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.

Key Words: 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. 5018[15] 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. 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

2. Frequently Asked Questions Regarding the Amendments Made on 16.11.2018 to the Communiqué (Communiqué No: 2008-32/34) on Decree No. 32 on the Protection of the Value of Turkish Currency

(https://www.hmb.gov.tr/finansal-piyasalar-ve-kambiyo-sikca-sorulan-sorular)