At the beginning of 2018, important changes were made to the foreign exchange credit provisions, which will be discussed further in this article. Firstly, an amendment to the Decree numbered 32 on the Protection of the Value of Turkish Currency was published in the Official Gazette on January 25, 2018 (the "Decree"). Secondly, the Regulation on the Principles of the Central Bank of the Republic of Turkey's Monitoring of the Transactions Affecting Foreign Exchange Position was published in the Official Gazette on February 17, 2018 (the "Regulation"). Subsequently, the Central Bank of the Republic of Turkey issued the Capital Movements Circular on May 2, 2018 (the "Circular") clarifying the terms of the Decree. The aforementioned amendments to the legislation change the provisions on the disbursement of foreign exchange ("FX") credits as outlined below:
- Clarification of the Terms Used in the FX Legislation
The following terms are defined in the Decree as follows:
- Turkish resident, refers to real or legal persons having residence in Turkey including Turkish citizens who work or have a job outside of Turkey.
- Credit balance, refers to the outstanding total of FX indexed, or the FX credit extended from Turkey or outside of Turkey.
- FX income, refers to the income generated from exports, transit trade, sales and deliveries, that qualify as export activities, as well as the income generated from FX generating services and activities.
- Disbursement of FX Indexed Credits
The Decree restricts Turkish Residents from disbursing FX indexed credits extended from or outside of Turkey.
The outstanding FX indexed credits extended before the issuance date of the Decree, May 2, 2018, should not be renewed as such.
- Disbursement of FX Credits by Real Persons
Under the Decree, individuals residing in Turkey are prohibited from borrowing FX credits, either from abroad or in Turkey. The Circular allows individuals residing outside of Turkey to disburse FX credits for their individual necessities in Turkey (e.g. to acquire real estate in Turkey).
- Legal Entities Incorporated in Turkey with no FX Income
Legal entities residing in Turkey, with no FX income, cannot obtain FX loans in Turkey or from abroad. However, this restriction is not applicable under any of the following circumstances:
- If FX credits to be borrowed by a government institutions;
- If banks, financial leasing, factoring and finance companies are to lend FX credits to each other directly or through syndication (under this circumstances any instalments limit will not apply);
- Turkish residents who are to borrow FX credits under investment incentives;
- FX credits borrowed in order to finance certain machines and tools specified in Turkish tax legislation;
- FX credit extended to a Turkish resident who (i) wins a domestic tender that is announced internationally, (ii) has undertaken a defense industry project approved by the Undersecretariat for Defense Industries or (iii) is liable to carry out public private partnership projects, provided that the FX credit does not exceed the amount of the agreements regulating the aforementioned transactions;
- Foreign exchange credits to be extended to Turkish residents to finance investments in renewable energy resources with a government guarantee based on the Law on Utilization of Renewable Energy Sources for the Purpose of Generating Electrical Energy;
- FX credits to be utilized by Turkish residents who win public tenders or the tenders under the Law on Implementation of Privatization;
- FX credits to be utilized by SPVs incorporated for the sole purpose of share acquisition;
- FX credit to be extended to a Turkish resident, whose loan balance on the disbursement date totals USD Dollars 15,000,000 or higher;
- FX credit to be extended to a Turkish resident, who has not generated income in FX in the last 3 financial years but has potential FX income. Provided that (i) the credit shall not exceed the potential FX income and (ii) such residents should evidence their operations which are generating income in FX on exports, transit trades, sales and deliveries deemed as exports, services and activities as well as their potential FX income. Furthermore, the Circular clarifies the aforementioned potential FX income, which was questioned by marked players in the financial sector on several aspects. The Circular regulates that the Borrower and the credit based on "potential FX income" should comply with the following provisions:
- the borrower should confirm that it has not generated FX income for the last 3 years;
- the potential FX income shall be evidenced with an interim invoice or a customs declaration which will not be paid immediately;
- an additional FX credit shall not be extended to the borrower within 3 years following the utilization of FX credit under potential FX income provisions;
- the maximum maturity of such credits shall be 24 months;
- the borrowers who cannot generate the potential FX income will be informed to the Treasury;
- the borrower may use more than one credit line in a financial year, provided that for each credit line the borrower certifies its exports, transit trades, sales and deliveries deemed as export and services and activities generating FX income (i.e. each credit line should be evidenced by different and separate documents); and
- The borrower should certify that the document evidencing potential FX has not been used for other credits.
- Utilization of FX Credits by Turkish Resident Generating Foreign Exchange Income
Turkish residents who generate FX income may use FX credits, provided that (i) their total outstanding FX credit balance on the utilization date is less than USD Dollars 15,000,000 and (ii) the sum of the credit to be disbursed and the current credit balance shall not be higher than the foreign exchange income generated in the last three years as certified by a financial advisor.
If the creditors determine after disbursement that the total amount of the FX indexed credit, and FX credit is higher than the FX income generated in the last three years, the creditors will convert the exceeding portion of the credit into Turkish Lira or accelerate such portion within 10 business days following such determination and will inform the Risk Center of the Banks Association of Turkey accordingly.
- Requirement of Notifying the FX Credits More than 15 Million Dollars
The Regulation requires the companies whose FX credits and FX indexed credits' total is more than US Dollars 15,000,000 utilized from Turkey or abroad to inform the Central Bank of the Republic of Turkey starting from the subsequent accounting period. The aforementioned US Dollars 15,000,000's limit should be determined based on the companies' unconsolidated financial statements.
The companies who require to inform the Central Bank of the Republic of Turkey should execute an audit agreement with an independent auditing firm or an independent auditor authorized by the Public Oversight, Accounting and Auditing Standards Authority, within 60 days following the commencement of this requirement.
The board of directors of a company, who fails to fulfill its information requirement by misrepresentation or not notifying the Central Bank of the Republic of Turkey may be sentenced to a fine of minimum amount of TRY 20,000 and maximum amount of TRY 200,000.