Turkish Law Blog

Regulations and Final Amendments on the Protection of the Value of Turkish Currency

Yudum Uğur Yudum Uğur/
17 February, 2019
346

Decree No. 32 on the Protection of the Value of Turkish Currency (Decree No. 32) prepared by the Council of Ministers and published on the Official Gazette dated 11 August 1989 and numbered 20249, enacted on the Law No. 1567 on Protection of the Value of Turkish Currency published in the first years of the Republic of Turkey, has been amended by the decree of the President of Republic on the 13th of September 2018. This amendment has been implemented by adding a new subparagraph (subparagraph g) titled "Foreign Currency" to Article 4 of the Decree No. 32 on Protection of the Value of Turkish Currency. Subparagraph is as follows:

"(g) Residents in Turkey, except under certain circumstances to be determined by the Ministry, shall not determine contract price in lease of all kinds of movable and immovable properties including purchase and sale of movable and immovable, vehicle and financial leasing, leasing, employment and service agreements and contracts of work, and any other payment liabilities arisen from the foregoing contracts executed by and between Turkish residents, in foreign currency or indexed to foreign currency.

This Article does not mean that any foreign currency cannot be denominated or indexed to foreign currency in any contract in Turkey, it indicates only that payment obligations of the contract in certain types by and between residents in Turkey shall not be agreed on in foreign currency or indexed to foreign currency. In other words, the contracts made by and between residents in Turkey and abroad are not covered by this prohibition.

On the 6th October 2018, the Ministry of Treasury and Finance (the "Ministry") has re-amended Article 8 of the Comminiqué regarding the Decree No. 32 on the Protection of the Value of Turkish Currency (Communiqué) by the Communiqué No. 2018-32/51, and it has determined the kind of contracts to be exempted from the contacts defined in the scope of such prohibition.

However, due to the inability to eliminate uncertainties in practices by such implementation and the chaos it created in the commercial life, the Ministry has re-amended Article 8 of the Comminiqué by the Communiqué No. 2018-32/52  on the 16th November 2018.

While the chronology is like this, it would not be wrong to think that this amendment is not the last, due to the open ended statement and providing almost unlimited authorization by the last sentence of Article 1 of the reference law, the Law No. 1567 stating that ".... the President of Republic is entitled to make decisions on the protections of the value of Turkish currency". Since this article provides the President of Republic with the opportunity to make all kinds of decision which he considers to serve the purpose of protecting Turkish currency. This unlimited authority creates a legitimate basis for decisions that would affect our daily lives and interfere with many rights guaranteed in international agreements.

What is the Scope of the Prohibition ?

In its brief description, the decision restricts residents' in Turkey to make agreements  in foreign currency or indexed to foreign currency. Although this restriction is a rule, the exceptions are set out in Paragraph 27 of Article 8 of the Communiqué No. 52. First of all, the practice will be considered about to whom the exceptions will be applied to and not, in terms of the person as the important criteria.

Practice in terms of Person

In various sub-paragraphs (1, 2, 6, 7, 8, 9, 10, 11, 19, 20 and 23) of Article 8, titled “Foreign Currency and Foreign Currency Indexed Contracts" of the  of the Comminiqué regarding the Decree No. 32 on the Protection of Turkish Currency regulate a general rule that payment obligations of the contracts in certain categories by and between residents in Turkey shall not be agreed on in foreign currency or indexed to foreign currency. The related term of "resident" includes real person or legal entities.

In paragraph 3, 7 and 14 of the referred article, it is stated as an exceptional rule that payment obligations of the contract by and between "residents in Turkey without affiliation of citizenship to the Republic of Turkey" can be determined in foreign currency or indexed to foreign currency. Residents in Turkey without citizenship means that a foreign person resides in Turkey. For instance, in case such persons are parties as the purchaser or tenant in real estate sales and real estate leasing agreements, the payment obligations can be determined in foreign currency or indexed to foreign currency. By the review of the content of this regulation, it is understood that the counter party of the contact executed by a resident in Turkey without affiliation of citizenship to the Republic of Turkey is not important. In other words, it is not important in case a foreign person resident in Turkey executes a contract with a Turkish citizen or a with a foreigner, since such contract will not be subject to the prohibition.

The Concept of Residents in Turkey

In Article 2 of Decree No. 32, the definition of residents in Turkey is made as follows "real persons and legal entities having legal domicile in Turkey, including Turkish citizens who are workers, or self employers or independent business owners abroad”.

Please note that the distinction is made on the concept of the "residents in Turkey" rather than the concepts of "foreign" or "Turkish citizen". What is meant by this is to have a domicile in Turkey.

For instance, contracts in certain types made by and between overseas workers or overseas self-employers who are Turkish citizens and have a place of domicile or legal entities with a place of domicile in Turkey, will fall within the scope of the prohibition determined by the Regulation. In other words, they will not be able to determine the contract price in foreign currency or indexed to foreign currency. However, in case contracts made with persons resident abroad rather than among themselves will not fall within the scope of the prohibition (Article 8/3 of the Communiqué).

The definition of the place of domicile is made under Article 19 of Turkish Civil Code as follows “It is the place where a person intends to live permanently." Article 20 indicates that having more that one place of domicile is not possible, in other words it refers to the principle of the uniqueness of the place of domicile by stating that changing of the place of domicile can be realized on the acquisition of a new one. According to the Civil Registry Services Law No. 5490, the address of place of domicile must be notified to the Civil Registry Office. The addresses of persons registered in the MERNIS SYSTEM shall be considered as the address of their place of domicile as presumption of law.

The contd Article 20 of Turkish Civil Code states that in case a person has an unknown former place of domicile or not yet provided a place of domicile in Turkey even though he/she leaves the former place of domicile in abroad, then the current residence of that person is counted as his/her place of domicile. For instance, the place of residence of a person, who came to Turkey from abroad and is uncertain as to whether he will stay in the country or not, will be accepted as a place of domicile.

In case of dual citizenship, Turkish citizenship will be taken into consideration and a consideration will be made accordingly.

In order to determine as to whether such foreign person is a resident in Turkey or not, a residence permit shall be checked. According to the statement of Article 19 of the Law regarding Foreigners and International Protection No. 6458, "Foreigners who would stay in Turkey beyond the duration of a visa or a visa exemption or, in any case longer than ninety days should obtain a residence permit. The residence permit shall become invalid if not used within six months.", a foreigner who obtains a residence permit, shall be considered as a resident in Turkey.

The status of a stateless person is regulated in Article 50 of the Law regarding Foreigners and International Protection No. 6458. According to this article, a Certificate of Identity for Stateless Person shall be issued to stateless persons that provides them the right to be able to reside legally in Turkey. Those who have been subjected to stateless persons by other countries shall not benefit from this right. Stateless Persons are required to obtain a Certificate of Identity for Stateless Persons and such document is issued by the Governorship according to the assent of the General Directorate. This document, which is not subject to any fees, replaces the residence permit and is renewed in every two years by the Governorship. The Certificate of Identity for Stateless Person contains a foreign identification number. In this case, the stateless persons who obtain the Certificate of Identity for Stateless Person in Turkey shall also be considered as residents in Turkey.

The legal entities mentioned in the Communiqué may be private law legal entities (associations, foundations, clubs, unions, companies) or public legal entities. It is obligatory to state the head office addresses of business management of private law legal entities in the registry documents regarding their establishment. The head office address shall be considered as the place of domicile of the legal entity. Although the principle of uniqueness of the place of domicile is also applied to commercial entities, an exception to such principal in terms of procedural law can be reviewed in the case of any dispute arising from the transactions of branches, then a lawsuit can be initiated against such branch.

It should also be noted that the regulation in Subparagraph 23 of Article 8 of the Communiqué has been made to prevent fraud against the law. According to this regulation, the branches, representation offices, offices and liaison offices, the funds controlled or managed, located abroad, in which participated directly or indirectly a share of fifty percent or more by Turkish-resident persons, such companies are considered as residents of Turkey.

Agreements Falling into the Scope of the Prohibition on Foreign Exchange Transactions

According to subparagraph (g) of Article 4 of the Decree No. 32, contracts by and between residents in Turkey regarding the lease of all kinds of movable and immovable properties including "purchase and sale of movable and immovable", vehicle and financial leasing, leasing, employment and service agreements and contracts of work are in the scope of the prohibition on Foreign Exchange Transactions.     

1) As per the Communiqué, the contract sale price of and other payment obligations arising from the "immovable property sale contracts" executed by and between persons residing in Turkey in relation to immovable property, including houses and roofed workplaces located within the country, including free zones cannot be determined in or indexed to foreign currency and then according to the last amendments made in the Communiqué on the 16th of November 2018, sale contracts of immovable properties located within free zones have been excluded from such prohibition.

2) As per the Communiqué, the contract lease price of and other payment obligations arising from the "immovable property lease contracts" executed by and between persons residing in Turkey in relation to immovable property, including houses and roofed workplaces located within the country, including free zones cannot be determined in foreign currency or indexed to foreign currency and then according to the last amendments made in the Communiqué on the 16th of November 2018, lease contracts of immovable properties located within free zones have been excluded from such prohibition.

3) As per the Communiqué, the contract price of and other payment obligations arising from "employment contracts" executed by and between persons residing in Turkey, excluding contracts executed regarding duties to be performed abroad, cannot be determined in foreign currency or indexed to foreign currency and then with the last amendments made in the Communiqué on the 16th of November 2018, it is regulated that cannot be determined in foreign currency or indexed to foreign currency employment contracts with seamen have been excluded from such prohibition.  

4) As per the Communiqué, the contract price of and other payment obligations arising from the service contracts executed by and between persons residing in Turkey, including those executed for "consultancy, transportation and brokerage service contracts", but excluding the contracts specified hereinbelow, cannot be determined in foreign currency or indexed to foreign currency:  

(i) The service contracts whose their contacting parties are not citizens of Republic of Turkey,

(ii) Service contracts to be concluded within the scope of export, transit trade, sales and deliveries  accepted as export and foreign exchange earning services and activities,

(iii) Service contracts between residents in Turkey within the scope of the activities to be carried out abroad.

5) According to the last amendments made in the Communiqué on the 16th of November 2018, the regulation of determining the contract price and other payment obligations arising from the "service contracts executed by and between residents in Turkey in respect of electronic communication" which initiates in Turkey, terminates abroad and vice versa, in foreign currency or indexed to foreign currency have been abolished.  (However, it is indicated that the contract price and other payment obligations arising from service contracts executed by and between persons residing in Turkey which start in Turkey and end abroad, which start abroad and end in Turkey, or which start abroad and end abroad, can be determined in foreign currency or indexed to foreign currency.

6) As per the Communiqué, the contract price and other payment obligations arising from the contracts executed by and between residents in Turkey relating the "construction, repair and maintenance of the ships"  as defined in the the Turkish International Ship Registry Law No. 4490 and dated 16.12.1999, and Law Amending on Delegated Legislation No. 491 cannot be determined in foreign currency or indexed to foreign currency and then according to the last amendments made in the Communiqué on the 16th of November 2018, the scope of the regulation has been changed and it is decided that the contract price and other payment obligations arising from the contracts of work executed by and between residents in Turkey that bring costs in foreign currency can be determined in foreign currency or indexed to foreign currency.

Exceptions to the Prohibition on Foreign Exchange Transactions

Freedom of contract is stated as the fundamental principle in both the Constitution and the Code of Obligations. In this case, the regulations restricting freedoms shall be interpreted narrowly. Besides, the main thing is that the Laws should determine the prohibitions and regulate the prohibitions. However, it is observed that the unprohibited actions are also determined under this Communiqué which is enacted on the Law. It is also notified that the Communiqué has no systematic. On the other hand, it is possible to say that some issues are regulated contradictorily . For instance, according to the regulations stated in the current Communiqué, while the warehousing contracts in exportation can be made in foreign currency, the warehousing contracts in importation cannot be made in foreign currency. For this reason, amendments are expected in the Communiqué in the coming times or maybe even more than once.

Under Article 8 of the Communiqué, exceptions to the prohibition of contract with foreign exchange are stated. In other words, even if the contract subject to review is within the scope of the prohibition under Article 4 of the Communiqué, it will be possible to determine the contract prices in foreign currency or indexed to foreign currency in the presence of one of the provisions mentioned in Article 8.

These exceptions are found in the Communiqué on the Amendments to the Communiqué Regarding the Decree No. 32 on the Protection of the Value of Turkish Currency published in the Official Gazette.  

In order to determine whether a contract is forbidden or excluded, the characteristic performance of that contract shall be considered. Therefore, each contract should be reviewed on its own basis. Although it is controversial as to whether the underlying of the regulation of the Communiqué is in line with the ratio legis (the purpose of law) or not , it is considered that the principle of narrow interpretation shall be applied in determining the scope of the contracts, and such consideration will be more appropriate to the logic of law. According to such consideration; for instance, any kind of atypical contract, which is not in conformity with the typical contracts of work that normally fall into the scope of prohibition, shall be excluded from the scope of this prohibition. As another instance; types of goods and types of lease that are unmentioned in the Communiqué shall not be included to the prohibition with regard to the sales contract in which a contract price are forbidden to determine in foreign currency or foreign currency index and lease contracts of the same.

The elements of Sui Generis or mixed contracts shall be also checked and the scope of the prohibition and exception shall be discussed, if necessary, by making two contracts and separating the elements in mixed contracts.

The Sanctions of Noncompliance with the Prohibition

The sanction of not re-determination of the Turkish lira as a contract price which is previously denominated in foreign currency in the contracts fall within the scope of the prohibition is the administrative fine, the sanction of such is not the partial or complete invalidity of the contract. According to Article 3/1 of the Law No. 1567 on Protection of the Value of Turkish Currency:

"Those persons violating the general and regulatory provisions, which are enacted according to this law by the President of the Republic, shall be punished to pay an administrative fine between three thousand and twenty-five thousand Turkish Liras."

The prices in this Article have been updated 6.300-TL as lower limit and 55.000-TL as upper limit, respectively. In addition, by taking into consideration that the term of "contract" is included in the Decree indicates that the fine will be determined by considering the contract price re-denominated in Turkish Lira.

According to Paragraph 1 of Article 3 of the Law No. 1567 on the Protection of the Value of Turkish Currency in relation to the noncompliance with the Communiqué, the administrative fines between 6.300 and 55.000 TL shall be applied separately for each side of the contract. In case of recurrence, the penalties shall be applied as twofold of the actual amount.

According to the Decree on Re-determination of the Default Interest Rate for the Public Receivables published in Official Gazette dated 5 September 2018 and numbered 30526,  the monthly default interest rate is determined as 2% per month separately. The two-fold penalty to be paid in case of recurrence shall be also applied to default interests.

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