context, the established Policy or the board of directors’ decision not to determine a Policy must be disclosed to the public no later than 31.12.2024. Within the framework of the “Comply or Explain” principle, if the board of directors of the PMC decides not to set a Policy, the reasons for the decision should also be disclosed to the public.
  1. If the manager of the investment fund is a different PMC, the principles regarding the reporting to be made by the manager company to the founder company regarding compliance with the responsible management principles policy should be included in the portfolio management agreement.
  1. The codes of practice set out in the Policy must be disclosed to the public on the PDP page of the PMC and the funds it is the founder of, with an annual report prepared in accordance with the reporting standard in the Annex of the Guideline and approved by the board of directors of the PMC within 60 days following each accounting period. In addition, the information and explanations included in the report should be examined by the inspection unit of the PMC and the statement of the inspection unit regarding their consistency, whether they honestly reflect the truth, whether they contain errors and/or omissions should be included in the annual report.
  1. How the voting rights arising from the assets in the managed fund portfolios are exercised should be disclosed to the public once a year collectively on the PDP page and the official website of the PMC.
  1. The first reporting on the principles determined to be implemented within the scope of the Policy established by the PMCs must be disclosed to the public by 02.03.2026 at the latest, including the practices in 2025, and the reporting for the following periods must be made within the 60-day period specified in subparagraph (iii) above.
  1. If the PMCs that decided not to set a policy decide to set a policy in the following periods, the Policy should be disclosed to the public by the end of the relevant accounting period at the latest and the reporting for the following periods should be made within the 60-day period specified in subparagraph (iii) above.

IV. CONCLUSION

The Principles emerged especially in the aftermath of the global economic crisis in 2008, bringing to the agenda the impact of institutional investors on the corporate governance practices of the companies in which they invest, and the tendency to strengthen corporate governance has been effective. The Principles encourage investors to exercise rights beyond their classical legal rights arising from share ownership and aim to increase their oversight and voice over the companies in which they invest. The Principles, which focus on five areas, describe the activities that can be carried out on the investee company and aim to create value for all shareholders in the long term and provide sustainable benefits for the economy, environment and society.

It is foreseen that if PMCs adopt the implementation of the Principles and investors actively exercise their rights in this context, maximum sustainable benefits for the economy, environment and society can be achieved.

References

  1. Decision of the Capital Markets Board Decision Body dated 16.02.2024 and numbered 11/255 ↩︎
  2. Decision of the Capital Markets 323Board Decision Body dated 21.11.2024 and numbered 60/1696 ↩︎
  3. Deniz KAHRAMAN, “Portföy Yönetiminde Sorumlu Yönetim İlkeleri (Stewardship)”, Institutional Investor Magazine, Volume 60, 2023, p. 42 ↩︎
  4. Capital Markets Board, Guideline on Principles for Responsible Management (Guideline), p. 4 ↩︎
  5. Guideline, p. 4-6 ↩︎
  6. KAHRAMAN, p. 142 ↩︎
  7. KAHRAMAN, p. 142 ↩︎
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THE APPLICATION OF THE PROHIBITION ON CONTRACTING IN FOREIGN CURRENCY IN WORK CONTRACTS UNDER DECREE NO. 32 ON THE PROTECTION OF THE VALUE OF TURKISH CURRENCY

Abstract

The prohibition on contracting in foreign currency refers to the regulation that prohibits the determination of payment obligations arising from a contractual relationship in foreign currency or foreign currency-indexed. Whereas, the primary legal basis for the prohibition on contracting in foreign currency is Law No. 1567 on the Protection of the Value of Turkish Currency (“Law No. 1567”)1, the regulations regarding this prohibition are set forth under Decree No. 32 on the Protection of the Value of  Turkish Currency, dated 07.08.1989 (“Decree No. 32”)2, and the Communiqué No. 2008-32/34 on Decree No. 32 on the Protection of the Value of  Turkish Currency (“Communiqué on Decree No. 32”)3, issued by the Ministry of Treasury and Finance (“Ministry”) pursuant to Decree No. 32. In this study, first of all, a brief overview of the legal regulations concerning the prohibition on contracting in foreign currency will be provided. After addressing the legal basis and scope of the prohibition on contracting in foreign currency, this prohibition will be analyzed within the context of work contracts. Then, exceptions to the prohibition applicable to work contracts will be examined, and finally, the legal consequences of non-compliance with the prohibition will be discussed.

Keywords: Decree No. 32, Communiqué on Decree No. 32, Work Contract, Payment Obligation, Foreign Currency, Foreign Currency-Indexed, Prohibition, Exception

I. INTRODUCTION

With Presidential Decree No. 85 and dated 12.09.2018 on Amendments to Decree No. 32 on the Protection of the Value of Turkish Currency (“Decree No. 85”)4, an additional subparagraph (g) was added to Article 4 of Decree No. 32, and it was stipulated that, except in cases specified by the Ministry, residents in Türkiye are prohibited from agreeing to set the contract price and other payment obligations arising from contracts, including contracts for the purchase and sale of movable and immovable property, transportation and financial leasing, as well as any lease, employment, service, and work contracts, in foreign currency or foreign currency-indexed (prohibition on contracting in foreign currency). The prohibition on contracting in foreign currency applies solely to the types of contracts listed in the relevant article. The focus of this study is the examination of the application of this prohibition in relation to work contracts, as regulated under Articles 470 to 486 of the Turkish Code of Obligations No. 6098 (“TCO”)5.

II. LEGAL REGULATIONS REGARDING THE PROHIBITION ON CONTRACTING IN FOREIGN CURRENCY

In order to establish the procedures and principles for the implementation of  Decree No. 85, which forms the primary basis for the prohibition on contracting in foreign currency, the Ministry initially issued the Communiqué on Amendments to Communiqué No. 2008-32/34 on Decree No. 32 on the Protection of the Value of Turkish Currency (“Communiqué No. 2018-32/51“)6, and the cancelled Article 8 of the Communiqué on Decree No. 32 was rearranged under the title “Foreign Currency and Foreign Currency-Indexed Contracts“. However, as the regulations introduced by Communiqué No. 2018-32/51 proved insufficient in resolving uncertainties regarding the implementation of Decree No. 85, the Ministry issued the Communiqué on Amendments to Communiqué No. 2008-32/34 on Decree No. 32 on the Protection of the Value of the Turkish Currency (“Communiqué No. 2018-32/52“)7. With the Communiqué No. 2018-32/52, the Article 8 of the Communiqué on Decree No. 32 was amended again, the scope of the prohibition was determined more clearly and the exceptions to the prohibition on contracting in foreign currency under Decree No. 85 were regulated.

In order to clarify the questions arising from the implementation of Decree No. 85 and the secondary regulations issued pursuant to it, and to resolve the uncertainties that have emerged, the Ministry issued announcements titled “Frequently Asked Questions” on 12.10.2018, 16.10.2018, and finally on 27.02.2019, which were published on the Ministry’s website.8

Since the publication of Communiqué No. 2018-32/52 until today, legal regulations enacted by the Ministry have resulted in occasional amendments to Article 8 of the Communiqué on Decree No. 32, however, no additional obligation or exception has been introduced regarding the determination of payment obligations in work contracts in foreign currency or indexed to foreign currency. Therefore, the subsequent amendments to the Communiqué on Decree No. 32 are not included in this study.

III. EVALUATIONS REGARDING THE PROHIBITION ON CONTRACTING IN FOREIGN CURRENCY INTRODUCED BY DECREE NO. 85

The subparagraph (g) added to Article 4 of Decree No. 32 by Decree No. 85 only imposes restrictions on contracting in foreign currency for specific types of contracts to be executed between individuals residing in Türkiye. Therefore, contracts in which one of the parties is located abroad fall outside the scope of the provision of the relevant article.

For the purposes of the relevant provision, individuals residing in Türkiye include Turkish citizens working abroad as employees, freelancers, or independent contractors, as well as natural and legal persons who have their legal domicile in Türkiye.9 In other words, natural persons who do not have citizenship ties with the Republic of Türkiye but have their legal domicile in Türkiye, as well as legal entities with their legal domicile in Türkiye, are included within the scope of this regulation and are considered as residents in Türkiye for the purposes of the application of the relevant legal provisions. Additionally, the branches, representative offices, offices, liaison offices, funds operated or managed by persons residing in Türkiye abroad, as well as companies in which they hold directly or indirectly fifty percent or more of the shares, are considered as residents in Türkiye for the application of subparagraph (g) of Article 4 of Decree No. 32. However, this provision does not apply if the contract is executed abroad.10

Pursuant to the Communiqué on Decree No. 32, contracts indexed to precious metals and/or commodities priced in foreign currency on international markets and/or indirectly indexed to foreign currency are considered foreign currency-indexed contracts in terms of the application of subparagraph (g) of Article 4 of Decree No. 32.11

The regulation introduced by Article 4(g) of Decree No. 32 stipulates that not only the contract price specified in the contracts listed in Decree No. 32, but also any other payment obligations arising from the contracts cannot be agreed upon in foreign currency or indexed to foreign currency. Accordingly, this regulation encompasses any interest, late payment penalties, liquidated damages, and any other compensation obligations applicable to the contract price specified in the contracts.

Additionally, pursuant to Article 8 of the Communiqué on Decree No. 32, it is not possible for the amounts included in the negotiable instruments issued under contracts, where the contract price and other payment obligations arising from such contracts cannot be agreed upon in foreign currency or indexed to foreign currency, to be determined in foreign currency or indexed to foreign currency.12 However, negotiable instruments issued and circulated prior to the effective date of Decree No. 85, dated 13.09.2018, are exempt from the provisions of this article.

IV. FOREIGN CURRENCY PROHIBITON AND EXCEPTIONS IN THE CONTEXT OF WORK CONTRACTS

A. Regulation Regarding the Work Contract and the Exception of the Foreign Currency Prohibition in the Context of Work Contract

Under the TCO, a work contract is a contract in which the contractor undertakes to create a work, and the employer undertakes to pay a price in return. Therefore, construction and EPC contracts, contracts related to turnkey projects, or similar contracts where the personal characteristics of the contractor are significant in the creation of the work, are considered work contracts and are subject to the provisions related to work contracts under the relevant legislation.

Under regulations introduced by Communiqué No. 2018-32/51, Paragraph 5 of the rearranged Article 8 of the Communiqué on Decree No. 32 stipulated regarding work contracts that “residents in Türkiye may not agree on the contract price and other payment obligations arising from these contracts in foreign currency or indexed to foreign currency, with respect to work contracts, except for the construction, repair, and maintenance of ships defined in the Turkish International Ship Registry Law No. 4490 dated 16/12/1999 and the Law amending Decree Law No. 491.“

However, following the amendments made to the Communiqué on Decree No. 32 with the Communiqué No. 2018-32/52, the provision regarding the prohibition on work contracts was regulated in Paragraph 8 of the Article 8 of the Communiqué on Decree No. 32 as “residents in Türkiye may agree on the contract price and other payment obligations arising from such contracts in foreign currency or indexed to foreign currency in work contracts that involve costs in foreign currency.” As a result, all work contracts involving foreign currency costs have been included within the exception to the prohibition on contracting in foreign currency and the exception regarding work contracts has been significantly expanded.

In other words, as a general rule, it is prohibited to stipulate the contract price and other payment obligations arising from work contracts in foreign currency or indexed to foreign currency. However, where the work contract involves a cost in foreign currency, this constitutes an exception, and in such case, the contract price and other payment obligations under the work contract may be agreed upon in foreign currency or indexed to foreign currency.

Additionally, no specific percentage has been established regarding the foreign currency component that must be included in such costs. Indeed, in the response to question 6 of the information letter published on the Ministry’s website under the title “Frequently Asked Questions Within the Scope of the Communique on Decree No. 32 on the Protection of the Value of Turkish Currency (2018-32/52)”13, it has been stated that it is not necessary for the work contract to contain a foreign currency cost above a certain percentage in order for the prohibition on contracting in foreign currency not to be applied, and that it is sufficient for a portion of the costs to be denominated in foreign currency for the contract price and other payment obligations arising from such contracts to be agreed upon in foreign currency or indexed to foreign currency.

B. General Exceptions Applicable to Work Contracts

Other exceptions to the prohibition on contracting in foreign currency in relation to work contracts are regulated in the other paragraphs of Article 8 of the Communiqué on Decree No. 32. In this context, within the projects to be carried out under the execution of foreign currency or foreign currency-indexed tenders, contracts, and international agreements to which public institutions and organizations are parties, it has been made possible to decide on determining the contract price and other payment obligations arising from these contracts in foreign currency or indexed to foreign currency in contracts to be concluded by contractors or responsible companies and the parties with whom they enter into contracts, or concluded within the framework of the mentioned projects, excluding real estate sales contracts and employment contracts.14

Since, the relevant paragraph only excludes real estate sale contracts and employment contracts from the scope of exceptions, the contract price and other payment obligations arising from these contracts can be decided in foreign currency or indexed to foreign currency in the work contracts to be concluded for the projects to be carried out within the scope of the execution of tenders, contracts and international agreements in foreign currency or indexed to foreign currency to which public institutions and organizations are parties.

The phrase “public institutions and organizations” mentioned in the relevant regulation refers to the institutions, administrations, and local administrations referred to in the Public Financial Management and Control Law No. 501815 as public administrations within the scope of general administration and mentioned in Annexes I, II, III and IV of the said Law, as well as companies in which these institutions and administrations directly or indirectly hold at least 50% of the ownership.

Similarly, subject to the exception for public institutions and organizations, another paragraph of Article 8 of the Communiqué on Decree No. 32 has made it possible for contract prices and other payment obligations arising from these contracts to be determined, paid, and accepted in foreign currency or indexed to foreign currency in contracts other than real estate sales and real estate rentals to which public institutions and organizations or Turkish Armed Forces Foundation companies are parties.16 The companies referred to as the Turkish Armed Forces Foundation companies are those whose capital is at least fifty percent directly or indirectly owned by the Turkish Armed Forces Foundation, established to strengthen the Turkish Armed Forces, such as ASELSAN, HAVELSAN, and ROKETSAN. Therefore, there is no impediment to the contract price and other payment obligations arising from these contracts being determined in foreign currency or indexed to foreign currency, in terms of the work contracts to which the companies in question are parties.

V. SANCTIONS

Within the scope of the hierarchy of norms, in case of non-compliance with the regulations included in the Communiqué on Decision No. 32, an administrative fine is imposed separately for each party to the contract under Paragraph 1 of Article 3 of Law No. 1567. The amounts specified in the relevant article of Law No. 1567 are the amounts determined by the amendment made to the said Law in 2008, and these amounts are updated every year by taking into account the revaluation rates per Paragraph 7 of Article 17 of Law No. 5326 on Misdemeanors.17 In the case of recurrence, these fines are applied at twice the amount. However, in order to initiate proceedings before the Chief Public Prosecutor’s Office regarding violations of the Communique on Decree No. 32, the notifications sent to the Ministry must include concrete information and supporting documents (invoices, contract samples, price offers, etc.) to substantiate the claims. No action is taken by the Ministry on notifications that are not based on any concrete documents.

VI. CONCLUSION

With subparagraph (g) added to Article 4 of Decision No. 32 by Decision No. 85 and the secondary regulations issued by the Ministry afterward, it is aimed to ensure economic stability in Türkiye and to encourage the use of Turkish Lira in contracts involving monetary obligations of real and legal persons resident in Türkiye.

Work contracts, which are regulated in the relevant articles of the TCO, were also included in the scope of the prohibition in Decree No. 32, but the exceptions to the prohibition that can be applied to work contracts were determined with the regulations introduced later. In case even one of the exceptions in question exists, it has been made possible for the contract price in work contracts and the payment obligations arising from it to be determined in foreign currency or indexed to foreign currency.

References

  1. Official Gazette dated 25.02.1930 and numbered 1433 ↩︎
  2. Official Gazette dated 11.08.1989 and numbered 20249 ↩︎
  3. Official Gazette dated 28.02.2008 and numbered 26801 ↩︎
  4. Official Gazette dated 13.09.2018 and numbered 30534 ↩︎
  5. Official Gazette dated 04.02.2011 and numbered 27836 ↩︎
  6. Official Gazette dated 06.10.2018 and numbered 30557 ↩︎
  7. Official Gazette dated 16.11.2018 and numbered 30597 ↩︎
  8. Ercüment Özkaraca, “Türk Parası Kıymetini Koruma Hakkında 32 Sayılı Kararın İş Sözleşmelerinde Uygulama Alanı”, Marmara University Faculty of Law Journal of Legal Studies, Volume 25, Issue 1, 2019, p. 188. ↩︎
  9. Decree No. 32, article 2(b) ↩︎
  10. Communiqué on Decree No. 32, article 8/24 ↩︎
  11. Communiqué on Decree No. 32, article 8/23 ↩︎
  12. Communiqué on Decree No. 32, article 8/22 ↩︎
  13. https://www.hmb.gov.tr/finansal-piyasalar-ve-kambiyo-sikca-sorulan-sorular ↩︎
  14. Communiqué on Decree No. 32, article 8/16 ↩︎
  15. Official Gazette dated 24.12.2003 and numbered 25326 ↩︎
  16. Communiqué on Decree No. 32, article 8/15 ↩︎
  17. Official Gazette dated 31.03.2005 and numbered 25772 (repeating) ↩︎
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POSSIBILITY FOR PARTICIPANTS OPERATING IN THE ISTANBUL FINANCIAL CENTER TO KEEP THEIR BOOKS IN FOREIGN CURRENCY

Abstract

Since its establishment, the Istanbul Financial Center (“IFC”) has been quickly advancing towards becoming a global attraction center, with a proactive vision that not only provides tax incentives to participants in the region but also continuously adds new operational conveniences. In this context, most recently, participants in the region are allowed to keep their books and records in any currency of their choice.

Keywords: Istanbul Financial Center, Book Records, Foreign Currency, Central Bank of the Republic of Türkiye, General Communiqué of the Tax Procedure Law

I. INTRODUCTION

IFC, which set out with the goal of offering integration with international markets and an efficient ecosystem in the field of finance, aims to become a regional center in the short term and a global center in the medium term. In line with this vision, it brings together public and private sector banks, portfolio management companies, brokerage firms, insurance companies, professional service companies, international transit trade companies, and national and international financial institutions from various categories.

In line with this vision, in addition to offering various tax incentives and operational advantages to participants in the region, within the scope of providing new opportunities and conveniences over time, it is aimed to enable these participants to keep their books in the foreign currency of their choice, allowing more accurate reporting and facilitating integration with their headquarters through a common currency. Participants who utilize this option will also be able to minimize the additional tax burdens arising from expenses that are not legally accepted due to the changes in exchange rate, compared to institutions that keep their books in Turkish Lira.

In accordance with the authority granted to the Ministry of Treasury and Finance (“Ministry”) by Istanbul Financial Center Law numbered 74121 (“Law”), which allows participants in the region to keep mandatory books and issue documents in foreign currencies, the Ministry has published Tax Procedure Law General Communiqué numbered 5692 (“Communiqué”), and the procedures and principles regarding the implementation, which is set to commence from the 2025 fiscal period, have been established. The procedures and principles introduced by the Communiqué are outlined in our article.

II. PARTICIPANTS INCLUDED IN THE SCOPE OF THE IMPLEMENTATION

Those who are eligible to keep their books in foreign currencies must first obtain a participant certificate and be a participant according to Law. As per Law, the “Participant” is defined as real and legal persons, their branches and representative offices, ordinary partnerships, liaison offices, regional management centers and sovereign wealth funds that will operate in the office area by obtaining a certificate of participation. Additionally, as per paragraph 2 of the Article 3 of the Communique, to be eligible to keep books in foreign currencies, the activities of these participants must exclusively consist of the activities that form the basis for the deductions and exemptions listed in the first paragraph of Article 6 of the Law, or of the activities that qualify for income deductions under subparagraph (i) of the first paragraph of Article 10 of the Corporate Tax Law numbered 5520 (“Covered Activities”).

In this context, financial institutions that obtain a participant certificate and operate in the IFC, whose activities are exclusively related to the export of financial services, as well as institutions that obtain a participant certificate and operate in the IFC by selling goods purchased from abroad without bringing them to Türkiye or by acting as intermediaries in the purchase and sale of goods from abroad, will be able to benefit from this implementation.

III. START TIME OF THE IMPLEMENTATION

A. Participants Whose Activities Consist Exclusively of the Covered Activities

As per paragraph 2 of the Article 3 of the Communique, participants whose activities consist exclusively of those within the scope of the eligible activities will be able to keep their books in any foreign currency for which the exchange rate is determined daily by the Central Bank of the Republic of Türkiye (“CBRT”), starting from the 2025 fiscal period (or from the fiscal period that begins in 2025 for those with a special accounting period). On the other hand, participants whose activities are exclusively within the scope but who have not yet obtained their participant certificate as of the publication date of the Communiqué which is 26.09.2024, but start operations by obtaining their participant certificate by 31/12/2024, can also keep their books in any foreign currency, the rate of which is determined daily by the CBRT, starting from the date they begin operations. Therefore, participants whose activities are exclusively within the scope of eligible activities may keep their books in any foreign currency, the rate of which is determined daily by the CBRT without the need for any application or permit.

B. Participants Whose Activities Do Not Consist Exclusively of the Covered Activities

As per paragraph 3 of the Article 3 of the Communique, in addition to the Covered Activities, participants who also conduct other activities within or outside the region and wish to keep their books in foreign currencies exclusively for their branches within the region, must submit a written application to the Revenue Administration (“Administration”) through the tax offices to which they are affiliated for income or corporate tax purposes.

For participants falling under this scope, who wish to keep their books in foreign currency for their activities in the region, as per paragraph 4 of the Article 3 of the Communique, the following conditions must be met in order to submit an application:

i. As of the application date, at least 30% of its capital must belong to businesses owned by persons whose residence, legal, and business headquarters are located outside of Türkiye.

ii. As of the end of the most recent fiscal period prior to the application date, at least 30% of the income from activities within the region must be derived from the Covered Activities.

The income condition mentioned in paragraph (ii) will not be required for participants starting their activities for the first time.

Participants falling under this scope must submit their request to keep books in a foreign currency at least two months prior to the start of the fiscal period in which the books will be kept. The application must be annexed with:

i. A copy of the participant certificate and the foreign currency in which the books are to be kept.

ii. Information regarding activities within and outside the office area, as well as details of the ownership structure.

iii. Information regarding the gross sales revenue reflecting the volume of activities within and outside the office area.

iv. The ratio of the gross sales revenue obtained from the Covered Activities to the total gross sales revenue from all activities within the region.

For participants starting operations in the region for the first time, it will be sufficient to provide the information specified in paragraphs (i) and (ii).

Applications will be concluded by the Administration by the end of the fiscal period in which the application is made. Upon review of the application, participants with a valid participant certificate whose situation is deemed appropriate can be granted permission by the Ministry to keep their books in foreign currency.

IV. EXCHANGE RATES TO BE USED IN BOOK KEEPING

As per paragraph 8 of the Article 3 of the Communique, participants who keep their books in foreign currencies will convert transactions made in Turkish Lira into the foreign currency in which the records are kept, using the buying rates of exchange announced by the CBRT on the date the transaction occurred. For transactions made in foreign currencies other than the currency in which the records are kept, the cross-exchange rates announced by the CBRT on the date of the transaction will be used. In cases where no cross-exchange rate is available, the transactions in foreign currency will first be converted into Turkish Lira using the buying rates of exchange announced by the CBRT, and then converted from Turkish Lira into the foreign currency in which the records are kept, based on the buying rates of exchange announced by the CBRT on the same day.

Example 1: The participant (A) J.S.C., operating in the IFC and keeping its books in U.S. Dollars, issues an invoice in Euros on 20/8/2026.

Accordingly, (A) J.S.C. will convert the invoice amount, which is in Euros, into U.S. Dollars using the Euro/U.S. Dollar cross exchange rate announced by the CBRT on the date the invoice was issued, and will record the transaction in its books accordingly.

Example 2: The participant (B) J.S.C., operating in the IFC and keeping its accounting records in Euros, receives an invoice in Romanian Leu on 9/9/2026. As of the invoice date, the CBRT has not announced a Romanian Leu/Euro cross exchange rate.

In this case, (B) J.S.C. will first determine the Turkish lira equivalent of the invoice amount in Romanian Leu using the CBRT’s buying rate of exchange on the invoice date. The Turkish lira equivalent will then be converted into Euros, and the transaction will be recorded in the company’s books accordingly.

V. DECLARATIONS TO BE SUBMITTED BY PARTICIPANTS KEEPING THEIR BOOKS IN FOREIGN CURRENCY

As per Article 4 of the Communique, participants who keep their books in foreign currency will convert their declarations, including the balance sheet and income statements attached to the declarations, into Turkish lira using the exchange rate announced by the CBRT on the first day of the month in which the declarations must be submitted. They will submit their reports and declarations in Turkish lira. For declarations related to provisional tax periods, the exchange rates announced on the first day of the month in which the provisional tax return must be submitted will be used. For the payment, offsetting, and refund of taxes subject to the declaration, Turkish lira will be used.

Example 3: The participant (D) J.S.C., operating in the IFC and keeping its books in Russian rubles starting from the 2025 fiscal period, will submit its corporate tax return for the 2025 fiscal period in Turkish Lira, based on the Russian ruble buying rate of exchange announced by the CBRT on the first day of April 2026.

In cases where the CBRT does not announce the exchange rate on the first day of the month in which the declaration is due, the exchange rates announced on the first business day prior to that date will be taken into account.

VI. NOTIFICATION OBLIGATION OF PARTICIPANTS KEEPING BOOKS IN FOREIGN CURRENCY

As per Article 5 of the Communique, participants whose activities exclusively consist of Covered Activities, and who can keep their books in any foreign currency determined daily by the CBRT without the need for any application or permission, must notify the tax office to which they are affiliated for income or corporate tax purposes about the foreign currency they will use for their book records. This notification must be made by the end of the first month of the fiscal period in which they begin keeping books in foreign currency.

Participants who begin their activities for the first time during the fiscal period must notify the tax office to which they are affiliated for income or corporate tax purposes of the foreign currency they will use for their book records by the end of the month following the date they begin keeping books in foreign currency.

Those who fail to notify on time or provide misleading information will be subject to the relevant penalty provisions of the Tax Procedure Law numbered 213.

Participants who are granted permission by the Ministry to keep books in foreign currency as a result of their application do not need to make any further notifications under this scope.

VII. OTHER PRINCIPLES REGARDING THE IMPLEMENTATION

i. Those approved to keep books in foreign currency must keep their books based on the balance sheet method.

ii. Participants keeping books in foreign currency will determine the values of the assets included in the business and their tax bases at the end of the period (including provisional tax periods) according to the currency in which the records are kept.

iii. The date of delivery of goods or performance of services will be considered as the transaction date. However, if an invoice is issued before the delivery of goods or performance of services, the date the invoice is issued will be accepted as the transaction date.

iv. No switch to another foreign currency other than the one initially used for the records can be made until the end of the third fiscal period, including the first fiscal period in which book records are kept in foreign currency.

Example 4: The participant (C) J.S.C., operating in the IFC, starts keeping books in Euros from the 2026 fiscal period. Accordingly, this participant cannot keep books in any other foreign currency until the end of the 2028 fiscal period. However, from the 2029 fiscal period onward, books can be kept in U.S. Dollars or any other foreign currency, the exchange rate of which is determined daily by the CBRT.

v. Taxpayers operating in the IFC and keeping books in foreign currency may switch to keeping books in Turkish lira from the beginning of the following fiscal period. However, taxpayers who switch to keeping books in Turkish lira must continue to do so for three consecutive fiscal periods.

vi. Participants operating in the IFC and keeping books in foreign currency, whose participant certificates are canceled during the fiscal period, must switch to keeping books in Turkish lira from the beginning of the following fiscal period.

VIII. CONCLUSION

Allowing financial institutions engaged in financial service exports, as well as institutions involved in transit trade and intermediary activities for transit trade, who are included in the ecosystem of IFC, to keep their mandatory books and issue documents in foreign currency under the relevant regulations and incentives provided by the IFC is a significant step towards making the region a center of attraction.

Similar proactive measures to be taken within this scope will make important contributions to the vision of the IFC becoming a major financial and trade center in the world and will help Türkiye secure a larger share of the global investments.

References

  1. Published in the Official Gazette dated 28.06.2022 and numbered 31880. ↩︎
  2. Published in the Official Gazette dated 26.09.2024 and numbered 32674. ↩︎
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CALL OPTION AGREEMENT ON SHARES OF A JOINT STOCK COMPANY

Abstract

A call option agreement on shares of a joint stock company is an agreement that grants the option holder the right to purchase the shares subject to the agreement at the price and on the date determined in the agreement, at option holder’s unilateral will. However, due to the relative nature of the agreement, it is not possible to assert it against third parties. Accordingly, under Turkish law, call option agreements do not have corporate effect, and the most secure way to preserve the contractual right would be to obtain a call option agreement with deterrent penalty provisions and a guarantee from the transferor to cover failure to transfer the shares pursuant to the call option agreement. Furthermore, an escrow agent mechanism may be used to prevent the transfer of the shares to third parties in the event of a dispute between the parties regarding the call option agreement. It is important to note that these mechanisms are not definitive solutions to restrict the transfer of shares to a third party.

Keywords: Call Option Agreements, Call Right, Share Certificate, Joint Stock Company, Share Transfer Restrictions

I. INTRODUCTION

In principle, registered share certificates in joint stock companies may be transferred without any restriction. The realization of such transfer depending on the choice of the transferee in the future due to the current market situation, financial reasons or other commercial arrangements between parties lead us to the concept of call option or call right. In this study, the nature of call option agreements, their reflections in Anglo-Saxon law and Turkish law, the problems that may arise in the transfer of shares and the practices regarding alternative solutions to these problems are analyzed.

II. CALL OPTION AGREEMENTS

A. Call Option Agreements Under Anglo-Saxon Law

In Anglo-Saxon law, agreements are formed by the exchange of mutual declarations of will, and the subject matter of a call option agreement is constituted by another agreement. The agreement that constitutes the subject matter of the call option agreement is characterized as the main agreement and the call option agreement is defined as an option agreement established in order to guarantee that the main agreement is established at the option holder’s discretion1.Thus, with the call option agreement, the investment to be made by the option holder is left at its own initiative and offers the opportunity to evaluate alternative investments.

B. Call Option Agreements under Turkish Law

“A call option right entitles the holder to purchase shares at a price determined by the parties as to the amount or how it will be calculated at a specified maturity.”2 Accordingly, a call option is a right that gives the right holder the right to purchase the shares in question with a unilateral declaration of will, in other words, it is a formative right3. Accordingly, it is irrelevant whether the person who grants a call option to the other party under a call option agreement accepts the option holder’s declaration of will or not. This is because a call option agreement grants one party the right to purchase the shares at a price whose amount or method of calculation is specified in the agreement within the specified term, and imposes an obligation on the other party to sell the shares in question at the relevant price in the event that the call right is exercised4.

Although the call right gives the right holder the right to acquire the shares of the company under the conditions set forth in the agreement and the call option agreement is valid under the Turkish Code of Obligations numbered 60985, it does not have a corporate effect in Turkish law and only creates a contractual obligation to transfer the shares to the other party6. In this context, the fact that the call option is a relative right may cause various problems in practice.

III. REFLECTIONS AND PROBLEMS OF CALL OPTION AGREEMENTS UNDER TURKISH LAW

First of all, for a legally valid share transfer to take place in a joint stock company, the registered share certificates must be endorsed in the name of the transferee and the share certificates must be physically delivered by the transferor to the transferee (transfer of possession) in accordance with the relevant provisions of the Turkish Commercial Code numbered 61027. Additionally, in order for the new shareholder to assert its shareholding rights (voting rights, dividend distribution rights, etc.) against the company, the transferee must be registered as a shareholder in the share ledger of the company8. According to the mandatory provisions of the Turkish Commercial Code, since keeping the share ledger is one of the non-transferable duties and powers of the board of directors9, it will not be possible for the board of directors to authorize a third party to keep the share ledger of the company. Therefore, in the event of a possible share transfer in the future, the company’s board of directors must register the new shareholder in the company’s share ledger in order to exercise the shareholding rights.

In practice, if the option holder wishes to exercise the purchase right established by the call option agreement, there is no obstacle under Turkish commercial law for the debtor not to fulfill its obligation or for the shareholder to transfer the shares subject to the agreement to a third party before the option holder exercises its right. In the event that the shares are transferred to a third party, it is not possible for the option holder to assert its right against a third party due to the fact that the purchase right established by the agreement is a relative right as explained above. Therefore, in the event that the party obliged to transfer the shares under the call option agreement breaches its obligation, it is not possible to impose any remedy under Turkish commercial law10.

On the other hand, if the party to the call option agreement who is obliged to transfer the shares breaches its obligation, there are several remedies that can be provided under Turkish law of obligations.

IV. REMEDIES IN CASE OF BREACH

A. Specific Performance

In theory, if the breaching party does not voluntarily endorse and deliver the share certificates, the option holder has the right to forcibly take over the certificates through the execution offices11. However, Turkish execution offices do not execute such a takeover and there is no precedent in practice. On the other hand, this remedy is only applicable in the event that the share certificates are not endorsed and delivered to the option holder and does not restrict the transfer of the shares to a third party prior to option notice. For these reasons, specific performance is not considered as an applicable legal remedy under a call option agreement.

B. Penalty And Compensation

In the call option agreement, it is possible to determine certain penalty and compensation provisions in case of breach of the transfer promise. If such provisions are included in the agreement, in the event of a breach, a penalty or compensation will be paid in the amount specified in the agreement, and it would be beneficial to obtain a guarantee such as a bank letter of guarantee to guarantee the penalty or compensation. However, although penalty and compensation provisions are included in the agreement and deterrence against breach will be provided, this practice does not absolutely prevent the transfer of shares to a third party.

C. Handing Over the Share Certificates to the Escrow Agent

The shares that are the subject of call option agreements may be held by an escrow agent. An escrow agreement may stipulate that the escrow agent will hold the share certificates and deliver them to the transferee upon the fulfillment of the conditions in the call option agreement. However, even if the escrow agent delivers the share certificate to the transferee, in order for the shareholder to assert its shareholding rights, the share certificates must be registered in the share ledger of the company, and the board of directors of the company may refrain from registering the transferee in the share ledger. In this case, the transferee may file a lawsuit before the relevant Turkish court in order to be registered in the share ledger. In this context, the escrow agent mechanism may prevent the transfer of shares to third parties. However, although the escrow agent mechanism is widely used abroad, currently there is no business in Türkiye that provides escrow agent services. Therefore, in the current situation in Türkiye, the escrow agent mechanism is not common but real persons or businesses located abroad can be used as escrow agents.

D. Writing the Beneficiary on the Back of the Share Certificate

In practice, it is observed that the name of the option holder and the option right are written on the back of the share certificate in order to prevent the transfer of shares to third parties. Thus, it is intended to prevent transfers against third parties. However, in order to assert share transfer restrictions against third parties in joint stock companies, the relevant share transfer restrictions must be included in the articles of association12. Since the writing in question does not have such a legal effect, it will not be effective unless the third party is in malicious intent, and the option holder will not be able to claim ownership since it does not have possession of the shares. In addition, this practice is incompatible with the basis of the call option agreement. Because the purpose of the call option agreement is that the exercise of the option holder’s right is at its own initiative.

References

  1. Dr. Gülşah Yılmaz, Pay Sahipleri Sözleşmesinden Doğan Birlikte Satma Hakkı ve Birlikte Satışa Zorlama Hakkı, 1st Edition, İstanbul 2018, p.98-101 ↩︎
  2. Dr. Umut Metin, Şirketlerde Yönetim Kurulu Krizleri ve Çözüm Yolları, 2nd Edition, Ankara 2022, p.381 ↩︎
  3. Yılmaz, p.101-103 ↩︎
  4. Gül Okutan Nilsson, Anonim Ortaklıklarda Paysahipleri Sözleşmeleri, 1st Edition, İstanbul 2003, p.228 ↩︎
  5. 04.02.2011 dated and 27836 numbered Official Gazette ↩︎
  6. Nilsson, p. 228 ↩︎
  7. 14.02.2011 dated and 27846 numbered Official Gazette ↩︎
  8. Ali Murat Sevi, Anonim Ortaklıkta Payın Devri, 4th Baskı, Ankara 2018, p.273 ↩︎
  9. Turkish Commercial Code, Article 375 ↩︎
  10. Nilsson, p. 256-276 ↩︎
  11. Gül Okutan Nilsson/Oğuz Atalay, Anonim Ortaklık Pay Sahipleri Sözleşmelerinde Öngörülen Pay Alım ve Satım Opsiyonlarının Hukuki Niteliği ve Cebri İcrası Prof. Dr. Hüseyin Ülgen’e Armağan, 1st Volume, İstanbul 2007, p.416-418 ↩︎
  12. Turkish Commercial Code, Article 490 ↩︎
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INTERNATIONAL ARBITRATION IN TÜRKİYE

Abstract

Arbitration is an alternative form of adjudication to state proceedings in dispute resolution. In order to refer to arbitration, the dispute must meet certain conditions. In addition, the main reason for choosing arbitration as an alternative is the advantages which it offers to the parties. Arbitration, which has many types, is subject to recognition and enforcement in Türkiye if the arbitral awards are rendered abroad.

Keywords: Arbitration, Institutional Arbitration, Ad Hoc Arbitration, Arbitration Board, Arbitrator, Arbitral Award, Recognition and Enforcement

I. INTRODUCTION

Arbitration is the agreement of the parties, to the extent permitted by law, for the final and binding settlement of disputes that have arisen or may arise between the parties by arbitrators instead of courts.

The settlement of any dispute by arbitration is subject to two conditions. The first of these is that the dispute is arbitrable and the second is that the parties have agreed that the dispute will be resolved by arbitration.

The parties cannot arbitrate every dispute between them. In order for a dispute to be resolved by arbitration, it must be arbitrable and there must be a legally valid subject. Pursuant to Article 408 of Code of Civil Procedure numbered 61001, disputes arising out of real rights over immovable property, or disputes arising out of works that are not subject to the will of the two parties are not arbitrable. Considering this article, circumstances on which the parties cannot freely dispose, disputes that are expressly stated in the legislation as not arbitrable, or disputes where the principle of ex officio investigation is applied are not arbitrable2. Examples of such cases include settlement or acceptance, cases relating to the real rights of  immovable property, divorce, denial of paternity, and custody3. In addition to these, arbitrability cannot be mentioned in cases where there is a public interest or a superior interest. Lastly, disputes in criminal proceedings, administrative proceedings, enforcement law and non-contentious judicial proceedings are also not arbitrable4.

II. ADVANTAGES OF ARBITRATION

Arbitration has many advantages over other alternative dispute resolution methods such as judicial remedy or mediation and reconciliation. One of the most important advantages is that these alternative methods are not binding unless the parties have agreed that they are binding, whereas arbitration proceedings are binding. Especially in cases where non-binding alternative methods of resolution do not achieve results, the time spent and costs incurred during the use of these methods will be to the detriment of the parties to the dispute. In this respect, the binding character of arbitration proceedings is advantageous for the parties in terms of time and costs incurred5.

Another advantage of arbitration is that it is subject to confidentiality. The confidential resolution of the dispute, the protection of trade secrets, the non-publication of arbitral awards as a rule, and therefore the publication of arbitral awards to the extent permitted by the parties make arbitration more advantageous than other dispute resolution methods.

Arbitration proceedings are resolved by experts. Pursuant to the principle of natural judge in state proceedings, disputes are resolved by the competent and authorized courts6. Therefore, the parties are not able to choose the competent and authorized court for the resolution of the dispute, and therefore they are not able to choose the judge of their choice. However, arbitration proceedings are more advantageous compared to other judicial remedies, as the parties can choose an arbitrator who is specialized and knowledgeable in the subject matter of the dispute in arbitration proceedings.

In this context, unlike in state proceedings, since the parties have freedom of will in arbitration proceedings, the parties can choose the procedural rules to be applied in arbitration proceedings, the country where the proceedings will be held and the arbitrators7.

Another advantage of arbitration is that it is easier to enforce arbitral awards compared to the enforcement of court decisions. Under Turkish law, as per Act on Private International Law and International Civil Procedure numbered 5718 8(“APILICP“), enforcement of foreign court decisions and enforcement of foreign arbitral awards are regulated by different provisions. In order for a foreign court decision to be enforced in Türkiye, there must be reciprocity between the country where the foreign court decision was rendered and Türkiye. However, the international agreements that Türkiye has concluded in this regard are bilateral agreements, the number of which is quite limited. However, in terms of enforcement of foreign arbitral awards, since Türkiye is a party to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards 9(“New York Convention“), arbitral awards can be enforced in any country that is a party to the New York Convention, including Türkiye10. Thus, the enforcement of arbitral awards is made easier compared to the enforcement of court decisions.

Besides, from Türkiye’s perspective, arbitration is much more advantageous than other dispute resolution methods in terms of time, considering the length of the process together with the state proceedings, cassation and appeal phases.

The controversial issue in terms of arbitration is the cost of arbitration proceedings. Although the cost of arbitration is a concern for the parties’ preference for arbitration, arbitration is generally a more beneficial solution for the parties, especially when the importance of the dispute is taken into consideration, in addition to its advantages such as resolving the dispute in a shorter period of time and being more in line with the speed of commercial life and the expectations of the parties11.

III. TYPES OF ARBITRATION

The parties to arbitration proceedings may choose either institutional arbitration or ad hoc arbitration to resolve the dispute between them.

A. Institutional Arbitration

Institutional arbitration is the conduct of arbitration proceedings by an arbitral institution that has rules applicable to the arbitration proceedings and includes regulations governing arbitration12. Parties prefer institutional arbitration centers due to the more detailed regulation of arbitration proceedings and the existence of a regular, technical and administrative organization to manage the process13.

There are various arbitration institutions established for the resolution of disputes. International Chamber of Commerce (“ICC“) International Court of Arbitration, London Court of International Arbitration (“LCIA”), Permanent Court of Arbitration (“PCA”), Stockholm Chamber of Commerce (“SCC”), World Intellectual Property Organization (“WIPO”), Grain and Feed Trade Association (“GAFTA”), Court of Arbitration for Sport (“CAS”) and Istanbul Arbitration Center (“ISTAC”) are some examples of arbitration institutions.

Istanbul Arbitration Center Law numbered 657014 paved the way for institutional arbitration in Türkiye in the international arena. ISTAC and the Istanbul Chamber of Commerce Arbitration and Mediation Center (“ITOTAM”) can be cited as arbitration board in Türkiye.

B. Ad Hoc Arbitration

Ad hoc arbitration is a type of arbitration in which the parties determine the arbitrator, the arbitral tribunal and the arbitration procedure without being subject to any arbitral institution, and which, by agreement of the parties, is temporarily determined solely to resolve the concrete dispute between those parties15.

In practice, in ad hoc arbitration, the parties more often choose the United Nations Commission on International Trade Law (“UNCITRAL”) Arbitration Rules. If the parties choose the UNCITRAL Arbitration Rules for dispute resolution or if they cannot agree on the arbitration rules applicable to the dispute, the UNCITRAL Arbitration Rules will be applied upon the decision of the arbitration tribunal. Pursuant to the UNCITRAL Arbitration Rules, if the parties have agreed that a dispute between them in respect of a particular legal relationship, whether contractual or not, shall be resolved in accordance with the UNCITRAL Arbitration Rules, such disputes shall be resolved in accordance with these rules, taking into account the amendments to be agreed by the parties16.

IV. RECOGNITION AND ENFORCEMENT OF FOREIGN ARBITRAL AWARDS

A. In General

APILICP and New York Convention are the main regulations on the recognition and enforcement of foreign arbitral awards. According to these regulations, for a foreign arbitral award to be recognized and enforced in Türkiye, it must be a foreign arbitral award17. Pursuant to the first article of the New York Convention, in order for an arbitral award to be considered a foreign arbitral award, it must have been rendered and recognized in a place other than the country where enforcement is sought and the procedural rules of the country where enforcement is sought must not have been applied to that arbitral award. In this regard, the Supreme Court does not recognize ICC arbitral awards that are sought to be enforced as foreign arbitral awards in some cases. In cases where ICC arbitral awards are recognized as domestic arbitral awards, there will be no need to seek enforcement in order to ensure that the award is enforceable in Türkiye18.

Supreme Court had a ruling19 that ICC arbitral awards rendered by applying Turkish procedural law will not be considered as foreign arbitral awards, and in the light of this ruling, it can be said that such awards will be deemed as domestic arbitral awards and, therefore, will not be subject to enforcement. In addition, it is important to note that it does not matter whether it is an institutional arbitration or an ad hoc arbitration when seeking recognition and enforcement of a foreign arbitral award.

Pursuant to the fifth paragraph of Article 90 of the Constitution of the Republic of Türkiye20, as the New York Convention is an international treaty which Türkiye is a party, a foreign arbitral award falling within the scope of this Convention will no longer be enforced in accordance with the provisions of APILICP, but in accordance with the provisions of the New York Convention21. In other words, in order to apply the provisions of the APILICP to a foreign arbitral award that may be sought to be enforced, it must not fall within the scope of the New York Convention or the New York Convention must refer to the procedural law of the enforcing state. In the context of Türkiye, it must refer to APILICP.

In addition, under Turkish law, the court will only examine whether the judgment for which recognition and enforcement is sought meets the conditions for recognition and enforcement. Under Turkish law, according to the decisions of the Supreme Court, there is a prohibition on reviewing the correctness of foreign arbitral awards (revision au fond)22. Therefore, the authorized court will only examine whether the conditions for enforcement exist.

The authorized court for the recognition and enforcement of foreign arbitral awards is the civil court of first instance23. However, pursuant to the Code of Civil Procedure, the Supreme Court recognizes that the authorized court for the enforcement of foreign arbitral awards in commercial cases is the commercial court of first instance24. In addition, the parties may agree in writing on the competent court for the enforcement of foreign arbitral awards25.

B. Enforcement of Arbitral Awards in Türkiye

In order for foreign arbitral awards to be enforced in Türkiye, there must be no obstacle to the enforcement of the foreign arbitral award. Since the third article of the New York Convention refers to the procedural law of the enforcing state, the provisions of APILICP shall apply by analogy to the enforcement of foreign arbitral awards subject to the New York Convention26.

Enforcement of foreign arbitral awards is requested by petition from the court of first instance in the place agreed upon in writing by the parties. In the absence of such an agreement between the parties, the court of the place of residence of the party against whom the award has been rendered in Türkiye, or if this is not the option, the court of the place where the properties that may be subject to enforcement are located, shall be deemed competent27.

The reasons which will prevent the enforcement of foreign arbitral awards are regulated in the fifth article of the New York Convention, some of which are to be taken into account ex officio by the enforcement court and some of which are to be claimed and proved by the parties. Accordingly, the grounds that will be taken into consideration ex officio by the court are as follows:

  • The impossibility of resolving the dispute that is the subject matter of the arbitral award through arbitration according to the law of the country where recognition or enforcement is sought,
  • The arbitral award is contrary to public order.

The reasons preventing enforcement to be claimed and proved by the parties are as follows:

  • The parties to the arbitration agreement are incompetent or the arbitration agreement is invalid,
  • The party against whom enforcement of the award is sought has not been duly informed of the selection of the arbitrator or the arbitral proceedings or has been deprived of the opportunity to present evidence,
  • The arbitral award relates to a matter not covered by the arbitration agreement or exceeds the limits of the arbitration agreement,
  • The selection of the arbitrators or the procedure applied by the arbitrators is contrary to the agreement of the parties or, in the absence of such an agreement, to the law of the place where the award was rendered,
  • The arbitral award has not become final or enforceable under the law of the jurisdiction to which it is subject or where it was rendered, or has been set aside by the court of the jurisdiction where it was rendered28.

Foreign arbitral awards that are enforced shall be enforced in the same manner as Turkish arbitral awards. However, since the appeal of the enforcement decision will stay the enforcement of the arbitral award, the enforcement of the foreign arbitral award may be enforced after the court decision on enforcement becomes final. For the enforcement of a foreign arbitral award, a request for precautionary distraint may also be filed, if the conditions for it exist29.

C. Recognition of Arbitral Awards in Türkiye

Neither the New York Convention nor the APILICP provides different provisions for the recognition and enforcement of foreign arbitral awards. Therefore, the recognition of any foreign arbitral award is subject to the provisions on enforcement30.

Unlike the enforcement of a foreign arbitral award, there is no requirement to file a separate action for the recognition of a foreign arbitral award. A separate lawsuit may be filed for the recognition of the foreign arbitral award, or the recognition of the foreign arbitral award may be requested within a pending lawsuit31. This request must be made by way of a petition, and the petition must include the matters set forth in Article 52 of the APILICP and the documents set forth in Article 61 of the APILICP must be attached to the petition32.

If the Turkish court considers that the foreign arbitral award meets the conditions for recognition, the Turkish court will decide to recognize the foreign arbitral award and will decide either to consider the foreign arbitral award as conclusive evidence in that case or to dismiss the case due to res judicata. On the other hand, if it concludes that the foreign arbitral award does not meet the conditions for recognition, it will reject the request for recognition and proceed to examine the case on the merits. However, since the decision on the rejection of the request for recognition is an interim decision, it cannot be appealed on its own, but can only be appealed together with the final award33.

References

  1. 04.02.2011 dated, 27836 numbered Official Gazette ↩︎
  2. Derya Buluttekin, Hukuk Muhakemeleri Kanununa Göre Tahkimin Değerlendirilmesi (HMK m. 407-444), Dicle Üniversitesi Hukuk Fakültesi Dergisi, V. 27, 2022, s. 265; Özbay/Korucu, p. 8, 10; Pekcanıtez Usul, p. 2633 ed seq ↩︎
  3. Buluttekin, p. 265; Nuray Ekşi, Hukuk Muhakemeleri Kanunu’nda Tahkim, İstanbul: Beta Yayınevi, 2013, p. 73 ed seq ↩︎
  4. Buluttekin, p. 266; Nevhis Deren Yıldırım, Tahkime Elverişlilik, p. 53; M. Serhat Sarısözen, Medeni Usul Hukukunda Hakem Yargılaması, lst Edition, İstanbul 2005, p. 12 ↩︎
  5. Ziya Akıncı, Milletlerarası Tahkim, 4th Edition, İstanbul 2016, p. 7 ↩︎
  6. Akıncı, Milletlerarası Tahkim, p. 8 ↩︎
  7. Akıncı, Milletlerarası Tahkim, p. 8: Ziya Akıncı, Alternatif Çözüm Yolları, p.95-96, 101 ↩︎
  8. 12.12.2007 dated, 26728 numbered Official Gazette ↩︎
  9. 21.05.1991 dated, 20877 numbered Official Gazette ↩︎
  10. Akıncı, Milletlerarası Tahkim, p. 8 ↩︎
  11. Akıncı, Milletlerarası Tahkim, p. 9 ↩︎
  12. Asst. Prof. Dr. Ebru Karademir, Milletlerarası Kurumsal Tahkim Merkezlerinin Karşılaştırılması, MHB, V: 2, p. 73-104 ↩︎
  13. Cumhurbaşkanlığı İdari İşler Başkanlığı, Hukuk ve Mevzuat Genel Müdürlüğü, Tahkime İlişkin Temel Kavramlar, Düzenlemeler ve Güncel Gelişmeler, 1st Edition, Ankara 2021, p. 4: Nomer/ Ekşi/ Gelgel, p.3 ↩︎
  14. 20.11.2014 dated, 29190 numbered Official Gazette ↩︎
  15. Cumhurbaşkanlığı İdari İşler Başkanlığı, Hukuk ve Mevzuat Genel Müdürlüğü, p. 4: Nomer/ Ekşi/ Gelgel, p.7 ↩︎
  16. Cumhurbaşkanlığı İdari İşler Başkanlığı, Hukuk ve Mevzuat Genel Müdürlüğü, p. 4: Ergun Özsunay, UNCITRAL Tahkim Kuralları, Istanbul 2014, p. 3 ↩︎
  17. Prof Dr. Adnan Deynekli, Yabancı Hakem Kararlarının Türkiye’de Tanınması ve Tenfizinde Karşılaşılan Sorunlar, Dokuz Eylül Üniversitesi Hukuk Fakültesi Dergisi, 2015, p. 105-122 ↩︎
  18. Nuray Ekşi, Yargıtay Kararları Işığında ICC Hakem Kararlarının Türkiye’de Tanınması ve Tenfizi, Ankara Barosu Dergisi, No: 1, 2009, p. 59 ↩︎
  19. Ekşi, Yargıtay Kararları Işığında ICC Hakem Kararlarının Türkiye’de Tanınması ve Tenfizi p. 59; 11. HD, F.7355, R. 7099, D. 19.12.1985 ↩︎
  20. 09.11.1982 dated, 17863 numbered Official Gazette ↩︎
  21. Akıncı, Milletlerarası Tahkim, p. 339 ↩︎
  22. Akıncı, Milletlerarası Tahkim, p. 336 ↩︎
  23. Article 60/2 of APILICP ↩︎
  24. 11. HD., F. 2013/5133 R. 2013/8847 D. 02.05.2013 ↩︎
  25. Article 60/2 of APILICP ↩︎
  26. Ekşi, Yargıtay Kararları Işığında ICC Hakem Kararlarının Türkiye’de Tanınması ve Tenfizi, p. 58 ↩︎
  27. Article 60/2 of APILICP ↩︎
  28. Ekşi, Yargıtay Kararları Işığında ICC Hakem Kararlarının Türkiye’de Tanınması ve Tenfizi, Ankara Barosu Dergisi, No: 1, 2009, p. 59 ↩︎
  29. Akıncı, Milletlerarası Tahkim, p. 359 ↩︎
  30. Article 63 of APILICP ↩︎
  31. Ekşi, Yargıtay Kararları Işığında ICC Hakem Kararlarının Türkiye’de Tanınması ve Tenfizi, p. 58 ↩︎
  32. Akıncı, Milletlerarası Tahkim p. 349: Baki Kuru, Hukuk Muhakemeleri Usulü, İstanbul 2001V. VI, p. 6215 ed seq ↩︎
  33. Akıncı, Milletlerarası Tahkim, p. 349: Kuru, B. VI, p. 6215-6216 ↩︎
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