Joint ventures in Turkey: overview
A Q&A guide to joint ventures law in Turkey.
The Q&A gives a high level overview of joint ventures law, including regulation of joint ventures, types of joint ventures permitted in the jurisdiction, whether corporate joint ventures are subject to the corporate law, formalities for formation and registration of joint ventures, statutory limits on duration, anti-trust rules, termination, rules relating to joint ventures with foreign members, and incentives.
This Q&A is part of the Joint Ventures Law Global Guide.
Domestic company joint ventures (JVs)
JVs are neither expressly defined in the Turkish Commercial Code No. 6102 nor in the Turkish Code of Obligations No. 6098. However, certain provisions under various laws are applicable to JVs.
Under the Code of Obligations, if the form of a corporation does not satisfy the terms and conditions of any specific regulation, it must be assessed in accordance with the provisions on "ordinary partnership". Under Article 620 of the Code of Obligations, a partnership is an agreement under which "two or more parties combine their services and assets in order to achieve a common purpose". This form of ordinary partnership has a flexible structure. For example, the founders are subject to unlimited liability and can freely determine the partnership structure. Accordingly, each shareholder must subscribe to the share capital either with money, receivables or other assets or services (Article 621, Code of Obligations). Unless otherwise stipulated under the articles of association, each subscription of the shareholders to the share capital must be equal in importance and meet the required qualifications for the purposes of the company. Under the provisions of ordinary partnerships, founders can borrow from banks in the name of the JV and are liable for the repayment of such loans. In this respect, contractual JVs must be assessed in accordance with the terms and conditions of ordinary partnerships.
The Communiqué on foreign direct investment law (adopted by the Ministry of Economy on 17 June 2003) aims to encourage foreign direct investment in Turkey and regulates the principles governing such investments in order to:
Protect the rights of foreign investors.
Define investment and investors in line with international standards.
Establish a notification-based system for foreign direct investments rather than screening and approval.
Increase foreign direct investments with the support of established policies.
This Communiqué states that foreign investors can invest in companies defined under the Code of Commerce and in ordinary partnerships as stipulated under the Code of Obligations. Corporations established under an agreement under any name, such as ordinary partnership, consortium, business partnership, JV, and which do not fall within the terms and conditions of the companies set out under the Code of Commerce must be defined as ordinary partnerships.
Specific regulations governing JVs can be found in the Competition Board's Communiqué numbered 2010/4 (dated 7 July 2010) regarding mergers and acquisitions which are subject to the Competition Board's approval. Article 5 of the Communiqué regulates cases of permanent control change in the following cases:
Merger of two or more entities.
Full or partial control of the company or companies to be transferred either under an agreement or as a result of an acquisition of the shares or assets of the company.
Establishment of a JV that satisfies the requirements of an independent economic entity.
Another definition of a JV is provided under Law No. 4734 on public procurement. Article 4 of this Law defines JVs as "an agreement between two or more private individuals or legal entities for the purpose of participating in a tender".
Turkish law clearly recognises the existence of an economic unit that is subject to joint control and is formed either as a result of the formation of a new JV or change in control of an existing JV.
Considering the importance of foreign direct investments for the Turkish economy, Communiqué No. 2009/2 on the registry of the business corporations without a legal personality and operated by commercial partnerships was introduced by the Ministry of Industry and Commerce (currently the Ministry of Science, Industry and Technology) on 1 April 2012. The objective of this regulation is to provide a legal framework for JVs and specify the terms and conditions for business corporations without a legal personality that are operated by commercial partnerships. JVs can be registered with the Trade Registry if this is requested by the founders of these JVs, therefore creating a safe legal environment for these entities. It also ensures the recognition of JVs by third parties. Therefore, potential investors can solicit the necessary information regarding any JV, if required. The aim of ensuring the availability of such information is to provide confidence to potential investors.
Under Article 2/7 of Law No. 5520 on corporate tax, JVs are defined as business partnerships that are established in order to jointly operate a business and subsequently share profits. However, although such partnerships do not have a separate legal personality, they are liable for the payment of tax. JV founders are free to select the most suitable tax status resulting either in a JV being subject to corporate tax or payment of income tax by the founders.
Parties of the JV can freely select whether they prefer for the JV to have contractual or corporate legal status, within the scope of the above regulations. However, there are a number of regulations limiting this selection, especially if the purpose of the JV involves the protection of public interest. For example, Law No. 5411 on banking and Law No. 6362 on capital markets state that if a bank or an intermediary firm joins a JV as a party, then that JV must be set up as a joint-stock company.
Since there is no clear definition of JVs under the law, legal doctrine and jurisprudence have determined that a JV can either be contractual or take the form of a corporate entity. Corporate JVs are formed as a result of capital contributions. For example, consortium members of a big project can form a JV based on their agreement in order to realise the JV's purpose. It is also possible for the founders of a JV to establish a commercial entity or join one that has already been established. On the other hand, contractual JV's are usually formed for specific projects to be carried out by multiple parties.
Neither the old nor the new Turkish Code of Commerce explicitly refers to JVs. However, in practice, JVs have been governed by corporate law as a result of satisfying the provisions applicable to "ordinary partnerships" listed in Article 620 of the Turkish Code of Obligations, which provides that an "ordinary partnership agreement is an agreement pursuant to which two or more parties combine their services and assets in order to realise a common goal. If the form of a corporation does not fall within the terms and conditions of any specific regulation, it must be assessed by applying the provisions regulating ordinary partnerships".
Formation and registration
Law No. 805 on the compulsory usage of the Turkish language in economic institutions contains a restriction on the use of foreign languages in transactions that take place among Turkish citizens or companies. Under Article 1 of Law No. 805, all types of Turkish companies and entities are obliged to have their agreements and company books regarding transactions that take place in Turkey in Turkish.
This restriction is applicable to contractual and corporate JVs where all parties are Turkish citizens. See Question 25 on the language requirements for transactions where one of the parties is a foreign entity.
The formation of corporate JVs is addressed under Article 40 of the Turkish Code of Commerce and Article 2(b) of the Communiqué concerning the principles for the establishment and amendments of articles of association of joint-stock companies and limited liability companies. These state that the company must be registered with the respective Trade Registry covering the area where the company's headquarters is located or associated with, within 15 days after the notarisation of the articles of association. The founding documents of corporate JVs must therefore be notarised by the notary public and registered with the Trade Registry. After registration, the company becomes a legal entity. Accordingly, information subject to announcement after registration must be published in the Trade Registry Gazette.
During the establishment process of a JV, numerous public authorities may be involved depending on the scope of the respective project. For example, JVs operating in the construction sector must apply for and obtain a construction certificate from the Ministry of Environment and Urban Planning in order to operate. Companies operating in the energy sector must apply for and obtain a transmission, distribution, wholesale, generation or trade licence (depending on the activities of the company) from the Energy Market Regulatory Authority.
JVs are registered with the local Trade Registry offices. These offices report to the Chambers of Commerce and Industry or Chambers of Commerce, as determined by the Ministry of Science, Industry and Technology. Application for the registration of a JV must be submitted to the local Trade Registry office located in the area supervised by the respective Trade Registry where the JV is registered. The Trade Registry offices where JV parties are registered must also be notified of the JV registration by the relevant local Trade Registry on the same day.
Public sector bodies
Other public sector bodies such as the Energy Market Regulatory Authority, Competition Board and Capital Markets Board, can also be involved in the JV establishment process, depending on the purpose and subject matter of the company. Under the regulations of the Energy Market Regulatory Authority, JVs that operate in the electricity, natural gas, petroleum market and the liquid petroleum gas (LPG) sectors must request a final approval in the form of a licence issued by the Energy Market Regulatory Authority.
Companies whose capital market instruments are to be issued on the market or publicly offered are subject to capital markets law (Article 4, Law No. 6362 on Capital Markets). Where the purpose of having an authorisation is to realise these transactions, companies must then prepare a statement that includes specific information stipulated in Article 4 of Law No. 6362 on capital markets for ratification by the Capital Markets Board.
According to Communiqué No. 2010/04 on mergers and acquisitions which are subject to the Competition Board's approval, a company must comply with an outlined notification procedure since mergers, acquisitions and JVs are transactions that have lasting effects on the markets that can lead to significant issues of competition. Therefore, the acquisition of a dominant position or strengthening of an existing dominant position as a result of such transactions is of particular importance. The reason for notifying the Competition Board regarding transactions that form a concentration is to ensure prior identification and elimination of transactions that may have a negative impact on competition or society. Applications in relation to merger and acquisition transactions or JVs are governed by Article 7 of the Law on the Protection of Competition No. 4054. These applications must be submitted after filling out the notification form provided in the Communiqué No. 2010/4 on mergers and acquisitions which are subject to the Competition Board's approval, as issued by the Competition Board, together with the stipulated documents. Information required in the notification form related to mergers and acquisitions' applications must be complete and accurate. Any changes to the submitted form must also be notified to the Competition Board. In the event of failure to notify the transaction subject to notification procedure or the provision of misleading or false information, the Competition Board is authorised to impose administrative fines. Under Communiqué No. 2010/4, the Competition Board's approval is required for the recognition of transactions where either the:
Total turnover in Turkey of all involved parties exceeds TRY100 million and the turnover in Turkey of at least two parties exceeds TYR30 million.
Global turnover of one of the parties exceeds TRY500 million and the turnover in Turkey of at least one of the parties exceeds TRY5 million.
None of the approvals mentioned above can be avoided.
There are no additional formal requirements to those mentioned in Question 6.
Under the fundamental rule of freedom of contract, as stipulated under Article 26 of the Code of Obligations, parties to a JV can enter into a contract for all types of purposes within the boundaries set by the law. Accordingly, both contractual and corporate JVs can be established for any purpose. However, there is a general restriction on the freedom of contract principle. Parties cannot execute any kind of agreement that would be contrary to (Article 27, Code of Obligations):
The imperative provisions of Turkish law.
Turkish public order.
All contracts contra bonos mores (that is, contracts that contravene socially accepted standards and norms) and with a subject matter that cannot be honoured are considered invalid.
Share capital and participation
Under Articles 342 and 581 of the Turkish Commercial Code No. 6102, which entered into force on 1 July 2012, corporate JV shareholders can participate in the share capital of the company by making contributions in kind, including intellectual property rights (such as domain names). However, such assets must be free of any limitations on rights in rem, attachment or precaution, and should then be appraised or calculated in cash and be transferrable.
There is no clear legal regulation restricting the establishment of JVs with foreign currency. However, in practice, this is not possible since local trade registries require amounts stated in the JV agreements to be stipulated in Turkish Lira. This practice stems from the Turkish Code of Commerce that lists shareholder thresholds in Turkish Lira. However, it is possible to include within a JV agreement a foreign currency that would be immediately translated into Turkish Lira (with the official exchange rate on the establishment date) and the accounting will be carried out in Turkish Lira terms. The official share capital of a Turkish company must be expressed in Turkish Lira at all times. However, both the share capital invested by the foreign JV partner and all the activities of the JV based on foreign currency is shown on the balance sheet with the exchange rate gains and losses in accordance with the accounting policies in Turkey.
Duration and limits on membership
Corporate JVs can be established for an indefinite period of time as the law does not impose any limits on their duration. However, as contractual JVs are generally established in connection with the execution of a specific project, the period foreseen for the project constitutes the duration of the JV, unless otherwise agreed by the parties.
Since JVs are generally established as joint-stock companies and, as such, are regulated under Article 338 of the Turkish Code of Commerce, the minimum number of shareholders is two. Where the number of participants exceeds 250, these companies are deemed to become publicly-held joint-stock companies and are therefore subject to regulatory activities of the Capital Markets Board.
Although the threshold for the establishment of limited liability companies is one shareholder, in order for a JV to be established as a limited liability company there must be a minimum of two and a maximum of 50 participating shareholders (Articles 573 and 574, Turkish Code of Commerce).
Public sector bodies
There are no restrictions on the character of the JV parties. It is therefore possible for public sector bodies to enter into a JV agreement.
Currently there is no law on public private partnerships (PPP). While a draft law was prepared in 2007, it was not adopted by the Turkish National Assembly. Therefore, when public sector bodies engage in JVs, the legal aspects regulating their activity depend on the relevant regulations, depending on the public body and the activity undertaken. For example:
To establish a production facility with electric power within the scope of the build-operate transfer model, specific terms and conditions stipulated under Law No. 4283 are applied, such as obtaining approval of TEIAS (State Electricity Generation and Transmission Corporation).
Companies that operate in the construction sector must obtain a contracting certificate from the Ministry of Environment and Urban Planning.
Another important implementation in relation to PPP transactions was introduced into the health sector by the Law on Building and Renewal of Facilities and Procurement of Services through Public Private Partnership Model No. 6428, which came into effect on 9 March 2013. This new regulation offers a more comprehensive and satisfactory framework to both private and public sectors for long partnership agreements.
Non-competition and anti-trust clauses
Parties to a JV agreement can include a non-competition clause under the regulations adopted by the Competition Board and the provisions of the Turkish Code of Obligations.
Shareholders cannot conduct a business for their personal or third parties' benefit that restricts the common purpose of the company or that damages the company's business (Article 626, Code of Obligations).
Articles 444 to 447 of the Code of Obligations that entered into force on 1 July 2012, govern non-competition clauses between an employer and an employee. An employee can be required to not compete with his employer nor to work for another company or entity that operates in the same field of activity, both during the term of the agreement and for a maximum of two years after the expiration date of the employment contract.
Regarding regulations of the Competition Board, the Communiqué on block exemptions regarding vertical agreements applies to agreements executed for the purpose of buying and selling goods and services by two or more entities that are operating on different levels of production and distribution chains. Under this regulation, parties can include a non-competition clause, provided that such a provision does not apply for more than five years from the term of the agreement. For example, a one year non-competition period from the term of the agreement can be included in the JV agreement.
De facto company/partnership
Limiting member liability
For contractual JVs, shareholders can share the company profits equally among themselves (Article 622, Turkish Code of Obligations). Unless otherwise stipulated in the articles of association, each shareholder's proportion of the company's profits and loss must be equal, without consideration for their contribution to the capital.
A provision entitling a shareholder to profit without bearing any loss is only valid for a shareholder who contributes to the share capital through his services.
For corporate JVs, it is possible to grant to a certain group of shares a privilege on the distribution of dividends, liquidation profit, right of first refusal and voting rights either by specifying such rights in the articles of association or by amending the articles of association (Article 478, Turkish Code of Commerce). Each shareholder can otherwise benefit from the company's profit in proportion to his contribution to the share capital (Article 507, Turkish Code of Commerce). However, it is not possible for members to participate in a JV without bearing any risk or loss or benefiting from profit distributions, except for shareholders who contribute to the share capital through their services.
However, the total amount of profit share can differ among shareholders, in which case the decision is taken by the general assembly.
The establishment of fully functioning JVs for the purpose of permanently fulfilling the functions of an independent economic entity is subject to the Competition Board's approval since JVs are included in the definition of mergers and acquisitions (Communiqué No. 2010/4 on mergers and acquisitions which are subject to Competition Board's approval). If the JV cannot be defined as a fully functioning JV, it must be considered as a concerted action among the parties, and is therefore subject to the approval of the Competition Board, and an "exemption" must be requested.
Anti-trust rules for research and development agreements are provided in the Communiqué dated 27 August 2003 numbered 2003/2 of the Competition Board.
Governance and limits on directors
The form and structure of power allocation between the corporate bodies of the company is regulated. Therefore, under the Turkish Code of Commerce, as recently amended by Law No. 6335, parties are free to regulate a JV through the articles of association, shareholders' agreement, and resolutions adopted by the board of directors and general assembly. However, under the Code of Commerce, the following restrictions apply:
The right of veto cannot be vested in just one party. A clause to that effect is deemed invalid. Therefore, different groups of shares and shareholders must be granted similar veto rights.
The board of directors can be appointed for a maximum period of three years. Unless otherwise stipulated in the articles of association, members whose appointment has expired can be re-elected for another three years.
Board meetings are validly held with the majority of members present during the relevant meeting and resolutions are validly adopted if the majority of the members present in the meeting vote in favour. However, certain major decisions regarding the company's business can only be passed with a unanimous vote.
Unless a higher quorum is stipulated in the articles of association of the company, general assembly meetings are validly held with one-quarter of the members attending.
Each share gives the holder at least one vote, and a maximum of 15. Shareholders can use their right to vote proportionally to the nominal values of the total shares. For limited liability companies, TRY25 represents one vote.
Shareholders cannot issue loans on behalf of the JV unless all shareholder debts are paid in full and profits, including free reserves of the company, exceed the previous year's losses.
Before the amendment to the Turkish Code of Commerce by Law No. 6335, all the following had to apply:
At least one member of the board of directors had to be a Turkish citizen.
This member had to have a resident address in Turkey.
One-quarter of the members of the board had to be in possession of a higher education diploma.
However, these initial provisions have now been withdrawn. It is not necessary to be a shareholder in order to be appointed as a member of the board of directors.
The board of directors is set up with a minimum of one member who can be either a real or legal person.
However, statutory auditors must consist of either independent auditors or an independent auditing firm, and must be appointed by the Public Supervision, Accounting and Auditing Standards Institution.
Contractual JVs are terminated in the following situations (Article 639, Code of Obligations):
Fulfillment of the purpose of the partnership or impossibility of fulfillment of the purpose of the partnership.
Death of a partner, unless the articles of association foresee continuation of the partnership with legal heirs.
Bankruptcy of a party, legal incapacity of a party or liquidation of the shares of a party.
Where there is no clear stipulation in the articles of association regarding continuation of the partnership, following a unanimous decision of all parties.
Expiration of the period determined for the partnership.
Following a termination notification sent by a partner, if the partner has a reserved unilateral termination right or if the partnership is set up for an indefinite period of time or for the duration of a partner's lifetime.
Where a valid reason exists, shareholders can apply to the court to decide the termination of the company.
Corporate JVs (joint-stock companies and limited companies) are terminated in the following situations (Articles 529 to 548 and Article 636, Turkish Code of Commerce):
Termination of the period as agreed in the initial agreement, unless the business is continuing and the term is extended to an indefinite period.
Occurrence of any termination condition as stipulated in the initial agreement.
Subject matter or main purpose of the company cannot be realised.
Following a decision by the general assembly.
Where one of the key departments of the company has been inactive for a prolonged period of time.
For a just cause.
Unless otherwise stipulated in the JV agreement, the JV can also be terminated on the request of one of the parties.
Choice of law and jurisdiction
Parties are free to decide on the governing law under the rule of freedom of contract (Code of Obligations). However, Article 24 of the International Private and Civil Procedure Law No. 5718 states that Turkish law is applicable to agreements executed between Turkish parties, since in such transactions all elements of the JV fall within the jurisdiction of Turkish law and do not involve a foreign element.
For JVs with foreign members, although the applicable law can be a foreign law, Turkish law will apply where the selected foreign law is deemed contrary to Turkish public order. For example, in a case before the Court of Cassation, the Court decided that German law provisions regarding the period of limitation were contrary to Turkish public order and therefore, in that specific case, Turkish law was applied, even though German law was selected by the parties as the governing law.
Under the International Private and Civil Procedure Law, the applicable law can be freely determined by the parties. Article 24 of the Law states that the relationship between the parties, which arises from an agreement, is subject to a specifically identified law by the parties. If the parties have not identified the governing law, the law recognised in the provisions of the agreement is to be deemed validly selected. Parties can choose the applicable law to govern the agreement partially or as a whole. Parties can also select or change the applicable law at any time. In case the parties do not select the applicable law, the law to be applied to the agreement must be the law most closely related to that agreement.
Termination conditions can differ depending on the applicable law.
JVs with foreign members
Validity and authorisation
The law allows JVs with foreign parties.
There is no minimum/maximum number of parties who must be local.
Under the Communiqué on the implementation of the Foreign Direct Investment Law, JVs with foreign parties are subject to approval from the Incentive and Foreign Capital General Directorate of the Ministry of Economy. Companies that are subject to the provisions of this law must notify the Foreign Capital General Directorate of:
The JV's capital.
The JV's activity.
Payments to the capital account.
Any share transfers between the current national or foreign partners or to national or foreign investors.
Effect of foreign membership
The application of certain regulations differs if there is foreign membership in a JV.
Regarding the governing language, under Article 3 of Law No. 805 on the obligation of using the Turkish language in economic institutions, a foreign language can be used for transactions between Turkish citizens or companies and foreigners. However, for documents drafted in foreign languages to be valid, Turkish legal procedure requires a Turkish version. Therefore, while a foreign language can be used between Turkish and foreign citizens or companies, founding documents submitted to the relevant authorities must be translated into Turkish, notarised and apostilled.
Regarding the validity of choice of law clauses, see Question 23.
Economic or financial incentives
Detailed economic and financial incentives are outlined in the Law on Foreign Direct Investments.
The Decision of the Council of Ministers (No. 2012/3305) on state aid to investments adopted on 19 June 2012, contains a detailed incentive scheme for general, regional, large-scale and strategic investments. Depending on the investment, incentives include, but are not limited to:
Exemption from customs and VAT.
Reductions of income tax.
Assistance with the employer's share of assurance premium.
Assistance with the investment location.
Assistance with interest rates.
The regulatory authorities
The Grand National Assembly of Turkey
Main activities. The Grand National Assembly of Turkey uses its legislative power on behalf of the Turkish nation to enact, amend and repeal laws.
Ministry of Customs and Trade
Main activities. The Ministry of Customs and Trade generates, enforces and supervises the policies and practices promoting competition, entrepreneurship and economic growth in the field of customs and trade.
Investment Support and Promotion Agency
Description. Official website operated by the Republic of Turkey Prime Ministry Investment Support and Promotion Agency. The website provides a wide range of up-to-date commercial and legal information about Turkey to foreign investors.
Professional qualifications. Turkey, Attorney
Areas of practice. Banking and capital markets law; mergers and acquisitions; IPOs; foreign investments and foundations law.
Non-professional qualifications. Ankara College and Ankara University Faculty of Law, 1970; American University in Washington DC, USA (Fulbright Scholarship)
- Ministry of Tourism: Attorney and Assistant Manager in the Expropriation Department.
- Development Bank of Turkey: Secretary to the Board, Attorney, Deputy General Counsel, Consultant to Chairman.
- World Bank: Consultant.
- Development Bank of Turkey: Manager of Istanbul Securities Centre.
- First National Bank of Boston (which then became Oyakbank and now Ing Bank): Legal and Capital Markets Co-ordinator.
- General Manager of Oyak Portfolio Management Company.
- Coca-Cola Beverage Company: Legal Director.
- Chairperson of the Turkish Economic Law Research Foundation.
- Executive committee member of the Foreign Relations Center at the Istanbul Bar Association.
- Advisory board member at the American and International Law Academy at Dallas, Texas.
Emir Ali Baser
Professional qualifications. Turkey, Attorney
Areas of practice. Corporate law; intellectual property law; information technology; employment law; energy; general commercial law.
Non-professional qualifications. LLM in International Commercial Law, University of Durham, 2014; Law degree, Marmara University School of Law, 2009; currently studying a Master's programme in Economic Law, Galatasaray University