Identifier
Created
Classification
Origin
05ANKARA304
2005-01-18 09:29:00
UNCLASSIFIED
Embassy Ankara
Cable title:  

2005 INVESTMENT CLIMATE STATEMENT FOR TURKEY

Tags:  EINV KTDB EFIN TU 
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UNCLAS SECTION 01 OF 12 ANKARA 000304 

SIPDIS

STATE FOR EB/IFD/OIA
TREASURY FOR OASIA
DEPT PLEASE PASS USTR
FAS FOR ITP/PAUL SPENCER
USDOC FOR ITA/MAC/DDEFALCO

E.O. 12958: N/A
TAGS: EINV KTDB EFIN TU
SUBJECT: 2005 INVESTMENT CLIMATE STATEMENT FOR TURKEY

Ref: STATE 250356

This is the first of two cables transmitting e following
is the 2005 Investment Climate Statement for Turkey:

UNCLAS SECTION 01 OF 12 ANKARA 000304

SIPDIS

STATE FOR EB/IFD/OIA
TREASURY FOR OASIA
DEPT PLEASE PASS USTR
FAS FOR ITP/PAUL SPENCER
USDOC FOR ITA/MAC/DDEFALCO

E.O. 12958: N/A
TAGS: EINV KTDB EFIN TU
SUBJECT: 2005 INVESTMENT CLIMATE STATEMENT FOR TURKEY

Ref: STATE 250356

This is the first of two cables transmitting e following
is the 2005 Investment Climate Statement for Turkey:


1. OPENNESS TO FOREIGN INVESTMENT

The Government of Turkey (GOT) views foreign direct
investment as vital to the country's economic development
and prosperity. Accordingly, Turkey has one of the most
liberal legal regimes for FDI in the OECD. With the
exception of some sectors (see below),areas open to the
Turkish private sector are generally open to foreign
participation and investment. However, all companies -
regardless of nationality of ownership - face a number of
obstacles: excessive bureaucracy, weaknesses in the
judicial system, high and inconsistently collected taxes,
weaknesses in corporate governance, sometimes
unpredictable decisions taken at the municipal level, and
frequent, sometimes unclear changes in the legal and
regulatory environment. Historically, investment has also
been discouraged by high inflation and political and
macroeconomic uncertainties, though Turkey has become much
more stable in the years following the 2001 economic and
financial crisis.

As a result, FDI inflows, at well below one percent of GDP
over the last decade, have been far below FDI received by
more investor-friendly emerging markets and also below
Turkey's potential. The GOT's far-reaching economic
reform program agreed with the World Bank and IMF, and
motivated also by multilateral agreements and EU
accession, has begun to address these problems and should
allow FDI inflows to grow.

Regulations governing foreign investment are, in general,
transparent. Legislation approved by Parliament in 2003
(Law 4875 on Direct Foreign Investment) repealed 1954
legislation on foreign investment. The 2003 law
liberalized the foreign direct investment regime by
eliminating screening of foreign investors in favor of a
notification system and providing national treatment in
acquisition of real estate by foreign-owned entities
registered under Turkish law. The law also abolished
specific minimum capital requirement for foreign
investments (general capital requirements apply to all
companies); the requirement to seek permission from
Treasury if a capital increase would change the

participation ratio between the foreign investor and any
local partners; and the requirement for Turkish companies
to register with Treasury any licensing, management, or
franchising agreements concluded with foreign persons.

Foreign investors are subject to restrictions on
establishment in certain sectors. The equity
participation ratio of foreign shareholders is restricted
to 20 percent in broadcasting and 49 percent in aviation,
maritime transportation, and many value-added
telecommunication services (though telecommunications
legislation has been amended to allow certain company-
specific exceptions to these limits). However, companies
receive full national treatment once they are established.
Establishment in financial services, including banking and
insurance, and in the petroleum sector requires special
permission from the GOT for both domestic and foreign
investors.

The GOT privatizes State Economic Enterprises through
block sales, public offerings, or a combination of both.
Foreign investors generally receive national treatment in
privatization programs. Law 5189 of 2004 removed the
limit on foreign ownership of Turk Telecom, the dominant
provider of voice and other telecommunications services.
The company's privatization plan foresees a block sale of
55 percent of the company.

The Turkish Parliament passed legislation in 2003
streamlining the company registration process (see Section
8 - Transparency of the Regulatory System). Another 2003
law on work permits for foreign citizens gave the Labor
and Social Security Ministry additional authority in this
area (see Section 5 - Performance
Requirements/Incentives). Inflation accounting was
introduced at the end of 2003. Law 5177, published in
June 2004, amended existing legislation on mining with a
view toward making this sector more accessible to foreign
investment by streamlining permit requirements and
procedures and removing limits on mining on certain types
of land.
At the end of 2003, Parliament replaced a complex series
of taxes on financial instruments with a 15 percent tax on
all of them. In 2005, Turkey also plans to reduce the
rate of corporate tax and to broaden the set of goods and
services eligible for lower value added tax rates.

Turkish law and regulation affecting the investment
climate continues to evolve. Potential investors should
check with appropriate Turkish government sources for
current and detailed information. The following web site
provides the text of regulations governing foreign
investment and incentives as well as other useful
background information:
http://www.treasury.gov.tr/for_inv.htm. Additional
information is available at:
http://www.investinginturkey.gov.tr


2. CONVERSION AND TRANSFER POLICIES

Turkish law guarantees the free transfer of profits, fees
and royalties, and repatriation of capital. This
guarantee is reflected in Turkey's Bilateral Investment
Treaty with the United States, which mandates unrestricted
and prompt transfer in a freely usable currency at a legal
market-clearing rate for all funds related to an
investment. There is no difficulty in obtaining foreign
exchange. However, as the result of a 1997 court
decision, the Turkish Government has blocked full
repatriation of investments by oil companies under Article
116 of the 1954 Petroleum Law, which protected foreign
investors from the impact of lira depreciation. Affected
companies have challenged the 1997 decision and the case
is currently in the Turkish court system.


3. EXPROPRIATION AND COMPENSATION

Under the 1990 Bilateral Investment Treaty with the United
States (codifying existing Turkish law),expropriation can
only occur in accordance with international law and due
process. Expropriations must be for public purpose and
non-discriminatory. Compensation must be reasonably
prompt, adequate, and effective. Under the Bilateral
Investment Treaty, U.S. investors have full access to the
local court system and the ability to take the host
government directly to third party international binding
arbitration to settle investment disputes. There is also
a provision for state-to-state dispute settlement.

As a practical matter, the GOT occasionally expropriates
private property for public works or for State Enterprise
industrial projects. The GOT agency expropriating the
property negotiates and proposes a purchase price. If the
owners of the property do not agree with the proposed
price, they can go to court to challenge the expropriation
or ask for more compensation. There are no outstanding
expropriation or nationalization cases.


4. DISPUTE SETTLEMENT

There are several outstanding investment disputes between
U.S. companies and Turkish government bodies, particularly
in the energy and tourism sectors.

Turkey's legal system provides means for enforcing
property and contractual rights, and there are written
commercial and bankruptcy laws. The court system is
overburdened, however, which sometimes results in slow
decisions and judges lacking sufficient time to grasp
complex issues. The judicial system is also perceived to
be susceptible to external influence and to be biased
against outsiders. Judgments of foreign courts, under
certain circumstances, need to be reconsidered by local
courts before they are accepted and enforced. . Monetary
judgments are usually made in local currency, but there
are provisions for incorporating exchange rate
differentials in claims.

Turkey is a member of the International Center for the
Settlement of Investment Disputes (ICSID),and is a
signatory of the New York Convention of 1958 on the
Recognition and Enforcement of Foreign Arbitral Awards.
Turkey ratified the Convention of the Multinational
Investment Guarantee Agency (MIGA) in 1987.

Turkish law accepts binding international arbitration of
investment disputes between foreign investors and the
state; this principle is included in the U.S.-Turkish
Bilateral Investment Treaty (BIT). In practice, however,
Turkish courts have on at least one occasion failed to
uphold an international arbitration ruling involving
private companies.


5. PERFORMANCE REQUIREMENTS/INCENTIVES

Turkey is a party to the WTO Agreement on Trade Related
Investment Measures (TRIMS).

Turkey provides investment incentives to both domestic and
foreign investors. These include a corporate tax
exemption of 40 percent of specified investment expenses
deductible from future taxable profits for investments
greater than 5,000 new TL (approximately USD 3,700). (New
Turkish currency was issued on January 1, 2005, with 1 new
Turkish lira equal to 1,000,000 (old) Turkish lira.)
Certain other incentives may require an incentive
certificate from the Turkish Treasury Undersecretariat.

Law 5084, which went into effect in early 2004, encourages
investment in provinces with annual per capita income
below USD 1,500 as well as to high priority development
regions. For low income provinces and under certain
conditions, the law provides for withholding tax
incentives on income tax; social security premium
incentives; free land; and electricity price support.
These incentives will remain in effect until the end of
2008, except for allocation of free public land, which has
no expiration date. The same law also limits certain tax
preferences previously enjoyed by Turkey's free zones (see
below). The Turkish Government is reported to be
considering expanding the number of provinces eligible for
the investment incentives.

There are no performance requirements imposed as a
condition for establishing, maintaining, or expanding an
investment. There are no requirements that investors
purchase from local sources or export a certain percentage
of output. However, domestic or foreign investors who
commit to realizing USD 10,000 of exports upon completion
of the investment may be exempt from certain fees and
taxes, such as those related to land registration or
company establishment. Investors' access to foreign
exchange is not conditioned on exports.

There are no requirements that nationals own shares in
foreign investments, that the shares of foreign equity be
reduced over time, or that the investor transfer
technology on certain terms. There are no government
imposed conditions on permission to invest, including
location in specific geographical areas, specific
percentage of local content - for goods or services - or
local equity, import substitution, export requirements or
targets, employment of host country nationals, technology
transfer, or local financing.

The GOT does not require that investors disclose
proprietary information, other than publicly available
information, as part of the regulatory approval process.
Enterprises with foreign capital must send their activity
report, submitted to the general assembly of shareholders,
auditor's report, and balance sheets to the Treasury's
Foreign Investment Directorate every year by May.

With the exceptions noted under Section 1 "Openness to
Foreign Investment" and Section 8 "Transparency of the
Regulatory System", Turkey grants all rights, incentives,
exemptions and privileges available to national capital
and business to foreign capital and business on an MFN
basis. American and other foreign firms can participate
in government-financed and/or subsidized research and
development programs on a national treatment basis.
Expatriates may be assigned as managers or technical
staff. We are aware of one case in the tourism sector in
which denial of a residence permit has hindered operations
for a foreign investor. A 2003 law (no. 4817) on work
authorizations for foreign nationals gave the Ministry of
Labor and Social Security more authority over work
permits.

Outside of the agricultural sector and many services,
Turkey generally has a liberal foreign trade regime.
There are no discriminatory or preferential export or
import policies directly affecting foreign investors.
Turkey harmonized its export incentive regime with the
European Union in 1995, prior to the start of the Customs
Union. Turkey currently offers a number of export
incentives, including credits through the Turkish
Eximbank, energy incentives, and research and development
incentives. Foreign investors can participate in these
export incentive programs on a national treatment basis.
More information on Turkey's trade regime can be found at
www.foreigntrade.gov.tr.

Military procurement generally requires an offset
provision in tender specifications. The offset guidelines
were modified to encourage direct investment and
technology transfer.


6. RIGHT TO PRIVATE OWNERSHIP AND ESTABLISHMENT

With the exceptions noted in Section 1, private entities
may freely establish, acquire, and dispose of interests in
business enterprises, and foreign participation is
permitted up to 100 percent.

Competitive equality is the standard applied to private
enterprises in competition with public enterprises with
respect to access to markets, credit, and other business
operations. Turkey is adopting the EU's competition
policy; a Competition Board was established in 1997 to
implement the 1994 competition (anti-monopoly) law.


7. PROTECTION OF PROPERTY RIGHTS

Secured interests in property, both movable and real, are
recognized and enforced. There is a recognized and
reliable system of recording such security interests. For
example, there is a land registry office where real estate
is registered. Turkey's legal system protects and
facilitates acquisition and disposal of property rights,
including land, buildings, and mortgages, although some
parties have complained that the courts are slow in
rendering decisions and that they are susceptible to
external influence (see "Dispute Settlement").

Turkey's intellectual property rights regime has improved
in recent years, but still presents serious problems.
Turkey was elevated from the Special 301 Watch List to the
Priority Watch List in 2004, due to concerns about lack of
pharmaceuticals data exclusivity protection and continued
high levels of piracy and counterfeiting of copyrighted
and trademarked materials.

Turkey's 2001 copyright law substantially modernized the
legal regime, providing deterrent penalties for copyright
infringement. However, it does not prohibit circumvention
of technical protection measures, a key feature of the
World Intellectual Property Organization (WIPO) "Internet"
treaties. In addition, the Turkish courts have generally
not rendered deterrent penalties to pirates as provided in
the copyright law. Legislation enacted in March 2004
contains several strong anti-piracy provisions, including
a ban on street sales of all copyright products and
authorization for law enforcement authorities to take
action without a complaint by the rightholder. However,
the law also reduces potential prison sentences in piracy
convictions.

In 1995, new patent, trademark, industrial design, and
geographic indicator laws revamped Turkey's foundation for
industrial property protection. Turkey also acceded to a
number of international conventions, including the
Stockholm Act of the Paris Convention, the Patent
Cooperation Treaty, and the Strasbourg Agreement. The
Turkish Patent Institute (TPI) was established in 1994 to
support technological progress, protect intellectual
property rights and provide public information on
intellectual property rights, but its effectiveness has
reportedly been limited by lack of resources.

In accordance with the 1995 patent law and Turkey's
agreement with the EU, patent protection for
pharmaceuticals began on January 1, 1999. Turkey has been
accepting patent applications since 1996 in compliance
with the TRIPS agreement "mailbox" provisions. The patent
law does not, however, contain interim protection for
pharmaceuticals in the R&D "pipeline."

Parliament amended the Patent Law in June 2004. The new
law provides for penalties for infringement of up to 3
years or 47,000 new TL (approximately USD 35,000) in
fines, or both, and closure of the business for up to one
year. However, some companies in the pharmaceutical
sector have criticized provisions that give judges wider
discretion over penalties in infringement cases, delay the
initiation of infringement suits until after the patent is
approved and published, and permit use of a patented
invention to generate data needed for the marketing
approval of generic pharmaceutical products.

The Health Ministry has accepted applications to register
generic copies of products which have a valid patent in
Turkey; in the absence of a system for patent linkage, it
may become possible for generics manufacturers to register
a copy of a brand name drug with a valid Turkish patent,
damaging the interests of the patent owner.

The key intellectual property concern for research-based
pharmaceutical companies is Turkey's lack of data
exclusivity protection for confidential test data. U.S.
industry contends that numerous products infringing data
exclusivity have been approved or are pending review by
the Turkish Health Ministry.

Trademark holders also contend that there is widespread
and often sophisticated counterfeiting of their marks in
Turkey, especially of apparel, pharmaceuticals, film,
cosmetics, detergent and other products.

In 2004, Turkey published its first Plant Variety
Protection (PVP) Law. However, at least one subsidiary of
a U.S. seed company has been unable to obtain protection
for its commercial seed under this new law.

Further information on the intellectual property situation
in Turkey is available in the National Trade Estimate
report, available at the U.S. Trade Representative's
website: www.ustr.gov.


8. TRANSPARENCY OF THE REGULATORY SYSTEM

The GOT has adopted policies and laws that in principle
should foster competition and transparency. However,
foreign companies in several sectors claim that
regulations are sometimes applied in a nontransparent
manner.

Turkish legislation generally requires competitive bidding
procedures in the public sector. In 2003, Law 4734 on
Public Procurement entered into force. The law
established a board to oversee public tenders, and lowered
the minimum bidding threshold at which foreign companies
can participate in state tenders. The law gives
preferences to domestic bidders, Turkish citizens and
legal entities established by them, as well as to
corporate entities established under Turkish law by
foreign companies. The public procurement law may be
further amended in the future.

In general, labor, health and safety laws and policies do
not distort or impede investment, although legal
restrictions on discharging employees may provide a
disincentive to labor-intensive activity in the formal
economy. Certain tax policies distort investment
decisions. High taxation of cola drinks discourages
investment in this sector. Generous tax preferences for
free zones have provided a stimulus to investment in these
zones, though these preferences will be trimmed in the
future (see free zones section). Similarly, incentives
for investment in certain low-income provinces appear to
be stimulating investment there (see Performance
Requirements/Incentives Section).

Bureaucratic "red tape" has been a significant barrier to
companies, both foreign and domestic. Law 4884 of June
2003 simplifies company establishment procedures. The law
repeals the permit requirement from the Industry and
Commerce Ministry for certain firms, institutes a single
company registration form and enables individuals to
register their companies through local commercial registry
offices of the Turkish Union of Chambers and Commodity
Exchanges. The goal is to enable registration to be
completed in as little as one day and to encourage
electronic sharing of documents. The government is also
considering other measures to streamline other business
procedures as part of its effort to improve the business
climate.


9. EFFICIENT CAPITAL MARKETS AND PORTFOLIO INVESTMENT

The government has taken a number of important steps in
recent years to strengthen and better regulate the banking
system, whose weaknesses had contributed to macroeconomic
instability over the previous decade and played an
important role in the 2000-2001 financial crisis.

A 1999 banking law established an independent Banking and
Regulation and Supervision Agency (BRSA) to monitor and
supervise Turkey's banks. The BRSA, which began
functioning in 2000, is headed by a board whose seven
members are appointed by the cabinet for six-year terms.
The law's provision's also toughened conditions for
establishing new banks or branches, set credit limits to
protect bank solvency, and strengthen regulatory and
sanctioning powers, including authorizing the board to
merge weak banks with stronger ones.

The law also created an independent deposit insurance
agency, the State Deposit Insurance Fund (SDIF). Until
2004, BRSA and SDIF had the same board and shared staff
and offices, though they were separate legal entities.
Since the beginning of 2004, BRSA and SDIF's boards and
staffing have been separated and SDIF's headquarters moved
to Istanbul.

During and after the 2000-2001 financial crisis, many
Turkish banks became insolvent or undercapitalized, and
SDIF, in coordination with BRSA, took over 21 financial
institutions. This includes Imar Bank, which was taken
over on July 4, 2003. The SDIF has recapitalized these
banks, and has been selling or liquidating them, at the
same time as it is negotiating repayment agreements from
the banks' former owners covering these banks' portfolio
of credits to affiliated companies. The BRSA also has
issued a regulation limiting the extent of connected
lending (between a bank and related corporate entities)
and requiring frequent BRSA on-site monitoring.

In early 2005, the government is preparing a new banking
law that helps to bring the bank regulatory framework in
line with European Union norms. Once enacted, the new law
is expected to further tighten bank regulation, notably by
broadening the range of expertise inspectors can draw on
when conducting on-site inspections.

Following the 2001 crisis, the government restructured
state-owned banks, minimizing the scope for political
interference, liquidating one of the banks, and slating
these banks for eventual privatization. However, the
process of privatizing the three remaining state-owned
banks has stalled.

Because of high local borrowing costs and short repayment
periods, both foreign and local firms frequently seek
credit from international markets to finance their
activities. As of end-2004, there were 48 commercial
banks (including 12 foreign banks) and 14 development or
investment banks operating in Turkey. Total sectoral
assets were approximately USD 184 billion, or about 70
percent of GNP, as of July 2004 according to data from the
Banking Regulation and Supervision Board. The three state-
owned commercial banks and the top 4 privately-capitalized
banks hold approximately 74 percent of total assets.

There is a regulatory system established to encourage and
facilitate portfolio investments, though it needs
improvements in transparency, accounting, and enforcement
provisions to bring it up to EU and U.S. standards. The
Istanbul Stock Exchange (ISE),formed in 1986, is becoming
a significant emerging market stock exchange. As of
January 2005, 276 companies were listed on the exchange.
However, Turkey has yet to develop other capital markets.
The Capital Markets Board is responsible for overseeing
the activities of capital markets, including activities of
ISE-quoted companies, and securities and investment
houses. A new Capital Markets Law is under consideration.

The Turkish private sector is dominated by a number of
large holding companies, whose upper management is family-
controlled. Most large businesses continue to float
publicly only a minority portion of company shares in
order to limit outside interference in company management.
There has been no attempt at a hostile takeover by either
international or domestic parties in recent memory.

There are no laws or regulations that specifically
authorize private firms to adopt articles of incorporation
or association in order to limit or prohibit foreign
investment, participation, or control. Neither is there
any attempt by the private sector or government to
restrict foreign participation in industry standard-
setting consortia or organizations.


10. POLITICAL VIOLENCE

Terrorist bombings -- some with significant numbers of
casualties -- over the past two years have struck
religious, political, and business targets in a variety of
locations in Turkey. The potential remains throughout
Turkey for violence and terrorist actions against U.S.
citizens and interests, both by transnational and
indigenous terrorist organizations.
In November 2003 the Al-Qa'ida network was responsible for
four large suicide bombings in Istanbul that, among other
targets, hit western interests. Indigenous terrorist
groups also continue to target Turkish as well as U.S. and
Western interests. In June 2004 the indigenous terrorist
group PKK/KADEK/KONGRA GEL announced an end to their
"unilateral ceasefire." Since the announcement, there
have been repeated attacks against Turkish targets in the
southeast region of Turkey, where the group has
traditionally concentrated its activities. In addition,
there have been bombings and other incidents in Istanbul,
Bodrum, Antalya, and Mersin. Other terrorist groups,
including the Turkish group Revolutionary People's
Liberation Party/Front (DHKP/C),continue to target
Turkish officials and various civilian facilities and may
use terrorist activity to make political statements. In
2002, 2003, and 2004, civilian venues such as courthouses
and fast food restaurants were the targets of minor bomb
attacks, which have resulted in small numbers of
casualties among bystanders. Similar, random bombings are
likely to continue in unpredictable locations. Americans
traveling to Southeastern Turkey, the site of
PKK/KADEK/KONGRA GEL actions, should exercise caution.

Although the Turkish government takes air safety seriously
and maintains strict controls, particularly on
international flights, hijacking attempts have occurred as
recently as 2003. For the latest security information on
Turkey and throughout the world, travelers should monitor
the State Department web site http://travel.state.gov,
where the current Worldwide Caution Public Announcement,
Travel Warnings, and Public Announcements can be found.


11. CORRUPTION

CORRUPTION IS PERCEIVED TO BE A MAJOR PROBLEM IN
TURKEY BY PRIVATE ENTERPRISE AND THE PUBLIC AT
LARGE, PARTICULARLY IN GOVERNMENT PROCUREMENT.
AMERICAN COMPANIES OPERATING IN TURKEY HAVE
COMPLAINED ABOUT BEING SOLICITED, WITH VARYING
DEGREES OF PRESSURE, BY MUNICIPAL OR LOCAL
AUTHORITIES FOR "CONTRIBUTIONS TO THE COMMUNITY".
PARLIAMENT CONTINUES TO PROBE CORRUPTION
ALLEGATIONS INVOLVING SENIOR OFFICIALS IN PREVIOUS
GOVERNMENTS, PARTICULARLY IN CONNECTION WITH ENERGY
PROJECTS. IN 2003, AFTER THE GOVERNMENT INTERVENED
IN A BANK OWNED BY THE UZAN GROUP, EVIDENCE OF
CORRUPT PRACTICES AT THE BANK EMERGED.
Recent public procurement reforms were designed to make
procurement more transparent and less susceptible to
political interference, including through the
establishment of an independent public procurement board
with the power to void contracts. The judicial system is
also perceived to be susceptible to external influence and
to be biased against outsiders to some degree.

Turkish legislation outlaws bribery and some prosecutions
of government officials for corruption have taken place,
but enforcement is uneven. Turkey ratified the OECD
Convention on Combating Bribery of Public Officials, and
passed implementing legislation in January 2003 to provide
that bribes of foreign officials, as well as domestic, are
illegal and not tax deductible. In 2003, Turkey signed
the UN Convention Against Corruption.

The Prime Ministry's Inspection Board, which advises a new
Corruption Investigations Committee, is responsible for
investigating major corruption cases. Nearly every state
agency has its own inspector corps responsible for
investigating internal corruption. The National Assembly
can establish investigative commissions to examine
corruption allegations concerning Cabinet Ministers for
the Prime Minister; a majority vote in the parliament is
needed to send these cases to the Supreme Court for
further action.

Transparency International has an affiliated NGO in
Istanbul.


12. BILATERAL INVESTMENT AGREEMENTS

Since 1985, Turkey has been negotiating and signing
agreements for the reciprocal promotion and protection of
investments. Turkey has signed or initiated negotiations
on bilateral investment treaties with 69 countries. Fifty-
two of these agreements are now in force, including with
the United States, United Kingdom, Germany, the
Netherlands, Belgium, Luxembourg, Denmark, Austria,
Sweden, Switzerland, Spain, Finland, Italy, Portugal,
Hungary, Poland, Romania, Tunisia, Kuwait, Bangladesh,
China, Japan, South Korea, Indonesia, Croatia, Cuba, the
Czech Republic, Estonia, Russian Federation, Azerbaijan,
Kazakhstan, Georgia, Tajikistan, Ukraine, Uzbekistan,
Belarus, Lithuania, Latvia, Slovakia, Macedonia, Pakistan,
Turkmenistan, Moldova, Kyrgyzstan, Albania, Bulgaria,
Argentina, Bosnia, Malaysia, Egypt, Mongolia, Greece and
Israel.

Turkey's bilateral investment treaty with the United
States came into effect on May 18, 1990. A bilateral tax
treaty between the two countries took effect on January 1,

1998. Turkey has signed avoidance of double taxation
agreements with 59 countries; 39 of these are in force.


13. OPIC AND OTHER INVESTMENT INSURANCE PROGRAMS

The Overseas Private Investment Corporation (OPIC) offers
a full range of programs in Turkey, including political
risk insurance for U.S. investors, under its bilateral
agreement with Turkey. OPIC is also active in financing
private investment projects implemented by U.S. investors
in Turkey. OPIC-supported direct equity funds, including
the USD 200 million Soros Private Equity Fund can make
direct equity investments in private sector projects in
Turkey. Small- and medium-sized U.S. investors in Turkey
are also eligible to utilize the new Small Business Center
facility at OPIC, offering OPIC finance and insurance
support on an expedited basis for loans from USD 100,000
to USD 10 million. In 1987, Turkey became a member of the
Multinational Investment Guarantee Agency (MIGA).

The U.S. Government annually purchases approximately USD
24 million of local currency. Embassy purchases are made
at prevailing market rates, which fluctuate in accordance
with Turkey's free floating exchange rate regime.


14. LABOR

The Turkish labor force numbers 25.3 million (22.9 million
employed and 2.4 million unemployed); 35.9 percent of the
workforce is in agriculture. The official unemployment
rate was 9.5 in the third quarter of 2004.

Students are required to complete eight years of schooling
and to remain in school until they are 15 years old.
Turkey has an abundance of unskilled and semi-skilled
labor. However, there is a shortage of qualified workers
for highly automated high-tech industries. Individual
high-tech firms, both local and foreign-owned, have
generally conducted their own training programs for such
job categories. Vocational training schools for some
commercial and industrial skills exist in Turkey at the
high school level. Apprenticeship programs, both formal
and informal, remain in place, although they are dying out
in some traditional occupations. Turkey's labor force has
a reputation for being hardworking, productive and
dependable.

Labor-management relations have been generally good in
recent years. Employers are obliged by law to negotiate
in good faith with unions that have been certified as
bargaining agents. Strikes are usually of short duration
and almost always peaceful. Since 1980 Turkey has faced
criticism by the ILO, particularly for shortcomings in
enforcement of ILO Convention 87 (Convention concerning
Freedom of Association and Protection of the Right to
Organize) and Convention 98 (Convention concerning the
Application of the Principles of the Right to Organize and
to Bargain Collectively).

IN 2002, PARLIAMENT APPROVED A JOB SECURITY BILL,
PROVIDING BASIC JOB SECURITY FOR WORKERS AND REQUIRING A
VALID REASON FOR THE TERMINATION OF THE LABOR CONTRACT AT
THE INITIATIVE OF THE EMPLOYER. THE LAW CAME INTO EFFECT
ON 15 MARCH 2003. IN 2003, THE LABOR LAW OF 1971 (NO.1475)
WAS REPLACED BY A NEW LABOR LAW (NO.4857),WHICH PROVIDED
EMPLOYERS WITH GREATER FLEXIBILITY IN THE ORGANIZATION OF
WORK AND WEAKENED TO A CERTAIN EXTENT THE JOB SECURITY
PROVIDED BY THE 2002 LAW.

In 1995 and 2001, constitutional amendments reduced
restrictions on freedom of association and political
activity of trade unions. However, the restrictions on
the right to strike under Article 54 of the Constitution
were preserved intact. Under the Law on Collective Labor
Agreements, Strikes and Lockouts, some restrictions on the
right to strike were repealed in 1988. Civil servants
(defined broadly as all employees of central government
ministries, including teachers) are allowed to form trade
unions and to engage in limited collective negotiations,
but are prohibited from striking.


15. FOREIGN TRADE ZONES/FREE PORTS

Firms operating in Turkey's free zones have historically
enjoyed many advantages, but these will be limited in the
future by recent legislation. Twenty-one zones have been
established since passage of the Turkish law on free zones
in 1985. The zones are open to a wide range of
activities, including manufacturing, storage, packaging,
trading, banking, and insurance. Foreign products enter
and leave the free zones without payment of any customs or
duties. Income generated in the zones is exempt from
corporate and individual income taxation and from the
value-added tax, but firms are required to make social
security contributions for their employees. Additionally,
standardization regulations in Turkey do not apply to the
activities in the free zones, unless the products are
imported into Turkey. Sales to the Turkish domestic
market are allowed, with goods and revenues transported
from the zones into Turkey subject to all relevant import
regulations. There are no restrictions on foreign firms
operations in the free zones. Indeed, the operator of one
of Turkey's most successful free zones located in Izmir is
an American firm.

Law 5084 revised the free zones law to effectively
eliminate certain income and corporate tax immunities for
the zones. Under the new rules, taxpayers who possessed
an operating license as of February 6, 2004 will not have
to pay income or corporate tax on their earnings in the
zone for the duration of their license. Earnings based on
sale of goods manufacturing in a zone will be exempt from
income and corporate tax until the end of the year in
which Turkey becomes a member of the European Union.
Earnings secured in a free zone under corporate tax
immunity and paid as dividends to real person shareholders
in Turkey or to real person or legal-entity shareholders
abroad will be subject to 10 percent withholding tax. The
tax immunity of the wage and salary income earned by
persons employed in the zones by taxpayers possessing an
operating license as of February 6, 2004 will remain in
effect until December 31, 2008, or the expiration date of
the operating license, whichever is earlier. The
implications of the new rules are complex, and interested
parties may want to consult with a tax advisor and/or the
Foreign Trade Undersecretariat (web site:
www.dtm.gov.tr).


16. FOREIGN DIRECT INVESTMENT STATISTICS

With the foreign investment permit requirement in place
until 2003, the Turkish Treasury collected detailed
sectoral and country of origin data for authorized FDI.
Data collected since the abolition of the permit
requirement, by the Central Bank and other entities, is
not directly comparable to data collected prior to 2003.

According to Turkish Treasury data, as of June 2003, there
are 6,511 foreign firms invested and are operating in
Turkey. The Turkish government has provided permits for
foreign capital since 1980 amounting to USD 35.2 billion,
and aggregate actual inflows reached USD 16.4 billion. In
2003, EU countries accounted for 74.3 percent of
authorized new foreign investment, OECD countries
accounted for 93.7 percent, and Islamic countries for 3.7
percent. Over the past two decades, France (16.4 percent)
has been the top source of foreign investment, followed by
the Netherlands (15.8 percent),Germany (13.0 percent) and
the U.S. (11.5 percent) (Note that these figures are
based on the amount of authorized investment, not on
actual capital inflows.) Because of the absence of a
bilateral tax treaty until 1998, much U.S.-origin capital
was invested in Turkey through third-country subsidiaries.
According to U.S. Commerce Department data, U.S. company
investment amounted to about USD 2 billion in 2003. By
unofficial estimates, the U.S. may be one of the largest
sources of foreign investment in Turkey.

In 2003, about 58.9 percent of authorized foreign
investment took place in manufacturing, 30.23 percent in
services, 10.3 percent in mining and 0.6 percent in
agriculture. The sub-sectors with the greatest amount of
authorized foreign investment include banking (10.6
percent); communications (9.4 percent); food, beverage and
tobacco processing (8.0 percent); and trade (6.5 percent).
Between 1980 and June 2003, 53.0 percent of actual capital
inflows were invested in manufacturing, 44.0 percent in
services, 1.8 percent in agriculture, and 1.2 percent in
mining. The finance and communications sectors received
the highest share of increased foreign direct investment
permits in 2003.

FDI Inflow by Years (million USD)

Year Actual Inflow/GDP No firms
Inflow (Cumulative)
1980-1988 1,172
1989 663 0.80 1,525
1990 684 0.67 1,856
1991 907 0.69 2,123
1992 911 0.78 2,330
1993 746 0.56 2,554
1994 636 0.64 2,830
1995 934 0.66 3,163
1996 914 0.53 3,582
1997 852 0.54 4,068
1998 953 0.49 4,533
1999 813 0.41 4,950
2000 1,707 0.85 5,328
2001 3,288 2.21 5,841
2002 1,042 0.48 6,280
2003 1,702 0.71 6,511
2004(*) 2,216 1.02 N/A
TOTAL 20,140 6,511

Source: Central Bank of Turkey, State Institute of
Statistics,
(*)January through November 2004.
(**) Includes capital inflows, foreign loans and real
estate investment.

FDI Inflow by Source Country (1999-2002/ million USD)

Country Cumulative Value Share (percent)

Italy 1,968 30.9
Netherlands 962 15.1
U.S.A. 793 12.4
United Kingdom 647 10.1
Germany 514 8.1
Bahrain 323 5.1
Japan 267 4.2
France 263 4.1
Switzerland 104 1.6
Belgium-Luxemburg 25 0.4
Spain 23 0.4
Others 488 7.7

Total 6,377 100.0

Source: Turkish Treasury Undersecretariat, General
Directorate of Foreign Investment. Updated information
has not been issued for the period following 2002.

Sectoral Breakdown of FDI Permits (1980-2003*/ million
USD)
Sector Cumulative Value Share (percent)

Manufacturing 18,641 53.0
Services 15,453 44.0
Agriculture 616 1.8
Mining 442 1.2

Total 35,152 100.0

Source: General Directorate of Foreign Capital
(*) as of June 2003


Main Manufacturing Industry Sub-Sectors Receiving FDI
Permits

Industry Sub-Sector Share in Manufacturing
Industry (percent)*

Chemical Products 18.3
Food 14.7
Transport Equipment 12.3
Electrical Machinery 5.8
Garment Industry 3.9
Iron and Steel 3.4

Source: General Directorate of Foreign Capital
(*) as of June 2003

Turkey's External Investment by Country (As of December
2004)

Country Amount Share
(USD millions)
Netherlands 2,248.8 34.8
Azerbaijan 1,043.6 16.1
United Kingdom 524.2 8.1
Germany 472.1 7.2
Kazakhstan 434.5 6.7
Luxembourg 248.7 3.9
United States 179.8 2.8
Russia 159.7 2.5
France 93.4 1.4
Switzerland 84.9 1.3
Others 976.5 15.1

Total 6,466.2 100.0
Source: General Directorate of Banking and Foreign
Exchange,
Treasury

Major foreign investors

Turkey's foreign investors include Telecom Italia,
Renault, Toyota, Fiat, Castrol, Enron Power, Citibank,
Pirelli Tire, Unilever, RJR Nabisco, Philip Morris, United
Defense, Honda, Hyundai, Bosch, Siemens, DaimlerChrysler,
Chase Manhattan, AEG, Bridgestone-Firestone, Cargill,
Novartis, Coca Cola, Colgate-Palmolive, General Electric,
ITT, Ford Motor Co., Lockheed Martin, Goodyear, Aventis,
McDonald's, Nestle, Mobil, Pepsi, Pfizer, Procter and
Gamble, InterGen, Abbot Laboratories, Aria, Bechtel,
Shell, Delphi-Packard, Toreador/Madison Oil, AES, GE, NRG,
Normandy Mining, Marsa-Kraft-Jacobs Suchard, ESBAS A.S.,
Archer Daniels Midland, Merck, Sharp Dohme, Bunge, and
Bausch and Lomb.
Edelman