Turkey : Openness To Foreign Investment

Openness to Foreign Investment

The Government of Turkey (GOT) views foreign direct investment as vital to the country's economic development and prosperity. Accordingly, Turkey has one of the most liberal legal regimes for FDI in the OECD. With the exception of some sectors (see below), areas open to the Turkish private sector are generally open to foreign participation and investment. However, all investors – regardless of nationality – face a number of challenges: excessive bureaucracy, a slow judicial system, high taxes, weaknesses in corporate governance, sometimes unpredictable decisions made at the local government level, and frequent changes in the legal and regulatory environment.

Regulations governing foreign investment are, in general, transparent. Turkey provides national treatment, including in the acquisition of real estate by foreign-owned corporate entities registered under Turkish law, and in most sectors does not have an investment screening system (only notification is required). The GOT uses "reciprocity with the related nation" as a precondition for real estate property purchases by foreigners, and set an upper limit of 2.5 hectares on real estate purchases by foreign individuals. No individual may own more than 10 percent of the land in any given development zone.

Equity participation of foreign shareholders is restricted to 25 percent in broadcasting and 49 percent in the aviation and maritime transportation sectors. Establishment in financial services, including banking and insurance, and in the petroleum sector requires special permission from the GOT for both domestic and foreign investors. In practice, regulators have not restricted foreign ownership in the financial sector: in 2005 and 2006 a series of foreign acquisitions in the sector were approved, and several foreign financial houses have longstanding operations in Turkey.

Turkey's privatization process continues to move forward. The GOT privatizes State Economic Enterprises through block sales, public offerings, or a combination of both. Transactions completed under the Turkish privatization program generated $8.1 billion in 2006 and $4.3 billion for 2007 and $6.3 billion in 2008. The Turkish government is committed to continuing the privatization process although the contraction in global capital flows that began in 2008 may cause some delays.

Bureaucratic "red tape" has been a significant barrier to companies, both foreign and domestic. However, recent reforms have simplified company establishment procedures, reduced permit requirements, instituted a single company registration form, and enabled individuals to register their companies through local commercial registry offices of the Turkish Union of Chambers and Commodity Exchanges.

Since 2001, the Turkish government has been implementing a comprehensive investment climate reform program. This program aims to streamline all investment-related procedures and to attract more FDI to the country. A national platform jointly formed by the public and private sectors, the Coordination Council for the Improvement of Investment Environment (YOIKK), provides technical guidance for issues relating to the investment environment.

In addition, the Investment Advisory Council of Turkey (IAC) was created in 2004 to provide an international perspective for the reform agenda of Turkey. IAC members include executives from multinational companies, representatives of international institutions such as the IMF, World Bank and EIB, and the heads of Turkish NGOs representing the private sector. The Council, chaired by the Prime Minister, convenes yearly to advise the government on the direction of its reform program. The Council’s recommendations serve as a guideline for the YOIKK Platform, and developments regarding the Council recommendations are published in the Turkish Treasury's annual IAC Progress Reports.

The government continues to implement judicial reforms, some of which aim to attract foreign investment to Turkey. The National Judiciary Network project, automation and integration project overseen by the Ministry of Justice, completed construction of the technical infrastructure in 2008 and is expected to be fully online in 2009. This will significantly speed the processing of commercial cases by sharing documents and court records more easily, as well as allowing for the filing of suits online. The Ministry of Justice began redistributing caseloads among courts in 2007 to reduce the burden in the busiest courts. As part of this redistribution, the Ministry shut down 137 small district courts and reassigned their resources to those with increased workloads. In addition, the government has improved foreign investors' access to justice, including to legal aid and Alternative Dispute Resolution mechanisms supported by the U.S., the EU, and the World Bank.

In addition to structural reforms, the Investment Promotion Agency (IPA), whose main objective is to support new investors throughout the establishment process and solve problems that arise after establishment, became much more active in 2007. The agency serves as an advocate within the government for reforms that promote investment and works to raise public awareness of the benefits of investment.

Turkey also made the taxation system more investor-friendly. In 2006, the basic corporate tax rate was reduced from 30 to 20 percent. The Government also cancelled the withholding tax for foreign investors' holdings of bonds, bills, and stocks, while retaining it for bank deposits and repurchase agreements. The Tax Administration also established a large taxpayer unit in 2007 that will handle tax collection from large corporations. The GOT failed to implement further tax reforms, however, including an employment tax reduction, the rate of which is among the highest of OECD countries. The GOT also increased the VAT tax on leasing activities from 1 percent to 18 percent at the end of 2007. The special consumption tax on alcoholic beverages as of 2008 is 275.6%, with a minimum specific tax requirement calculated based on the product’s market price.

Turkish law and regulations affecting the investment climate continue to evolve. Potential investors should check with appropriate Turkish government sources for current and detailed information.

Text of regulations governing foreign investment and incentives as well as other useful background information

Additional information on the reforms can be found in the Treasury website.

Conversion and Transfer Policies

Turkish law guarantees the free transfer of profits, fees, and royalties, and repatriation of capital. This guarantee is reflected in Turkey's 1990 Bilateral Investment

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