Contracts and currencies: New rules
Turkey has been a liberal economy since the 1980s and has enjoyed the benefits of being one. As per recent developments in the economy, the Government has introduced a variety of fiscal policy options: The withholding tax rate has been reduced for TRY-based deposit accounts and differentiated from exchange-based deposits. The Central Bank has also increased the interest rate and has made slight adjustments to interest payments for reserves held by banks in Central Bank accounts.
Another important step is the restrictions on currency in contracts. The main rule of liberty of contract in currency and payments was changed, at least for Turkish residents. According to Presidential Decree, no. 85, the following item has been inserted into Article 4 of Decree No. 32 dated 7/8/1989 on the Preservation of the Value of the Turkish Currency, which is the main regulation in terms of Turkish Currency usage in the economy:
“g) The contract value and other payment obligations arising from these contracts cannot be agreed in foreign currency or as indexed to foreign currency in any kind of movable asset and real estate renting, leasing business, service and art work contracts including movable asset and real estate purchase, sale, vehicle and financial leasing between the persons residing in Turkey except for the cases determined by the Ministry.”
This is a radical change and some controversial issues have arisen as a result. The Government has given a time period to revise the current contracts. The Presidential Decree has inserted the following provisional article in the same Decree:
“Provisional Article 8 - Within thirty days following effectiveness of item (g) of Article 4 of this Decree, the values agreed in foreign currency in the contracts stated in the aforesaid item and executed previously shall be re-defined by the parties in Turkish currency except for the cases determined by the Ministry.”
This Decree took effect on the date of publication, September 13, 2018, and the Ministry of Treasury and Finance has announced that exceptions will be published soon, including firms having liabilities and costs in foreign exchange. In addition, firms not sub- ject to restrictions in borrowing in foreign currencies, according to the Decree no 32, article 17 and 17/A, will not be subject to the new Decree.
Key po nts
The key point in the amendment is that it only covers contracts made between persons residing in Turkey on the date of execution of the contract, as defined in Decree No. 32. Also, existing contracts in which “the values were defined in foreign currency before the date of issue the Decree” will be re-defined in Turkish lira.
On the other hand, as per the articles listed above, it is also stipulated that some cases deemed appropriate by the Ministry may be excluded.
“While determining the scope of cases to be excluded by the Ministry, the input costs or liabilities in foreign currency are among the first items to be evaluated,” the Ministry said in a statement. “For instance, the contracts executed by persons residing in Turkey who can utilize loans in foreign currency and who undertake liability in foreign currency without subject to any restriction as per articles 17 and 17/A that govern the utilization of loans in foreign currency in Decree No. 32 shall be taken into account in this scope.
“In this respect, the scope of the aforesaid amendment will be determined by taking the opinions of the related public authorities and other stakeholders in a way that does not negatively affect economic activities and will be announced by the Ministry.”