Newly Introduced Legislation in Relation to Joint Ventures - Turkey

Introduction
In the middle of 80s, entry of foreign capital into Turkey has significantly increased following the introduction of certain favorable amendments in the foreign investment laws of Turkey. Such increase has stimulated an improvement in the technology, industry and commercial life, which lead to the introduction of extremely sizeable projects into the Turkish economy. Those projects required the collaboration of two or more companies because in order to realize such kinds of investments, strong company capital structure and advanced technological supplies, as well as being able to take major risks in different markets were musts.
Due to the limited financial and technical resources of Turkish companies, they started to collaborate mostly with foreign ones, and joined their efforts by sharing the administrative costs, experiences and especially technical infrastructure of the two companies. In the international arena, such collaboration has been mandatory between foreign investors and a domestic company in certain countries, in order for foreign investors to enter into such domestic markets. On the other hand, in Turkey, the legislative environment has been very liberal and by the admission of the Law on Foreign Direct Investment numbered 4875 (LFDI), foreign investors became entitled to incorporate or participate in all kinds of companies in the fields which are open to invest to domestic investors in Turkey, under equal treatment principle*.
Turkish Legislation
In recognition of the importance of foreign investment and establishment of business partnerships for the Turkish economy and in order to harmonize the Turkish legal system with the global legal system; promulgation of a new legislation has become quite important. At least the formation of such new form of partnerships, established mostly between Turkish companies and foreign companies, and the tax issues arising from incomes of the same had to be regulated. Consequently, with the enactment of the Communiqu numbered 2009/2, which was published in the Official Gazette dated 01.04.2009 and numbered 27187 by the Ministry of Industry and Commerce (Communiqu), Business Partnerships or Joint Ventures (JVs) terms have been introduced to the Turkish Legal System.
At the beginning, JVs used to be regarded as ordinary partnerships and were subject to the provisions of Turkish Code of Obligations (TCO) and thus Article 520 and subsequent articles of the TCO relating to ordinary partnerships were applicable to the JVs. Meanwhile, it was always possible to establish JVs by incorporating separate commercial entities, having no legal entity status or by participating in already established commercial entities, having legal entity status.
Later on, following the enactment of the Law No. 3239 and dated 01.01.1986, JVs were started to be treated as corporations and became subject to the Corporate Tax Law dated 13.06.2006 and numbered 5520 (CTL). On 29.07.1998 Law No. 3239 was amended and then being subject to the CTL has became optional for JVs.
Today, under the CTL, JV founders are free in choosing for the tax status of their JVs. Therefore JVs may either be subject to the CTL or may be regarded as ordinary partnership and be subject to the TCO and its owners will be subject to Income Tax Law. In the event that a JV is established as an ordinary partnership, then it will only be liable for the payment of Value Added Tax and Withholding Tax, and yet such selection of being subject to certain tax laws is irrevocable for the founders of the JVs.
Finally, in the event that a JV is incorporated in the form of an ordinary partnership, then only the shareholders of such JV are able to obtain loans from banks or authorized financial institutions in the name of the JV and are personally liable for re-payment of such lent amount, because ordinary partnerships do not hold legal entity status under the Turkish legal system.
JV Concept
Under Article 2/(7) of CTL, JVs are defined as partnerships which are established by and between capital corporations, cooperatives, economical enterprises of associations and foundations, economical public institutions and partnership companies or real persons undertaking to achieve certain business and share the income arising from such business.
As we have stated earlier, establishing corporate tax obligation for JVs is at the discretion of the parties, however in order to establish corporate tax obligation for the JVs, which are briefly summarized as follows, there are certain requirements stated under Article 2.5 of General Communiqu on the execution of CTL, numbered 2007/1, dated 03.04.2004;
At least one party of the JV must be a Corporate Tax payer,
JV must have been established by means of execution of an agreement in writing,
Scope of activity of the JV must be specific,
A definite term must have been anticipated for the achievement of the purpose of the JV,
Parties must be liable for the performance of the entire business,
Income must be shared between the parties,
Termination of the Tax Duty by means of fulfillment of all the obligations set forth in Tax Procedural Law, and achievement of the business undertaken.
New Regulation
Even though the JV was already a recognized concept and relevant tax regulations had been introduced for the JVs under the Turkish Tax System, registration of a JV with the Trade Registry which is to make the JV recognized by third parties, had frequently been argued in different commercial cycles until the enactment of a Communiqu (Communiqu).
As a result of establishment of high number of overseas JVs in Turkey, it is easy to state that the ratio behind enacting such new Communiqu was for the purpose of attracting foreign investors attention in making further investments in Turkey by providing them a safe legal environment and a familiar legal framework which they would have been likely to be subject to in their home countries.
The enactment of the Communiqu, has enabled the JVs to get registered with the Trade Registry, if requested by the founders of the same. This new legislation is very important because it eliminates a significant uncertainty in connection with JVs, which lasted to date and provides further safe, transparent and attractive investment climate for the investors.
Article 1 of Communiqu provides for the procedure and principals of registration of JVs with the Trade Registry. Furthermore, pursuant to Article 3 of Communiqu, the application for the registry with the Trade Registry is possible only if the agreement in connection with establishing a JV (Agreement) is official, i.e. has been made in writing and certified by a Turkish Notary Public. The same article provides for the information that must be stated in the Agreement at the minimum, such as; names, trade names, leading partner and the registered addresses of the parties to the JV, as well as the extent of their authorizations in relation to representing and committing the JV.
Moreover, a provision confirming that the partnership has been established particularly for the purpose of operating a commercial enterprise, must be included in the Agreement together with other information on such enterprise.
Registration of the JVs with the Trade Registry will enable potential investors or the third parties to view and observe any important and official information on the respective JV. Furthermore, because their investment will be registered with an official registry and thus become publicly known, parties to a JV will feel more secure.
Application Process
Pursuant to Article 4 of Communiqu, application for the registration of a JV must be made to the Trade Registry, which is located in the place where the JV is under the Agreement.
Furthermore, in order to provide consistency between the relevant registries, Trade Registry Offices where the parties to such JV are registered must also be notified by the concerned Trade Registry to such effect on the same day.
De-registration of Records
Article 5 of the Communiqu regulates the de-registration of the JVs from the respective trade registry offices at which they were registered. De-registration of the registry will be possible only if a petition to such effect is submitted to the Trade Registry office where such JV is registered. Finally, such petition must contain the signatures (certified by a notary public) of the representatives of each partner of the JV.
What is more is that in case the Agreement between the JV partners has been terminated and such fact has officially been certified, then for de-registration of the JV from the records of the Trade Registry, written request of the representative of either of JV partners will be adequate. Nevertheless, in the event that the JV has not been drawn to an end by its partners and yet particular business determined under the Agreement has been achieved, then the partners of the JV are free to decide on the continuance of registry of such JV with Trade Registry or de-registration of the same.
Conclusion
Because the information in relation to a registered JV will become publicly known and third parties will be deemed to be aware of the existence of the JV; ignorance of records of such JV will not constitute an official excuse for any third party and in the event of a mispresentation in the Trade Registry, any aggrieved third party will be entitled to claim for compensation.
Granting the JVs with the opportunity to be registered before the Trade Registry is expected to attract foreign investors since such attempt improves the investment environment for them and although JVs do not have any legal entity status, registration of them with the Trade Registry is likely to help their institutionalization.
With the Communiqu, any interested third party is able to check the status of a JV or obtain any required information when making a potential investment assessment.
In Turkey, at least one party to each existing JV is likely to be an overseas company. In consideration of the importance of JVs in commercial life and foreign capital, granting possible investors with a secure environment, apparently shows Turkeys enthusiasm to welcome foreign investments. It is obvious that while enacting regulations in connection with foreign investments; regulatory authorities are taking into consideration of such fact.
When it comes to making investments in a foreign country, it is easy to say that many investors are looking for long-term strategic investment relationships. However it is not always so easy to feel in safe hands in a place where the legal system and/or the rights of the parties are not clearly set. Registration of a JV with Trade Registry will make it officially recognized and authentication of claims will be easier. Consequently, we can say that foreign investors whom are interested in operating in the Turkish market are explicitly supported through the enactment of such new Communiqu. Our understanding is that, such new regulation will get down to rock bottom of attracting such investors interest and Turkey will turn out to be a more attractive investment area.
*Prior to the admission of the LFDI, foreign investors were only entitled to establish Joint Stock Companies, Limited Liability Companies and branches in Turkey. However, in the long run, limitation on types of companies which the foreign investors were entitled to establish in Turkey started not to meet the needs of the commercial life.
ABOUT THE AUTHOR: Serap Zuvin and Melis Oget Koc
Serap Zuvin, who is the sole partner in the firm, has previously worked as International Legal Counsel for White & Case, LLP. Drawing on her previous experience where she represented several international corporate clients, Ms. Zuvin has specialized on corporate finance and in particular equipment finance. She has been extensively involved in various cross-border joint ventures and mergers and acquisitions. Ms. Zuvin is widely recognized in the profession for her expertise in aviation law and in particular aircraft financing where she has represented major airline companies. Ms. Zuvin is a member of both the Istanbul Bar and the International Bar Association (IBA).
Melis Oget Koc is a graduate of the Ankara University, Faculty of Law. She was admitted to the Istanbul Bar in 2008. She is currently completing her LL.M. degree on Private Law (Maritime Law) at Ankara University. Her spoken language is English. Her practice areas are Corporate and Commercial Law, Aviation Law.