A Q&A guide to outsourcing in Turkey.
This Q&A guide gives a high-level overview of legal and regulatory requirements on different types of outsourcing; commonly used legal structures; procurement processes; and formalities required for transferring or leasing assets. The article also contains a guide to transferring employees; structuring employee arrangements (including any notice, information and consultation obligations); and calculating redundancy pay. It also covers data protection issues; customer remedies and protections; and the tax issues arising on an outsourcing.
To compare answers across multiple jurisdictions, visit the Outsourcing Country Q&A tool. This article is part of the PLC multi-jurisdictional guide to outsourcing. For a full list of contents, please visit www.practicallaw.com/outsourcing-mjg.
Turkish Law does not specifically regulate outsourcing transactions unless they are related to services falling within regulated markets (such as banking).
However, all commercial activity in Turkey is expected to be compliant with the overriding Turkish Commercial Code and Code of Obligations. Under the New Turkish Commercial Code (which is due to enter into force in July 2012) shareholders cannot be debtors to the company, unless related to the scope of the business of both the company and the shareholder. In a related party outsourcing, it is almost certain that the scope of business rider is satisfied. However, the transaction must still be conducted at arm's length.
As a draft Data Protection Law is awaiting enactment, there is no specific law covering outsourcing involving sensitive data.
However, this must still be addressed in a way that is compliant with:
The Turkish Constitution.
Any situation specific laws that apply a level of protection.
Non-disclosure agreements (that are often preferred in such instances).
Banking Law No 5411 regulates the procurement of support services by banks and the internal systems of banks. Banks are entitled to use external support services provided they adequately measure the risks of such services. In addition, the outsourcing company is liable for data protection issues applicable to the bank.
Other financial service providers are also regulated in a similar way to banks, to a greater or lesser extent, depending on the function and sector. However, all companies must comply with the obligations placed on them by the Turkish Commercial Code concerning responsibility for financial statements and so on.
There are no further regulations specifically applicable to business process outsourcings.
There are no further regulations specifically applicable to IT outsourcings.
There are no further regulations specifically applicable to telecommunications outsourcings.
The public sector can outsource its needs to the private sector. The relevant legislation is the:
Public Procurement Law No. 4734.
Law of Public Procurement Contracts No. 4735.
Public procurement contracts may be transferred to third parties but this is conditional on them meeting the requirements of the original bidder. Furthermore, if the administration approves outsourcing in the public procurement contract, outsourcing is permissible under the conditions of that approval.
Outsourcing is possible in almost all sectors of commercial life, provided that the necessary requirements are met. These requirements become particularly relevant when operating in the more tightly regulated sectors such as energy, capital markets, telecommunication and banking.
Further requirements that must be considered include the following:
The outsourcer should always carry out comprehensive due diligence on the outsourcing company to ensure the quality of service that will be provided, as per any jurisdiction.
Confidentiality agreements are likely to be desirable and required when putting together any outsourcing relationship.
The outsourcer, and the outsourcing company, must comply with all relevant regulatory compliance matters to prevent suspension of the services or application of administrative attachments (particularly in strongly regulated sectors).
Liability needs to be considered since the joint and collective liability may be relevant in any given outsourcing relationship. Turkish employment Law No. 4857 for example, envisages joint and several liabilities of the contractor and the sub-contractor against the employees of the sub-contractor. Issues relating to the apportionment of liability between the outsourcer and the outsourcing company must be considered under the Turkish Law of Obligations.
The outsourcing relationship may have competition law implications under the Block Exemption Communiqué on Vertical Agreements, as amended by the Competition Board Communiqués No. 2003/3 and 2007/2.
Generally, (except in certain industries like banking) there is no strict requirement of notification for outsourcing contracts.
Where notification to the Banking Regulation and Supervision Agency (BRSA) is required, it should generally be served within three months of the previous year. Failing to notify the BRSA can result in payment of fines.
In Turkey, there is regulation of bank's procurement of support services under Articles 35, 36 and 93 of the Banking Law by BRSA. Those services that may not be outsourced are clearly listed within the Regulation.
In accordance with the Regulation, banks that decide to use outsourcing must do the following:
Prepare a detailed risk management programme which must be submitted to the board of directors.
Prepare a risk analysis report to submit to the BRSA as necessary. It is obligatory that before a contract is signed with a support service provider, banks must conduct examinations and evaluations as to whether the capabilities of that service provider (in terms of technical equipment and infrastructure, financial capability, experience, knowledge and human resources) are sufficient to enable them to achieve the support services to the required quality regulated under Article 6 of the Regulation.
A technical adequacy report is then prepared to submit to the BRSA when required.
Following the positive evaluation of the risk analysis report and technical adequacy report with the opinion of the audit committee (to be composed in accordance with the Turkish Banking Law) the support service agreement can be executed with the selected provider.
Such services can also be further outsourced if the sub-provider meets the criteria required for the support service provider and after seeking the bank's approval.
If the support service providers or sub-contractors are established abroad, or they operate through their overseas branches or partnerships, there must be no obstacles preventing the board from obtaining information and documents that it may consider necessary concerning the regulations and practices of the countries in which the service providers operate.
It must also be possible to inspect these service providers in connection with services procured. If support services are procured from service providers established abroad, banks have to consider country risks and produce action plans ready for implementation to ensure business continuity and local procurement of such services are available in case of any interruption of services.
Such services and the support service providers must be reported annually and at the end of the third month of the following year to the BRSA.
The audit committee prepares an evaluation report at least once every three months to be submitted to the board of directors. This indicates if there have been any factors over procurement of support services which may prevent an effective and adequate operation of the bank's internal systems or have led to risks, and whether the support service providers (including their shareholders and managers) maintain compliance with the conditions stated under the Regulation.
Description of structure. Outsourcing may be by way of establishing companies to outsource certain business functions. The types of companies most frequently established for such arrangements are joint stock companies and limited liability companies.
Advantages and disadvantages. Company establishment can be advantageous considering the limitation of liability, but it increases the administrative burdens of maintaining the additional companies.
Description of structure. In a direct outsourcing, the customer enters into an outsourcing contract with the external service provider. In an indirect outsourcing model the customer enters into a direct outsourcing contract with an external service provider who then appoints a sub-contractor outsourcing company (usually located abroad).
In a complex business it can be desirable to utilise a combination of outsourcing arrangements to best meet the various requirements individually.
Advantages and disadvantages. A key advantage is that this is a generally simple form of outsourcing where the customer maintains flexibility to select the best value solution to a variety of needs.
Description of structure. Outsourcing may be by way of a joint venture (JV) or through a consortium. The difference between the two is that partners in the JV are jointly and severally liable for the total portion of the outsourced service, whereas a partner of a consortium is liable on the basis of the apportioned parts of the outsourced service as per their consortium agreement.
Advantages and disadvantages. Consortiums are typically more advantageous and the primary choice over JV structures. These structures can hold strong advantages where a combination of specialist expertise is needed to fulfil an outsourcing requirement that is not common to just one provider. This may provide disadvantages, however, if the JV or consortium partners are not well selected for harmonious service provision.
Description of structure. In a captive entity structure, processes are outsourced to a wholly-owned subsidiary with advice taken from local suppliers on a consultancy basis.
Advantages and disadvantages. This structure gives the customer direct operational control and may have tax benefits depending on the jurisdictions involved. It may also be that increased buying power can be gained through a single outsourcing company within a group of companies. However, there are significant upfront set-up costs and risks that cannot be passed to a third-party supplier.
Build Operate Transfer (BOT) structure. In a BOT structure, a third-party supplier is contracted to build and operate a facility pending the transfer of the operation to the customer. The customer may ask the supplier to operate the facility in the long term. This model is very commonly used in PPPs where the state imposes relatively rigid model contracts to the private party.
Advantages and disadvantages. This is a relatively low-risk model but can be expensive. As a further advantage, the state may choose to provide state aid/subsidy for essential public projects to the private party.
The outsourcer usually requests the potential outsourcing companies to submit their proposals. In the proposals, the outsourcing company sets out its fee structure, demonstrates its level of expertise and its certifications related to the quality and standard of the service to be provided.
Invitation to tender is a subject of administrative law where the relevant state division calls for the bidders to submit their proposals. The lowest bid wins the tender provided that the successful bidder fulfils the strict criteria set by the administration. These criteria usually concern the finances of the bidder.
The outsourcing process in the public and private sectors differ. State outsourcing is conducted through tenders, whereas there is no such requirement in the private sector.
In state tenders, the process generally commences by the tender arrangements of the authorised state division or Ministry. In tender specifications, the state generally requires bidders to meet certain financial and service criteria to qualify. The successful bidder enters into a contract which must be subject to private law principles.
In the private sector, the process generally commences by selecting the method of outsourcing and continues by conducting due-diligence over the outsourcing company. The reputation, corporate structure, know-how, supply chain, distribution lines and responsiveness of the outsourcing company must be measured by the customer.
In the public sector, due diligence is a matter of state practice. On rare occasions, the state performs due diligence on the bidders of the tender. State practice is to inspect the correctness of the information provided in the submissions from the bidders.
After the customer and the external provider (outsourcing company) agree on the terms and conditions of the service, they enter into the outsourcing contract. The contract, among other things must cover:
The service specifications.
Cost and duration of the service.
In state tenders, there is generally no negotiation. The standards and terms are concrete and aim to benefit the state. In private practice, the outsourcing process is always open to discussion on the basis of bilateral negotiations.
If the outsourcing transaction includes a transfer of immovable property (real estate), this transfer is subject to certain legal formalities under Turkish law. Title transfer for real estate can be realised by an official deed prepared by the title registry officer. Alternatively, if the title transfer is to be realising later, an agreement can be executed before a notary public.
The transfer must be registered with the relevant title deed office where the immovable property is located.
A person who has acquired an economic right or a licence to exercise such right from the author or his heirs, may transfer a right or licence to another person only with the written consent of the author or his heirs (Article 49, Law of Intellectual Property and Artistic Works).
Where the right of adaptation is transferred, the consent of the author or his heirs must also be as necessary as it is to the person who has acquired by derivative transfer.
Except for the transfer of trade marks, patents, industrial designs and geographical signs, IP rights do not require any involvement from governmental offices.
Trade marks, patents, industrial designs, and geographical signs should be registered with the Turkish Patent Institute for full validity and protection in Turkey. If such rights are not registered there, the rights will be more generally protected under provisions in accordance with Turkish Commercial Law.
Generally, movable property can be transferred by an agreement concluded orally or in writing. For evidentiary purposes, a written contract is advisable.
There are no specific formalities for movable properties, except for certain transactions which are subject to formal due process such as the sale of a vehicle or seized assets.
The various clauses in the key contract can differ, but are at all times governed by the Turkish Code of Obligations and will generally include provisions covering:
Representations and warranties.
Duration of the agreement.
The assignment of key contracts should be made in writing. Generally, the counterparty's express consent or approval is required.
The Lease Law only applies to real estate located within municipal borders or on wharfs, harbours or stations (Article 1, Lease Law). Its application requires that the real estate has a roof, meaning that lease agreements regarding land will fall outside the scope of the Lease Law. Such lease agreements will be governed by the Code of Obligations.
For lease agreements governed by the Lease Law, unless the lessee notifies the lessor of its decision to vacate 15 days before the expiration of the lease agreement, the lease agreement is deemed to be renewed automatically for a period of one year under the same conditions.
Lease Law provisions aim to protect the lessees, therefore, there can be no clause inserted in a lease agreement which is contrary to the Lease Law and adversely affects the rights of the lessee.
However, clauses contrary to the Lease Law can be inserted in a lease agreement if they improve the right of the lessee.
A written licence agreement should be entered (see Question 7).
See Question 7.
See Question 7.
The employees of the customer will not be transferred to the supplier under an initial outsourcing provided that it is not a transfer of business.
Transfer of business is not regulated under Labour Law. However, under the Court of Appeal resolutions, the business may be considered as transferred if it is a long-term economic unit, which despite the transfer retains its identity. Furthermore, in various outsourcing transactions, the determining factor is whether the supplier takes over any tangible or intangible assets. The courts consider all facts to determine whether a transfer has occurred.
See above, Initial outsourcing.
Employees of the customer will not be transferred to the client due to termination of outsourcing provided that the outsourcing was not a business transfer.
As the employment agreements (and collective bargaining agreements) are automatically transferred to the supplier, they are transferred with all their existing terms and conditions.
Employees are only entitled to severance pay in the case of termination of employment (exemptions apply). Therefore, during a transfer of employment, employees are not entitled to severance payment.
A severance payment should be paid to the employee in the amount of a 30 day salary for each completed year of employment with the company. For time spans remaining aside from the complete one-year-periods, payment is made at the same rate pro rata.
There is a maximum limit of yearly severance pay, therefore, even if the employee's 30-day-wage is over the severance payment threshold (determined semi-annually), the severance payment will equal the severance threshold for every subsequent year as well.
Any unfavourable change to employees' terms and conditions for a reason connected with the transfer is void (except where the employee consented to the change). However, if there is a valid reason (that is, economic, technical or organisational) for the change, non-acceptance by the employee may be considered a valid reason for termination.
A dismissal is invalid if it is due to transfer of a business. Dismissals on other grounds (for example, due to employee's conduct or for operational reasons) remain permissible.
Certain professional activities are subject to a licence or authorisation requirement (for example, the practice of Turkish law). These professional activities cannot be performed by a non-Turkish national.
In addition, non-Turkish nationals must obtain a work permit before commencing work in Turkey (although exemptions apply).
Since employees will be transferred in a business transfer, a contractual clause providing that certain employment agreements (which belong to the business) do not pass on to the transferee (and that the employee remains an employee of the customer) would be invalid.
There is no statutory requirement to have a smooth transition. However, it is advisable that the following information should be provided by the transferor to the transferee:
Unpaid due employee entitlement amounts.
Employment commencement date of the employees.
Details of working conditions (benefits provided to the employees and so on).
There is no statutory notice, information and consultation requirement regarding the transfer. However, the employer has additional information and consultation obligations if there are mass dismissals in connection with an outsourcing. These apply if the following numbers of employment agreements are terminated within a month by the employer for business reasons:
Ten or more employment agreements if the transferor employs between 20 and 100 employees.
More than 10% of all employment agreements if the transferor employs between 101 and 300 persons.
More than 30 agreements if more than 300 persons are employed.
General requirements. The most common data protection issues that arise on an outsourcing are the protection of:
Employees' personal data (particularly on a human resources, payroll, recruitment or related outsourcing).
Customer's data (particularly with a customer support, marketing, customer relationship, billing or similar related outsourcing).
Usually these issues are covered under a separate non-disclosure agreement and/or a provision in the outsourcing agreement for an unlimited period.
There are no specific data protection laws. Data protection is regulated under the Constitution and other laws such as the:
Bank cards and credit cards law.
Additionally there is a draft law on data privacy that has not yet been adopted, based on the 1995 EU data protection directive. This is currently awaiting parliamentary approval.
Compliance with international security standards is highly recommended which includes the following:
The Turkish Constitution. Everyone has the right to claim respect for his/her private and family life (Article 20, Turkish Constitution). A breach of an individual and their family's privacy is prohibited. In addition, unless a decision granted by a judge on grounds such as national security or public order exists, or an order of an agency authorised by law in cases where delay is deemed prejudicial is shown, the search or seizure of any individual, his private papers or his belongings is prohibited.
The Turkish Civil Law. An individual whose personal rights are unjustly breached has the right to initiate a civil action to prevent the breach and/or request compensation for damages arising from the breach (Article 24, Turkish Civil Law numbered 4721).
The Criminal Code. The unlawful storage of personal data is punishable by imprisonment.
Mechanisms to ensure compliance. Agreements should include clear confidentially requirements.
International standards. Turkey signed the Convention for the Protection of Individuals with regard to Automatic Processing of Personal Data (ETS No. 108) but it has not yet been ratified. Therefore, this convention is not yet a part of Turkey's national law.
General requirements. Banks' directors, managers and other personnel are required not to disclose personal information relating to their customers (Article 73, Banking Law numbered 5411).
Mechanisms to ensure compliance. A breach of Article 73 of the Banking Law (see above, Banking secrecy) is punishable by both (Article 159, Banking Law):
Imprisonment ranging from one to three years.
An administrative fine.
If a breach is made to obtain a benefit, the penalty can be increased by one sixth.
International standards. See Data protection and data security, International standards.
General requirements. Member merchants/shops cannot use, store or copy customers' personal data obtained from the use of credit cards or bank cards in their shop or workplace without written consent of the customer (Article 23, Bank Cards and Credit Cards Law numbered 5464). A breach of this requirement is punishable by imprisonment ranging from one to three years as well as an administrative fine (Article 39, Bank Cards and Credit Cards Law numbered 5464).
Mechanisms to ensure compliance. To ensure data protection and prevent unauthorised processing, security measures, auditing or monitoring are generally adopted individually or in combination.
International standards. See Data protection and data security, International standards.
Generally, service specifications are drawn up by the supplier (due to their expertise) whilst taking the needs of the client into consideration. It is then normally reviewed and approved by the customer.
Generally, the parties identify a set of objectives and measurable criteria for performance in the agreement. Service levels are generally taken as a basis for:
Service level credits give the customer the right to lower the service fee (usually a percentage depending on the breach) if the supplier does not perform within the agreed service levels.
The following charging methods are commonly used in an outsourcing:
Fixed price. The parties determine a fixed price to be paid by the client for the services provided by the supplier in lump sum or periodically (monthly/quarterly and so on).
Pay as you go. The client pays a pre-agreed unit price for specific items of service. The parties may include a minimum fee level.
Hourly rate. Another less commonly used method is an hourly rate method. In this model, the client pays the supplier's agreed hourly rates of the supplier's employees. Parties have the option to determine a fee cap.
The following additional key terms are used for costs:
Interest on late payment.
In the case of breach of agreement, the non-breaching party will be entitled to demand either:
Specific performance of the agreement.
Termination of the agreement.
Provided the non-breaching party proves their damages, they will be entitled to indemnification of those damages in both instances.
A defaulting party must pay interest on monetary debts. Damages exceeding the interest may also be demanded by the non-defaulting party.
The breaching/defaulting party may avoid payment of indemnification and/or interest to the extent that it can prove it had no fault in causing the default/breach (Article 106, Code of Obligations).
If performance becomes impossible due to supplier's default, the customer can claim for indemnification of damages caused by non-performance. However, the supplier may be relieved from responsibility by proving that he was not at fault (Article 96, Code of Obligations).
In case of faulty performance, the customer can:
Reject the performance.
Accept the performance and claim for indemnification of damages caused by faulty performance.
However the supplier may be relieved from responsibility by proving that he was not at fault (Article 96, Code of Obligations).
In addition, there are specific provisions for types of contracts separately regulated in the Code of Obligations such as sale and construction agreements.
The following customer protections (without being limited to these) can voluntarily be included in the contract:
Contract management clauses and governance provisions.
Indemnification clauses in connection with specific losses.
Parent company guarantee.
Penalty clauses (no indemnification can be requested in addition to the penalty, unless otherwise explicitly agreed in the contract).
Replacement provisions allowing the customer to step in or obtain the services from a third party supplier, at the supplier's cost.
Right of access to the supplier's facilities.
Termination clauses under certain defined circumstances (for example, change of control).
According to the freedom of contract principle in the Turkish Code of Obligations, warranties and indemnities can be freely agreed among the parties. However, the indemnity agreed in a contract must not result in devastation of the normal day to day course of the supplier's business.
The indemnity can be agreed in the form of compensation for damages, penalties and/or liquidated damages. In some cases, the receiver of the outsourcing service might demand a performance bond to reassure performance in compliance with the outsourcing agreement. There are some other cases, where the supplier is asked to provide a bond or check for the same purpose.
The type of the outsourcing service will define the type of the agreement and the provisions that it will be subject to under the Code of Obligations, for example, the service might be accepted as an independent contractor agreement, or a service agreement or a mixed one. Therefore, the agreement should be the first point of reference to determine the limitation imposed on fitness for purpose and quality. However, the service provider must be responsible for damages in the case of failure to meet the required quality level unless it is proved that the supplier is fault-free (Article 96, Turkish Code of Obligations).
The limitation and/or cease of liability arising from an agreement is permitted for fault and negligence that does not qualify as gross negligence or gross fault.
Neither limitation nor cease of liability is permitted for services and/or occupations carried under a specific license granted by the competent authorities (for example, doctors).
Although not specific to the suppliers, they can benefit from the following insurance options that are available to all the legal entities in Turkey:
Third party liability, including for professional indemnity risks and fraud.
Turkish law does not impose a maximum or minimum term on an outsourcing agreement, therefore the term can be agreed by the parties.
Turkish law does not impose a minimum or maximum notice period. The supplier and customer can agree on notice periods.
There are no specific provisions for termination by justified cause. However, in principle, a permanent-term contract can be terminated by justified cause at any time. In principle, a material breach making it unacceptable for the customer to continue the contractual relationship is deemed to be a justified cause.
If a party is unable to perform its obligations due to insolvency or bankruptcy, the other party has the right to terminate the contract unless its contractual claims are guaranteed within a reasonable term (Article 82, Code of Obligations). In addition, parties can voluntarily agree on a termination clause in the contract for insolvency and/or bankruptcy cases.
The parties can agree on a force majeure clause enabling the parties to terminate the contract in case of events preventing or delaying the parties from fulfilling their obligations without defaulting.
The parties can voluntarily agree on the following additional termination rights (without being limited to these) within the contract:
Breach of contract.
Breach of confidentiality obligations.
Breach of IP rights.
Change of control.
Failure to pay contractual fees.
Insolvency, bankruptcy, and so on.
Termination for convenience (if so, the terminating party is usually held liable to pay an early termination penalty).
The contractual termination rights can usually be challenged by the counter party, alleging that the conditions for termination were not met.
If the supplier is licensed for the customer's IP rights in the outsourcing contract, it is implied that the licence ends with the termination of the outsourcing contract. However, the parties may agree on a specific provision enabling the supplier to use the customer's IP rights post-termination and regulating the conditions. Otherwise, there are no implied rights for the supplier to continue to use IP rights post-termination.
In principle, the customer cannot gain access to the supplier's know-how after termination of the outsourcing contract, unless otherwise is explicitly agreed in the contract.
The customer can use the supplier's non-confidential know-how gained during the outsourcing relationship, post termination of the outsourcing contract. However, use of the supplier's non-confidential know-how post termination can be prohibited in the contract by anti-competition or confidentiality clauses.
The customer cannot use the supplier's confidential know-how post termination of the outsourcing contract, unless otherwise is explicitly agreed in the contract or good faith demands this. Otherwise, the supplier may hold the customer responsible for culpa post contrahendum and unfair competition.
The parties are free to exclude most forms of liability except for gross negligence or wilful misconduct (such as fraud).
The parties can agree on a liability cap, subject to limitations (see Question 35). Parties generally determine the liability cap as the total service fee stated in the agreement or as a multiple of that service fee.
General conditions of tax legislation apply. When the outsourcer issues an invoice, that invoice is subject to corporate tax (20%) plus VAT (18%).
When the outsourcer issues an invoice, it is subject to corporate tax (at 20%) plus VAT (at 18%). Taxes related to the employment, such as social security payments, also transfer with the employee.
The delivery of goods and/or performance of service are generally subject to VAT tax in Turkey (currently 18%). Rates that supersede this are a tax rate of 1% for staple foods and 8% for textiles. Detailed listings of exemptions can be found in the VAT list published on 27 January 2012.
There is no service tax in Turkey.
In Turkey, parties are jointly liable for paying stamp duty. The stamp tax is calculated at 0.825% applied to the amounts stated in the contract, with a maximum liability currently set at TRY1,379,775 (as at 1 February 2012, US$1 was about TRY1.8).
The following are subject to corporation tax:
Public economic enterprises.
The rate of corporation tax is currently 20%. When a company issues an invoice for the delivery of goods and/or performance of service, they have to pay this 20% corporate tax on their benefit.
In case of a real person providing the outsourcing service, income tax may be applicable in place of corporation tax, between 5% to 35%.
* The author would like to thank Batuhan Sahmay, Melis Akkurt, Aslihan Erdem, Arda Alposkay, Duygu Ince and Omer Mirze, Bener Law Office for their assistance in preparing this article.
Qualified. Istanbul Bar, Turkey, 2000
Areas of practice. Corporate consultancy; disputes resolution.