Turkey Announces the Exceptions of the Agreements Prohibited from Being Denominated in Foreign Currency

As it will be recalled, Presidential Decree No. 85, Amending Decree No. 32 on the Protection of the Value of Turkish Currency (the “Decree”) was published in the Official Gazette on September 13th , 2018 and became effective the same day:

According to the Decree;

1) The following paragraph has been inserted into Article 4 of Decree No. 32 on the Protection of the Value of Turkish Currency:

    “g) Save exceptional situations determined by the Ministry, persons residing in Turkey are prohibited to agree the contract value under, and other payment obligations arising out of, their mutual contracts of sale and purchase of movable and immovable properties, all types of movable and immovable property rent including vehicle and financial leasing, leasing and employment1 , service and intellectual work of art agreements, in, or indexed to, foreign exchange currency.”

2) The following temporary article has been inserted into Decree No. 32 on the Protection of the Value of Turkish Currency:

    “Temporary Article 8 – Save exceptional situations determined by the Ministry, the values determined in foreign currency in the previously executed and still effective contracts which are specified in article 4 paragraph (g) of this Decree, shall be redetermined by the parties in Turkish Lira within thirty days after the said paragraph enters into force.”

The Ministry of Treasury and Finance (the “Ministry”) was expected to deliver the exceptional situations with respect to the Decree.

(It is not explicitly mentioned in the Decree whether the term “iş sözleşmesi” in Turkish refers to not only the “employment agreements” in terms of the Labor Law, but also the “business agreements” in terms of the Turkish Commercial Code. We assume that it is intended to make a reference to “employment agreements” in terms of the Labor Law.)

Accordingly, the Communique No. 2018-32/51 Amending the Communique No. 2008-32/34 Regarding the Protection of the Value of Turkish Currency (the “Communique”) was issued by the Ministry and entered into force by being published in the Official Gazette on October 6th, 2018.

As per the Communique; contracts which are excepted from the Decree, and therefore, in which the values can be determined in or indexed to foreign currency despite the fact of being executed between the persons residing in Turkey, are mainly as follows:

    • Service contracts to which non-Turkish citizens of are a party,

    • Service contracts executed within the scope of the export, transit trade, sales and deliveries deemed to be export as well as the services and activities of earning foreign exchange,

    • Service contracts executed within the scope of activities to be performed out of Turkey by the persons residing in Turkey,

    • Service contracts to be executed between the persons residing in Turkey regarding the electronic communication that starts in Turkey and ends out of Turkey, or that starts out of Turkey and ends in Turkey,

    • Sale/lease contracts regarding movables except sale/lease contracts regarding the vehicles including construction vehicles,

    • Sale contracts regarding the software produced out of Turkey, as well as the license and service contracts regarding the hardware and software within the scope of information technologies,

    • Financial leasing contracts executed within the scope of the articles 17 and 17/A of the Decree No. 32 on the Protection of the Value of Turkish Currency,

    • Employment contracts to which non-Turkish citizens residing in Turkey are a party,

    • Employment and service contracts, to which the branches, representative offices, offices, liaison offices located in Turkey and owned by the persons residing out of Turkey, as well as the companies in which such persons own directly or indirectly fifty percent or more than fifty percent of the shares, and the companies in free trade zones within their activities in free trade zones, are a party,

    • Vehicle (including construction vehicles) lease agreements executed before the enforcement date of temporary article 8 of the Decree.

As per the Communique, enterprises, companies and funds located out of Turkey are deemed to be “resident in Turkey”, and thus, within the scope of the Decree in presence of certain circumstances. Accordingly; “The branches, representative offices, offices, liaison offices located in Turkey and owned by the persons residing out of Turkey, and the funds operated or managed by such persons as well as the companies in which such persons own fifty percent or more than fifty percent of the shares or which such persons directly or indirectly own, are deemed to be resident in Turkey as the implementation of paragraph (g) of article 4 of the Decree No. 32 on the Protection of the Value of Turkish Currency.”

As per the Communique, in the case that the parties cannot reach to a mutual agreement on re-determining the values in TL in the contracts not excepted from the Decree, TL equivalent of the values in the contracts are first calculated taking into account the effective exchange selling rate of T.R.C.B. as of January 2nd , 2018 as the “indicator rate” and then such TL equivalent will be increased based on the monthly changes of the consumer price index announced by Turkish Statistical Institution every month between January 2nd, 2018 and the date of such redetermination. In such way, the values determined in, or indexed to, the foreign currency in the contracts will be re-determined in TL under the scope of the Decree.

Furthermore, this rule will apply to the lease contracts for houses and roofed-working places for a transitional period of two years, however, will not apply for collected or due receivables. If the parties do not re-determine the values in the lease contracts for houses and roofedworking places within a transitional period of two years, it is unclear how the Decree will be implemented after the end of such period.

We hope that this memorandum is sufficiently explanatory for you. In order to receive more detailed information regarding the Decree and the Communique as well as any possible question on a specific situation, please do not hesitate to contact us.