Turkey: Foreign Currency Denominated Cross-Border Intercompany Loans

This memorandum provides detailed information on the foreign currency ("FX") denominated loan ("FX Loan") regime in Turkey with a special focus on cross-border intercompany loans, in light of recent changes in the applicable legal framework. This memorandum addresses intercompany loans where the borrowing Turkish entity is not a bank, financial institution, leasing and factoring company given that they are not restricted in obtaining FX Loans from abroad and granting FX abroad without prejudice to the relevant legislation. Hereunder, bank refers to participation, deposit, development or investment banks which carry out activities in Turkey.

I. Overview of the Applicable Legal Framework

For the limited scope of this memorandum, applicable laws and regulations in relation to the FX Loans are as follows:

1. Decree No: 32 on the Protection of the Value of Turkish Currency (the "Decree")^[1];
2. Decree amending Decree No: 32 (the "Amending Decree")^[2];
3. Circular on Capital Movements of the Central Bank of the Republic of Turkey (the "Circular")^[3];
4. Communiqué No: 2008/32-34 Regarding Decree No: 32 (the "Communiqué")^[4];

The Circular entered into force as of 2 May 2018 has provided guidance on the new rules introduced by the Amending Decree dated 25 January 2018 and provided clarification regarding the FX Loan regime in Turkey.

Article 17 titled "Loans obtained from abroad" of the Decree stipulates:

• Persons resident in Turkey are free to obtain Turkish lira denominated loans from abroad, provided that such loans are utilized through banks.
• Persons resident in Turkey are allowed to obtain FX Loans from persons resident abroad, provided that such loans are utilized through banks, subject to certain criteria explained hereunder.
• Persons resident in Turkey who do not have FX revenues are not allowed to obtain FX Loans abroad, except in circumstances listed in Article 17(3).
• Persons resident in Turkey who have FX revenues and whose outstanding FX Loan balances are less than USD 15 million, may obtain FX Loans from abroad on condition that sum of their outstanding loans^[5] and the additional loan does not exceed their aggregate FX revenues in the last three (3) financial years ("FX Revenue Criterion").
• Persons resident in Turkey cannot obtain FX indexed loans.

Pursuant to Article 11 of the Communiqué and Article 22 of the Circular, as a rule, loans obtained from abroad by persons resident in Turkey shall be utilized through a bank. However, there are four exceptions where no intermediary bank is required:

• Loans obtained exclusively for work to be carried out abroad;
• Loans obtained from or guaranteed by export credit agencies (listed under Appendix 3 of the Circular) which are directly disbursed to the exporter resident abroad;
• Non-cash loans obtained from development banks resident abroad exclusively for the import of goods;
• Loans obtained for the acquisition and import of ships.

Further to the same Article of the Communiqué, persons resident in Turkey shall apply to an intermediary bank with the loan agreement including the maturity date, interest rate and other relevant information in order to utilize loans obtained from abroad. The intermediary is obligated to notify the Risk Center of the Banks Association of Turkey on the date such loans register with the account of the intermediary bank. Pursuant to Article 19(8) of the Circular, intermediary banks are obliged to monitor repayment of the loan. In addition, Article 19(6) of the Circular obligates banks to scrutinize transfers received in excess of USD 50,000 where the object of the transfer cannot be determined for indications of whether the transfer is a loan and if so, request documentation from the company.

Please note that if the loans are transferred to another bank before utilization, the latter will be considered as the intermediary bank with respect to the notification and monitoring duties. Loans may not be transferred to other banks after utilization.

II. Obtaining Cross-Border Intercompany FX Loans

Companies duly incorporated in Turkey may obtain FX Loans from abroad if they satisfy either FX Revenue Criterion or fall under exceptions numerated in Article 17(3) of the Decree and Article 21 of the Circular to which the FX Revenue Criterion is not applied.

According to paragraph 15(d) of Article 21, companies incorporated in Turkey which are fully owned by foreign parent companies may obtain FX Loans from foreign-owned group companies resident abroad.

Paragraph 19 of the Article includes two provisions related to borrowing FX Loans from group companies. Companies resident in Turkey may obtain FX Loans from:

• their parent companies which are directly fully owned by persons resident abroad; or
• other directly or indirectly fully-owned subsidiaries of their parent companies if the parent has 100% indirect ownership and is located outside of Turkey.

In order to authenticate utilization of such loans, in addition to the loan agreement and the loan repayment schedule, companies are required to submit documentation of ownership structure that meets either exemption to the intermediary. Specifically, the company shall submit relevant trade registry gazettes and/or other official documents to the intermediary bank in Turkey establishing the parent company's 100% ownership and for the latter case additionally, that the lending subsidiary is directly or indirectly 100% owned by the same parent company.

III. Granting Cross-BorderIntercompany FX Loans

According to Article 11(12) of the Communiqué and Article 48 of the Circular, residents in Turkey may grant foreign currency or Turkish Lira denominated loans to partnerships in which they are shareholders, parent companies and group companies located abroad.

Per Article 38 of the Circular, banks and financial institutions and other persons determined by the Ministry of Treasury and Finance are authorized to grant Turkish Lira or foreign currency denominated loans to foreign persons. Pursuant to the Turkish Commercial Code No: 6102 (the ¨TCC¨)^[6], companies located abroad are entitled to receive loans from their group companies in Turkey provided that certain requirements under the law are met.

Per Article 358 of the TCC, an intercompany loan agreement between the Turkish entity and its parent company could be executed provided that following conditions are met:

• parent company has no overdue debts to the company related to its capital subscription; and
• the Turkish subsidiary's reserve funds and profits are sufficient to cover previous years' losses.

Further to Article 48 of the Circular, loans granted to persons outside Turkey must be intermediated by banks. Before transfer of the loan amount, a copy of the loan agreement and the relevant trade registry gazettes indicating that the loan beneficiary located abroad is a subsidiary, group company or parent company shall be submitted to the intermediary bank located in Turkey. The loan may be transferred directly to the beneficiary's account abroad or in Turkey, in Turkish Lira or foreign currency.

IV. Tax Implications of FX Loans Borrowing Abroad

This memorandum does not offer tax advice. However, for the sake of completeness a summary of certain tax implications are covered below. For specific tax advice, please consult your tax advisor.

Three types of taxes which are generally considered for loan arrangements are:

1. Resource Utilization Support Fund (KKDF) contribution
2. Banking and Insurance Transaction Tax (BSMV)
3. Value-Added Tax ("VAT")

As per Article 32 of the Circular, official documents, annotations and warranties prepared for the purpose of obtaining loans from banks, international agencies and foreign credit agencies and repayment of such loans are exempted from stamp duty and  fees. However, it should be stated that this exemption is not applicable to FX Loans borrowing from companies located abroad.

In addition, Article 29 of the Expenditures Tax Law No: 6802^[7] does not include intercompany loans among the list of banking transactions which are exempted from the BSMV.

Special notice No: 62030549-125[30-2015/280]-14801 dated 17 January 2017 from the Turkish Revenue Administration addresses loans obtained from a company resident abroad. The following information is based on that notice and the applicable legislation.

According to Article 17(4) of Law No: 6035 on Value Added Tax[8], transactions subject to BSMV are exempt from VAT. If the lender located abroad is deemed to be a credit institution in its jurisdiction, no VAT will be incurred. Otherwise, the transaction is exempt from BSMV, but VAT will be incurred on accrued interest.

By Article 2 of Communiqué No: 6 related to Decree No: 88/12944 dated 12 May 1988, loans obtained from abroad by persons resident in Turkey, with the exception of banks and financing companies, will be subject to withholding of 3% of the loan amount by the intermediary bank, as contribution to KKDF.

The amounts subject to KKDF contribution withholding are the accrued interest for Turkish lira denominated loans and the principal on the date of utilization for FX Loans. According to Article 11 of Council of Ministers Decree No: 2012/4116, for FX Loans or loans denominated in gold obtained from abroad by non-bank, non-financing company persons resident in Turkey, applicable KKDF contribution as share of those amounts are:

• 3% for loans with an average maturity of less than 1 year;
• 1% for loans with an average maturity of at least 1 year and less than 2 years;
• 0.5% for loans with an average maturity of at least 2 years and less than 3 years;
• 0% for loans with an average maturity of at least 3 years.

Please be advised that the maturity structure should be planned taking into consideration the KKDF contribution above.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.