The Central Bank of the Republic of Turkey (the “CBRT“) has introduced several amendments to the Capital Movements Circular concerning the FX borrowing restrictions (the “Amendments“) on May 11, 2020. The most striking change is the introduction of a concept which is similar to “capital advance” which was abolished several years ago.
Converting Capital Payments to a Shareholder Loan
Any FX advance provided to a private company from abroad for the purposes of capital injection will need to be converted into capital in three months and the capital increase process will need to be completed by the end of this three month period.
The company will be entitled to refrain from capitalizing any FX advance provided by non-resident shareholders and decide to treat such advance as a shareholder loan. In such a case, the company will need to substantiate its will to convert to a loan in a use of proceeds statement in writing, stating that the amount received is intended to be used as a loan. In case the company provides this statement to the intermediary bank or fails to substantiate that the capital increase has been completed in three months, the intermediary bank will verify if the company is eligible for utilizing FX loans.
If the intermediary bank concludes that the company is eligible for utilizing FX loans, then it will add the concerned amount to the company’s FX loan balance and report it to the Banks Association of Turkey Risk Center (the “Risk Center“) as an FX loan. If company is ineligible, then the intermediary bank will transfer the concerned amount back to its respective owners.
FX borrowing restrictions will not apply to FX amounts transferred pursuant an FX denominated convertible loan agreement entered into by and between a Turkish resident and a venture capital fund located outside of Turkey. However, in order to be exempt from these restrictions, the agreement must contain a clause that ensures;
- the FX amount will be converted into capital within a maximum of 12 months as of the transfer date;
- the FX amount will be converted into the capital (i.e. will not be repaid as a loan), except in case of dissolution of liquidation of the borrower;
- the entire amount will be added to the capital.
The borrower must provide the intermediary bank with the agreement, together with a written statement stating that it has not previously used funds without converting them into capital, and an undertaking that the amount specified in the agreement will be injected into the capital within a maximum of 12 months.
The intermediary bank will assess whether the agreement meets the requirements listed above. Furthermore, the bank will also request the borrower to certify that the venture capital fund is duly existing pursuant to the relevant applicable laws.
If the borrower does not submit the requested documents substantiating the capital increase within 12 months of the transfer date, then the bank will inform the Ministry of Treasury and Finance, add the relevant amount to the company’s FX loan balance and report it to the Risk Center. Moreover, the amount converted to the loan will be reported to the General Directorate of Statistics of the Central Bank of the Republic of Turkey.
If the amount transferred to the borrower within the scope of the convertible loan agreement is used without being converted into capital, then the borrower will not able to procure any further convertible loans benefitting from this exemption.
Borrowing In Connection With An Investment Incentive Certificate
Pursuant to the Circular, companies resident in Turkey that procured loans within the scope of an investment incentive certificate (the “IIC“) can borrow a foreign currency loan without any foreign currency income. Pursuant to the Amendment, the amount of the FX loan that can be borrowed will be calculated as follows, if the Company previously borrowed interest bearing TRY loan within the scope of the same IIC:
|Maximum amount||–||Amount of TRY loan issued||=||Amount that can be issued as a foreign currency loan|
Maximum amount is calculated as below:
- If the IIC includes any external source amount, this will be the maximum amount;
- If the IIC includes equity amount, then the maximum amount is calculated by deducting this amount from the total investment amount.
The intermediary bank will verify the amount of previous TRY loans in Turkey via the General Directorate of Incentive Practices and Foreign Capital E-IPFC (E-TUYS). In addition to this, the intermediary bank will procure written statement of the borrower confirming whether it has utilized a loan other than a TRY-denominated and interest bearing loan. The written statement will also contain the utilization date and amount. If the borrower declares any amount relating to the foregoing, then this amount will be deducted from the maximum amount.
FX Loans Utilized Based on Potential FX Income
Pursuant to the Amendment, there will be no maturity limits for foreign currency loans utilized based on potential foreign currency income.
The borrower can utilize more than one loan within the same financial year, given that the connection between the exports and services providing foreign exchange earnings are certified.
In order to prevent the duplicate use of documents, Taxes, Duties and Charges Exemption Certificates and Inward Processing Certificates (Dahilde İşleme Belgesi) will include the amount of the utilized loans.
The Amendments brought new and material exemptions to the FX borrowing bank, introducing the capital advance-like concept in respect of FX amount brought from abroad.
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