TURKEY: 2007 INVESTMENT CLIMATE STATEMENT

UNCLAS SECTION 01 OF 11 ANKARA 000077

SIPDIS

DEPARTMENT FOR EB/IFD/OIA
DEPARTMENT PLEASE PASS USTR FOR LERRION

SIPDIS

E.O. 12958: N/A
TAGS: ECON EINV OPIC KTDB USTR TU
SUBJECT: TURKEY: 2007 INVESTMENT CLIMATE STATEMENT

REF: 06 STATE 178303

The following is the 2007 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, a slow judicial system, high taxes,
weaknesses in corporate governance, sometimes unpredictable
decisions taken at the municipal level, and frequent
changes in the legal and regulatory environment.
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 does
not have an investment screening system (only notification
is required). The GOT set "reciprocity with the related
nation" as a precondition for real estate property
purchases by foreigners, and set an upper limit of 25,000
square meters to the area of the real estate foreigners can
buy.

Equity participation of foreign shareholders is restricted
to 25 percent in broadcasting and 49 percent in the
aviation and maritime transportation sectors.
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 and 2006
a series of foreign acquisitions in the sector were
approved, and several foreign financial houses have
longstanding operations in Turkey.

Turkey's privatization process continues to move forward.
The GOT privatizes State Economic Enterprises through block
sales, public offerings, or a combination of both.
Transactions closed under the Turkish privatization program
generated $8.2 billion in revenues in 2005 and $8.1 billion
in 2006. On a cash basis, however, the program yielded
$3.0 billion in 2005 and $9.6 billion in 2006, since
privatizations are often paid for in installments. The
Turkish government is committed to continuing the
privatization process despite delays that may occur in some
individual cases.

Bureaucratic "red tape" has been a significant barrier to
companies, both foreign and domestic. However, recent
reforms 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.
In 2006, the government introduced a number of reforms
specifically aimed at attracting foreign investment to
Turkey. A National Judiciary Network project will
significantly speed the processing of commercial cases by
sharing documents and court records more easily, as well as
allowing for the filing of suits online. Intermediary
regional appeals courts have also been created to speed the
processing of cases, and new courthouses are being built to
alleviate overcrowding. In addition, the government has
improved foreign investors' access to justice, including to
legal aid and Alternative Dispute Resolution mechanisms
supported by the U.S., the EU and the World Bank.

In addition to structural reforms, the Prime Ministry has
created an Investment Promotion Agency whose main objective
will be to support new investors throughout the
establishment process and solve problems that arise after
establishment. The agency will also serve as an advocate
within the government for reforms that promote investment
and will work to raise public awareness of the benefits of
investment.

Turkey is also making progress in making the taxation

ANKARA 00000077 002 OF 011


system more investor-friendly. In 2006, the basic
corporate tax rate was reduced from 30 to 20 percent. The
Government also cancelled the withholding tax for foreign
investors' holdings of bonds, bills and stocks, though
retaining it for bank deposits and repurchase agreements.
The 15% rate on bonds, bills and stocks was reduced to 10%
for domestic investors. The Tax Administration authority
is also in the process of establishing a large taxpayer
unit which will handle tax collection from large
corporations.

Turkish law and regulations 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 has been in the
Turkish court system for several years.


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. The BIT ensures
that 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 some 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.
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

ANKARA 00000077 003 OF 011


currently one arbitration case 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).

The Turkish Government 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

ANKARA 00000077 004 OF 011


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 certain deficiencies from
international standards remain a concern. Turkey remained
on the U.S. Special 301 Priority Watch List in 2006 due to
insufficient protection for confidential pharmaceutical
test data and continued high 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. The law 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 rights holder. However, the law also reduces
potential prison sentences for piracy convictions, a result
of its harmonization with EU requirements. While pirated
materials are still common, the number of cases brought
against the producers and/or distributors of these goods
have increased significantly, and deterrent penalties have
become more common.

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.

Turkey accepts patent applications 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 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.

Unlike some other countries, including the United States,
Turkey does not currently have a system that directly links
marketing approval for pharmaceutical products to the
patent protection system. The Patent Institute sends
reports to the Ministry of Health informing them of
pharmaceutical-related patents that have been approved. In
addition, in 2006 the Patent Institute, with assistance
from the World Bank, created an online database that allows
users to search for valid patents. The Patent Institute
does not, however, share with other entities or the public
unpublished information regarding patent applications that
have not yet been approved.

In general, the Ministry of Health provides protection for
confidential test data submitted in support of applications

SIPDIS
to market pharmaceutical products. However, several of the
regulation's provisions undermine protection for
confidential test data. Data exclusivity is limited to

SIPDIS
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. In addition, the term of exclusivity is

ANKARA 00000077 005 OF 011


limited to the duration of the drug patent. 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, deswx2QQv{ystem

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. Turkey
is an observer but not a member to the WTO Government
Procurement Committee.

Turkish legislation generally requires competitive bidding
procedures in the public sector. A Public Procurement
board exists to oversee public tenders, and there are
minimum bidding thresholds under which foreign companies
are prohibited from bidding on public 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: it has been cited by the EU as not being in
conformity with the EU "acquis communautaire."

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. A 2005 revision of the Banking Law brought tighter
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 October 2006, there were 33 deposit-taking commercial
banks and 13 development or investment banks operating in
Turkey. Sector assets as of August 2005 totaled
approximately USD 333 billion, or about 83 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

ANKARA 00000077 006 OF 011


a significant emerging market stock exchange. As of
December 31, 2006, 332 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 2006, attacks of the indigenous
terrorist group PKK/KADEK/KONGRA GEL increased
significantly and claimed as many as 600 lives through the
first nine months of the year; the PKK declared a
unilateral ceasefire in October, but since the
announcement, there have been repeated attacks against
Turkish targets. The PKK operates in parts of Northern
Iraq and crosses the border to conduct attacks in the
southeast region of Turkey, where the group has
traditionally concentrated its activities, Istanbul, and
resort areas of southern and western Turkey. 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. Since 2002, civilian venues such as
courthouses, fast food restaurants, and public
transportation have been 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, a hijacking occurred on a Turkish
Airlines flight as recently as October 2006. 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 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.

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,

ANKARA 00000077 007 OF 011


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 2006, Turkey's
parliament ratified the UN Convention Against Corruption.

Turkey's Criminal Code makes 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 again in 2006, moving
Turkey from 65th to 60th in the transparency ranking of 159
countries.


12. Bilateral Investment Agreements

Since 1962, Turkey has been negotiating and signing
agreements for the reciprocal promotion and protection of
investments. Turkey has signed bilateral investment
treaties with 78 countries and has initiated negotiations
with nine countries. 62 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, Iran,
Lebanon, Syria, Slovenia and Jordan.

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

ANKARA 00000077 008 OF 011


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 between the ages 15-64 and 28.8 percent
of which is 14 years old or younger. Of this, 60.3
percent live in urban areas. The Turkish labor force
numbers 25.4 million (23.13 million employed and 2.3
million unemployed); 28.4 percent of the workforce is in
agriculture. The official unemployment rate was 9.1 in last
quarter of 2006.

The literacy rate is 87.4 percent (93.86 percent among men
and 80.61 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 95.74 percent of the
population, of which only 34.46 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, there are few restrictions on freedom of
association and the political activities of trade unions.
The Constitution provides certain restrictions on the right
to strike. 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

ANKARA 00000077 009 OF 011


striking.

Improvements to job security legislation provided employers
with greater flexibility in the organization of work and
weakened to a certain extent the job security provided by
the regulations. They contain 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.

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. 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.

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 October 2006,
there are 14,356 foreign firms invested and operating in
Turkey. The aggregate actual inflows reached USD 43.6
billion. In 2005, EU countries accounted for 58.4 percent
of FDI inflows to Turkey, non-EU European countries
accounted for 19.5 percent, Gulf countries for 19.6 percent
and Americas for 2.8 percent. Over the past two decades,
the Netherlands (22.2 percent) has been the top source of
foreign investment, followed by France (11.9 percent),

ANKARA 00000077 010 OF 011


Germany (10.5 percent),United Kingdom (8.8 percent) and
the U.S. (7.2 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 2.4 billion in 2005. By
unofficial estimates, the U.S. may be one of the largest
sources of foreign investment in Turkey.

In 2005, about 57.3 percent of foreign direct investment
took place in services, 33.6 percent in manufacturing, 3.1
percent in mining and 0.5 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 2,883 0.96 8,661
2005 9,793 2.71 11,540
2006* 15,804 0.15 14,356
TOTAL 43,639 14,356

Source: Central Bank of Turkey, State Institute of
Statistics,
(*)January through October 2006.
(**) Includes capital inflows, foreign loans and real
estate investment.

FDI Stock by Source Country (end of 2005/ million USD)

Country Value Share (percent)

Netherlands 14,043 22.2
France 7,547 11.9

Germany 6,616 10.5
United Kingdom 5,580 8.8
U.S.A 4,579 7.3
Italy 4,131 6.5

Belgium 3,124 4.9

Finland 2,261 3.6

Switzerland 1,863 2.9
Canada 857 1.4
Others 12,684 20.0

Total 63,285 100.0

Source: Central Bank of Turkey.

The investment permit requirement lifted as of 2004.

Turkey's External Investment by Country (As of December
2006)

Country Amount Share
(USD millions)
Netherlands 2,732.8 30.1
Azerbaijan 2,706.7 29.8
United Kingdom 507.4 5.6
Germany 492.6 5.4
Kazakhstan 469.5 5.2
Luxembourg 251.4 2.8
United States 199.1 2.2
Russia 192.3 2.1
Romania 175.7 1.9

ANKARA 00000077 011 OF 011


Switzerland 109.3 1.2
France 95.5 1.1
Others 1,161.4 12.8

Total 9,093.7 100.0

Source: General Directorate of Banking and Foreign
Exchange, Treasury

Major foreign investors

Turkey's foreign investors include Renault, Toyota, Fiat,
Castrol, Citigroup, 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, Abbot
Laboratories, Aria, Bechtel, Shell, Delphi-Packard,
Toreador/Madison Oil, AES, NRG, Normandy Mining, Marsa-
Kraft-Jacobs Suchard, ESBAS A.S., Archer Daniels Midland,
Merck Sharp Dohme, Bunge, Texas Pacific Group, Cisco
Systems, Vodafone, Fortis and Bausch and Lomb.

Wilson