Liaison Offices and Conditions of Foreigner Corporations in Establishing Liaison Offices under the Turkish Legislation
1. What is a Liaison Office?
Organizations that are built with the pursuit of observing the business opportunities and testing the market conditions in Turkey regarding a business line, who also desire to follow the business opportunities by researching the market conditions, and who also consecutively provide information to the central institution on these issues without seeking any commercial purposes are called liaison offices.
Liaison offices fulfill the necessity for observation of the investment atmosphere, market opportunities and obtaining familiarity with markets in Turkey, on behalf of the central organizations of foreign investors/business owners; without the risk of commencing commercial operations. The main purposes and fields of work of the liaison offices are: (a) Representation and Accommodation, (b) Test and Control, (c) Technical Support, and (d) Correspondences and Transfer of Information.
Although subject to limitations deriving from the Turkish legislation, liaison offices can be confused with branch offices or agencies of a corporation. Liaison offices differ from these structures by being limited to numerous purposes that exclude the commercial and industrial activities, as provisioned by the Turkish legislation.
2. Establishment of Liaison Offices by the Foreign Corporations
2.1. Founding of a Liaison Office
Foreign investors, upon the completion of the legal procedure, can establish a liaison office for the fulfillment of purposes other than the commercial needs. The necessary permits are obtained from the Turkish Ministry of Industry and Technology. Upon obtaining these permits, the duration of the permits can be extended with additional applications to the Ministry.
2.2. Applicable Legislation for Liaison Offices
For the foreign corporations to obtain the information, conduct the observations and they need and to test the markets in Turkey firsthand, a convenient solution method is created via Application Directive on Law No. 4875, Direct Foreign Investments Law (the “DFIL”). The Directive (“DFILD”) that is put in force by DFIL Art. 5/b creates very detailed provisions regarding the issue.
3. Conditions for Establishment of a Foreign Corporation Liaison Office
In practice, according to the Turkish legislation and the aforementioned explanations in this newsletter, the requirements for the establishment of a liaison office in Turkey can be listed as:
- There must be an existing corporation, founded duly under the applicable laws of the foreign state.
- The Liaison Office, operating under the foreign corporation must be exempted from carrying out commercial operations.
- Permits issued by the Turkish Ministry of Industry and Technology must be obtained.
- In the application, the necessary documents must be submitted duly and in a complete form.
4. Duration of Operations for Liaison Offices
The authority of granting permissions to a foreign corporation regarding the establishment of a liaison office in Turkey is granted to the General Directorate of Incentive Implementation and Foreign Capital under the Turkish Ministry of Industry and Technology. The establishment of liaison offices is permitted for 3 years and offices that desire to extend this period must apply to the General Directorate with a request for extension.
The application to request an extension must also include in its attachment a detailed report which involves the documents that are: (a) the operations report regarding past years, (b) future business plans, and (c) the number of employed personnel; along with some additional information.
By examining the operations of the liaison office regarding the past years and the future business plans, General Directorate can extend the permission period from 5 up to 10 years. The liaison offices are established for (a) conducting market research and/or (b) promotion of the services offered by the central corporation will not be granted an extension by the General Directorate. (DFIL Art. 8/a, b)
5. Fields of Practice of the Liaison Offices
Liaison Offices cannot practice and become involved with commercial conduct. Their fields of practice are provisioned by Direct Foreign Investments Law Art. 8/d in a list with limited options granted for liaison offices:
“To conduct market research, to promote the goods and services provided by the central corporation, control of the suppliers, providing technical support, correspondences and information transfer, regional administration and other practices”
The compliance of the liaison office operations with the Turkish legislation is overseen by the Ministry. After the audits, the liaison offices that are found to be exceeding their field of practice and operations are given a duration of 30 days, which can be extended to 60 days with reasonable grounds, in order to get their business affairs to comply with the legislation. With the passing of the duration that is granted for correction without any applications to the Ministry, the permits and licenses for the liaison offices are canceled.
The liaison offices’ field of operations and their differentiating circumstances regarding the permit durations are indicated in the table below, prepared in accordance with DFIL Art. 8/d:
6. RESTRICTIONS FOR THE LIAISON OFFICES
The Liaison Offices are prohibited from having commercial activities in line with the Regulations. The Liaison Offices do not have their own separate assets ,unlike the Branch, the entire organization and activities, expenses and costs have been financed by the investor’s main company in foreign country. The Principal Company makes all the payments for the liaison offices.
7. POWER AND LIABILITY OF REPRESENTATION OF THE LIAISON OFFICES
The legal relationship could be the contract of mandate or employment agreement between the representative person or people who is in charge of undertaking the activities of the Liaison Offices and the Foreign Company. The representative officer could be called as a director or general director. The Liaison Office established under the Turkish Law shall be a workplace in line with the Turkish Labor Law. The workplace Articles of the Turkish Labor Law shall be effective for the Liaison Offices.
The Foreign Investors mean “natural persons have foreign nationality and Turkish citizens live in the foreign country, the legal persons and international organizations established under the foreign countries’ regulations” according to the DFILD. In this case, the foreign investors mentioned in the Law shall be described as an employer regarding the Labor Law. In this sample, the employer is not the Liaison Office, the employer shall be the principal company in the foreign country. The Liaison Office could not be described as an employer.
8. CONCLUSION
Owners and administrators of the foreign corporations who do not want to undertake the commercial risk directly establish liaison offices in Turkey with purposes experience the Turkish market firsthand, observing the Turkish market and to make the necessary examinations. The liaison offices are regulated by the Application Directive on Law No. 4875, Direct Foreign Investments Law. At the start, operation permits for liaison offices are granted for three years and with the decisions of the General Directorate of Incentive Implementation and Foreign Capital under the Turkish Ministry of Industry and Technology, these periods can extend from 5 to 10 years. It is prohibited for liaison offices to be involved in commercial conducts and failure to do so may result with the removal of the permits. The permitted operations of liaison offices are listed as (1) to conduct market research, (2) to promote the goods and services provided by the central corporation, (3) control of the suppliers, (4) providing technical support, (5) correspondences and information transfer, (6) regional administration and other practices; and are limited to these.
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