Foreign Capital and Partnership Formation in Turkey

A foreign investor wishing to do business in Turkey can choose to partner with an existing Turkish company rather than establish one from scratch. This approach offers many advantages: rapid market entry, an established customer portfolio, local expertise, and built-in regulatory familiarity. The experience of our Antalya law firm managing many files where foreign investors formed companies with Turkish partners across tourism, real estate, food, healthcare, and technology sectors forms the foundation of this guide.

Foreign-Capital Partnership Structures

The structures a foreign investor can establish with a local partner under Turkish law include:

1. Becoming a Partner in a JSC or LLC

The most common structure: adding capital to an existing company or purchasing shares to become a partner.

2. Joint Venture

Establishing a joint venture (consortium or project company) for a specific project. The project company model is typically preferred in Turkey.

3. Branch and Representative Office

A foreign company may open a branch directly in Turkey or grant representation rights to a Turkish company.

4. Distributorship or Agency Agreement

Rather than a full partnership, products and services are sold in the Turkish market through a Turkish company acting as distributor or agent.

Steps for Partnership Structuring

1. Due Diligence (Legal and Financial Investigation)

Before forming a partnership with a Turkish company, a full due diligence review of the target company must be conducted:

• Legal due diligence: Articles of association, share structure, pending litigation, contracts, licences, intellectual property,
• Financial due diligence: Financial statements, debts, tax status, banking relationships,
• Operational due diligence: Workforce, customer relationships, supply chain,
• Tax due diligence: Retroactive tax risks.

In medium-sized companies in Antalya, problems such as poorly maintained records, undeclared income, and missing SGK declarations are frequently encountered. Due diligence is critical to prevent unpleasant surprises after the transaction closes.

2. Shareholders' Agreement (SHA)

A dedicated shareholders' agreement is prepared between the partners, separate from the articles of association. This agreement covers:

• Share ratios,
• Board structure and appointment authority,
• Decision-making rules (matters requiring a special majority),
• Profit distribution,
• Share transfer restrictions (right of first refusal, drag-along, tag-along),
• Exit mechanisms,
• Dispute resolution,
• Operational and procedural provisions.

A shareholders' agreement is binding among the parties provided it does not conflict with the articles of association.

3. Adding Capital or Transferring Shares

The partnership can be structured through one of two routes:

a. Capital Increase

The existing company's capital is increased and the foreign investor purchases the newly issued shares. Under this method:

• The existing partners' pre-emption rights must be addressed,
• New capital flows into the company (available for operations),
• A general assembly resolution and trade registry registration are mandatory.

b. Purchase of Existing Shares

One or more existing partners sell their shares to the foreign investor. Under this method:

• The purchase price goes to the selling partner, not into the company,
• Stamp duty and capital gains tax may apply to the share transfer,
• The foreign currency entry into Turkey must be documented.

Which approach is preferred depends on tax planning and operational objectives.

Important Contract Provisions

Board Membership

The shareholders' agreement must clearly specify:

• How many board seats the foreign partner may appoint,
• How many board seats the Turkish partner may appoint,
• Which decisions require a majority vote and which require unanimous participation,
• Who appoints the general manager.

Veto Rights

Where the foreign partner holds a minority stake, a veto right is a critical protection. For specific material decisions (e.g., capital increase, asset sales, new borrowings):

• The foreign partner's approval is required,
• This right must be expressly protected in the shareholders' agreement.

Share Transfer Restrictions

The risk that one partner sells shares to an outside party is one of the key concerns in any joint venture. Standard protective provisions include:

• Right of First Refusal: When one partner wishes to sell shares, they must first offer them to the other partner on the same terms,
• Tag-Along: If one partner sells shares to a third party, the other partner has the right to join the sale on the same terms,
• Drag-Along: A majority partner's right to compel the minority partner to participate in a sale to a third-party acquirer.

Anti-Dilution

Anti-dilution provisions preserve the existing partners' proportionate shareholding in new capital rounds, or limit dilution to a specified rate.

Exit Mechanisms

To ensure the partnership has a defined exit path:

• Put Option: The foreign partner's right to sell its shares to the Turkish partner under specific conditions,
• Call Option: The Turkish partner's right to purchase the foreign partner's shares,
• Automatic exit scenarios: Triggered upon the occurrence of specific events,
• IPO route: The company going public.

Tax Dimension

Tax Structuring of the Investment

Within the framework of the double taxation treaty between the foreign investor's home country and Turkey:

• The withholding rate on profit distributions may be reduced,
• Income tax exemption may apply on share transfers,
• Reduced rates may be available on interest and royalty payments.

Structuring the investment through a third country (the Netherlands, Luxembourg, and other tax-efficient jurisdictions) may sometimes be more efficient; however, anti-treaty-abuse provisions that have been tightened in recent years restrict the effectiveness of these structures.

Taxation of Partners

Profits earned in Turkey are subject to taxation at multiple levels:

• Corporate tax at the company level,
• Withholding tax on distribution to foreign partners,
• Potential additional tax in the foreign partner's home country (with foreign tax credit provisions).

Foreign Investor Protection

Under Turkish law, a foreign investor is entitled to equal treatment with a Turkish investor. Additional protections include:

• Compensation guarantees in the event of nationalisation under the foreign investment law,
• Double taxation treaties,
• Bilateral investment protection treaties,
• ICSID (International Centre for Settlement of Investment Disputes) arbitration option.

This framework provides meaningful additional security for foreign investors operating in Turkey.

Common Mistakes

1. Skipping due diligence — debts or litigation discovered after closing can destroy the investment.
2. Relying on verbal agreements — verbal agreements have very limited legal weight in Turkey; all material terms must be in writing.
3. Insufficient shareholders' agreement — the articles of association alone are not enough; a detailed SHA is required.
4. No exit mechanism — a major problem when the partnership eventually needs to be dissolved.
5. Wrong tax structure from the start — restructuring later is costly and sometimes impossible.

Legal Support

For foreign investors in Antalya seeking to partner with Turkish companies, MONA HUKUK provides comprehensive advisory services covering due diligence, shareholders' agreement negotiation, share transfer documentation, and tax structuring. A properly structured partnership provides a solid foundation for rapid market entry and sustainable long-term growth.

Contact us at contact@monahukuk.com or call +90 (242) 606 14 32 to schedule a consultation in Antalya.