Capital Movement Circular within the Scope of the Decree No. 32
For the purpose of clarification of matters with regard to the Decree No. 32 on the Protection of Value of Turkish Currency of the Council of Ministers numbered 89/14391 and published in the Official Gazette dated August 7, 1989 and numbered 20249 (the “Decree”) and the amendments to the Decree with the Decree Regarding the Amendment to the Decree No. 32 on the Protection of Value of Turkish Currency numbered 2018/11185 published in the Official Gazette dated January 25, 2018 and numbered 30312 (the “Decree No. 2018/11185”), the Capital Movement Circular dated May 2, 2018 (the “Circular”) was issued by the Central Bank of the Republic of Turkey (the “Central Bank”). Procedures and principles to be complied by the banks and financial institutions with respect to the utilization of FX loans abroad and within Turkey are one of the matters regulated within the scope of the Circular.
1. Foreign Exchange Loan
In our Newsletter dated February 2, 2018 with respect to the Decree, restrictions and regulations for obtaining loans from abroad and from Turkey were set forth.
The Circular has explained the issue of utilization of FX loans setting forth that “Foreign exchange loans may be utilized directly as foreign exchange or by means of conversion of the credit amount to Turkish Lira.”
2. Renewal of Loans
Provisional Articles 5 and 6 of the Decree No. 2018/11185 have regulated the renewal of the loans that have already been extended, setting forth the circumstances in which the loans may be renewed. The said circumstances which shall be considered as “renewal” are determined in the Circular.
Accordingly, it is stated that restructuring shall not be deemed as renewal within the scope of the Decree whereas FX-indexed loans may not be restructured as FX-indexed.
3. Foreign Currency Income
Foreign currency income defined as “Income generated from export, transit trade, sales and deliveries deemed export, and foreign exchange earning services and activities” within the scope of the Decree, is explained in Article 15 of the Circular. Pursuant thereto; foreign currency income may be one the following:
(i) Income generated from export
(ii) Income generated from transit trade
(iii) Income generated from sales and deliveries deemed export
(iv) Income generated from FX earning services and activities
Income stated above in items (iii) and (iv) are clarified as income generated from transactions listed in Paragraph 3 of Article 6 of the “Communique Re. Tax, Duty and Charge Exceptions in Export, Transit Trade, Sales and Deliveries Deemed Export and Foreign Exchange Earning Services and Activities” numbered 2017/4, and from other commercial activities approved by the ministry which are authenticated to have been collected from Turkish non-residents.
Furthermore, income generated from export and transit trade carried out to free trade zones provided that the goods are sold to a third country from the free trade zone, and income earned in Turkish Lira from Turkish non-residents generated from activities stated above in items (i), (ii), (iii) and (iv) and other commercial activities to be approved by the ministry shall be deemed foreign currency income.
4. Declaration of Foreign Currency Income
Pursuant to Article 16 of the Circular, last three financial years’ foreign currency income shall be declared on company basis, including the group and holding companies, provided that the Foreign Income Declaration Form annexed to the Circular shall be submitted to banks and financial institutions together with a report prepared and approved by public accountants or certified public accountants based on the unconsolidated financial statements relating to the last three years.
5. Exceptions to the Generation of Foreign Currency Income
Several exceptions to the requirement to generate foreign currency income are regulated in the Decree and the said exceptions are repeated in the Circular. However, the below mentioned three exceptions are added among the exceptions for the requirement to generate foreign currency income to utilize loans with the Circular:
a) Foreign exchange loans to be utilized by Turkish residents for the financing of investments with regard to the renewable energy sources within the scope of the guarantee of purchase of the government as per the Law re. Utilization of Renewable Energy Sources for the Purposes of Electricity Generation dated 10/5/2005 and numbered 5346.
b) Foreign exchange loans to be utilized by Turkish residents who are awarded tenders within the scope of Law on Privatization Implementations dated 24/11/1994 and numbered 4046 and public tenders of which the price was determined in foreign currency.
c) Foreign exchange loans to be utilized by Turkish residents who have been established for the purposes of acquiring the shares of a new company and who do not carry out any other activities out of such purpose.
The documents to be submitted to related institutions and organizations and procedures and principles to be complied with when utilizing FX loans within the scope of the exceptions determined in the Decree and the Circular are explained in the Circular in detail.
6. Revolving Loans
Pursuant to Article 24 of the Circular, Turkish residents except for banks and financial institutions are prohibited from obtaining revolving/renewable loans from abroad. However, such prohibition shall not apply to revolving loans obtained from Turkey. As per Article 41 of the Circular, banks and financial institutions in Turkey are entitled to extend revolving/renewable FX loans to companies from Turkey.
7. Additional Explanations regarding the Loans Extended Abroad
As stated in the Decree, the rule is that the FX loans that are obtained from abroad shall be utilized through the intermediation of banks located in Turkey. However, various exceptions to such rule are set forth under Article 22 of the Circular. Such exceptions allow the FX loans obtained from abroad to be utilized without being brought to Turkey through a bank located in Turkey and the procedures and principles for the utilization and repayment of such loans are regulated, as well. Such exceptions are as follows:
In the events when;
a) Turkish residents obtain loans from abroad with regard to their businesses abroad and directly utilize such loans abroad.
b) Turkish residents, who obtain loans from export loan institutions or from abroad within the scope of the guarantee of the export loan guarantee institutions registered under the List of Export Loan and Export Loan Guarantee Institutions (Annex:3), directly pay such loans to the exporting company located abroad.
c) Turkish residents, who obtain loans from development banks located abroad that are not export loan institutions or guarantee institutions, and that provide financing support with fixed term and purchasing of the goods in advance instead of extending cash loans, directly pay such loans to the exporter abroad.
d) Turkish residents utilize the loans that are obtained within the scope of the import to be made for the purpose of buying ships from abroad.
The FX loans that are to be obtained from abroad by the Turkish residents shall be sent directly to the intermediary bank located in Turkey by the creditor to the name of debtor company with the annotation of loan. However, in the event that the loan is initially paid to the bank account that is to be opened at the creditor bank in the name of the debtor and then sent to the intermediary bank located in Turkey, in order for the loan to be deemed as a loan utilized through the banks in Turkey, a letter from the creditor indicating that the loan is transferred to the bank account opened in the name of the debtor shall be submitted to the intermediary bank.
According to Article 29 of the Circular, the loans extended to Turkish residents or extended in order to be transferred to Turkey by the branches of the banks and financial institutions located in free trade zones shall be deemed as FX loans extended domestically. Accordingly, the regulations and liabilities concerning FX loans extended domestically shall apply to such loans.
8. Additional Explanations on the Loans Extended from Turkey
Article 38 of the Circular regulates the general principles of Turkish residents’ obtainment of FX loans from Turkey. It is underlined with the same article that no company is entitled to extend FX loans to another company; since it is stated in the Decree that Turkish residents can obtain FX loans only from banks and financial institutions. Banks and financial institutions are imposed the duty to report the companies that are determined to act contrarily to such provision to the Undersecretariat of Treasury.
8.1 Extension of Loans and Funds Provided by Financial Institutions
As per the Decree, financial institutions, financial leasing, factoring and financing companies are entitled to extend FX loans to Turkish residents in conformity with the general principles of FX loan utilization provided that it is not contrary to the legislation.
Paragraphs 2 and 3 of Article 42 of the Circular provide a detailed explanation on the loans and funds that are to be extended and provided by the banks and factoring companies. With this regulation, a distinction between the receivables to be assigned is made and the distinction is centered on the question whether the receivable to be assigned has arisen from export or transit trade within the framework of Paragraph 11 of Article 11 of the Communique No. 2008-32/34 regarding the Decree No. 32 on the Protection of the Value of Turkish Currency.
In the event that FX denominated funds are utilized by assignment of receivables which have arisen or will arise from export and transit trade without recourse, such funds shall not be considered as FX loans within the scope of the Decree. Yet, if FX denominated funds are utilized by assignment of receivables arising from export and transit trade with recourse, such funds shall be considered as FX loans within the scope of the Decree and shall meet the requirements to which the FX loans are subject to as per the Decree.
It is stated under Paragraph 3 of Article 42 of the Circular that FX denominated funds to be utilized by assignment of receivables, which have arisen or will arise from transactions other than export and transit trade shall be considered as FX loans.
According to Article 48 of the Circular, Turkish residents are entitled to extend FX loans or loans in Turkish Lira to the corporations abroad, in which they hold shares and to their parent companies and group companies abroad. However, as stated in the general principles concerning the FX loans, such loans are mandatory to be transferred abroad through the intermediation of a bank located in Turkey.