Presidency of the Republic of Turkey issued a new Presidential Decree (Decree No: 85) in the Official Gazette dated 13 September 2018 and numbered 30534, which brings prohibition of the foreign currencies’ usage in contracts between Turkish residents (the “Amendment”).
According to the Amendment, Turkish residents acting as a party to the contracts listed below, with other Turkish residents are prohibited to use foreign currency (including Turkish Lira indexed to foreign currency) in determining the contractual value and payment liabilities:
1) Contracts on purchase and sale of any movables and immovables
2) Contracts on rental of any movables and immovables including car rentals and financial leasing contracts,
3) Leasing contracts,
4) Employment contracts,
5) Service contracts,
6) Contracts of work and labor.
The Amendment also states that, except for the exceptional cases to be determined by the Ministry of Treasury and Finance, existing contracts between Turkish residents with foreign currency liabilities shall be revised as to define the liabilities in Turkish Lira only within 30 days following the issuance of the Amendment (13 Sep 2018). In light of the Amendment, following issues shall be noted:
As noted above, 6 kinds of contracts within the scope of the amendment. These 6 kinds of contacts include some of the most important types of contracts, The Turkish code of obligations define and therefore only a few kinds of contracts (retainer agreements, donation agreements and atypical agreements) don’t fall within the scope of the amendment. In this respect, the determination of the scope of this amendment has utmost importance. In addition, as noted above; by the reason that the Ministry of Treasury and Finance was given the right to determine the scope of the amendment, further regulations on the subject are to be expected.
The media reporting on the amendment, have been using the phrase” Amendment on the Shopping Mall Lease Contracts” to describe the amendment. This phrasing wrongfully gives the impression that, the scope of the amendment is to be the lease contracts. From a brief look at the subject, construction contracts with the government, consultancy agreements, labor contacts between workers and diplomatic missions or international corporations are usually signed with foreign currency liabilities, just to name a few. From this point, the broadness of the effect of the amendment can be easily seen.
The second important point about the amendment that should be noted is the revision of the existing contacts to the Turkish Lira. As the Turkish markets for foreign exchange are very volatile, determination of the currency value on which the contacts are to be revised is very important. The amendment does not contain any regulation as to this issue but only the time frame, 30 days following the issuance of the amendment which will end in 13th of October. Further regulations are also expected in this respect.
Final issue to be noted is that, the prohibition is applicable for contractual liabilities between Turkish residents only. Accordingly, contracts between Turkish residents and foreign persons or foreign entities shall not be subject to the prohibition. For the scope of the Amendment, Turkish residents refer all real persons and legal entities residing or incorporated in Turkey. It is unclear whether international organizations or diplomatic missions fall within this scope. Further regulations by the ministry are to be expected, for the clarification of the term: “Resident in Turkey”
The amendment discussed in this piece will surely be an important milestone in the way of business deals are made in Turkey. If the scope of the amendment is kept too wide, the effect will be felt throughout all fields of economy by making it harder to conduct business. As in line with our deductions, on 17th of September a press release had been issued, confirming that: “more regulations are on the way”.