Turkey: Presidential Decree On Carrying Out Certain Transactions On Turkish Currency

Transaction values and amounts of agreements of sale, purchase, lease, financial leasing, service and to produce work shall be based on Turkish Lira.

In the Official Gazette published on the date of 13 September 2018, it was legislated by introducing paragraph "g" to Article 4 of the Decision numbered 32 regarding Protection of Value of Turkish Currency that payment obligations arising from certain types of agreements, especially lease contracts, shall not be based on or indexed to foreign currencies.

"g) Transaction value and other payment obligations set forth in agreements with subjects of sales and purchases of movables and immovables including vehicles, leasing of movables and immovables including financial leasing, labour agreements, service agreements, and contracts to produce a work by and between the persons residing in Turkey; shall not be based on or indexed to foreign currencies."

A provisional article has also been enacted to the Decision numbered 32 as in the following:

"Provisional Article 8 - Within 30 days as of effective date of paragraph (g) in Article 4 of this Decision, amounts determined in the agreements recited in the paragraph concerned, and agreements in force concluded before shall be adjusted by their parties to Turkish currency, with an exception of cases to be specified by the Ministry."

It should be noted with emphasis that, in contrary to public perception, this amendment applies not only to lease agreements, but also to agreements concerning financial leasing, all kind of services and works.

What does the new provision bring about?

Prominent aspects of the said amendment may be explained as follows:

• Transactions whereby the limitations are applicable shall be the transactions to be concluded between persons residing in Turkey. Even if one of the parties' the place of residence is Turkey, works and transactions will not be limited thereby, provided that the counterparty has his place of residence abroad. The term of "persons residing in Turkey" should be interpreted as real persons, legal entities and public entities.
• Since the Decree entered into force on the date of 13 September 2018 upon its announcement, it shall be impossible to conclude an agreement based on or indexed to foreign currency, and required to designate contract value and other payment obligations in Turkish Liras.
• With respect to existing agreements which are yet to be performed, a transition period of 30 days has been granted, and it has been provided that parties shall negotiate and redetermine conversion of the amounts decided on foreign currencies to Turkish Liras. However, the Decree has not ascertained any exchange rate upon which such conversion will be based. In practice, some decrees are announced for implementation of this kind of decisions whereby details for application are regulated. In this case, announcement of such decree should be expected. Should no provision on the exchange rate be introduced, and no agreement of parties be reached; disputes shall be indispensable to be filed.
• This conversion shall also be implemented not only to contract value (fee, rent etc.), but also to deposits, securities, penalties, compensations etc.
• A number of agreements will be excluded form this limitation. The Ministry is vested with the power to regulate which kind of agreements may contain foreign currencies. The Ministry may exercise this power by issuing regulatory acts or decision applicable to specific persons. In other words, the Ministry may issue a regulatory decree, for example, it has recited the conditions for negotiated tendering procedures or direct purchases in articles 21 and 22 as the exceptions to tendering procedure; it may regulate circumstances for adopting foreign currency in a decree to be published. Along with this option, it may grant exemptions by taking special cases into account. In the latter scenario, persons concerned shall be supposed to obtain an exemption certificate through an application to be lodged before the Ministry.
• In the presidential decree, it has been stated "payment obligations cannot be designated on, or indexed to foreign currencies." Thus, the agreements indexed to gold or other precious metals will not be affected by this limitation.

How are lawsuits and execution proceedings affected?

The decree does not provide broad information about this issue, however, notable aspects of the regulation introduced may be summarised as follows:

• In dispute settlement, some debates may arise with respect to the provisions which may be deployed. In our view, Article 138 of the Turkish Code of Obligations and legislations related to adaptation of contracts may apply hereto. For evaluation of conditions of adaptation, the main issue is arising of an unpredictable situation with respect to existing agreements. However, excessive difficulty will not be regarded at this point, given that the Decree provides an adaptation for agreements. In settlement of disputes, equity principle will be considered case by case basis in the light of market conditions and substantial situation of the parties.
• Foreign currencies will not be regarded in execution proceedings filed before the date of 13th of September 2018 concerning agreements of leasing, producing work and services, these formerly-filed proceedings will not be affected. With respect to new execution proceedings, objections to foreign currency debt may be raised, and the role attributed to agreements in Article 68 of the Bankruptcy and Enforcement Code will become out of question.
• In terms of ongoing disputes filed before the date of 13th September 2018, different analyses should be made for the period between filing date and the date of Decree, and for period of the agreement after the Decree. From the point of view of courts' interruption to agreements, i.e. on the matter of permanent determination of contract value, they will render their decision by taking the new legislation into consideration. With an exception of compromise by the parties, ongoing cases will not be dismissed, or not be decided not to be heard due to lack of legal interest. However, the court can rule with respect to new legislation only with the request of the parties.

What is the consequence of incompliance with the Decree?

Sanctions shall be imposed upon those acting in breach of the Decree.  Despite the Decree, persons determining transaction values and indexes on foreign currencies in agreements despite the Decree, will be levied with administrative fines from TRY 3,000.00 up to TRY 25,000.00 as per the first paragraph of article three of the Law numbered 1567.

This fine should be imposed per agreement. However, in some cases, it is observed that administrative fines are levied for each event. For instance, it may be enforced that fines for each month are issued in monthly rents. In the face of such cases, it is required to object to these fines by filing an annulment case.

What is the solution? May mediation be an alternative?

Last but not least, instead of resorting to courts, conflicts arising from adjusting transaction values can be settled by mediation, especially for the cases with parties who are willing to settle the disputes amicably. Settlements that are made through mediations are exempted from stamp tax, furthermore, the minutes recorded will be treated as an official document and stronger evidence. 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.