Borrowing in foreign funds is about to get complicated. Here are the basics

The Council of Ministers Decision numbered 2018/11185 published in the Official Gazette dated 25 January 2018 introduced major changes to Decision No. 32 on the Law for Protecting the Value of the Turkish Currency. Below, we provide our comments regarding the new regime that is expected to become effective on 2 May 2018 in relation to foreign-currency loans and foreign-currency-indexed loans.

The firms in Turkey should scrutinize the current loans (foreign-currency loans and foreign-currency-indexed loans), foreign-currency incomes and possible foreign-currency incomes of their own for the near future and document them all according to the tax and accounting rules.

1- Real persons res d ng n Turkey

The first distinction concerning the grant of foreign-currency loans and foreign-currency-indexed loans is between real persons and legal entities.

The new regime does not permit real persons to borrow any foreign-currency loans or foreign-currency-indexed loans in Turkey or from outside Turkey.

Thus, it now becomes completely impossible for real persons to borrow any foreign-currency loans and foreign-currency-indexed loans in Turkey or from abroad in any way, unlike in the former regime, which permitted real persons to use foreign-currency loans and foreign-currency-indexed loans in Turkey for commercial and professional purposes.

2-Legal ent t es res d ng n Turkey

Principles governing the use of loans in Turkey or from outside Turkey by said entities classify these entities into the following two categories: “those that earn foreign-currency income” and “those that do not earn any foreign-currency income”.

Foreign-currency income refers to the income earned from exports, transit trade, sales and deliveries treated as exports, and services and activities bringing in foreign currency.

2.1-Fore gn-currency loans that may be borrowed from abroad by ent t es that earn a fore gncurrency ncome

If the borrower’s loan balance (the outstanding portion of the cash foreign-currency loans it borrowed domestically or from abroad) is below USD 15 million as of the drawdown date, the loan that may be borrowed cannot exceed the sum of existing loans and the foreign currency income during the last 3 years. It should be documented by the certified tax advisors (CPA’s) that the loan asked from the financial institutions cannot exceed the sum of existing loans and the foreign currency income during the last 3 years. If it is understood afterwards that the loan amounts exceed the threshold, that amount should be converted to TRY credit or recalled.

Loans borrowed by banks, leasing and factoring companies in accordance with their own legislation and public-sector loans in general are not subject to these provisions.

No limits apply to loans to be borrowed from abroad by companies whose loan balance is above $15 million as of the drawdown date.

2.2-Borrow ng of fore gn currency loans from abroad by ent t es that do not earn a fore gn-currency ncome

In principle, entities that do not earn a foreign-currency income are not permitted to borrow foreign-currency loans from abroad.

On the other hand, for loans borrowed from abroad under the conditions specified below, it is not important whether or not the entity earns any foreign-currency income. In other words, entities that do not earn a foreign-currency income may also borrow foreign-currency loans from abroad subject to the following conditions:

Entities whose loan balance is above $15 million as of the drawdown date

Banks, leasing, factoring and financing companies

Entities that are granted the right to borrow loans under an Investment Incentive Certificate

Loans to be borrowed for financing the investment-related machinery and equipment listed as Item 17 on List 1 attached to the Decision for the Determination of the Value Added Tax Rates to be Applied to Goods and Services, which was implemented through the Council of Ministers Decision No. 2007/13033.

Projects conducted under the PPP (Public-Private Partnership) Model

Loans to be borrowed by entities that have connections that may bring in foreign-currency income and will probably earn foreign-currency income but has not had any foreign-currency income within the last 3 years (the amount of these loans may not exceed the possible foreign-currency income they document)

Loans to be borrowed by entities that undertake projects for the defense industry and works subject to international tenders held domestically

In addition, entities without any foreign currency income are also permitted to borrow loans in accordance with the procedures to be determined by the Ministry to which the Undersecretariat of the Treasury is affiliated.

Considering these provisions as a whole, it turns out that entities that do not have a foreign currency income and are not covered by the exceptions listed above may not use loans from abroad.

For instance, those whose foreign-currency loan balance was below $15 million as of the drawdown date may not borrow foreign-currency-loans from abroad in any way if they are not covered by one of the exceptions.

As in the case of real persons, it is completely forbidden for entities residing in Turkey to use foreign-currency-indexed loans from abroad.

2.3- Fore gn-Currency Loans Borrowed Domest cally

Only banks, leasing, factoring and financing companies are granted the right to extend foreigncurrency loans in Turkey. Real persons and legal entities that are not among the organizations listed above may not extend foreigncurrency loans.

No entity, including said organizations, is allowed to extend foreign-currency loans in Turkey to real persons residing in Turkey.

Likewise, no institution in Turkey may provide foreign-currency-indexed loans to real persons and legal