Foreign Capital and Partnership Formation in Turkey

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

Foreign-Capital Partnership Structures

Structures a foreign investor can establish with local partner under Turkish law:

1. Becoming Partner in JSC or LLC

Most common structure; adding capital to existing company or buying shares to become partner.

2. Joint Venture

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

3. Branch and Representative Office

Foreign company opening branch directly in Turkey or giving representation to a Turkish company.

4. Distributorship or Agency Agreement

Instead of full partnership, products and services sold in Turkish market through a Turkish company.

Steps for Partnership Structuring

1. Due Diligence (Legal and Financial Investigation)

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

• Legal due diligence: Articles of association, share structure, lawsuits, contracts, licenses, intellectual property,
• Financial due diligence: Financial statements, debts, tax status, bank relations,
• Operational due diligence: Workforce, customer relations, supply chain,
• Tax due diligence: Retroactive tax risks.

In medium-sized companies in Antalya, problems like poorly maintained records accumulated over the years, undeclared income, missing SGK declarations are frequently observed; due diligence is critical to prevent surprises.

2. Shareholders' Agreement (SHA)

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

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

contains. Shareholders' agreement is binding among parties if it doesn't conflict with articles of association.

3. Adding Capital to Company or Share Transfer

Partnership can be realised through one of two routes:

a. Capital Increase

Existing company's capital is increased and foreign investor purchases new shares. In this method:

• Existing partners' priority rights must be balanced,
• New capital enters company (for operations),
• General assembly decision and registration mandatory.

b. Purchase of Existing Shares

One or more existing partners sell their shares to foreigner. In this method:

• Money goes to existing partner, not company,
• Stamp duty and capital gains tax may apply on share transfer,
• Foreign currency entry to Turkey must be recorded.

Which is preferred is determined by tax planning and operational needs.

Important Contract Provisions

Board Membership

In shareholders' agreement:

• How many members will foreign partner appoint,
• How many members will Turkish partner appoint,
• Which decisions require majority, which require participation of all members,
• Who will appoint general manager

must be clearly specified.

Veto Rights

In situations where foreign partner is minority, veto right is critical protection. For specific critical decisions (e.g., capital increase, asset sale, new borrowing):

• Foreign partner's approval required,
• This right protected by shareholders' agreement.

Share Transfer Restrictions

Situation where one of partners sells shares to others is one of important risks. Standard provisions:

• Right of First Refusal: When one partner wants to sell shares, first offered to other partner,
• Tag-Along: If one partner sells shares, other partner has right to sell on same terms,
• Drag-Along: Majority partner's right to compel minority partner to sale.

Anti-Dilution

Preserving existing partners' share ratio in new capital entries or limiting dilution to specific rate.

Exit Mechanisms

For partnership's predictability:

• Put Option: Foreign partner's right to sell shares to Turkish partner under specific conditions,
• Call Option: Turkish partner's right to purchase foreign partner's shares,
• Automatic exit scenarios: Upon occurrence of specific events,
• IPO route: Company going public.

Tax Dimension

Tax Structuring of Investment

Within the double taxation prevention treaty between foreign investor's country and Turkey:

• Withholding rate on profit distribution may be reduced,
• Income tax exemption may apply on share transfer,
• Reduced rates possible on interest, royalty payments.

Structuring investment through another country (Netherlands, Luxembourg etc. tax-advantageous countries) may sometimes be more efficient; however, anti-treaty-abuse rules in recent years restrict these structures.

Taxation of Partners

Profit obtained in Turkey:

• Corporate tax at company level,
• Withholding during distribution,
• Additional tax in foreign partner's home country (with credit possibilities).

Foreign Investor Protection

In Turkish law, foreign investor is subject to equal treatment principle with Turkish investor. Additionally:

• Nationalisation compensation guarantee under foreign investment law,
• Double taxation treaties,
• Investment protection treaties,
• ICSID (International Centre for Settlement of Investment Disputes) arbitration option.

This framework offers additional guarantees for foreign investor.

Common Mistakes

1. Skipping due diligence — debts or lawsuits discovered later can ruin investment.
2. Trusting verbal agreements — verbal agreements aren't very valid in Turkey; everything must be in writing.
3. Insufficient shareholders' agreement — articles of association alone insufficient, detailed SHA required.
4. Not contracting exit mechanism — major problem when partnership dissolves years later.
5. Wrongly setting tax structure at start — conversion later costly.

Legal Support

For foreign investors in Antalya seeking to partner with Turkish companies, MONA HUKUK provides holistic advisory in due diligence, shareholders' agreement negotiation, share transfer, and tax structuring. Properly structured partnership is a solid foundation for both rapid market entry and sustainable growth.

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