Liaison Offices under Turkish Law

Liaison Offices under Turkish Law
Liaison Offices under Turkish Law

Liaison Offices under Turkish Law

Foreign investors may prefer to set up a liaison office in order to have more information on doing business in Turkey before deciding to establish a corporation in Turkey. This article aims to give an overview of establishing a liaison office of a foreign resident company in Turkey.

1. General Information

Foreign companies may establish liaison offices, which are not companies or branches and which do not have any separate legal entity but can solely act as representative offices of the foreign companies in Turkey. Foreign entities basically prefer liaison office structures in Turkey for their representation and to gather information on behalf of the parent company in the related sector and the country. Liaison offices cannot carry out commercial activities in Turkey and act for their own profit or give or accept any offers or issue invoices. All the expenses of the liaison offices arising as a result of the daily activities, including the salaries of employees, are to be covered by the foreign patent companies.

2. Establishment Procedure

2.1 – Establishment of liaison offices in Turkey is regulated under the Foreign Direct Investment Law numbered 4875 (the “Law”) and the Regulation on the Implementation of Foreign Direct Investment Law (the “Regulation”). According to the Law and Regulation, a foreign company must obtain a permit from the Ministry of Trade (the “Ministry”) in order to open a liaison office in Turkey.  

2.2 – The following documents have to be submitted to the Ministry (more specifically, the Foreign Investment Directorate[1]) for application for a permit to establish a liaison office:

i. The Application Form
ii. The Letter of Commitment indicating the scope of activity of the liaison office and including a statement that the office will not carry out commercial activities and the authorization document of foreign company official who signed the letter,
iii. The “Certificate of Activity” of the parent company approved by the relevant Turkish Consulate or apostilled,
iv. Operational report or balance sheet and income statement of the parent company,
v. The certificate of authority issued to the name of the person/persons who is/are appointed to carry out the operations of the liaison office,
vi. The power of attorney in case that another person will carry out the establishment transactions of the liaison office.

2.3 – The applicant for a permit for opening up a liaison office must specify the field activity to be conducted by the liaison office as one of the activity fields enumerated below

i. Market research
ii. Promotion of the products and services of the foreign company
iii. Representation and Hosting (Representation of the foreign company at sectoral institutions and relevant organizations, coordination of business contacts of the company officers, meeting the office demands of those officers)
iv. Control, Inspection and Provision of Local Suppliers (Provision of local producers and products for the foreign company and inspection of those suppliers in terms of the quality standards of the foreign company)
v. Technical Support (Provision of training and technical support services for distributors, supporting local suppliers for their enhancement of quality standards)
vi. Communication and Transfer of Information (Collection and transmission of information to the foreign company having business contacts in Turkey such as the market conditions, consumption trends, sales of competitors and distributors, performance of distributors)
vii. Regional Management Headquarter (Particularly oriented to other units of the foreign company in foreign countries; coordination and management of some operations such as formulation of investment and management strategies, planning, promotion, sales, after sales services, brand management, financial management, technical support, R&D, external supply, testing of newly developed products, laboratory services, research and analysis, training of personnel)
viii. Other (in case the liaison office will operate in another field of activity, detailed information is required concerning that activity)

2.4 – The application is processed by the Ministry and if found acceptable, a permit for a term of maximum 3 years is grated for the activities specified in the application. Extensions may be possible in subject to certain conditions and restrictions.

2.5 – Following the issue of the permit, the liaison office must be registered in the tax office and must execute a rent contract for the address they will have in Turkey. The tax office registration documents and the rental contract of the liaison office must be submitted to the Ministry within one month. Any change of address, change of the liaison office representative and title of the foreign company must be notified to the Ministry within one month of such change.

3. Representation, daily activities, reporting requirements

3.1 – The foreign company must appoint a liaison office representative and issue a POA to such representative to represent the office before the Turkish authorities. The appointment and the POA of the representative must be notified to the Ministry

3.2 – The liaison office can and must open a bank account in Turkey and the expenses of the office should be covered by the funds wired into such account by the foreign company.

3.3 – The liaison office must be registered with the social security institution in order to employ employees and must pay social security premiums of the employees employed by the liaison office.

3.4 – Liaison offices must send an activity report in accordance with the requirements of the Regulation to the Ministry every year until the end of May of each year in relation to the activities conducted during the previous year. The extension applications of the liaison offices which have not sent such reports are not accepted and the operation permits of such offices can be cancelled

4. Extension of the term of permits

In principle the permit can be extended by an application to be filed before the end of term of the three-year. For extensions, the past activities of the liaison office and the grounds for further extension of the term are investigated by the Ministry in detail and the applicant is required to submit detailed evidence for the past activities. For example the details of the companies, any suppliers, clients, other establishments that the liaison office dealt with have to be submitted, documents proving such relations must be provided. The future business plans and goals of the foreign company, actual and estimated expense amounts and number of employed personnel is also investigated.  The term of permit of the liaison offices, which are established to engage in activities on market research and promotion of the foreign company products or services, cannot be extended as per the explicit provision, Article 8, of the Regulation

5. Tax implications

Liaison offices are not subject to corporate tax, but must be registered at the tax office and obtain a tax number. They file monthly or quarterly tax declarations for withholding tax. They also keep petty cash book registering their expenses. The liaison offices are exempt from the obligation to withhold income tax on the salaries of the employees employed by the liaison offices provided that the salaries are paid by the foreign parent company from abroad.

6. Inspections

The Ministry, on its own or on the written request of relevant institutions or organizations may carry out inspections on the liaison offices whether their activities are in conformity with relevant legislation and the field of activity determined in their operation permits. Within the framework of the results of this inspection, the Ministry allows for a period of thirty days to the offices determined to have operated outside the scope of their permissions so as to provide them the opportunity to make an application for their actual operations. This period may be extended for thirty days at most in case of justifiable reasons. The operation permits of the offices which do not make their applications within the given period are cancelled by the Ministry. On the other hand, the Ministry cancels the operation permits of the liaison offices ascertained, as a result of inspection, to have carried out commercial activities and notifies the relevant institutions thereof.

7. Some labour law issues

According to Article 18 of Labor Law in workplaces having more than 30 employees, employees are protected by “job security” provisions. Under the job security provisions, in order for the employer to terminate the employment agreement of an employee there must be a valid reason prescribed by the law. In other words, the employment agreement may not be validly terminated by simply paying the severance pay and giving the required notice periods if there are no legally permissible valid reasons. If there are no valid reasons for termination, the employer may end up paying a 12 month salary (this is the maximum amount) as compensation in addition to the severance and notice pays and other rights due to termination.

According to Court of Appeal rulings, in case of liaison offices, in addition to the liaison office employees, the employees of the parent company are also taken into account when determining the number of employees for the purposes of “job security” principles.  In other words, the employees of a liaison office may benefit from “job security” provisions even if the office employs less than 30 employees if the total number of the employees in the liaison office and the parent company is more than 30.

The employer’s representatives defined by the law may not be protected by the “job security” provisions. Two types of employers’ representative may not be protected by “job security”

i. Employers’ representative who has the power to control and manage the entire entity (ie the parent company)
ii. Employers’ representative who has the power to control and manage the entire workplace (ie liaison office) and who can employ and discharge other employees

8. Closing formalities

In the case that the liaison office terminates its activities, the “termination and examination of business note” must be received from the tax office and social security institution. The “termination and examination of business note” to be received from the relevant tax office has to be submitted to the Ministry along with the notification of termination of the office. Liaison offices cannot claim any money transfer except the residue arising due to the termination and liquidation.

This Article aims to provide a brief and general overview of liaison offices under Turkish law, but does not intended to serve as a legal advice. Before taking any action or relying on the information given, addressees of this Article should seek specific advice on the matters which concern them.

[1] Free Zones, Foreign Investment and Services Directorate