In 2018, a ban on agreements in foreign currency was introduced to protect the Turkish Lira. Many difficulties were encountered in practice. Many amendments were made with the new communiqué having published in April 2022.
Transactions and agreements in foreign currency, essentially, are not a new subject, however, they are always on the agenda and questions and assessment on this subject are, in practice, endless. With the fluctuations in exchange rates since 2018, a set of rules were brought in for agreements made or to be made which are in foreign currency or foreign currency-indexed between the persons settled in Türkiye to maintain the continuance of commercial and production activities, create balances in debt-credit relationship, and protect the rights of parties.
The initial starting point of these rules was the Presidential Decree No. 85 published in the Official Gazette dated September 13, 2018, and numbered 30534 based on the Decree No. 32 on the Protection of the Value of Turkish Currency Law (“the Decree”). We remember very well that the Decree introduced a prohibition on the determination of the prices in foreign currency or foreign currency-indexed in the real estate lease agreements to be concluded between the persons settled in Türkiye. Subsequently, the expected regulation regarding the implementation and exceptions of the Thereafter, Decree entered into force after being published in the Official Gazette onOctober 6, 2018 (“Communiqué”). By the way, I would like to emphasise to avoid any misunderstanding that the regulations at that time were not enough competent to fully meet the needs and questions in practice, additional alterations were brought in on this subject up to 2022; I will refer to them in the rest of my article.
The first thing drawing attention in the Communiqué dated October 6, 2018, was that Türkiye residents shall not determine the prices of the agreements to be concluded between themselves, which are also mentioned below, and other payment obligations arising from these agreements in foreign currency or foreign currency-indexed. Sales and lease agreements, including agreements which their subject is free zone, related to domestic real estates, vehicle and lease agreements, including agreements which their subject is work machine, labour agreements other than those to be performed abroad, service and work agreements, including consulting, brokerage and transport agreements, were included in this scope. Whilst the said agreements in foreign currency are largely prohibited to do so with the Communiqué, afterwards, many of these prohibitions were lifted and a relief to certain extent was observed in the market.
REGULATIONS ARE BEING CONTINUED
Some other significant changes have come to our aware as of April 19,2022. With this new regulation, an attempt has been made to clarify the issue of foreign currency agreements and payment in foreign currency in ‘movable sales agreements' which are the subject of much debate. Of course, at this point, what the term ‘movable' mentioned in the Communiqué covers is occupying the agenda. There is no direct definition of the term ‘movable' in the Communiqué, nonetheless, according to the general rules of law, it can be said that it covers all kind of goods and property which is excluded out of the definition of real estate.
If you ask what this last regulation have brought to the table, it can be said that the agreement prices in movable sale agreements to be concluded between the persons settled in Türkiye may be determined in foreign currency or foreign currency-indexed. However, payments cannot be made in foreign currency; payments can be made only in Turkish Liras. There is no explanation in the Communiqué regarding the exchange rate on which date will be taken into account for payments made to be in Turkish Lira. In practice, until now, what is seen frequently in practice is that the exchange rate announced by Central Bank on the day of the payment are taken as basis. At the stage we have reached in practice, At the stage we have reached in practice, foreign currency transactions and foreign currency agreements are still handled in each concrete case as to whether they fall within the scope of the prohibition or exemption, and ambiguous points emerge. It is hoped that these issues will be finalised with rapid and proper regulations according to the developing need of the day.
GROUP COMPANY BORROWINGS
One of the other debate subjects in practice was that whether the borrowings between group companies can be done in foreign currency. The foreign currency transactions was regulated under foreign exchange law, no coordinated collective regulations have been made in reference to tax regulations. The subject, with this aspect, remains to legal and tax interpretations in practice. At first, the Ministry of Finance interpreted intra-group borrowings in foreign currency between group companies narrowly and stated that they fall within the scope of the prohibition of transactions foreign currency under the Communiqué. However, the market, business world, legal experts and tax experts have objected this firmly. The Treasury has intervened and conveyed an official letter to the Ministry of Finance (MTF General Directorate of Financial Markets and Exchange's dated E.86766257-010.99-116665) and accordingly, it stated that it does not fall within scope of the prohibition of transactions in foreign currency since the issue of taxpayers' borrowings or lending in foreign currency or foreign currency-indexed to/from their partners, their subsidiaries or their affiliates should not be assessed as agreements in foreign currency or foreign currency-indexed but as the use/ensuring to use of credit in foreign currency. However, the topic does not just stop there. As you can see from the above, Central Bank needs to be included in the framework with the Treasury's assessment of intra-group borrowing as the use/ensuring to use of credit in foreign currency. The topic evolves into this; “The company with a surplus of funds may transfer the equivalent amounts in foreign currency related to the borrowing transactions, provided that the pursuance is made in Turkish Lira, to the relevant domestic accounts of the company or group company within the same holding group with a deficit of funds based on the written declaration of the company in order to deposit the relevant amount in foreign currency.” At this point, intra-group borrowings can be made as long as the borrowing and pursuance made in Turkish Lira and within the scope specified. This issue has not been clear yet since it needs the inclusion of tax regulations and assessments. It will be in the interest of commercial life and all stakeholders in the market if the Ministry of Finance and competent authorities address this issue in co-ordination and introduce new regulations which aim to eliminate ambiguous and incomplete points.
WHAT DID THE NEW REGULATION BRING IN?
- It is possible to make payment obligations regarding the movable sale agreements concluded/to be concluded between the Türkiye residents and non-residents in foreign currency.
- Cheque and so forth issued in foreign currency on or after April 19, 2022, in payments obligations in foreign currency regarding the movable sale agreements concluded/to be concluded between the persons resident in Türkiye will not be possible.
- The alterations will not change the current situation of vehicle sale agreements. Thus, determining the prices in vehicle sale agreements to be concluded between the persons settled in Türkiye and other payment obligations arising from these agreements in foreign currency or foreign currency-indexed will not be possible.
- Precious metal and precious stone trading transactions in foreign currency at Precious Metals and Precious Stones traded in İstanbul Exchange joint stock company and payment obligations within the context of exchange of these transactions will be possible to be made.
- The agreements regarding the transactions performed within the scope of the Law on the Regulation of Public Financing and Debt Management numbered 4749 will not be subject to ban on payment in foreign currency.
- Issuing, buying, selling and trading capital market instruments in foreign currency including foreign capital market instruments, depositary receipts and foreign investment fund shares, and the determination of the obligations in foreign currency regarding the transactions thereof will be possible.
- The bans on payment in foreign currency in the Communiqué related to the other agreements will remain valid.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.