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16 November 2018
Decree 32 on the Protection of the Value of Turkish Currency was published on 11 August 1989 to determine:
In addition to the numerous amendments made over the years, on 25 January 2018 the Council of Ministers published a decree amending Decree 32, which entered into force on 2 May 2018 and imposed restrictions on foreign currency loans and foreign currency indexed loans in order to decrease the foreign currency risk in the market.(2)
This article examines the recent amendments to Decree 32 and the amending decree's relevant provisions, respectively.
Decree 32 includes two separate sections for foreign currency loans:
However, in both sections, legal entities with foreign currency income are regulated differently than those that generate no foreign currency income.
All Turkish-resident legal entities, irrespective of whether they generate foreign currency income, can obtain a foreign currency loan without being subject to any limitation if their existing credit exposure is equal to or more than $15 million. However, if the existing credit exposure of a legal entity is less than $15 million, the amending decree imposes certain limitations on foreign exchange borrowing.
Article 2(y) of Decree 32 defines 'foreign currency income' as "the income generated from export, transit trade, sales and deliveries that qualify as export activities, and services and activities generating foreign currency specified in relevant legislation". The definition is further clarified under Article 15 of the Circular on Capital Movements of 2 May 2018. In terms of sales and deliveries qualified as export activities and services and activities generating foreign currency, the circular refers to Communique 2017/4 on Tax, Duty and Charge Exceptions on Exports, Transit Trade, Sales and Deliveries that Qualify as Export Activities. For the avoidance of doubt, foreign currency generated from transactions between legal entities resident in Turkey does not fall within the scope of foreign currency income, save for the activities stated in Communique 2017/4. The procedure and principles to declare foreign currency income are set out under Article 16 of the Circular on Capital Movements. According to same provision, foreign currency income in the last three fiscal years can be certified with declaration forms and reports, including evidence pertaining to documents indicating foreign currency income.
Another newly introduced term is the credit exposure of legal entities. Article 2(z) of Decree 32 defines 'credit exposure' as "the outstanding amount of foreign currency cash loans obtained within Turkey or from abroad". Legal entities resident in Turkey with a credit exposure equal to or above $15 million on the utilisation date can obtain a foreign currency loan and are not subject to limitations pertaining to foreign currency income. However, the utilisation date is questionable, as it has not yet been clarified under Decree 32. The Circular on Capital Movements regulates the utilisation date of loans utilised by financial leasing and financing companies as the date of the agreement. However, it is still unclear for loans obtained from banks whether the signing date of the loan agreement or first drawdown date will be considered to be the utilisation date under Decree 32.
Legal entities with foreign currency income
Under Articles 17 and 17/A of Decree 32, Turkish residents that generate foreign currency income can obtain foreign currency loans from abroad or within Turkey provided that the sum of their existing credit exposure and the amount of the new loan do not exceed their total foreign currency income in the past three fiscal years.
In order to avoid any misunderstanding, if a legal entity generates a foreign currency income less than the facility amount that it desires to withdraw (and it already has an outstanding credit exposure equal to or more than $15 million) can obtain such loan as per the general principle.
Legal entities without any foreign currency income
According to the amending decree, legal entities that generate no foreign currency income cannot obtain foreign currency loans from abroad or within Turkey, save for the exceptions stated in Article 17 for loans from abroad and Article 17/A for loans within Turkey.
Turkish residents that have no foreign currency income cannot obtain a foreign currency loan from abroad. However, in the following cases, the 'having foreign currency income' criterion is not required:
Pursuant to the last exception, Article 21 of the Circular on Capital Movements states that the ministry has determined exemptions in addition to Article 17 for:
In addition, loans borrowed from the branches of Turkish-resident banks and financial institutions abroad (including offshore branches but excluding free-zone branches) are considered foreign currency loans obtained from overseas.
Loans obtained in Turkey
The framework that applies to loans obtained from overseas also applies to loans obtained in Turkey by Turkish residents. However, in addition to the above exceptions, Turkish residents with no foreign currency income can obtain a foreign currency loan in Turkey or enter into a foreign currency leasing transaction under the following scenarios:
Since Turkish residents can obtain foreign currency loans only from banks and financial institutions, non-financial entities cannot provide foreign currency loans to each other under Decree 32.
In contrast to the previous version of Decree 32, two fundamental procedures are no longer in operation. The first concerns the provision of foreign currency loans to real persons. Before the amending decree was introduced, providing foreign currency loans of $5 million or above with an average maturity of more than one year to real persons resident in Turkey was allowed. In addition, Article 17(f) stated that special cases determined by the Ministry of Treasury and Finance would not fall within the scope of the restriction on foreign currency indexed loans as outlined above. The amending decree takes this restriction further and prohibits providing foreign currency loans from abroad or within Turkey to real persons resident in Turkey without exceptions.
The second implementation allowed foreign currency indexed loans to be obtained by Turkish residents. Before the amending decree was introduced, banks could provide foreign currency indexed loans with a commercial or professional aim to a legal entity or real person under Decree 32. Moreover, the Ministry of Treasury and Finance had the right to determine cases that were exempt from the restrictions on foreign currency indexed loans. The amending decree prohibits obtaining foreign currency indexed loans from overseas and in Turkey for real persons and legal entities resident in Turkey.
The amending decree introduced strict restrictions on foreign currency loans from overseas or in Turkey. The provision of foreign currency loans to real persons resident in Turkey is now forbidden, as is providing foreign currency indexed loans to legal entities or real persons under Decree 32. In terms of legal entities, Decree 32 states that Turkish residents with foreign currency income can use foreign currency loans within the limits of their foreign currency income in the past three years. However, legal entities which generate no foreign currency income but have credit exposure equal to or above $15 million are free to obtain foreign currency loans without limitation.
For further information please contact Neslihan Tuna Saracgil or Pelin Ecevit at Selvi & Ertekin by telephone (+90 212 236 12 12) or email (firstname.lastname@example.org or email@example.com). The Selvi & Ertekin website can be accessed at www.selviertekin.com.
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