Foreign Direct Investment in Turkey

Foreign direct investment (FDI) provides a driving force to an economy, much like an engine in a train. FDI is a crucial instrument for economic growth. FDI boosts a country’s economy in so many ways. Transfer of foreign capital, technology, and experts are some ways FDI impacts a nation’s economy.

Turkey is a business-friendly environment located between Europe and Asia. With its good infrastructure and skilled and young workforce, Turkey is a good place for foreign investment. Yet, foreign direct Investment in Turkey and portfolio investment have recently decreased. In addition to economic fragilities and structural deficiencies, Turkey is also experiencing emigration, resulting in various economic effects and making foreign investors wary of investing in the country. Read along as we take you through foreign direct Investment in Turkey. Here we will also discuss the foreign direct investment incentives in Turkey and the concerns of foreign investors in Turkey.

Foreign Direct Investment in Turkey: Is it a Good Place to Invest?

Turkey attracts Foreign Direct Investment for many reasons. Apart from being one of the top twenty economies in the world, so many other attributes make Turkey a hub for local and foreign investors. Here are some reasons Turkey is a good place for FDI.

Turkey has a fast-growing economy

The economy of Turkey has exhibited impressive growth since 1980. In 2020, Turkey was ranked as the 11th largest GDP at Purchasing Power Parity (PPP). Also, Foreign Direct Investment in Turkey expanded by 290 USD million in 2022. Turkey was the second-fastest growing economy amongst other OECD states in 2021. The country aims to be one of the ten largest economies in the world by 2023. There has also been a rapid population growth from 13.5 million in the first census in 1927 to 84.7 million in 2021.

Turkey strategic location

Turkey’s geographical location between Europe and Asia is good for FDI. With its strategic location, Turkey provides access to key regional markets. It serves as a bridge between the western and gulf countries. The country’s proximity to markets in the middle east and West makes it a good place for FDI.

Turkey has incentives for foreign investors

Among other OECD members, Turkey has one of the most liberal legal regimes for FDI. To encourage foreign Investment in Turkey, the Turkish government started incentive programs to stir up start-ups and FDI in Turkey. The Foreign Direct Investment Law of 2013 gives a foreign investor equal rights as a domestic investor. As such, investors can set up their businesses in Turkey despite their nationality. It is one of the many perks of investing in Turkey.

Turkey has a skilled and qualified workforce

With a young and educated workforce, Turkey’s workforce is an asset for investors. It is contrary to an ageing and shrinking population in some European countries. The youth in Turkey comprise about 15.3% of the total population. Given the workforce in Turkey, investors can enjoy the rich labour pool.

Turkey has a well-developed infrastructure

Turkey’s infrastructure is remarkable. It has developed transport, communication, and modern infrastructural innovation. It makes it a hub that attracts foreign investment.

What is the Outflow of FDI in Turkey?

FDI outflow has sometimes caused controversy because it signifies the loss of Turkish capital to a foreign country. Yet FDI outflow facilitates technology transfer into Turkey. It also serves as a means of increasing competition amongst Turkish firms.

FDI inflow to Turkey amounted to 12 billion US dollars in 2021. It further increased by 914 million US dollars in December 2022. According to Statista data, FDI outward flows in Turkey fluctuated from over 2.3 billion US dollars in 2011 to 5 billion US dollars in 2021.

What are Foreign Direct Investment Incentives in Turkey?

Turkey offers incentives to foreign investors to encourage foreign direct investment. The incentives are accessible by investors to boost private investment activities in Turkey. Thus, the incentives an international business will enjoy depends on some factors. Factors like the sector, size, city, and type of business determine the incentive an FDI in Turkey will enjoy.

General investment, regional and sector investments, strategic investment, and project-based investments are the classes of Investment in Turkey. FDI in Turkey is not a special type of investment entitled to general incentives. General incentives are custom duty and VAT exceptions on purchasing investment goods. Other incentives include corporate tax reduction, energy support, property tax exemption, cash support, interest support on financing, allocation of land, and income withholding tax, to name a few.

What is Foreign Portfolio Investment in Turkey?

Turkey supports foreign portfolio investment (FPI) in Turkey. The government has established a regulatory system to control portfolio investment in Turkey. Nonetheless, in recent years (2017-2023), foreign portfolio investment in Turkish stock shares and government bonds has declined. According to CEIC data, FPI in Turkey experienced an all-time high of 15.805 billion USD in December 2012. The country recorded an all-time low of -10.851 billion USD in June 2020. Investors have been concerned about the Turkish lira exchange rate crisis since 2020. In December 2022, FPI in Turkey increased by 2.189 billion USD, compared with a drop of 3.898 billion USD in the previous quarter.

What are FDI Screening Mechanisms in Turkey?

Various governments introduced FDI screening mechanisms to protect their economies against the impact of COVID-19. Likewise, the Turkish government adopted measures to cushion the COVID-19 pandemic. Yet, none of the measures adopted affects foreign direct Investment in Turkey.

The Foreign Direct Investment Law and other regulations govern foreign investments in Turkey. The law establishes a notification-based system for FDI in Turkey. Generally speaking, Turkey does not screen or sanction foreign direct investments. Nonetheless, various sectors may have specific regulations for different types of markets. These sectors are energy, real estate, banking and finance, insurance, aviation, technology, media, and telecommunications. Authorities in these sectors screen investments majorly for tax audits and not on discriminatory bases. Except for these sectors, foreign investors enjoy the same privileges as Turkish investors.

Screening mechanisms for FDI in Turkey are to ensure fair competition or other economic benefits. Where an investment fails a screening, the authorities may give notice and time for the error to be corrected. In other cases, a penalty may be levied.

What is the best sector to invest in Turkey?

In the past, the following sectors have driven the change in the Turkish economy – the real estate sector, the energy sector (natural gas, geothermal energy, wind energy), the environment and recycling sector, the tourism sector, the Turkish textile market, the technology department, software development, Turkish universities investment, healthcare sector, raw materials sectors, service sectors, among other important sectors. However, among all these, commercial real estate acquisition has been the most advantageous for both domestic and foreign investors, considering its exponential growth in the past.

However, things are not the same for Turkey or Turkish citizens, especially after a series of earthquakes in February 2023. Considering the decrease in trading values, there has been a decrease in investor confidence, especially in the real estate sector. For now, the consumer discretionary and telecom sectors are attractive investment options and profitable investments in the country’s economy.

The private sector has also been picking up pace in the country in line with the growth of the privatization program; however, the pace is still slow since most of the well-educated population supports domestic products. It is yet to be seen how economic activities will resume and market gaps will be adjusted in the country after the tragedy, especially considering that there is a scope for changes to be made in Turkey’s legal system.

According to the Central Bank of the Republic of Türkiye​, the following chart illustrates the top investor countries for Turkey from 2003-2021:

What types of incentives are offered in Turkey?

Various conveniences are provided to domestic and foreign investors to support Turkey’s growth strategy of becoming the world’s leading integrated economy. For this reason, foreign companies operating in the country, established on FDI by legal entities in Turkey, are provided equal treatment as domestic companies. This is done within their Investment Incentive Program.

Further, the following incentives are offered by the Turkish government, in line with the foreign direct investments law, for foreigners who wish to invest in Turkey:

Value Added Tax (VAT) exemption. The value-added tax for the free transfer of machinery and equipment has been excluded, in line with the investment incentive certificate.

Customs tax exemption. According to Turkish law, there are no customs to be paid for machinery and equipment purchased from abroad, considering that it comes within the investment incentive certificate.

Income and corporate tax discount. The reduced tax amount is calculated over the discount rates until the contribution rate to the investment is reached.

Social Insurance Premium support. The social security contributions are calculated over the legal minimum wage for employment, as provided by the investment covered by the state.

Land Allocation. Depending on the availability of the land, investment land is allocated for investments in accordance with the Turkish Ministry of Finance regulations.

Free Trade Zones incentives. Free zones are defined as special sites within the country which are outside the ambit of the country’s customs territory. Till now, 18 free zones have been identified in the country, including Tekirdag, Istanbul, Kocaeli, Bursa, Izmir, Denizli, Antalya, Mersin, Adana, Kayseri, Gaziantep, Samsun, Trabzon, Rize. Additional free zones can further be included in the country to promote investment options.

Turkey citizenship by investment. The government introduced the option of receiving Turkish citizenship through investment to attract FDI in the country further. The domestic and foreign investors can engage in real estate acquisition of at least 400,000 USD or invest at least 500,000 USD in fixed capital, or open a Turkish bank account with at least 500,000 USD equivalent foreign cash or Turkish lira, to achieve investment citizenship in the country.

Bilateral Investment and Taxation Treaties in Turkey

Since 1962, Turkey has especially been active in negotiating and signing agreements for reciprocal promotion and protection of investments. As of 2023, Turkey has entered into 87 bilateral investment agreements with different countries. The list of countries with whom these bilateral investment agreements have been entered into has been maintained by the Ministry of Industry and Technology on its website.

Turkey also has a bilateral investment treaty with the United States, which came into force in 1990. The countries had signed the Avoidance of Double Taxation and the Prevention of Fiscal Evasion concerning Taxes on Income Agreement, along with a related Protocol in 1996.

Which company types are commonly used in Turkey?

Article 17 of the Implementation Regulation for Foreign Direct Investments Law, which came into force in 2003 in Turkey, provides more information about companies capable of being established or affiliated by foreign investors as companies stipulated in TCL (Commercial Code) and unincorporated companies under the Obligations Law.

Joint Stock Companies and Limited Liability Partnerships are the most sought-after company types in Turkey. A Joint Stock Company is a company founded by at least one person. They deal with particular economical subject and purpose and is divided into shares. On the other hand, a Limited Liability Company is a company established by one or more real or legal persons under a commercial title. The liability of the partners in such a type of company is limited to the extent of capital that they have invested in the company. According to the Commercial Code, the number of partners in a limited liability company cannot exceed 50 members.

How is a working permit issued for foreigners regulated in Turkish law?

According to Turkish law, foreigners can have the same rights and responsibilities as their citizens. The rights stipulated in the Turkish Constitution under “Fundamental Rights and Responsibilities” are equally applied to foreigners and citizens. However, this rule has limiting factors per international law. The limitations are especially seen to stand out in employing foreign personnel.

Earlier, the work permits of foreigners were regulated by different laws and executive orders, making the process extremely tedious for foreigners. This has now been subsumed within a single legislation through the Law on Work Permits For Foreigners Law, which has specially been prepared to deal with scenarios involving unfair competition and unemployment in Turkey.

Foreign Exchange and Remittances

The free transfer of fees, profits, royalties, and repatriation of capital is envisaged within Turkish law. There is no limitation on the number of foreign currencies that may be bought into the country. However, a limit of 25,000 Turkish Lira or 10,000 euros of foreign currency may be taken out of the country. If any person wishes to take out more than the stipulated amount, then the required declarations will have to be made to the government.

Further, even though the Turkish Lira is completely convertible, most international transactions are denominated in US dollars or euros, considering the universal acceptance. Turkish banks deal in foreign exchange but do not borrow or lend in foreign currencies. While in the majority of cases, foreign exchange is freely traded and widely available in the country. However, in May 2019, a government decree imposed a settlement delay for foreign exchange purchases by individuals with more than 100,000 US dollars. In addition, there was also a 0.2% tax on foreign exchange purchases. The decree was repealed in December 2020, and hence, at the moment, foreign investors are free to convert and repatriate their Turkish Lira profits.

Regarding remittance, there have been no recent changes related to investment remittance policies in the country. Currently, there are no limitations on the inflow or outflow of funds for remittances of profits or revenue.

What are the Concerns of Foreign Investors in Turkey?

Excessive bureaucracy, absence of checks and balances, unstable economy, and inflation are some concerns of foreign investors in Turkey. Turkey’s economy has suffered structural problems since 2018. The Turkish Lira experienced an exchange rate crisis in the second half of 2018 compared with other foreign currencies. The COVID-19 pandemic further exacerbated the economic situation. On December 20, 2021, Turkish Lira depreciated 18.00 to the United States dollars.

According to the World Bank, inflation reached 42.5 percent in 2023. The invasion of Ukraine by Russia has not helped matters as Turkey shares close economic ties with Russia and Ukraine. This has also led to an increase in investment disputes in Turkey.

Obscurity in governance, lack of checks and balances, and bad economic policies are the features of the present Turkey business environment. 

Turkey needs structural reforms and a stable economy to improve foreign investment. The rule of law, transparency, checks and balances, low inflation rate, and stability of the Turkish Lira could help achieve this.

The National and International legal system and judicial independence of Turkey

Turkey has been a candidate for EU membership. However, the process has been stalled, keeping in mind other considerations. Some Turkish laws have been harmonized with the EU laws, and the country has adopted many European Regulatory Norms and Standards. In addition, Turkey is also a member of WTO, even though it must be kept in mind that not all draft technical regulations have been notified by Turkey related to the WTO Committee on Technical Barriers to Trade (TBT). Therefore, not all international standards are followed by the country.

Regarding the domestic legal system, Turkey is based on civil law, consisting of written commercial and bankruptcy laws, along with contractual rights and obligations. The country has an overburdened judicial system, which has become a reason for slow decisions and complex issues. Under some specific circumstances, the local courts have also upheld the judgments of foreign courts and enforced them within the country.

The country has had talks about the reformation of the judicial system and the need to adopt fair, democratic and unbiased standards. Keeping the same in mind, the country has implemented several judicial reforms since 2019. However, a noteworthy issue in the same has been highlighted by Amnesty International, wherein they have concluded that “the reforms fail to bring Turkey’s laws in line with human rights law and standards, and rather tinker at the edges of a system marked by the deepening erosion of the independence of the judiciary.”

Such observations have limited judicial independence in the country. As of now, nine priorities have been identified as part of the judicial reform’s strategy: Protecting and improving rights and freedoms, popularizing alternate mediation methods, improving judicial independence, simplifying civil justice and administrative procedures, objectivity and transparency, increasing the effectiveness of the penal justice system, improving the quality and quantity of human resources, making justice more approachable, enabling the right of defence to be used properly, and increasing productivity and performance.

Frequently Asked Question

What sectors have screening requirements in Turkey?

The FDI Law establishes a notification-based system, but different industries may have specific regulations and rules. Some regulated sectors include energy, real estate, banking, finance, aviation, and telecommunications.

What steps can the Turkish authority take to stop an investment?

Under the FDI law, no mechanism would lead to the suspension or stop of an investment. However, competent authorities monitor foreign investment and may cancel, suspend or decide against an investment.

Conclusion

With its fast-growing economy, skilled workforce, and well-developed infrastructure, Turkey is a hub for foreign investment. Its strategic location between Europe and Asia makes it more attractive to investors. To encourage FDI in Turkey, the Turkish government started investment incentive programs. However, despite the new incentive program, in recent times, foreign Investment in Turkey has decreased.

Since 2018, the Turkish economy has faced significant challenges. The high inflation rate and currency crises have discouraged foreigners from investing in Turkey. The COVID-19 pandemic exacerbated the economic situation. 

The war in Ukraine has caused economic instability worldwide, and Turkey is not left out. However, Turkey’s well-developed infrastructure and investment may attract international investment in the medium term. Nevertheless, in the long run, structural reforms and a stable economy are needed to restore foreign direct and portfolio Investment in Turkey.

Do you wish to invest in Turkey? You will certainly need the service of legal experts to guide you through the process. We are here to assist you. LegaMart is an online legal platform that offers direct interaction between lawyers and clients from multiple jurisdictions. We have all the solutions to your legal problems. Visit the LegaMart Lawyer directory and hire any legal professional that meets your requirements.

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