TURKEY: An Introduction to Banking & Finance

Navigating Private Credit: Key Considerations for Turkey

Turkey is rapidly establishing itself as an attractive destination for private credit providers seeking to deploy capital and diversify their portfolios. Despite its status as the seventh-largest economy in Europe, with a steadily improving economic outlook, Turkey remains a relatively untapped market, offering significant opportunities for private credit investors.

However, successful investment in this market requires careful navigation of the local legal framework and thoughtful tax structuring. This can help create robust financing structures and address risk factors that may have previously deterred certain private credit providers.

This article offers a high-level overview of the principal considerations for private credit providers looking to deploy capital in Turkey.

Regulatory requirements for foreign lenders

Foreign funds are permitted to lend to Turkish borrowers without the need for a local banking licence, so long as they do not engage in active marketing, solicitation or promotional activities within Turkey or towards Turkish borrowers. Lending must be conducted on a reverse inquiry basis, and the fund must not present itself as carrying out licensed banking activities in the country.

Foreign currency borrowing by Turkish entities

Turkish foreign exchange regulations impose certain restrictions on corporate borrowers. Generally, foreign currency loans are permitted only if the borrower has foreign currency revenues or existing foreign currency loans, unless an exemption applies. Among others, exemptions are available for banks, financial institutions, defence industry contractors, public-private partnership (PPP) project companies, and companies established solely to acquire the shares of another company.

Taxation and structuring considerations

Careful structuring is essential to ensure a tax-efficient and viable financing transaction by foreign funds. Without appropriate structuring, material VAT, stamp duties, and withholding tax may apply, potentially making the transaction prohibitively expensive. Tax structuring typically involves ensuring the lending entity meets certain criteria in its home jurisdiction, and that a significant portion of the loan is extended to a Turkish entity.

Financial assistance restrictions

Turkish financial assistance regulations generally prohibit a joint stock company from providing any advance, loan, or security to third parties for the purpose of acquiring its own shares. Exceptions exist for credit or financial institutions acting in the ordinary course of business, or for assistance provided to employees as part of stock option schemes, subject to certain conditions. This prohibition does not extend to other company types, such as limited liability companies. Lenders may, however, obtain group-level recourse and security by merging the target company or companies with the acquiring company post-closing.

Security arrangements and lender protections

Foreign funds and lenders may directly take and hold security from Turkish borrowers or security providers. However, careful structuring is required to ensure that the relevant security documents benefit from tax exemptions provided by Turkish legislation.

Turkey offers relatively robust enforcement processes, including self-help remedies for security over shares, receivables and bank accounts. Transactions can often be structured with a single point of enforcement, which can be triggered swiftly and without recourse to local courts. For other types of security interests, such as mortgages and pledges, self-help remedies are not available, and official enforcement authorities must be involved. While this process can be lengthy, it remains a reliable method of enforcement for lenders.

Insolvency regime in Turkey

Turkey has a well-developed and thoroughly tested insolvency regime. However, the insolvency process can be protracted, particularly in complex financing transactions. While the regime provides a comprehensive framework for managing insolvency cases, its application in intricate financial arrangements is less well tested, which may introduce additional uncertainties and delays.

Conclusion

Turkey presents a compelling opportunity for private credit providers, with a growing market and a supportive legal and regulatory environment. By understanding and addressing the key legal, regulatory, and tax considerations, private credit providers can successfully navigate the Turkish market and unlock its significant potential.