Changes in procedures for establishing liaison offices - International Law Office

Legal status
Establishment procedures
Revocation of permission
Tax and employment implications

Under Turkish law, liaison offices are governed by the Foreign Direct Investment Law(1) and the Regulation on the Implementation of the Foreign Direct Investment Law.(2) On July 3 2012 the regulation was amended, introducing major changes in relation to the incorporation, authorisation, extension and operations of liaison offices. This update outlines the procedure for establishing a liaison office, in light of these recent amendments.

Legal status

Under Turkish law, foreign investors may set up liaison offices in Turkey, on condition that these liaison offices enter into no commercial transactions with third parties. Accordingly, a liaison office can provide only representation and relationship management with respect to the overseas principal's Turkish customers and suppliers; it cannot engage in any commercial or trading activities.

Establishment procedures

Pursuant to the amendments, the regulatory authority for issuance and extension processes has shifted from the Undersecretariat of the Treasury to the Ministry of Economy. Accordingly, authorisation must be obtained from the Ministry's General Directorate of Incentive Implementation and Foreign Investment before a liaison office can be established. Under the regulation, the finalisation periods for applications for liaison office establishments, as well as extension applications, have been increased from five to 15 business days.

Authorisation for the establishment of a liaison office can be granted for an initial period of three years, at most. Further extensions can be granted for up to five or 10 years for each extension. However, authorisation granted for liaison offices that are established for market research or for promoting the principal's products and services in Turkey may not be extended. In determining whether to extend a permit, the directorate will consider the liaison office's past activities, as well as its future projects, objectives, current and expected turnover and number of employees.

In addition, in assessing applications for authorisation submitted by new companies, the directorate will consider the company's scope of activity, share capital and number of employees and may decide to wait for one year after its establishment before granting permission for authorisation.

Revocation of permission

A liaison office's expenditures must be paid in foreign currency transferred from the principal based abroad and these moneys must be declared to the ministry. Liaison offices must send the Data Form for Liaison Office Activities (which is annexed to the regulation) to the directorate before the end of May each year. Failure to do so may result in revocation of authorisation.

Under the regulation, the ministry has the right to revoke the liaison office's permit if it determines that the office has been engaging in commercial activities. The ministry further has the right to monitor a liaison office's activities and to determine whether these activities are in line with the office's declared scope of activity.

Tax and employment implications

Given that a liaison office can perform no commercial activity, such offices are not subject to corporate or withholding tax. In addition, income that arises from an individual's employment in a liaison office is exempt from income tax, provided that payments are made from abroad in foreign currency and outside of the non-Turkish source earnings of the overseas principal.

Although a liaison office does not have separate legal personality, it may employ personnel. However, only one foreign 'key' personnel member may be employed by a liaison office. Such key personnel, as with any other foreign personnel, must obtain a work permit in order to work legally in Turkey, albeit through a simplified and accelerated application procedure.

For further information on this topic please contact Maral Minasyan or Neriman Pelit at Kolcuoglu Demirkan by telephone (+90 212 355 9900), fax (+90 212 355 99 99) or email (mminasyan@kolcuoglu.av.tr or npelit@kolcuoglu.av.tr).

Endnotes

(1) Official Gazette, June 17 2003.

(2) Official Gazette, August 20 2003.