Booming Foreign Investment in Turkey and Some Major Concerns

Monday, February 25, 2013

By Asli Orhon 

Turkey, with its unique position serving as a gateway to Europe and the Middle East and its growing domestic market, has become one of the most attractive destinations for foreign investors in the last couple of years.  According to the UNCTAD Global Investment Trends Monitor Report, the country received $12,4 billions of FDI in 2012.  The majority of the FDI flowed into sectors including construction, real estate, transportation and energy.

The next few years remain promising with major projects such as privatization of electricity distribution companies, bridges and highways forthcoming.  Although the last couple of years in Turkey have been productive in terms of securing a more stable and attractive legislative framework for foreign investors, there is still work to be done for the purposes of eliminating some major challenges.

In recent years, some of Turkey’s essential laws have undergone considerable reforms to allow a more favorable environment for foreign investors.  For example, the Foreign Direct Investments Law adopted in 2003 marked a significant step by easing the requirements applicable to FDI.  The law introduced the principle of equal treatment with domestic investors, which enabled establishing and operating a foreign capital company in Turkey, subject to the same conditions with local companies.  Further, it allowed foreign investors to freely repatriate and transfer their benefits and dividends abroad.  The law also prohibited expropriation and nationalization on FDI and granted the opportunity to settle disputes through international arbitration.

Recently, The Turkish parliament has also adopted some provisions in favour of foreign investors wishing to acquire real property or limited rights in rem in Turkey.  It abolished the reciprocity condition for foreign individuals of certain nationalities and increased the maximum total area that can be acquired by a foreign individual from 2.5 hectares to 30 hectares.  As such, under the current laws, foreign capital companies that are controlled by or in which 50% or more of the shares are held by foreign individuals or legal entities can acquire real property or limited rights in rem in Turkey with the purpose of executing the activities stated in their articles of association.  Also, companies, which have less foreign shareholder ratio or are not controlled by foreign individuals or legal entities can acquire such rights for any purpose as local companies.

Lastly, a notable recent reform in Turkey was the entry into force of a new commercial code (“New TCC”) on 1 July 2012, which is a result of the country’s efforts to harmonize its laws with EU regulations.  The New TCC brought significant changes in favour of foreign investors that include; the possibility of establishing corporations with one shareholder, forming a board of directors with merely one member who does not have to be a shareholder and the adoption of corporate governance principles including independent audit in accordance with IFRS.

However, despite the above reforms, foreign investors still encounter some obstacles, especially in some regulated sectors.    Certain laws remain ambiguous in terms of some key issues. For example, regarding general entry requirements for specific markets, indirect shareholding restrictions imposed on foreigners are not clearly indicated in certain sectors like aviation, a field where foreign investors have become keen on investing in the recent years. In addition, implications of M&A transactions on licensing and other regulatory restructuring issues are not clearly defined under certain laws such as LPG and autogas legislations. These kinds of ambiguities constitute major difficulties for foreign investors as the implementation thereof remain uncertain. Most of the time, the foreign investor resorts to informal discussions over a telephone conversation with an official.  These conversations are not usually very productive as the authorities may not be willing to give definite answers to queries addressed informally or may have a tendency to assume an approach in favour of a broader interpretation to avoid any mistakes in practice. The lack of clear legislation gives the governmental officials broad discretion in terms of framing a foreign investment transaction and also forces foreign investors disclose a transaction to authorities at a relatively early stage of their investment. Therefore, the Turkish legislature needs to provide more clear and defined laws in order to prevent possible different statutory interpretations under the laws affecting FDI.

Another important issue is that, while Turkey has abundance in renewables and enormous potential to receive FDI in renewable energy, foreign investors continue to face significant challenges in this sector despite the government’s recent efforts to encourage the investments in this area.  It is surprising to many that even though Turkey is considered to have the highest solar energy potential in Europe only after Spain, the first solar power plant was established only in July 2012 and there is still no licensed company generating electricity using solar energy.

International energy companies stay cautious in investing in Turkey due to financing issues and difficulties in licensing process. Recent laws have introduced a number of major incentives for renewable energy investments, such as discount in land usage fees and certain privileged rights for use of particular lands, however, these changes remain insufficient for many firms.

According to Turkish laws, renewable energy companies currently benefit from feed-in tariffs of $0.073/kWh for hydroelectric power and wind energy, $0.105 for geothermal energy and $0.133 for solar energy. World leaders in solar power however, such as Spain, Japan, and the US apply much higher feed-in tariffs, reaching €O.42/kWh in Spain and €0.406/kWh in Japan. In addition, the Turkish government has recently announced that it is planning to issue licenses for only 600 MW of solar energy until the end of 2013. Such restrictions and high technology costs set aside, foreign investors also face environmental impact assessment and feasibility problems due to inadequate regulations and bureaucratic procedures.  For example, lack of standards regarding technical and environmental pre-qualifications sometimes cause inexperienced companies acquire licenses, resulting eventually to cancellation or postponement of some projects, especially in the field of hydropower. Therefore, in order to increase FDI in renewables and make use of its entire potential effectively, Turkey still needs to ameliorate its regulatory scheme to provide for higher financial incentives and clearer technical and environmental standards for licensing and feasibility purposes.

Finally, a common problem for foreign capital startup companies in Turkey is human resources and work permit issues.  According to the latest practice of the Ministry, companies wishing to employ foreign personnel are required to employ at least five Turkish citizens for each foreign employee for whom a work permit is requested. Moreover, obtaining work permit in Turkey may take up to several months if additional documents have to be submitted to support the application. Foreign investors complain about such restrictions and bureaucratic difficulties as they certainly cause delay in their investments. 

While the recent changes in Turkey’s investment environment are important steps in moving forward, the foregoing illustrates cause for major concerns involving foreign investors. Accordingly, with further reforms, Turkey can expect to receive their target of an annual FDI of $80 billion by the year 2023, or perhaps even more.

Asli Orhon is a Turkish corporate and M&A lawyer. She received her law degree from Galatasaray University in Turkey in 2008. She is currently pursuing her LL.M. studies in Harvard Law School and expecting to graduate in May 2013