New regulations on the restriction of foreign currencies in contracts

Published 29.07.2019 00:11

Presidential Decree No. 85 was published on the Official Gazette on Sept. 13, 2018 (Amendment Decree) due to the extreme pressure on the value of the Turkish lira. The government decided to lower the demand for foreign currencies in local markets to ease the devaluation pressure. During the first public debate regarding the Amendment Decree, the main issue was the lease contracts of shops in malls all around Turkey that were based on foreign currency values that create unexpected pressure on retailers to keep up with. However, things go far beyond these main concerns. With the Amendment Decree, subparagraph G of Article 4 of Decree No.32 is amended as mentioned below:

"G) The agreement/contract price and any other payment obligation arising from sale and purchase agreements/contracts for movable and immovable assets; lease/rent agreements for any movable and immovable assets, including vehicles and financial leasing; employment; service; and construction agreements, executed by and between persons residing in Turkey, cannot be denominated in foreign currency or be indexed to foreign currency, except in circumstances determined by the Ministry of Treasury and Finance."

It also has a new Provisionary Article to Decree No. 32:

"Provisionary Article 8 – The denominations in foreign currencies made in the agreements/contracts in force executed prior to the enforcement of the subparagraph G of Article 4 of this decree, shall be redefined in Turkish lira within 30 days except for situations determined by the Ministry of Treasury and Finance."

The main objective of this article is to point out the updated analysis of the imposed restrictions and the exemptions offered for contracts in Turkey using foreign currency directly as value denomination.

Turkish Residency Clause

Turkish residency is mentioned in Article 4 of Income Tax Law; accordingly, people who have legal residency in Turkey and people who have resided continually within Turkish borders for over six months in one calendar year are regarded as residents of Turkey. Again, in accordance with Article 5 of ITL, businesspeople, scientists, specialists, civil servants, press reporters and others who visit Turkey for temporary duty and foreigners who visit Turkey for collection, treatment, recreation or travel purposes shall not be regarded as Turkish residents even if they reside more than six months.

The sale and purchase of immovable properties are subject to the restrictions and therefore need to be executed in Turkish lira among Turkish residents. Additionally, based on the Turkish Code of Obligations (TCO) contracts for the transfer of rights of preemption, redemption and repurchase of immovable properties are also under the sales contract regime and therefore their position regarding the regime is controversial. We can assume that they are deemed to be exempt from restriction of use of foreign currencies since the amendment is related to sales and purchase contracts only.

The Amendment Decree is very clear on this issue and limits any type of movable property sales and purchases. However, the exemptions issued by the ministry limit the restriction and notes that all sales and purchase contracts/agreements that are executed among Turkish residents could be denominated with foreign currency directly or be subject to foreign currency index, except for the contracts/agreements regarding vehicle sales and purchases. All motorized vehicles are considered as movable properties under Turkish law.

The Amendment Decree is imposed on both movable/immovable properties and therefore any kind of rental and leasing contracts/agreements among Turkish residents are subject to the restrictions imposed for the use of foreign currency denomination and shall be executed or be converted into Turkish lira if they happened before the enforcement of the Amendment Decree. Since lease/rental of vehicles are regarded as rental and leasing contracts/agreements, they are included in the restrictions.

Employment-employee contracts are described as labor/employment contracts/agreements under Labor Law, but as "service" contracts under TCO. Other legal systems include different types of service contracts and have more comprehensive differentiations between any goods and services in this regard.

However, Turkish laws refer to service contracts under an employer-employee relationship; therefore, when it referred to "work," "employment" and "service" contracts separately, a discussion arose. Some of these controversies were partly resolved by the annotation issued by the ministry, which notes that all the employment and service contracts among Turkish residents need to be executed or be converted into Turkish lira if they happened before the enforcement of the Amendment Decree.

Tourism, Insurance and Football Players

According to the Turkish Hoteliers Union explanation, tourism entities and travel agencies shall execute service agreements with residents in Turkey in/or indexed to foreign currency. In this sense, we assume that tourism entities and travel agencies are not in the scope of the foreign currency ban regarding their service agreements with residents of Turkey.

Rates of the football players are in fact considered in the scope of labor/employment agreements. With respect to Article 8 subparagraph 3 of First Amendment Communiqué; it is possible to pay the rates of football players who don't have Turkish citizenship with foreign currency.

The situation for football players who are Turkish citizens, however, is not the same. Insurance agreements/contracts are not in the scope of Decree No. 32, except if such agreements are provided as other payment obligations of agreements that are prohibited from the usage of Turkish currency.

These changes are quite important and impose restrictions on contracting in Turkey by using foreign currency denominations. Since the penalties for noncompliance are high and may be imposed in a repetitive manner, many people in the market have made the conversions required or assumed exemptions in order to remain unaffected regarding their contract denominations. Therefore, effected parties should consider the Turkish lira value for their budgeting purposes, at least for the foreseeable future.

* Lawyer based in Istanbul

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