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The subject of this study is to guide to foreign investors who are planning to invest and to do business in Turkey. It should be underlined that this study frames only the general climate of Turkish Investment atmosphere. Therefore, a foreign investor who is really thinking about investing in Turkey should take legal advice in order to consider special conditions that could change case by case. For this purpose, our firm is ready to serve foreign investors who would like to invest in Turkey. Detailed information could be extracted from this link: www.legal-finance.com

The information that stated in this study refers to the actual legal situation in Turkey up to September 2005.

Different types of incentives could be enumerated as the followings:

• Investment incentives
• Export incentives
• Incentives in Free Trade Zones
• Technology Parks
• Research and Development subsidies
• Regional incentives
• Incentives and advantages on custom operations
• Incentives for Environmental Protection
• Incentives on opening specialization fairs in domestic and foreign countries
• Incentives on expenses of patent, useful model certificate and industrial design
• Incentives on office-shop and enterprise-brand introduction operations
• Tax incentives on revenues obtained from the operation and transfer of ships registered in ship register

The main purposes of the incentives are to eliminate the interregional imbalances, to facilitate a larger capital contribution by the public to the capital structure and to support activities that have a positive effect on employment.

Firstly, it should be noted that the new Foreign Direct Investment Law abolishes all of the permits that are required for establishing a company with foreign capital. As a result, all transactions for establishing a company with foreign capital will be the same as with local companies. All companies established with a foreign capital contribution and under the rules of the Turkish Commercial Code (existing and newly established foreign companies) are regarded as a Turkish company. Therefore, all duties and responsibilities are equal regardless of the nature of capital formation. Then, it could be easily said that Turkey is a country where the principle of non-discrimination and equal treatment finds scope of application. This is an important point inciting the foreign investors to invest in Turkey.

On the other hand, there are no rules requiring a Turkish participation in the capital or management of a company with foreign capital; a company may be established with 100% foreign capital and almost all sectors are open to foreign capital. It should also be clarified that under the new Foreign Direct Investment Law, a minimum amount of capital is no more required to establish a company with foreign capital. Moreover, it is no longer obligatory to establish either a limited liability company or joint stock company. Any form of company included in the Turkish Commercial Code is acceptable.

The company establishment procedures have been simplified to a great extent through shifting from screening system to monitoring system for foreign investments and through eliminating the unnecessary procedures to set up a business for both the local and foreign investors.


Investment Incentives

Investment incentives in Turkey could be classified under three main topics:

• General incentive regime
• Incentives granted to Small and Medium Size Enterprises (SMEs)
• Energy support

General Incentive Regime

General incentive regime is mainly a tax benefit program with some credit possibilities. This regime varies according to the location, scale and subject of investments. Also, the region where the investment will be realized is important. Because Turkey is divided into three types of region with different levels of incentives in order to eliminate regional imbalances and to create job opportunities in less developed areas. The followings are the categories of the regions:

- Developed Regions
- Priority Development Regions
- Normal Regions

Developed regions include the cities of Istanbul, Ankara, Kocaeli, Izmir, Antalya, Bursa and Adana. Priority development regions are determined by a decision of the Council of Ministers. The other cities falling outside of developed regions and priority development regions compose normal regions.

The main investment incentive tools that the investors could benefit from are:

- Exemption from custom duties and fund levies
- Investment allowance
- Value added tax exemption for imported and locally purchased machinery and equipment
- Exemption from certain taxes, duties and fees
- Credit allocation from the Budget

In order to be entitled these investments ( except investment allowance ), foreign investors must apply to General Directorate of Foreign Investment (GDFI) of Turkish Treasury with their feasibility studies and proposals to obtain an incentive certificate before the investment is initiated. The first condition of getting this certificate is that the investment must cost 600 million YTL in developed regions, 400 million YTL in the normal regions and 200 million YTL in priority development regions. On the other hand, it is not necessary an incentive certificate for investment allowance and also the above mentioned condition concerning the investment cost is not sought for investment allowance.

a) Exemption from Custom Duties and Fund Levies
Within the scope of an incentive certificate, the import of machinery and equipment is exempt from custom duties and fund levies. In practice, this incentive is important for the imports outside of EU because the Custom Union Treaty has already been ensuring the exemption from custom duties for the imports from EU countries.

b) Investment Allowance
Through the investment allowance for which it is not necessary to get an incentive certificate, investors could benefit from a deduction of 40% of purchase price of the brand-new fixed asset purchases exceeding 5 million YTL, from the corporate tax base. The deduction is realized automatically from the corporate income without an incentive certificate. Any brand new fixed asset exceeding 5 million YTL is eligible for investment allowance, except for the cars, aircraft, sea vessel, etc, intellectual property (purchase of licenses, royalties, trademarks), purchase of lands and lots, construction and purchase of buildings that will not be utilized as a place of business or production facility, furniture and fixtures that are not directly relevant to the production of goods and services.

c) VAT exemption for imported and locally purchased machinery and equipment
Imports and local purchases of machinery and equipment within the scope of incentive certificate are exempt from VAT.

d) Credit allocation from the Budget
Credits could be granted, within the limits in compliance with the legislation about state aids on investments, in order to guide and encourage the following investments:

- Research and development investments
- Technology parks and investments to be realized in technology parks
- Investments related to environmental protection
- Priority technological investments which are determined by the High Commission of Science and Technology or TUBITAK
- Investments aiming at eliminating regional imbalances
- Investments to be relocated to Organized Industrial Zones
- Investments concerning production industry, agricultural industry and mining in priority development regions

Incentives granted to Small and Medium Size Enterprises (SMEs)

Incentives granted to SMEs cover the following investments:

Investments in the production and agricultural sectors (excluding cotton gin and non-integrated packaging investments) to be realized by the enterprises of which the value of the total machinery and equipment, vehicles, properties, installations and other facilities excluding land and buildings do not exceed 600 million YTL and with a maximum of 250 employees.

SME investment certificate is not issued for the research-development investments in developed regions, investment for environmental protection, technopark investments and complete new investment that will be made in special organized industrial zones determined by Ministry of Industry and Trade and organized industrial zones and small-scale industrial zones including organized small-scale industrial zones constituted from small-scale industrial zones.

-Tourism investments excluding the coastline Canakkale and Mersin and the districts of Urgup, Avanos and Nevsehir.
- Health investments in priority development regions
- Educational investments to be realized in priority development regions and expansion and modernisation of existing primary and secondary education facilities in developed and normal regions.
- Mining
- Software development

The incentives tools that accorded to SMEs are these followings:

- Credits for machinery, equipment and raw materials
- Investment allowance
- Custom duty and fund exception (excluding importation of used machinery and equipment)
- Stamp duty and fees exception
- VAT exemption for imported and locally purchased machinery and equipment

Energy Support

Energy support is provided in the regions where GDP per capita equal to or less than 1500 USD as from 2001. The conditions that are needed to obtain energy support are the followings:

- Companies should be operating in manufacturing industry, mining, animal husbandry (including aquaculture and poultry), greenhouse production, cooling warehouse, tourism, education and health sectors.
- Newly established companies should employ at least 10 workers permanently after starting operation.

The maximum rate of energy support is 40% of the electricity cost. For companies established in the organized industrial zones or industrial zones, this rate is 50%.

Export Incentives

Export incentive tools are these followings:

- Export credits
- Exemption from taxes, duties and charges
- Insurance of export receivables
- Exemption from VAT and custom duties for raw materials and intermediary goods
- State aids for certain expenses

Export Credits
Turkish export policy is aimed at encouraging the companies and the manufacturers to export goods. In order to realize this policy, export credits are provided to companies and manufacturers through Eximbank (the export credit bank of Turkey). Credit conditions that are searched by Eximbank are appropriate to the EU’’s conditions. This is a necessity emerged from the entry of Turkey to customs union. The credits are both available in YTL and in foreign currency.

Exemption from Taxes, Duties and Charges
All types of export credits, including letters of guarantee, letters of credits and all other export-related transactions are exempt from all taxes and charges.

Insurance of Export Receivables
Export receivables derived from export proceeds are insured by Turk Eximbank against commercial and politic risks.

Exemption from VAT and Customs Duties for Raw Materials and Intermediary Goods
Import raw materials, intermediary goods, packaging materials to be used in the production of goods to be exported are exempt from customs duties, VAT and other charges.

State Aids for Certain Expenses
Subsidies are granted for management and promotional expenses for new foreign offices, registration expenses of patent and other industrial property rights, personnel training expenses, trade fair and show expenses.

Incentives in Free Trade Zones

Although the free trade zones are geographically in Turkish territory, they are regarded as outside of Turkish custom borders. Free trade zones are created in order to assist investors wishing to benefit from Turkey’s location, to increase export-oriented investment, to accelerate the entry of foreign capital and to raise the utilization of external finance and trade possibilities.

In order to participate in operations in free trade zones, permission should be received from the General Directorate of Free Zones. There is an application fee to obtain this permission. The amount of this fee is 5000 USD. If the application is rejected and the permission is not granted, this fee is refunded. These permissions are valid for 15-30 years and their validity period can be extended at the expiration date.

Investors who receive operation permission pay rental fees ranging between USD 5-11/m2/month for office, warehouse, factory buildings and USD 4/m2/month for open storage areas in the free trade zones. It is possible for investors to build their own factories, premises in some free trade zones.

The currently operating free trade zones are listed below:

- Mersin (1987)
- Antalya (1987)
- Aegean (1990)
- Istanbul Ataturk Airport (1990)
- Trabzon (1992)
- Istanbul Leather Industry (1995)
- Eastern Anatolia (1995)
- Mardin (1995)
- IMKB (Istanbul Stock Exchange) (1997)
- Izmir Menemen Leather (1998)
- Rize (1998)
- Samsun (1998)
- Istanbul Trakya (1998)
- Kayseri (1998)
- Europe (1999)
- Gaziantep (1999)
- Adana Yumurtalik (1999)
- Denizli (2001)
- Bursa (2001)
- Kocaeli (2001)
- Tubitak-Marmara Research Center Technology (2002)

The advantages that the free trade zones offer to the investors are stated below:

Exemption from Income and Corporate Tax
The income obtained through the activities in the free trade zone by real or legal persons was exempt from all kinds of tax including corporate and income tax but the discussions concerning the incentives in free trade zones resulted with the restriction imposed to tax exemptions. Thus, the exemption for corporate income tax was abrogated. However, a transition period is accepted in order to protect the gained rights of the taxpayers who have been already operating in free trade zones. As a result, taxpayers possessing an operating license as of 6 February 2004 will benefit from the income tax exemptions for the duration of their license.

Furthermore, salaries paid to employees working in the zones are exempted from income tax but this exemption will remain in effect until end of 2008.

The earnings from manufacturing activities of existing licence-holders in free trade zones will be exempt from corporate income taxes until the end of year in which Turkey becomes a full member of the European Union. This exemption will also apply to the earnings of new investors from the sale of goods manufactured in free trade zones. The earnings from the sale of the goods manufactured in free trade zones to Turkey may also benefit from the exemption.

Exemption from Value Added Tax
The transactions performed in free trade zones are exempt from VAT. The transactions between Turkish free trade zones are also out of the scope of VAT. In addition, sales from Turkey to the free trade zones are regarded as exports and these are not also subject to VAT. However, sales from free trade zones to Turkey are treated as imports and VAT is imposed to these sales to Turkey.

Free trade zones earnings can be transferred freely to any country, including Turkey, without any prior permission from a competent authority.

Exemption from Custom Duties
Custom duties are not imposed to goods while they are entering into the free trade zones, it is not important from which country the goods come from. However, importation from free trade zones to Turkey is subject to foreign trade regime.In Turkish free trade zone regime, there is no regulation restricting importation of goods from free trade zones to Turkish domestic market.

Exemption from Stamp Tax
The transactions in the free trade zones are exempt from stamp duty.

Exemption from other Taxes, Fees and Duties
Except for the payments to Special Account and social security taxes, no other taxes, fees and duties are applicable in free trade zones.

Research and Development Incentives

Reimbursement of certain expenses and grant of subsidized credits are provided for research and development activities. The following research and development activities could benefit from the incentives:

- Concept development
- Technologic and economic feasibility studies
- Design and drawing studies
- Prototype production
- Establishment of pilot facility
- Pilot production
- Patent and license studies
- Post-sales solutions studies for problems arising from product design
- Laboratory studies in the transition stage from design to implementation

The Scientific and Technical Research Council of the Turkish Republic is competent to decide whether the State aid would be granted.

Furthermore, deferral of corporate tax is provided for companies’ research and development activities. The companies are required to apply to Ministry of Finance to defer their corporate tax before the due date for the submission of the corporate tax return. The deferred tax is payable in 3 years in equal installments, free of interest.

Related Links

Ministries

Ministry of Agriculture and Rural Affairs
www.tarim.gov.tr

Ministry of Culture and Tourism
www.kultur.gov.tr

Ministry of Energy and Natural Resources
www.enerji.gov.tr

Ministry of Finance
www.maliye.gov.tr

Ministry of Foreign Affairs
www.mfa.gov.tr

Prime Ministry
www.basbakanlik.gov.tr

Governmental Bodies

Export Promotion Center
www.igeme.org.tr

Investor Relations Office
www.hazine.gov.tr/iro.htm

Office of the First Economic Counsellor
www.turkisheconomy.org

Republic of Turkey Prime Ministry Undersecretariat of Customs
www.gumruk.gov.tr

Small and Medium Industry Development Organization
www.kosgeb.gov.tr

State Institute of Statistics
www.die.gov.tr

State Planning Organization
www.dpt.gov.tr

The Central Bank of Turkey
www.tcbm.gov.tr

Turk Eximbank Export Credit Bank of Turkey
www.eximbank.gov.tr

Turkey Cooperation and Development Administration
www.tika.gov.tr

Turkish Exporters Directory
www.dtm.gov.tr

Undersecretariat of the Prime Ministry for Foreign Trade
www.dtm.gov.tr

Undersecretariat of the Prime Ministry for Treasury
www.treasury.gov.tr

Independent Administrative Bodies

Banking Regulation and Supervision Agency
www.bddk.org.tr

Capital Markets of Board of Turkey
www.cmb.gov.tr

Energy Market Regulatory Authority
www.epdk.org.tr

The Scientific and Technological Research Council of Turkey
www.tubitak.gov.tr

Turkish Competition Authority
www.rekabet.gov.tr

Unions and Organizations

Economic Development Foundation
www.ikv.org.tr

Foreign Economic Relations Board
www.deik.org.tr

Foreign Investors’ Association
www.yased.org.tr

Technology Development Foundation of Turkey
www.ttgv.org.tr

The Union of Chambers and Commodity Exchange
www.tobb.org.tr

Turkish Exporters’ Assembly
www.tim.org.tr

Turkish Foreign Trade Association
www.turktrade.org.tr

Turkish Industrialists and Businessmen Association
www.tusiad-us.org