TURKEY: 2006 INVESTMENT CLIMATE STATEMENT

UNCLAS SECTION 01 OF 09 ANKARA 000100

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E.O. 12958: N/A
TAGS: ECON EINV KTDB TU OPIC USTR
SUBJECT: TURKEY: 2006 INVESTMENT CLIMATE STATEMENT

REF: 05 STATE 202943

The following is the 2006 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 investors -
regardless of nationality - face a number of challenges:
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.
As a result, FDI inflows have historically been far below
levels received by more investor-friendly emerging markets.
Along with the GOT's far-reaching economic reform program,
which is supported by the World Bank and IMF, the EU
accession that was launched in 2005 has begun to address
some of the structural impediments to FDI.
Regulations governing foreign investment are, in general,
transparent. Turkey provides national treatment, including
in the acquisition of real estate by foreign-owned corporate
entities registered under Turkish law, and not have an
investment screening system (only notification is required).
In 2005, the Constitutional Court ruled unconstitutional
legislation enabling property acquisition by non-Turkish
individuals. However, Parliament is considering new
legislation that will provide limited acquisition rights to
foreigners.
The equity participation ratio of foreign shareholders is
restricted to 25 percent in broadcasting and 49 percent in
aviation and maritime transportation. 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. In practice, regulators have not restricted
foreign ownership in the financial sector: in 2005 a series
of foreign acquisitions in the sector were approved, and
several foreign financial houses had longstanding operations
in Turkey.
The GOT privatizes State Economic Enterprises through block
sales, public offerings, or a combination of both. The sale
of 55 percent of Turk Telekom to Saudi Oger Telecom in 2005
for USD 6.6 billion was a turning point for the Turkish
privatization program. Two other major privatizations in
2005 were the sale of 51 percent of oil-refinery TUPRAS to
Turkish business giant Koc Group (with Dutch Shell having a
minor share of 2 percent),and the sale of 46 percent of
Erdemir to another Turkish company Oyak Group (the Oyak
Group then sold 41 percent of its winning consortium shares
to Arcelor). Turkish privatization revenues in 2005 totaled
USD 16.8 billion, most of which will be collected in
subsequent years.
Bureaucratic "red tape" has been a significant barrier to
companies, both foreign and domestic. However recent laws
have simplified company establishment procedures, reduced
permit requirements, instituted a single company
registration form, and enabled individuals to register their
companies through local commercial registry offices of the
Turkish Union of Chambers and Commodity Exchanges. The
government is also considering other measures to streamline
other business procedures as part of its effort to improve
the business climate.
Turkey is also making progress in making the taxation system
more investor-friendly. In 2006, the basic corporate tax
rate will be reduced from 30 to 20 percent and a uniform
withholding tax of 15% will be applied to income from
financial investment.
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 1990 Bilateral Investment Treaty
(BIT) 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, and
there are no foreign exchange restrictions. 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 BIT, expropriation can only occur in accordance
with due process of law. Expropriations must be for public
purpose and non-discriminatory. Compensation must be
reasonably prompt, adequate, and effective. Under the BIT,
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 real 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. However, the court system is overburdened,
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 executed 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. There is
currently one arbitration cases pending before ICSID.
Turkish law accepts binding international arbitration of
investment disputes between foreign investors and the state.
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).
Law 5084, which went into effect in early 2004, encourages
investment in provinces with annual per capita income below
USD 1,500 and 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).
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. 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 "Openness to Foreign
Investment" and "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 a most-favored-nation (MFN)
basis. American and other foreign firms can participate in
government-financed and/or subsidized research and
development programs on a national treatment basis.
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 above, 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 has an independent Competition Board.

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
remained on the U.S. Special 301 Priority Watch List in 2005
due to concerns about insufficient protection for
confidential pharmaceutical test data and continued high

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levels of piracy and counterfeiting of copyright and
trademark materials.

Turkey's copyright law provides 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, Turkish courts
have failed to render deterrent penalties to pirates as
provided in the copyright law but have instead applied the
Turkish Cinema Law, which has much lower penalties.
Recently enacted legislation contained 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 rights
holder. However, the law also reduces potential prison
sentences for piracy convictions. U.S. industry estimated
losses to piracy in 2004 at $50 million for motion pictures,
$15 million for records/music and $23 million for books.
There are signs that anti-piracy measures introduced in 2004
may be having a positive impact on industry.

Turkey is a signatory to a number of international
conventions, including the Stockholm Act of the Paris
Convention, the Patent Cooperation Treaty, and the
Strasbourg Agreement.

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 research and development "pipeline".

Turkey's recently amended Patent Law provides for penalties
for infringement of up to 3 years in prison, or 47,000 YTL
(approximately $32,000) in fines, or both, and closure of
the business for up to one year. However, research-based
companies in the pharmaceuticals sector have criticized
provisions which delay the initiation of infringement suits
until after the patent is approved and published, permit use
of a patented invention to generate data needed for the
marketing approval of generic pharmaceutical products, and
give judges wider discretion over penalties in infringement
cases. There is concern that amendments proposed this year
to the patent law could lead to weaker enforcement and
penalties and dilute basic intellectual and industrial
property protections.

Turkey does not currently have a system for patent linkage,
which could create confusion and possibly allow generic
pharmaceutical manufacturers to register a copy of a brand
name drug with a valid Turkish patent.

The Ministry of Health introduced limited protection for
confidential test data submitted in support of applications

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to market pharmaceutical products in a regulation issued in
January and revised in June 2005. However, several of the
regulation's provisions severely undermine protection for
confidential test data. Data exclusivity is limited to

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original products licensed in a European Customs Union
country after January 1, 2001, for which no generic
manufacturers had applied for licenses in Turkey as of
January 1, 2005, and the term of exclusivity is limited to
the duration of the drug patent. Also, the six-year term of
data protection starts on the date of licensing in a
European Customs Union country, implying a shorter term of
protection because of the length of the marketing approval
process in Turkey.

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

Turkey recently published its first Plant Variety Protection
(PVP) Law. A subsidiary of a major U.S. seed company,
however, has been unable to obtain protection for its
commercial seed under this new law, reportedly at great cost
to the company.
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. Law 4734 on Public
Procurement established a board to oversee public tenders.
Law 4761 lowered the original minimum bidding threshold at
which foreign companies can participate in state tenders.
The law gives preference 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 has been
amended eight times since its enactment and 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").

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 2005 revision of
the Banking Law helps to bring the bank regulatory framework
closer to European Union norms. The new law will tighten
bank regulation, notably by broadening the range of
expertise inspectors can draw on when conducting on-site
inspections.
An independent Banking and Regulation Supervision Agency
(BRSA) monitors and supervises Turkey's banks. The BRSA is
headed by a board whose seven members are appointed by the
cabinet for six-year terms. In addition, bank deposits are
protected by an independent deposit insurance agency, the
State Deposit Insurance Fund (SDIF).
Because of high local borrowing costs and short repayment
periods, foreign and local firms frequently seek credit from
international markets to finance their activities. As of end-
2005, there are 46 commercial banks (including 13 foreign
banks) and 13 development or investment banks operating in
Turkey. Sector assets as of August 2005 totaled
approximately USD 260 billion, or about 74 percent of GNP,
according to BRSA data.
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 U.S. and EU standards. The
Istanbul Stock Exchange (ISE),formed in 1986, is becoming a
significant emerging market stock exchange. As of December
31 2005, 282 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. 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.

10. Political Violence
In recent years, terrorist bombings -- some with significant
numbers of casualties -- 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, Cesme, Kusadasi 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, 2004, and 2005 civilian venues
such as courthouses, fast food restaurants, and public
transportation were the targets of minor bomb attacks,
resulting in small numbers of casualties. 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.
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 2005, Turkey's Foreign
Affairs Committee approved a draft law ratifying the UN
Convention Against Corruption, which was signed in 2003.
Amendments in 2005 to Turkey's Criminal Code make it
unlawful to promise or to give any advantage to foreign
government officials in exchange for their assistance in
providing improper advantage in the conduct of international
business. In the event that such a crime makes an unlawful
benefit to a legal entity, such legal entity shall be
subject to certain security measures. The provisions of the
Criminal Law regarding the bribing of foreign governmental
officials are in line with the provisions of the Foreign
Corrupt Practices Act of 1977 of the United States (the
"FCPA").
There are, however, a number of differences between the
Turkish law and the FCPA. For example, there is not an
exception under the Turkish law for payments to facilitate
or expedite performance of a "routine governmental action"
in terms of the FCPA. Another difference between the
provisions of the FCPA and the Turkish law is that the FCPA
does not provide for a punishment of imprisonment, while the
Turkish law provides a punishment of imprisonment from four
years to 12 years. 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 parliament can
establish investigative commissions to examine corruption
allegations concerning Cabinet Ministers for the Prime
Minister. A majority vote is needed to send these cases to
the Supreme Court for further action.
Transparency International has an affiliated NGO in
Istanbul. Transparency International noted that Turkey
improved its fight against corruption in 2005, moving Turkey
from 77th to 65th in the transparency ranking of 159
countries.

12. Bilateral Investment Agreements
Since 1985, Turkey has been negotiating and signing
agreements for the reciprocal promotion and protection of
investments. Turkey has signed bilateral investment treaties
with 74 countries and has initiated negotiations with nine
countries. 54 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,
Israel, Afghanistan, Ethiopia, and Iran.
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 avoidance of double taxation agreements with 61
countries.

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
Turkey has a youthful population of 71 million, 65.5 percent
of which is in the 15-64 age group and 28.8 percent in the 0-
14 age group. Of the total population, 60.3 percent live in
urban areas. The Turkish labor force numbers 24.9 million
(22.6 million employed and 2.4 million unemployed); 35.9
percent of the workforce is in agriculture. The official
unemployment rate was 9.7 in the third quarter of 2005.
The literacy rate in Turkey is 88.3 percent (95.7 percent
among men and 81.1 percent among women). Students are
required to complete eight years of schooling and to remain
in school until they are 15 years old. Those who complete
primary school education account for 96.1 percent of the
population, of which only 30.3 percent complete vocational
or higher educations, including distance education.
Turkey has an abundance of unskilled and semi-skilled labor.
Although the Ministry of Education launched projects within
the framework of EU programs to meet the needs of high-tech
industries, there is a shortage of qualified workers.
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. Formal apprenticeship programs remain in
place, although informal training is 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. Approximately 2.9 million of the 11
to 12 million wage and salary earners are unionized. The
law prohibits discrimination on the basis of union
membership but discrimination occurs occasionally in
practice. There is no obligation for a worker to become a
member of any union and there is no obligation to make a
collective labor agreement for any sector. However, in
order to be covered by a collective labor agreement, a
worker should be a member of a union. In order to be a
bargaining agent, a union must have a membership of more
than half of the workers employed in a work place and
include at least 10 percent of the workers employed in that
specific sector. The Labor Law sets a series of steps to be
followed, including mediation by an Arbitration Board,
before a union may initiate a strike. Facilitating labor-
employer relations is among the responsibilities of the
Economic and Social Council, which aims at maintaining an
effective dialogue between the state and social parties to
encourage compromise in industrial relations.
Turkey has signed many International Labor Organization
(ILO) conventions protecting workers' rights, including
conventions on Freedom of Association and Protection of the
Right to Organize; Rights to Organize and to Bargain
Collectively; Abolition of Forced Labor; Minimum Wage;
Occupational Health and Safety; Termination of Employment
and Elimination of the Worst Forms of Child Labor. 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). However, in 1995 and
2001, constitutional amendments reduced restrictions on
freedom of association and political activity on trade
unions. The restrictions on the right to strike under
Article 54 of the Constitution were preserved intact. Civil
servants (defined broadly as all employees of the central
government ministries, including teachers) are allowed to
form trade unions and to engage in limited collective
negotiations, but are prohibited from striking.
The Job Security Bill provides basic job security for
workers and requiring a valid reason for the termination of
the labor contract at the initiative of the employer. Labor
Law 4857 provided employers with greater flexibility in the
organization of work and weakened to a certain extent the
job security provided by the 2002 law. It contains many new
provisions in conformity with international regulations of
the ILO and the EU.
There are no special laws or exemptions from regular labor
laws in the country's 21 free trade and export processing
zones, although these zones are otherwise regulated by Free
Trade Zones Law 3218.
Use of technology is encouraged at work. There is a special
law concerning establishment of Technology Development Zones
(called "techno-parks"). The state also contributes to
research and development activities either though
reimbursement or providing subsidies. The personnel
expenses, cost of machinery, equipment and software,
consultancy and other services, fees paid to scientific
institutions, registration fees for patent and industrial
designs to the Patent Institute, and the cost of R&D related
materials may be reimbursed up to 60% by the state. This
aid may be extended for up to 3 years.

15. Foreign Trade Zones/Free Ports
Firms operating in Turkey's 21 free zones have historically
enjoyed many advantages. 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.
Under Law 5084, 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
manufactured 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 sector
and country of origin data for authorized FDI. Data
collected since the abolition of the permit requirement, by
the Central Bank and other entities, may not be directly
comparable to data collected prior to 2003.
According to Turkish Treasury data, as of November 2005,
there are 10,984 foreign firms invested and operating in
Turkey. The aggregate actual inflows reached USD 21.7
billion. In 2004, EU countries accounted for 79.5 percent of
FDI inflows to Turkey, OECD countries accounted for 16.7
percent, and Middle East countries for 3.8 percent. Over the
past two decades, the Netherlands (32.3 percent) has been
the top source of foreign investment, followed by Germany
(10.1 percent),United Kingdom (10.0 percent) and the U.S.
(9.7 percent) 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 2004, about 75.8 percent of foreign direct investment
took place in services, 18.0 percent in manufacturing, 5.9
percent in mining and 0.3 percent in agriculture.
FDI Inflow by Years (million USD)
Year Actual Inflow(Cumulative) Inflow/GDP No firms

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 2,765 0.92 8,661
2005* 3,742 1.42 10,984
TOTAL 21,666 10,984
Source: Central Bank of Turkey, State Institute of
Statistics,
(*)January through September 2005.
(**) Includes capital inflows, foreign loans and real estate
investment.
FDI Stock by Source Country (end of 2004/ million USD)
Country Value Share (percent)
Netherlands 9,526 32.3
Germany 2,969 10.1
United Kingdom 2,952 10.0
U.S.A 2,859 9.7
France 2,450 8.3
Italy 1,207 4.1
Switzerland 1,072 3.6
Finland 1,043 3.5
Belgium 864 2.9
Japan 846 2.8
Canada 825 2.8
Others 2,897 9.8
Total 29,510 100.0
Source: Central Bank of Turkey.
The investment permit requirement lifted as of 2004.
Turkey's External Investment by Country (As of December
2005)
Country Amount Share
(USD millions)
Netherlands 2,485.2 31.9
Azerbaijan 1,891.6 24.3
United Kingdom 521.0 6.7
Germany 461.9 5.9
Kazakhstan 442.2 5.7
Luxembourg 249.9 3.2
United States 186.7 2.4
Russia 170.4 2.2
Romania 158.4 2.0
Switzerland 108.8 1.4
France 94.3 1.2
Others 1,020.7 13.1
Total 7,791.1 100.0
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.
McEldowney