All questions
Overview
In 2019, Turkish M&A activity saw a sharp fall in line with the global slowdown of economic activity as a result of macroeconomic uncertainties, trade tensions, geopolitical challenges and slower growth expectations. According to market data, around 233 mergers and acquisitions were carried out in 2019 in Turkey, with the aggregate transaction value reaching approximately US$5.3 billion, representing the lowest annual deal volume in the last decade, and a decrease of 56 per cent compared to 2018.
There were around 70 notable transactions involving foreign investors, making a solid contribution to the annual deal volume with an investment volume of more than US$3 billion, while Turkish investors represented an annual deal volume of around US$2 billion. European investors once again led the market in terms of deal numbers with 43 deals, while investors from the Asia Pacific and Gulf regions were also involved in a number of landmark deals.
In 2019, internet and mobile services and technology remained at the top of the list of sectors in relation to deal number. Energy, manufacturing, e-commerce, food and beverages sectors were among the most active sectors. Infrastructure was the biggest contributor to overall annual deal volume, followed by financial services, energy and retail, which significantly provided a major contribution to the total M&A deal volume.
The customary way of financing acquisitions in the Turkish M&A market is through conventional loans from onshore and offshore financial institutions, often in the form of senior secured debt. However, there has been an observable drop in cross-border acquisition financing deals following the entry into force of foreign currency lending restrictions progressively introduced from late 2018, which led to a rise in equity-funded deals.
Regulatory and tax matters
i Regulatory matters
Lending is a regulated activity in Turkey that generally requires the lender to hold a licence (for example, a banking licence), and unlicensed lending for profit constitutes a criminal activity pursuant to the Turkish Criminal Code (the Law No. 5237) (Criminal Code). However, there may be limited instances where intragroup lending may be permitted as well.
Bank loansTurkish lira loans
Pursuant to the Decree No. 32 Regarding the Protection of the Value of Turkish Currency (published in the Official Gazette dated 11 August 1989 and numbered 20249, the Decree No. 32) and the Capital Movements Circular issued by the Central Bank of the Republic of Turkey (the Central Bank) on 2 May 2018 (the Capital Movements Circular), Turkish lira denominated cross-border loans borrowed by Turkish entities are required to be utilised through local intermediary banks. Similarly, repayment and payment of interest in respect of Turkish lira denominated cross-border loans borrowed by Turkish entities are to be made through local intermediary banks, in Turkish lira. In addition, Turkish entities are not allowed to obtain cross-border revolving or overdraft facilities.
FX loans
Pursuant to the Decree No. 32 and the Capital Movements Circular, generally, Turkish companies that had foreign exchange (FX) revenues in the last three years may obtain loans denominated in foreign currency (FX loans) based on the amount of their documented FX revenues for such period. Turkish corporates that do not generate FX revenues cannot utilise FX loans unless such Turkish residents benefit from the exemptions listed exhaustively under Decree No. 32 and the Capital Movements Circular.
The general exemption is for Turkish corporates who have an aggregate outstanding FX-denominated credit balance of at least US$15 million (or equivalent in any other currency). Other exemptions are also available for Turkish borrowers that are operating in certain sectors, such as the defence industry or in public–private partnership (PPP) or energy projects. Further, Turkish residents are prohibited from utilising FX-indexed loans. Another notable exception to this rule is when the borrower is a Turkish special purpose vehicle (SPV) that is established for the sole purpose of purchasing the shares of a company, in which case the relevant SPV may be eligible to utilise a cross-border FX loan up to the purchase price stated in the share purchase agreement.
Decree No. 32 requires cross-border loans borrowed by Turkish entities to be utilised through local intermediary banks.
Intragroup lending
In addition, intragroup loans that are subject to various rules and regulations in the Turkish market (as explained below) are frequently used for corporate financing purposes.
The Turkish Commercial Code (Law No. 6102) (the TCC) does not allow shareholders to be indebted to their subsidiaries unless they have paid all amounts due under their equity undertakings and the profit of the relevant subsidiary for the relevant year (together with available reserves) is sufficient to meet the previous year’s losses. If these parameters are not met, upstream loans cannot be granted by Turkish entities to their shareholders.
In addition, under the TCC, a parent company cannot use its dominant position to force its subsidiary to enter into transactions that may result in losses to the subsidiary. These include acts such as requiring the controlled company to provide security, or to incur indebtedness. Failing to comply with this could result in the controlling company being responsible against such company, its shareholders or creditors for the losses incurred (which loss would need to be equalised until the end of the same calendar year or the right to demand compensation should be given by the parent to the controlled company) unless the controlling company can prove that a similar action would be to the corporate benefit of the controlled company and could have been taken by a prudent director in good faith of an independent company under the same circumstances.
Furthermore, among other tax considerations, pursuant to Corporate Tax Law (Law No. 5520) (published in the Official Gazette dated 21 June 2006 and numbered 26205) (the Corporate Tax Law), which includes rules and restrictions regarding related party transactions entered into by and between Turkish corporations, transactions between a Turkish company and its related parties must be conducted in accordance with the ‘arm’s-length transfer pricing’ principles under the Corporate Tax Law.
Intragroup cross-border lendingTurkish lira loans
Subject to the provisions of the TCC, Turkish companies may make available Turkish lira denominated loans to their subsidiaries, parent companies or affiliates incorporated in or outside Turkey.
Pursuant to the Decree No. 32 and the Capital Movements Circular, cross-border loans from Turkish resident lenders to their offshore subsidiaries, parent companies or affiliates are subject to fulfilment of ancillary requirements, including but not limited to (1) using a local intermediary bank to transfer the loan proceeds and (2) providing a copy of the written loan agreement (including a repayment plan) and documents evidencing the shareholding structure of the borrower to the local intermediary bank. The loan agreements to be signed in this respect must include an express maturity date and may not include structures such as overdraft or revolving credit facilities.
FX loans
Decree No. 32 and the Capital Movements Circular provide that Turkish companies cannot obtain intercompany loans denominated in foreign currency (FX loans) from other Turkish entities.
However, funds in foreign currency may be transferred to the onshore accounts of Turkish companies (subject to satisfaction of other criteria set out under the Capital Movements Circular) provided that:
- the transfer is in connection with a lending transaction carried out within the same holding or group;
- the intercompany debt is incurred and repaid in Turkish lira (TRY); and
- the Turkish borrower provides a written statement indicating that the funds in foreign currency to be transferred to its onshore accounts are a conversion of the loan proceeds originally denominated in TRY.
Further, the Decree No. 32 and the Capital Movements Circular allow foreign currency denominated intercompany loans to be granted to Turkish borrowers from abroad if (1) the Turkish borrower is directly and wholly owned by the offshore holding entity acting as the lender or (2) both the Turkish borrower and the offshore lender are (whether directly or indirectly) wholly owned affiliates of the same offshore holding entity, subject to fulfilment of ancillary requirements, including but not limited to (1) using a local intermediary bank to transfer the loan proceeds and (2) providing a copy of the written loan agreement (including a repayment plan) and documents evidencing the shareholding structure of the borrower to the intermediary bank.
Filing and reporting obligations
Generally, Turkish intermediary banks through which the proceeds of the loans flow are responsible for monitoring compliance with the restrictions under the Decree No. 32 and the Capital Movements Circular, including on the credit balance and the amount of the FX loans. Accordingly, the Turkish intermediary banks have increased responsibilities in monitoring the use of onshore and offshore FX loans and have certain reporting obligations to the Central Bank in this respect.
Furthermore, the Decree No. 32 provides that Turkish residents (other than banks and financial institutions) are obliged to notify any guarantee provided in favour of offshore beneficiaries to the Ministry of Treasury and Finance within 30 days of the signing date for information purposes.
ii Tax mattersWithholding tax
According to Article 30 of the Corporate Tax Law (Law No. 5520) published in the Official Gazette dated 21 June 2006 and numbered 26205 (the Corporate Tax Law), below-listed earnings and revenues other than commercial, agricultural, and other earnings and revenues of non-resident corporations that have limited tax liability are subject to a 15 per cent withholding tax:
- contract progress income for construction and improvement;
- independent professional service income;
- gains derived from securities other than dividends, gains derived from participation shares, dividends paid to board of directors and the profits repatriated by the limited liable entities; and
- payments received in return for the sale, assignment, or transfer of copyrights, patents, enterprise and commercial titles, trademarks, and similar non-material rights regardless of whether they are a part of commercial or agricultural income.
Within the framework of the said article of the Corporate Tax Law, interest income obtained by non-resident corporations is also subject to withholding tax in Turkey.
The President is authorised by the Corporate Tax Law to determine the rate of withholding tax that can apply to each separate item of the profits and incomes of non-resident corporations by their fields of operations, and to reduce it to zero or to increase the rate to 30 per cent. Per such authority, the withholding tax rate has been determined as 10 per cent in general for the interest payments paid by Turkish resident borrowers under a loan obtained from abroad and, as an exception, 0 per cent for the interest payments paid to one of the following lending entities: (1) foreign countries; (2) international institutions; or (3) foreign banks or entities that are authorised in their country of residence to customarily grant loans not only to entities they are affiliated with but to all real and legal people (qualified financial institutions).
In summary, for the borrowings from abroad, provided that the lender is a qualified financial institution, regardless of its jurisdiction, interest payments made to said institution in return of borrowing by a Turkish resident borrower will be subject to a withholding tax at the rate of 0 per cent.
On the other hand, interest payments to be paid on loans obtained from foreign parties that do not qualify as a qualified financial institution will be subject to a withholding tax at the rate of 10 per cent.
Value added tax (VAT)
In general, the payments made abroad are subject to 18 per cent reverse charge VAT, according to Article 9 of the Law on Value Added Tax (Law No. 3065) published in the Official Gazette dated 2 November 1984 and numbered 18563 (the VAT Law). As those payments are deemed as done against services, VAT liability occurs. The VAT amount that will be paid regarding those payments to abroad shall be declared via a No. 2 VAT return and deducted from the calculated VAT of the payer (the borrower) in the same month within the framework of the reverse charge mechanism.
In summary, to the extent the loans are granted by a financial institution, the interest payments made will not be subject to VAT. However, if the loans are extended by an institution other than a financial institution, the VAT in the ratio of 18 per cent over the interest payments will be triggered.
Stamp tax
Stamp tax applies to a wide range of documents, including but not limited to agreements, financial statements and payrolls. Stamp tax is levied at a rate of 0.948 per cent of the aggregate monetary amount stated on the agreements. Stamp tax is payable by the parties who sign a document. The signatories of a taxable document are jointly responsible for the payment of stamp tax. Only one signed copy of the agreement is subject to stamp tax. The stamp tax per document is subject to a cap of 3,239,556.40 Turkish lira for the year 2020.
According to the stamp duty regulations, the taxable event for the agreements signed in Turkey occurs when the documents are signed. In case the agreements are signed abroad, it may be claimed that no stamp tax arises until the agreement is brought into Turkey to be submitted to the official departments, or until the terms of the document are benefited from in Turkey.
It is necessary to understand the term ‘benefiting from the terms of the agreement’ as specified in the law in the broadest sense. In essence, ‘benefiting from the terms of the agreement’ in any way aims to impose no restriction. ‘Benefiting from the terms of the agreement’ means relying upon that document’s legal power. It is not compulsory to achieve a monetary benefit to consider that a document is relied upon or benefitted.
Pursuant to the Article 23 of Part IV of Table 2 attached to the Stamp Tax Law (Law No. 488) published in the Official Gazette dated 11 July 1964 and numbered 11751 (the Stamp Tax Law), if the loans are extended by banks, foreign credit institutions or international finance institutions, the instruments that would be issued for obtaining and back payment of the loan as well as annotations attached to these instruments shall be exempted from stamp duty. If the loan is obtained from institutions, other than the aforementioned, then a stamp duty of 0.948 per cent should be calculated over the amounts referred to in the instruments and annotations.
In summary, save for all other events that trigger stamp tax, under the applicable legislation, documents and annotations thereto to be issued in relation to the extension and repayment of loans to be granted by banks, foreign financial institutions and international institutions are free of stamp tax. However, if a loan is obtained from institutions other than a bank, foreign financial institution or an international institution, then a stamp duty in the ratio of 0.948 per cent over the aggregate monetary amounts referred to in the documents and annotations will be triggered.
Resource utilisation support fund (RUSF)
Pursuant to the Communiqué No. 6 Concerning the Resource Utilisation Support Fund on the Decree No. 88/12944 dated 12 May 1998, foreign currency borrowings from abroad with an average maturity of less than three years are subject to RUSF as follows:
| Maturity | RUSF rate |
|---|---|
| Average maturity up to 1 year | 3% |
| Average maturity between 1 year (including 1 year) to 2 years | 1% |
| Average maturity between 2 years (including 2 years) to 3 years | 0.5% |
| Average maturity of 3 years (including 3 years) and above | Exempt |
The RUSF amount is calculated over the principal amount for the foreign exchange loans. Turkish lira-denominated loans from abroad are subject to 1 per cent RUSF if the loan falls short of 1 year. The RUSF amount is calculated over the interest amount for the Turkish lira loans.