Is a Foreign-Owned Turkish Company — or a Branch — 'Resident in Türkiye' under Decree No. 32?

Article 2(b) of Decree No. 32 turns on legal domicile, so a wholly foreign-owned Turkish company is a resident — and the carve-outs it does have are narrower than most contracts assume.

A Turkish company is “resident in Türkiye” under Decree No. 32 on the Protection of the Value of Turkish Currency if its legal domicile is in Türkiye. That is the whole test. Article 2(b) of the Decree defines residents of Türkiye as natural and legal persons having their legal domicile in Türkiye — including Turkish nationals working abroad as employees, in the liberal professions or in independent business — and it makes no reference to shareholding, control, capital origin or the nationality of the founders. A company incorporated in Istanbul and owned entirely by a Frankfurt or Dubai parent is a resident, and the prohibition in Article 4(g) applies to it exactly as it applies to a family-owned local supplier.

This is the point at which cross-border contracts most often go wrong. The drafting team treats the currency restriction as a domestic measure aimed at local businesses, prices a services agreement or a warehouse lease in euro because both sides account in euro, and only discovers on enforcement that the price has to be recalculated in lira by a formula neither party negotiated. What follows sets out how the residence test is actually applied, where the prohibition begins and ends, which carve-outs a foreign-controlled entity genuinely has, and what happens to a clause that fails the test.

What Article 2(b) does and does not measure

The definition is short and deliberately mechanical. Under Article 2(b) of Decree No. 32, published in the Official Gazette of 11 August 1989 (No. 20249), residents of Türkiye are natural and legal persons whose legal domicile is in Türkiye. Article 2(c) completes the set by defining non-residents as natural and legal persons not deemed resident in Türkiye. There is no third category and no partial status.

Two consequences follow. First, because legal persons are expressly included, the analysis attaches to the contracting entity, not to its group. A Turkish subsidiary is a resident; its foreign parent is not; the two are separate parties for this purpose even where they are consolidated for every other. Second, because the criterion is domicile, a foreign shareholder’s presence changes nothing at the level of the definition. Any relief for foreign-controlled structures has to come from an exception, not from the definition — which is precisely how the instruments are built. Structuring questions of this kind sit at the intersection of contract drafting and market-entry planning, and are treated more fully in our work on foreign investment in Türkiye.

A branch is the harder case. A branch has no legal personality distinct from its head office, so read strictly, the contracting person is the foreign company and its legal domicile is abroad. The Decree does not resolve the question expressly. What the secondary legislation shows is that the administration did not leave branches to that argument: Article 8(19) of Communiqué No. 2008-32/34 lists branches, representative offices, offices and liaison offices located in Türkiye in the same breath as foreign-controlled Turkish companies and gives them the same narrow permission. A carve-out is only needed for something otherwise caught. An investor who has not yet fixed its structure should therefore weigh this exposure alongside the tax and capacity differences set out in our comparison of a liaison office, a branch and a subsidiary, because the vehicle chosen decides which of these provisions has to be argued.

Article 4(g): a closed list, and only between residents

The prohibition itself was inserted into the Decree by Presidential Decision No. 85 of 12 September 2018. Article 4(g) provides that residents of Türkiye may not, save in cases determined by the Ministry, agree contract prices or other payment obligations arising from those contracts in foreign currency or indexed to foreign currency in contracts among themselves for the sale of movables and immovables, for every kind of movable and immovable lease including vehicle and financial leasing, for leasing, and in employment, service and works contracts.

Two limits are built into that sentence, and both are frequently overlooked.

The first is the words “among themselves”. The prohibition is bilateral. If one party is a non-resident, Article 4(g) does not engage at all — which is why a supply agreement between a Turkish company and its foreign parent raises a different question from the same agreement between the Turkish company and a Turkish distributor. In practice this means the same product at the same price can fall on opposite sides of the line in two links of one chain: buying in euro from the foreign parent is unrestricted, while onward sale in euro to a Turkish dealer is inside the prohibition. That is precisely why intra-group pricing and domestic distribution pricing should not be generated from a single contract template.

The second is that the list is closed. Loan and credit agreements are not on it. Foreign-currency borrowing is governed instead by Article 17 of the Decree, which sets its own conditions, including a foreign-currency income requirement that is subject to an express list of exempt cases, and separate rules for resident natural persons and for FX-indexed borrowing from abroad. Treating the two regimes as one “currency ban” produces both false positives and false comfort; the financing analysis belongs with our banking and finance work rather than with the contract clause.

The words “save in cases determined by the Ministry” in the same sentence are not an empty reservation either: the long list of exceptions in Article 8 of the Communiqué rests legally on that delegation. The prohibition therefore cannot be assessed from the text of the Decree alone; in every case the analysis has to descend to the relevant paragraph of the Communiqué.

Note also what Article 4(g) actually restricts: it restricts how the price is agreed, not how it is paid. Payment currency is a separate question governed by Article 99 of the Turkish Code of Obligations No. 6098, under which a monetary debt is paid in the national currency and, where payment in another currency has been agreed without an “in kind” stipulation, may still be paid in lira at the rate on the payment date. The third paragraph adds the default position: where the debt is denominated in a foreign currency and again there is no “in kind” stipulation, a creditor who is not paid on the due date may demand payment either in that currency or in lira at the rate on the maturity date or on the date of actual payment. In a contract Article 4(g) permits — the sale of a non-vehicle movable between residents, say — that choice is what actually allocates the currency risk, and it is worth settling in the drafting rather than leaving to the default.

What a foreign-controlled entity can and cannot price in foreign currency

The exceptions live in Article 8 of Communiqué No. 2008-32/34, which was rewritten in October and November 2018 and has been amended repeatedly since. They are drafted by contract type and, in the provisions that matter here, by the role the foreign-controlled party plays. That second qualifier is what most drafting misses.

Read the two carve-outs that apply to foreign-controlled entities together and the shape becomes clear. Article 8(19) covers employment and service contracts, and only where the entity is employer or service recipient — a foreign-controlled Turkish company supplying services to another resident is not within it. Article 8(3) covers real-estate sale and lease, and only where the entity is buyer or tenant — the same company selling or letting Turkish property to another resident is not within it. Neither provision is a general exemption, and neither turns on the foreign ownership alone; each turns on a specific pairing of contract type and role. Getting that pairing right at drafting stage is ordinary commercial contract work, and considerably cheaper than getting it right in enforcement.

One further paragraph is easy to overlook. Article 8(22) provides that amounts in negotiable instruments issued under a contract whose price may not be set in foreign currency may not themselves be denominated in foreign currency or indexed to it. Converting the rent under a property lease into lira and then taking security in a euro-denominated promissory note simply moves the prohibited term from the contract into the instrument. The rest of the paragraph is a purely historical saving: instruments of this kind issued and already in circulation before Provisional Article 8 entered into force are exempt from that provisional article. The currency of a security note, a security cheque or a pledge agreement therefore has to be settled together with, and separately from, the main contract.

The rule also runs in the other direction

Article 8(24) of the Communiqué closes the obvious workaround. Overseas branches, representative offices, offices, liaison offices, managed or operated funds, and companies in which residents of Türkiye hold fifty per cent or more directly or indirectly are themselves treated as resident in Türkiye for the purposes of Article 4(g). Routing a domestic arrangement through a Dutch or Emirati subsidiary of a Turkish group therefore does not, by itself, take the contract out of the prohibition.

The provision then adds a sentence that is easy to miss and does most of the practical work: this paragraph does not apply where the contract is performed abroad. Place of performance, not counterparty domicile, is what decides the point for a group’s own offshore entities.

What happens when a clause fails the test

The instruments do not describe a breaching clause as void. Provisional Article 8 of the Decree required foreign-currency amounts in existing contracts within the scope of Article 4(g) to be redetermined by the parties in Turkish lira within thirty days of the provision entering into force, save in cases determined by the Ministry. Article 8(28) of the Communiqué makes that redetermination mandatory, and Article 8(29) supplies the method where the parties fail to agree: the foreign-currency amount is converted using the Central Bank indicative effective selling rate for 2 January 2018 and then uplifted by the monthly consumer price index changes published by the Turkish Statistical Institute from that date to the date of redetermination. Longer, more detailed rules apply to residential and roofed-workplace leases concluded before the provision took effect, and the paragraph expressly excludes collected or overdue receivables, lease deposits and negotiable instruments already in circulation from that mechanism.

For the scope of Provisional Article 8 the Communiqué adds three further exemptions that decide the outcome for long-term relationships formed before 2018. Article 8(25) exempts contracts brought within an exception by the Communiqué but concluded before Provisional Article 8 entered into force; Article 8(26) exempts vehicle lease contracts and sale contracts for commercial vehicles used to carry passengers concluded before that date; Article 8(27) exempts financial lease contracts over movables and immovables concluded before it. The date of conclusion is therefore the first fact to establish when asking whether a price had to be redetermined at all.

Turkish courts have applied this framework as a conversion mechanism rather than as a ground for destroying the bargain. In settled practice the court determines the lira equivalent by the method the Communiqué prescribes, and a judgment that converted a foreign-currency rent without following that method has been quashed for exactly that reason rather than the lease being treated as unenforceable. Article 27 of the Turkish Code of Obligations No. 6098 points the same way at the level of general principle — while contracts contrary to mandatory provisions are null, the second paragraph provides that the invalidity of some terms does not affect the validity of the others, unless it is clear that the contract would not have been made without them.

Conversion is not the only consequence. Article 3 of Law No. 1567 on the Protection of the Value of Turkish Currency attaches an administrative fine to acting contrary to obligations in the general and regulatory acts made under it, imposes the same fine on a legal person where the offence was committed for its benefit, and doubles the fine on repetition within five years of a sanction decision becoming final. The amounts printed in the Law are the nominal figures of their enactment and are revalued annually, so the applicable figure comes from the current revaluation communiqué rather than from the statute.

The commercial risk is therefore not usually that the contract disappears. It is that the price becomes something neither party chose, calculated from a rate fixed in January 2018 and an inflation index, at the moment the contract is being enforced. That is a materially different number from the one in the signed document, and it is the reason the residence question is worth answering before signature rather than after.

The structure of the Turkish company itself, including whether to use a subsidiary or a branch, is covered on our company formation in Turkey page.