How to establish a liaison office in Turkey?

Opening Liaison Offices in Turkey by Foreign Companies

Turkey is a country that values foreign investors. Therefore, Turkish laws provide many opportunities for foreigners. One of these is the ability for foreign companies to open liaison offices in Turkey.

In this article, we have covered all the important details that need to be known about foreign companies establishing liaison offices in Turkey. We have also answered frequently asked questions in practice.

It is very important for foreign companies to receive assistance from a lawyer to maintain their activities in Turkey in a healthy manner. Before that, a general reading on the subject will also be useful. Therefore, we recommend you read our article carefully.

Contents

1. What is a Liaison Office?

2. Opening a Liaison Office in Turkey for Foreign Companies

   • 2.1 Activity Period of Liaison Office

   • 2.2 Activity Areas of Foreign Company Liaison Offices

3. Conditions for Establishing a Liaison Office for Foreign Companies

4. Documents Required for Foreign Companies to Open a Liaison Office

5. Important Points About Liaison Offices

   • 5.1 Changes in Address, Authorized Person of Liaison Office – Change of Title of Foreign Company

   • 5.2 Expenditures of Liaison Offices of Foreign Companies

   • 5.3 Employees of Liaison Offices

   • 5.4 Employing Foreign Personnel in Liaison Offices of Foreign Companies

   • 5.5 Bookkeeping and Document Arrangement in Liaison Offices of Foreign Companies

   • 5.6 Tax Liability of Foreign Liaison Offices

   • 5.7 Termination of Liaison Office

   • 5.8 Advantages of Opening a Liaison Office in Turkey

   • 5.9 Difference Between Branches and Liaison Offices of Foreign Companies

   • 5.10 Points Foreign Companies Should Pay Attention to When Opening a Liaison Office

What is a Liaison Office?

A liaison office is defined as an establishment that aims to research market conditions in a country, establish contact with individuals and organizations, examine the market and legal regulations of the country where investment will be made, follow business opportunities, provide information to the main organization, and does not pursue social, cultural, or especially commercial purposes.

Liaison offices are closely monitored in Turkey because they are prohibited from engaging in economic purposes and activities. However, this monitoring is not an onerous inspection. As we will mention below, there are many advantages to establishing a liaison office.

Opening a Liaison Office in Turkey for Foreign Companies

When foreign companies, with permission from the Ministry of Economy and by complying with the necessary legal procedures, open liaison offices in Turkey to carry out their promotional, research, and other non-commercial activities, it is called opening a liaison office. "Liaison Office" is the equivalent of the English term "Liaison Office." Their activity periods can be extended with permission from the Ministry of Economy and are subject to some restrictions.

Liaison Office Legislation

The principles related to liaison offices in Turkey are governed by certain laws and regulations:

• Foreign Direct Investment Law No. 4875: The primary law governing foreign direct investments.

• Regulation on the Implementation of the Foreign Direct Investment Law No. 25205: Provides detailed rules about foreign liaison offices.

• International Private Law No. 5718: Addresses private law disputes of foreigners in Turkey.

• Administrative Jurisdiction Procedure Law No. 2577: Governs disputes between liaison offices and the Republic of Turkey in administrative jurisdiction.

Activity Period of Liaison Office

In the initial application, liaison offices are granted permission for a period not exceeding 3 years. Liaison offices that wish to extend their activity period must apply to the General Directorate of Incentive Implementation and Foreign Investment with a request for extension before the expiry of the period.

A liaison office extension petition needs to be submitted. The General Directorate evaluates extension requests by considering:

• Past activities of the liaison office,

• The foreign company's future business plan and targets in Turkey,

• Current and projected expenditure amounts,

• Number of personnel employed, etc.

Based on these evaluations, the activity period is extended up to the durations specified in the table below.

Activity Areas of Foreign Company Liaison Offices

Before discussing the conditions and stages of establishing a liaison office in Turkey by foreign companies, it is useful to mention the activity areas of these liaison offices.

There are some limitations on this subject, specified in Article 8 of the Regulation on the Implementation of the Foreign Direct Investment Law. Essentially, these can be explained in the following table:

ACTIVITIES OF LIAISON OFFICES OF FOREIGN COMPANIES IN TURKEY

Liaison offices must submit the "Information Form on Liaison Office Activities" along with necessary documents to the Ministry by the end of May each year at the latest, detailing their activities from the previous year.

Failure to comply means the extension request for the liaison office will not be considered. Consequently, since the period is not extended, the liaison office's activities are terminated, and the permission is canceled ex officio (by the administration without request).

Ministry Inspection

Liaison offices have certain obligations outlined in the legislation and their permission documents. The Ministry may inspect the activities of liaison offices ex officio or upon written notifications from relevant institutions and organizations.

• If Activities Exceed Permission Scope: If an inspection reveals that the liaison office is operating outside its permitted scope, a 30-day period is granted to apply for the necessary permissions. This period can be extended by another 30 days for valid reasons. Failure to apply results in the cancellation of all activity permissions.

• If Engaging in Commercial Activities: If it's determined that the liaison office is conducting commercial activities, its permission is canceled, and relevant authorities are notified.

Conditions for Establishing a Liaison Office for Foreign Companies

The regulation specifies several conditions for foreign companies to establish liaison offices in Turkey:

• Foreign Establishment: Must be a company established under the laws of a foreign country.

• Non-Commercial Activity: Must not engage in commercial activities in Turkey. The liaison office cannot be used to conduct business transactions.

• Ministry Permission: Must obtain permission from the Ministry of Economy. Operating without permission or outside the scope of permission has legal consequences.

• One-Year Establishment (if required): The Ministry may require the foreign company to have been operational for at least one year.

• Complete Documentation: All application documents and requested information must be fully and accurately submitted.

Note on Financial Sectors: For liaison offices intending to operate in financial sectors like banking, insurance, etc., applications are evaluated by the specific regulatory authorities for those sectors.

Documents Required for Foreign Companies to Open a Liaison Office

According to the Regulation on the Implementation of the Foreign Direct Investment Law, the following documents are required:

1. Liaison Office Application Form

2. Declaration Letter: Outlining the activities to be conducted and affirming that no commercial activities will be undertaken.

3. Document Showing Signature Authority: For the foreign company official who signed the declaration.

4. Activity Certificate of the Foreign Company: Approved by the relevant Turkish Consulate or per the Apostille Convention.

5. Activity Report or Financial Statements: Including balance sheet and income statement.

6. Authorization Document: For the person(s) who will manage the liaison office activities.

7. Power of Attorney (if applicable): If another person (e.g., a lawyer) is handling the application process.

Additional Documents for Tax Office Application and General Directorate Notification

Tax Office Application:

• Lease agreement

• Office manager's power of attorney

• Business commencement notification form

• Office manager's notarized signature declaration

• Notarized copies of the office manager's ID and residence documents

General Directorate Notification:

• Tax office registration document

• Lease agreement

• Liaison office establishment permit

• Liaison Office Activity Notification Form

• Documents related to Social Security Institution (SSI) and Employment Agency (İŞKUR) registrations

• Necessary permits from the Ministry of Labor and Social Security

• Municipal permit (if required)

Application Process

The Ministry and the General Directorate will verify the original documents and provide approved copies to the applicant. Forms and declarations are typically provided as templates annexed to the regulation.

Note: It's highly recommended to seek assistance from experienced lawyers during the application process to avoid legal complications.

If all documents are complete, the application is finalized within 15 days.

Post-Establishment: After obtaining the establishment permit, a copy of the tax office registration and the office's lease contract must be submitted to the General Directorate within one month.

Important Points About Liaison Offices

Changes in Address, Authorized Person of Liaison Office – Change of Title of Foreign Company

If the liaison office's address or authorized personnel change, or if the foreign company's title changes, the following must be notified to the General Directorate within one month:

• Address Change: New lease agreement.

• New Authorized Person: Authorization document for the new individual(s).

• Company Title Change: Relevant documentation reflecting the change.

Expenditures of Liaison Offices of Foreign Companies

Since liaison offices cannot engage in income-generating activities, they cover expenses using foreign currency provided by the parent company.

• Profit Transfer: Liaison offices cannot transfer profits since they don't engage in commercial activities. The only exception is during liquidation when remaining assets can be transferred to the parent company.

Employees of Liaison Offices

Liaison offices may employ both Turkish and foreign personnel.

• Social Security Notifications: Liaison offices must register their employees with the Social Security Institution (SSI) and comply with all employer obligations under labor laws.

• Taxation: Wages paid to Turkish employees are exempt from income tax withholding, but SSI contributions must be made.

• Foreign Employees: If a foreign employee is covered by social security in their home country (with which Turkey has a bilateral agreement), SSI contributions in Turkey may not be required, provided proper documentation is maintained.

Employing Foreign Personnel in Liaison Offices of Foreign Companies

Foreign employees in liaison offices act on behalf of the foreign company. Normally, for each foreign employee, a company must employ five Turkish citizens. However, this quota does not apply to "key personnel," who meet certain criteria such as holding managerial positions, possessing essential company knowledge, or having hiring and firing authority.

Note: Work permits are required for all foreign employees.

Bookkeeping and Document Arrangement in Liaison Offices of Foreign Companies

Liaison offices are considered limited taxpayers. They must maintain proper accounting records to document expenses and related tax obligations. Depending on their activities, they may need to keep journals, ledgers, and inventory books.

Proper documentation of foreign currency inflows and expenditures (e.g., bank transfers, foreign exchange purchase documents) is crucial for compliance and inspections.

Tax Liability of Foreign Liaison Offices

Liaison offices are exempt from income tax due to their non-commercial status. However, if they engage in prohibited commercial activities and generate income, they will be subject to taxation and potential penalties.

They are responsible for:

• Stamp Tax: Deductions on wage payments to employees must be declared and paid accordingly.

Termination of Liaison Office

Liaison offices may terminate operations voluntarily or be closed by authorities if they violate regulations.

• Voluntary Closure: Must obtain a closure document from the tax office and submit it to the General Directorate.

• Liquidation: Remaining assets may be transferred to the parent company.

Advantages of Opening a Liaison Office in Turkey

• Tax Benefits: Exemption from income tax due to non-commercial status.

• Market Presence: Allows companies to research and understand the Turkish market without significant investment.

• Government Support: Foreign investments are encouraged and may receive certain incentives.

Difference Between Branches and Liaison Offices of Foreign Companies

Points Foreign Companies Should Pay Attention to When Opening a Liaison Office

While we have covered general information about liaison offices, each case may have unique legal considerations. It's essential to:

• Prepare Legally: Ensure all legal groundwork is properly established before proceeding.

• Avoid Mistakes: Errors or omissions during establishment can lead to serious legal issues.

Ready to expand your business into Turkey? Let Ozm-Consultancy guide you through every step of establishing a liaison office. Contact us today for expert assistance and make your transition seamless and successful.

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