2005 INVESTMENT CLIMATE STATEMENT FOR TURKEY

UNCLAS SECTION 01 OF 06 ANKARA 000320

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 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(Law 4875 on Direct Foreign Investment) repealed 1954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.
Edelman