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TURKEY

Table of Contents
Geography ..............................................................................................................8 Population and Language ........................................................................................8 A. Introduction and Economic Overview...........................................................10

A.1 Government Structure...................................................................................10 A.2 Economy ......................................................................................................10 A.3 Leading Industries ........................................................................................11 Manufacturing ..............................................................................................11 Agriculture ...................................................................................................11 Textiles.........................................................................................................12 Automobiles and Auto parts .........................................................................12 Tourism........................................................................................................13 Transportation ..............................................................................................14 Telecommunications.....................................................................................14 Natural Resources.........................................................................................15 Energy..........................................................................................................15 A.4 Financial System ..........................................................................................16 Central Bank.................................................................................................16 Banking Sector .............................................................................................17 Stock Exchange ............................................................................................17 Leasing.........................................................................................................18 Factoring ......................................................................................................19 Insurance ......................................................................................................19 A.5 Currency and Inflation..................................................................................19

Inflation........................................................................................................20 A.6 Privatization .................................................................................................20 A.7 Regional and International Trade Agreements and Associations ...................21 A.8 Importing and Exporting...............................................................................22 A.9 Developments in EU Accession....................................................................22 Intellectual Property Rights ..........................................................................22 Industrial Property Rights .............................................................................23 B. Enterprises for Doing Business in Turkey.....................................................24

B.1 Forms of Enterprises.....................................................................................24 B.1.a B.1.b B.1.c B.1.d B.1.e B.1.f Companies ............................................................................................24 Partnerships ..........................................................................................26 Joint Ventures.......................................................................................27 Trusts....................................................................................................27 Sole Traders..........................................................................................27 Branches of Foreign Companies............................................................27

B.2 Foreign Investment Legislation.....................................................................28 B.3 Mergers and Acquisitions (M&A) ................................................................30 B.4 Competition Rules ........................................................................................32 C. Tax System...................................................................................................36

C.1 Taxation Authority .......................................................................................36 C.2 Individuals....................................................................................................36 Income Tax ..................................................................................................36 Who Is Liable ...............................................................................................36 Income Subject to Tax..................................................................................36 Employment Income.....................................................................................37 Professional Services Income .......................................................................37 Investment Income .......................................................................................37

Capital Gains and Losses ..............................................................................37 Taxation of Employer-Provided Stock Options .............................................37 Deductions ...................................................................................................38 Personal Deductions and Allowances............................................................38 Deductible Expenses.....................................................................................38 Rates ............................................................................................................38 Filing............................................................................................................39 Relief for Losses...........................................................................................39 C.3 Companies....................................................................................................39 Corporate Income Tax ..................................................................................39 Corporate Taxes at a Glance .........................................................................40 Dividend Taxation ........................................................................................41 Tax Incentives ..............................................................................................42 Investment Allowances.................................................................................42 Tax Exemption for Disposal of Participation Certificates and Immovable Properties .....................................................................................................42 Capital Gains and Losses ..............................................................................43 Filing............................................................................................................43 Assessment...................................................................................................43 Penalties and Interest ....................................................................................43 Foreign Tax Relief........................................................................................44 Determination of Taxable Income.................................................................44 Starting Point for Determining Taxable Income ............................................44 Deductions ...................................................................................................45 All business-related expenses are deductible, except for the following items:45 Inventories....................................................................................................45 Provisions.....................................................................................................45

Depreciation .................................................................................................45 Relief for Losses...........................................................................................46 Inflation Adjustment.....................................................................................46 Transfer Pricing............................................................................................47 Consolidated Returns....................................................................................47 C.4 Value-added tax............................................................................................47 VAT Rates ......................................................................................................47 Exemption from value added tax .....................................................................48 VAT assessment base ......................................................................................50 Deductible VAT ..............................................................................................50 VAT refund.....................................................................................................50 C.5 Special Consumption Tax .............................................................................51 C.6 Other taxes ...................................................................................................51 Banking and insurance transactions tax.........................................................51 Real estate tax...............................................................................................52 Inheritance tax..............................................................................................52 Stamp tax .....................................................................................................52 Municipal taxes ............................................................................................52 Motor vehicle tax..........................................................................................52 D. Financial Reporting and Auditing .................................................................53

D.1 Method of Accounting ..................................................................................53 D.2 Sources of Accounting Principles .................................................................53 D.3 Fundamental Concepts..................................................................................53 D.4 Significant Accounting Concepts for Investors .............................................54 Inflation accounting......................................................................................54 Inventory......................................................................................................54 Fixed Assets .................................................................................................54

Depreciation .................................................................................................54 Intangible Assets ..........................................................................................54 Government Grants ......................................................................................55 Capitalization of Financial Expenses ............................................................55 Pensions .......................................................................................................55 Investments in Securities ..............................................................................55 Consolidation ...............................................................................................56 Accounting for Deferred Tax........................................................................56 Related Party Transactions ...........................................................................56 Leases ..........................................................................................................56 D.5 Disclosure, Reporting and Filing Requirements ............................................56 Disclosure Requirements ..............................................................................56 Reporting and Filing Requirements...............................................................57 D.6 Books and Records .......................................................................................58 D.7 Audit Requirements......................................................................................59 Entities Requiring Audits..............................................................................59 Statutory Auditors ........................................................................................59 E. Labor Law and Social Security Law .............................................................61

E.1 Labor Law....................................................................................................61 E.1.a) E.1.b) E.1.c) E.1.d) E.1.e) E.1.f) E.1.g) E.1.h) Employment Agreements......................................................................61 Trial Period...........................................................................................61 Notification Period................................................................................62 Severance Payment ...............................................................................62 Annual Vacation ...................................................................................63 Work in the case of Maternity and hereafter ..........................................64 Obligation to Employ Disabled Handicapped, Ex-Convicts Employers .64 Wage ....................................................................................................64

E.1.i) E.1.j) E.1.k) E.1.l) E.1.m)

Overtime Pay........................................................................................65 Compensation Work .............................................................................65 Short Time Work and Payment for Short Time Work............................65 Employees personal file.......................................................................66 Principal Employer-Sub Employer Relation..........................................66

E.1.n) Right of Employee to Terminate the agreement Immediately On Justified Grounds .............................................................................................................66 E.1.o) Right of Employer to Terminate the Agreement Immediately on Justified Grounds .............................................................................................................67 E.1.p) Unions and Collective Bargaining Agreements .....................................69

E.2 Social Security Law......................................................................................69 E.3 Unemployment Law .....................................................................................70 E.4 Pension Fund Law ........................................................................................71 E.5 Bag-Kur Law................................................................................................71 E.6 Private Pension.............................................................................................71 F. Incentives .........................................................................................................75

F.1 Investment Incentives......................................................................................75 Investment Allowance ..................................................................................75 Exemption from Customs Duties and Fund Levies........................................75 Exemption from VAT...................................................................................76 Exemptions from Certain Taxes, Duties and Fees .........................................76 Subsidized Credits ........................................................................................76 F.2 Export Incentives..........................................................................................76 Export Credits ..............................................................................................76 Exemption from Taxes, Duties and Charges .................................................77 Insurance of Export Receivables...................................................................77 Exemption from VAT and Customs Duties for Raw Materials and Intermediary Goods ......................................................................................77

State Aids for Certain Expenses....................................................................77 F.3 Free-Trade Zones .........................................................................................77 F.4 Technology Development Zones...................................................................79 F.5 Research And Development Incentives.........................................................79 State Aids for R&D Activities ......................................................................79 Corporate Tax Deferral.................................................................................80 Promoting Investment in Less Developed Regions .......................................80 Appendices ..............................................................................................................81 Appendix 1: Appendix 3: Appendix 4: Useful Addresses and Telephone Numbers....................................81 Exchange Rates.............................................................................85 Trading Partners............................................................................86

Exports..................................................................................................................88 Imports..................................................................................................................88 Appendix 6: Appendix 7: Appendix 8: Appendix 9: Corporation Tax Calculation .........................................................89 Branch Tax Calculation.................................................................90 Treaty Withholding Tax Rates.......................................................91 Individual Income Tax Calculation................................................94

Ernst & Young in Turkey......................................................................................96 Major Clients ........................................................................................................97 Publications...........................................................................................................98 International Publications ......................................................................................98 Local Publications.................................................................................................98 Web Sites..............................................................................................................98 Ernst & Young Offices in Turkey..........................................................................99 Ankara ..................................................................................................................99 Izmir .....................................................................................................................99 Bursa.....................................................................................................................99

Geography
Turkey is a location of intersection for old continents, namely Asia, Europe and Africa. Straddling at the point where Europe and Asia meet, 97% of the country is located in Asia (the Anatolian Plateau) and 3% Europe (Eastern Thrace). It is of no surprise that history shows the countrys location is the birthplace of many great civilizations, as these lands have been the center for culture and commerce because of its unique location towards three continents and the sea surrounding it on three sides. The country occupies an area of 814,578 square kilometers, approximately equivalent to the combined areas of Germany and France, and larger than the state of Texas. The continents of Europe and Asia are separated by the Bosphorous Strait, Marmara Sea, and the Dardanelles Strait, all within the borders of the Turkish territory. The Anatolian Plateau is bordered by the Black Sea to the north, the Aegean Sea and the Marmara Sea to the West, and the Mediterranean Sea to the south. Turkey has a coastline of 8,000 kilometers and land border of 2,573 kilometers. The country is neighbor to European and Asian countries: Greece, Bulgaria, Georgia, Azerbaijan, Armenia, Iran, Iraq and Syria. Turkey is composed of seven geographical regions determined in line with the highly different and varying unique climatic and ecologic conditions. These regions are the Marmara Region, the Black Sea Region, the Mediterranean Region, the Eastern Anatolia Region, the Southeastern Anatolian Region, the Aegean Region and the Central Anatolian Region. There are three main climate zones in Turkey. The northern coast of Turkey, in particular the Black Sea Region, has a mild climate and is rainy throughout the year, temperatures not very low in winter and not very hot in summer. Western and southern coasts of the country have a climate of mild winters and hot, dry summers. The climate in Central Anatolia shows tough climatic features with cold and snowy winters followed by hot and dry summers. Ankara, the capital city, is situated in Turkeys heartland at the center of the Anatolian Plain, which is a high plateau region rising steadily to the east. Population and Language Based on the State Institute of Statistics, Turkey has a population exceeding 70 million people in 2003. Turkeys population is being rapidly urbanized, as approximately 65% of the population is living in urban areas. The most populated cities in Turkey are namely stanbul, Ankara, and zmir. The main religion of Turkish people by a ratio of 99% is Islam. Nevertheless, Turkey is a secular state, where freedom of worship for non-Muslims is protected under constitutional law. Among the non-Muslim population are Greek Orthodox, Armenian Christian and Jewish people. Turkey is the only Islamic country that separates state and religious matters by law.

The official language of the country is Turkish. All documents that are to be submitted to the government authorities must be prepared in Turkish. Compulsory primary education is 8 years. High schools teach English, French, German and Italian as primary foreign languages, English being the most common one. As a result of the significant efforts that have been contributed for improving the overall educational level in last two decades, today, the literacy rate is over 90%. Time: Turkey is two hours ahead of Greenwich Mean Time. Time differences between Turkey and some major cities are presented in the table below. TIME DIFFERENCES City Hours Ahead or Behind Turkey Berlin -1 Budapest -1 Paris -1 Rome -1 London -2 New York -7 Los Angeles - 10 Singapore +6 Tokyo +7 Sydney +8

A.
A.1

Introduction and Economic Overview


Government Structure

The Turkish Republic, founded in 29 October 1923, is a parliamentary democracy, for which political power is executed through a democratic parliamentary system constructed on the written constitution that safeguards individual liberties, fundamental civil rights and public freedoms. The parliamentary democracy has a single chamber, the Grand National Assembly, and a president. The assembly is composed of 550 members elected for a five-year term. Elections are held every five years unless the government decides to call for an early election. Citizens at the age of 18 or older have the voting right. In general application, the votes are cast for political parties, however individual candidates have the legal ground to be elected as a member to the Assembly. Assembly members elect the President of the Republic as the head of state for a term of seven years. The Grand National Assembly exercises the legislation power. Independent courts exercise judicial power. Turkish legal system is based on legal practices of different countries. The administrative law has been based on the French system, the criminal law from Italian legal system whereas Turkish Commercial Code and Civil Code are based on the German and Swiss systems. The highest legal body in Turkey is the Constitutional Court that ensures the compatibility of the laws with the constitution. The Supreme Court is the highest judicial body while the Court of Accounts is the highest judicial body responsible for controlling the financial contracts involving the state. Another Supreme Court, as the highest judicial body, rules on conflicts between the state and the individuals. The Prime Minister and the Council of Ministers exercise executive power after receiving a parliamentary vote of confidence. A.2 Economy

The Turkish economy has changed significantly during the last decades. Reforms starting in 1980 have adopted free market economy principles and in this context, emphasized international trade, encouraged foreign capital investments and liberalized exchange controls. On the other hand, a liberalized import regime, new foreign investment and export promotion policies have enabled Turkey to take its place in the global economy. A steady economic growth has been followed by a significant change in the composition of the GNP, evidenced by the decreasing share of the agricultural sector in Turkeys GNP, and the share of the industry and particularly services marking an important increase. Turkeys recorded GNP grew in real terms by an average 24% annually from 2001 through 2002.

Having faced serious economic problems in the recent years, Turkish economy has resumed its growth trend in 2002. GDP, GNP and % of Real Change in GNP & GDP
Year GDP (in billion USD) % Growth of GDP GNP (in billion USD) % Real GDP Growth

1999 2000 2001 2002 2003 Source: www.dpt.gov.tr

183.4 198.8 144.9 182.4 238.4

- 4.7 % 7.3% - 7.5 % 7.8 % 5.0%

183.4 200.3 148.2 180.4 237.2

-8.0% 9.0% -27.4% 24.0% 31.5%

Given the strong recovery in domestic demand, economic growth is expected to remain strong for 2004. The rebound in private consumption and investment in line with the restoration of confidence in the government will boost economic growth in 2004. Meanwhile, the continuing decline in real interest rates will further boost demand for consumer durables. Turkey should fulfill its commitments mentioned in the IMF program including target of public sector primary surplus of 6.5 percent of gross domestic product (GDP). A.3 Leading Industries

Manufacturing Manufacturing represents an increasing share of Turkeys economy, accounting for approximately 25% of GNP. A major portion of Turkeys manufacturing industry is state-operated. 31 % of production companies with foreign shareholders primarily manufacture metal goods, machinery, transport vehicles, tobacco products, food and beverages, and cement. 13 % of such production companies manufacture chemicals, petroleum products, rubber, textiles, tires and plastics. In 2002, exports amounting to US$ 32.6 billion have been realized. Exports of manufacturing accounted for 93% of total exports in 2002, while imports for the same year represented 82% of total imports. Agriculture Turkeys wide range of climate and soil conditions provides an ideal environment for rich harvests of grain, tea, tobacco, cotton, fruit and vegetables, as well as grazing land for sheep and cattle. Sheep are the most important livestock, and Turkey is Europes major wool-producing country. Historically, the agricultural sector has been Turkeys largest employer and a major contributor to gross domestic product (GDP), exports and economic growth. However, as the country developed, agriculture has been eclipsed by the rapidly growing industry and services sectors. Turkey satisfies nearly all of its domestic demand for food products, which accounted for approximately 12% of GNP in 2002. Farm products accounted for nearly 5.1% of total exports and 4.1% of total imports in January-September 2003.

Although the agricultural sector contributes significantly to the economy, it is characterized by outdated farming methods. Consequently, agricultural production has grown primarily by increasing the area of farmland. The government has encouraged investments in packaging, processing, livestock and slaughterhouses, and the introduction of new imported seed varieties, which has led to significant increases in crop output. Plans to improve livestock production include better use of productive crossbred animals, improved feed and a more concerted effort to fight disease. The government also encourages the use of modern equipment and subsidizes sales of fertilizer. The Southeastern Anatolia Project is expected to significantly increase the area of Turkeys irrigated land. Farms in Turkey are predominantly family businesses with small land holdings because large land holdings have been split up by the inheritance system of a father passing land to his sons. Since the government implemented its first structural adjustment program in 1980, Turkey has developed an ongoing series of reforms designed to privatize markets, reduce agriculture subsidies, remove trade barriers and integrate Turkey into the global economy. Measures adopted under the program include currency devaluation and price and trade liberalization. Textiles Textiles and clothing were for many years the only manufactured exports of Turkey. Today, the industry contributes significantly to the economy, accounting for almost 18% of total industrial production, approximately 11% of GNP and about 20% of total employment in 2002. Total textile and clothing exports were valued at US$12,162 million in 2002 accounting for 33.6% of the total export figure of Turkey. In 2002, Germany was the main importer of Turkish textile and clothing with $2.922 million, or 24% of all textile and clothing exports, followed by the U.S., England, France and Italy. In 2001, Turkey has realized 3.4% of world clothing exports and it was ranked as the fifth clothing exporting country to the US and second to the EU. In the same period, Turkey was the first in the textile exports to the EU and tenth to the US realizing 2.7% of world textile exports. Turkeys textile sector offers labor cost advantages in comparison with European countries. A customs union with the EU has provided Turkey with an opportunity to surpass its competitors and position itself favorably in EU markets. Turkeys clothing industry can adopt rapidly, deliver quickly and adjust to changing environmental regulations to conform to EU standards. For example, the textile industry quickly complied with the EU regulation concerning environmentally friendly packaging. The sector has also accelerated its efforts to adopt European standards on ecological testing with regard to textiles. Turkeys production and export of home textiles have also grown in recent years to meet increased domestic and foreign demand. Listed in order of their export values, home textiles include bed linens, bedspreads, table linens, towels, bathrobes, voiles, curtains, lace and interior blinds. Automobiles and Auto parts After the severe shocks of the economic crises in late 2000 and early 2001, the 2002year has seen Turkeys automotive sector show signs of not only recovery, but also a possible export boom. Turkey is currently the worlds 11th largest vehicle producer.

Automotive exports increased a stunning 11% in the first eighth month of the 2003 year, totaling approximately US$3 billion. Turkeys automotive parts manufacturing industry provides proof positive that high competitive intensity leads to high levels of productivity and, in turn, to growth. Turkey is a major player in global markets for car parts. Since 1996, when the customs union agreement with the European Union came into force, auto parts exports have risen by more than 12 % a year as international manufacturers entered into joint ventures with Turkish partners. More than 150 foreign auto parts suppliers had partnerships in Turkey in 2000, and the sector now accounts for more than 5% of Turkish exports. Upwards of 60 % of these parts exports go to European markets. The industrys total factor productivity stands at 91 % of the US level, but it could rise still higher to 127 %, as can be estimated. Many international car manufacturers use their Turkish plants as a base for exports, particularly to European markets, and thus demand high-quality parts from competitive suppliers. Global parts manufacturers also use Turkey as a base for supplying both original-equipment manufacturers and retailers in other markets. This demand has helped drive the sectors high level of productivity, which also reflects the relative absence of productivity restraints; Turkey, for instance, has a skilled workforce. Tourism In the 1950s it was realized that Turkeys cultural heritage and history, combined with its natural assets created a strong potential for the development of the tourism industry. In the early 1980s, more efforts were made to promote Turkey abroad. With that purpose in mind, at the end of 1986, a journal called Image was published. This and other tourism promotions have helped in making Turkey better known abroad. Turkey is now firmly established among the top Mediterranean tourism destinations like Greece, Spain and Italy as confirmed by constant yearly increases in the number of tourists and the tourism receipts. In 2001, Turkey ranked in the 18th place with 10.8 million tourists, and in the 13th place with US$ 8.1 billion of tourism revenues. Even in the year 2001, when the worldwide tourism industry recorded a decrease in both the tourist arrivals and the tourism receipts due to the September 11th terrorist attacks and the worldwide economic recession, tourism receipts in Turkey increased by 11% and the sector realized a 5.5% share in total GNP, its highest level over the past 10 years. Despite the political turmoil in the country, the tourism sector has been the only growing sector in Turkey. In year 2002, more than 13 million tourists visited Turkey and spent $8.5 million, a yearly increase of 5 percent over 2001. Based on the data obtained from the Tourism Ministry, as of November 2003 the number of tourist arrivals decreased by 11.6% compared to the same period of 2002 and reached 11.5 million. However, tourism receipts increased by 15% as of November 2003 compared to the same period of 2002 and reached US$8 billion. By the end of the year, approximately 14 million foreign tourists have been received, bringing US$9.8 billion in revenues and exceeding governments earlier target.

Transportation The transportation sector represents one of the major beneficiaries of public sector fixed-capital investments in the late 1980s. Shipping is significant to a country with such an extensive coastline, and Turkey has many ports located along its coasts, including Istanbul, Mersin, Izmir, Iskenderun and Izmit. Turkeys ports have largely managed to expand efficiently to meet the demand in the country. Despite relying on its roads for most of its transportation needs, Turkeys network is still underdeveloped. Out of a total of 36,000km of main roads, only 2000km are multi-lane motorways. Plans currently exist for the construction of 106,635km of new roads, of which 80,000 are to be four-lane motorways. Turkey, prior to the economic crises in the years 2000 and 2001, was able to improve its air terminals in its three main cities, stanbul, zmir and Ankara. Istanbuls Atatrk Airport. Combined, these airports have a capacity of 14 million passengers, and were opened in January 2000. Telecommunications The state-owned fixed line monopolyTrk Telekom, and four mobile operators dominate the telecommunications sector in Turkey. Current market size is estimated at around 7 billion US$. Turk Telekom has a highly modernised local access and transmission network. More than a decade of heavy investment starting from the mid-1980s has modernized and expanded the network and increased the number of subscribers significantly. At the end of 2002, digitalization stood at 89% of telephone exchanges and 98% of transmission and fixed line penetration was 27.2% of the population with 18.9 million active subscriber lines in use. Trk Telekom owns and operates the PSTN, cable TV and the two data networksTTnet and Turpak and also has ISP and satellite businesses. In terms of operations only, six revenue sharing partner companies service the cable TV networks investment and maintenance needs, all the other networks are fully operated by Trk Telekom. Efforts to privatize Turk Telekom have been ongoing since 1997. The current legal framework allows for privatization of 100% of Trk Telekom except for one golden share, which will be owned by the State to protect the national security interests. Monopoly rights of Trk Telekom in fixed line voice and data communication services are scheduled to be revoked at the beginning of 2004. In Turkey, the number of mobile subscribers increased substantially between 1998 and 2001, following the licenses granted to mobile operators. With around 26 million Global System for Mobile Communications (GSM) subscribers at the end of 2002, giving a penetration rate around 38%, the number of GSM subscribers has overtaken that of fixed line.

Natural Resources Although Turkey is not richly endowed with minerals by international standards, it supplies a significant amount of chromium, sulfur, bauxite and boron salts to world markets. Turkey possesses valuable resources of coal, iron, copper, lead, zinc, crude petroleum and lignite, which is a major source of energy. While Turkey has substantial natural resources, they are not fully exploited due to the high costs of production and transportation. Exports of production from mines and quarries accounted for only 1% of total exports in 2002, while imports for the same year represented 14% of total imports. Energy Turkeys strategic location makes it a natural energy bridge between major oil and gas producing areas of Middle East and Caspian regions and consumer markets in Europe. Turkey represents a hub between major oil and gas reserves and transportation routes. In the last decade, the combined impact of industrialization and urbanization has led the energy consumption to grow more than the economy as a whole, showing a CAGR of 9%. The competent authorities in the energy market are: Ministry of Energy and Natural Gas Resources (MENR); Energy Market Regulatory Authority (EMRA); General Directorate of Petroleum Works and Competition Authority. Turkey is currently at the crossroads of two major projects: BTC and Blue Stream. The 1,760 km Baku-Ceyhan pipeline will transport the bulk of Caspian oil to world markets through Turkey, managed by an international consortium. The project is expected to accelerate the integration of the regions republics into the world economy. The US$2.94bn Project is planned to be completed by late 2004 and fully operational in early 2005. The Project is to be 30% financed by the nine partners of the consortium and the remaining 70% to be financed by both international lenders and export credit guarantees from Western governments. The Blue Stream project, which exports Russian gas to Turkey through a Black Sea pipeline, was ratified by the Turkish parliaments in April 1998. Gasprom, a Russian gas company, has financed pipeline segments located in both the Russian Federation and Black Sea whereas the segments located in Turkish territory have been financed by Turkish sources. Construction started in 2001 and the pipeline became operational in 2002. GNP growth is a major determinant of the demand for energy in Turkey. Economic crises experienced in 2001 adversely affected energy demand in 2001 and demand has slightly recovered in 2002. Although there are optimistic forecasts by MENR, there is no energy shortage expectation for the coming 20 years, given the existing installed capacity in electricity and long term contracts in oil and natural gas. The Energy market has been undergoing a restructuring and liberalization process for the last couple of years. New Electricity Market Law and Natural Gas Market Law were launched in February and May 2001, respectively, allowing free competition in the market. Draft Petroleum Market Law waits for the approval of Parliament. The Energy Market Regulatory Board has been established to supervise the market and

facilitate a smooth transition from a monopolistic structure to a fully liberalized market. The Privatization Administration is following an aggressive program in the energy sector. However, there are still some legal uncertainties in the execution of new legislation. Under the existing program, 28 electricity generation power plants and 19 electricity distribution regions are to be privatized by mid-2004. There are two natural gas distribution companies of BOTA and six state-owned mining companies in the privatization portfolio. In 2003, shares owned by the Privatization Administration in TPRA, state-owned refinery company, and Petkim, state-owned petrochemicals company, have been offered for sale but after extensions and cancellations, both of the tenders could not be finalized. The Tpra tender is ongoing with bids already received and a second tender for the Petkim tender is announced with bids expected at the beginning of 2004. A.4 Financial System

The Turkish financial system has undergone considerable changes in the past decade. As a part of the restructuring process in the sector, reforms in banking and capital markets are setting a new regulatory framework for the effective and healthy functioning of the sector and have been the dominant and leading factors shaping the system. Central Bank The Central Bank of Turkey is an independent body whose primary purpose is to stabilize prices. The Central Bank is authorized to determine monetary policy and relevant instruments necessary for price stabilization. The Central Bank also determines the terms, types, maturity dates and validity periods of deposits; sets the parity of the national currency against gold and foreign currencies; manages the gold and foreign-exchange reserve; and trades foreign exchange and precious metals on the stock exchange. The cabinet determines money supply targets, and the Central Bank issues currency notes. The Central Bank also conducts lending and borrowing activities in the interbank money market, essentially by matching transactions. In addition to its brokerage role in the interbank money markets, the Central Bank sometimes conducts open-market operations. The Central Bank has disciplined the financial system by establishing open markets. By disseminating information as quickly and widely as possible, the Central Bank has created an unwritten code of conduct that is respected by all banks. In June 1999, the National Assembly enacted a new banking law to regulate and supervise the banking system to make sure it conformed to international criteria and EU directives. Under the new banking law, the Banking Supervision and Regulation Agency, composed of a seven-member board, became the nation's supreme banking authority taking this role from the Treasury and the Central Bank of Turkey. It has extensive powers to issue or cancel banking licenses. In regulating and auditing of banks, it adopted internationally accepted accounting standards. Under the new banking law, achieving price stability and restraining sharp fluctuations in currency rates became the Bank's priorities. Furthermore, a currency

board was established to help set inflation targets with Turkey's political authority. Transparency and accountability in monetary policy are maintained under the new legislation. The government also adopted the EU's Maastricht criteria and banned the Central Bank from providing loans to other government agencies. Banking Sector Turkish finance is principally founded upon a universal banking system. Banks operate in accordance with international rules and practices and offer a wide variety of services at their numerous branches. The banking system covers most of the Turkish financial system. Banks carry almost all of the activities, both in the money and capital markets, out. After the crisis in 2001, Turkey introduced a new stability program that aimed to eliminate weak banks and restore confidence in the financial system. The priorities were to reduce the uncertainty in the financial system, and quickly pull the country out of the economic crisis and restore the banking system. Instead of short-term policies, the program focused on structural reforms and new legal regulations. Measures introduced to restore the health of the banking system have accelerated the process of consolidation in the sector. The Savings Deposit Insurance Fund (SDIF) took control of 20 banks with weak financial structures. Some of these have since been merged or privatized; others have been shut down. This has led to a concentration of banking activities. As of December 2003, there are 50 banks operating in Turkish financial system. There are 36 commercial banks in the banking sector, of which three are state-owned, 18 are privately owned domestic banks and 13 are foreign-owned. The Savings Deposits Insurance Fund holds two of them. There are also 14 investment and development banks, of which eight are privately owned, three are foreign-owned, and three are state-owned. In Turkey, commercial banks are not allowed to engage in two types of activities: trading goods or immovable for commercial purposes, and leasing. In addition, investment and development banks may not accept deposits. Stock Exchange Istanbul Stock Exchange (ISE) and Broker Companies are involved in both Turkish and international stock markets. The Istanbul Stock Exchange (ISE) was established in early 1986. The ISE is the only securities exchange in Turkey established to provide trading in equities, bonds and bills, revenue-sharing certificates, private sector bonds, foreign securities and real estate certificates as well as international securities. As an autonomous organization its revenues are generated from fees charged on transactions, listing procedures and miscellaneous services. A subsidiary of the ISE, the Clearing and Settlement Company, has been reorganized as the Clearing and Settlement Bank, whose deposit accounts have been transformed into investor bases. Turkey has one of the most liberal foreign exchange regimes in the world, with a fully convertible currency as well as a policy that allows foreign institutional and individual investments in securities listed on the ISE since 1989. There are no restrictions on foreign portfolio investors trading in the Turkish securities markets. Decree No. 32

passed in August 1989, removes all restrictions on overseas institutional and individual investment in securities listed on the Istanbul Stock Exchange. Hence, the Turkish stock and bond markets are open to foreign investors, without any restrictions on the repatriation of capital and profits. Decree No. 32 also allows Turkish citizens to buy foreign securities. The Istanbul Stock Exchange is supervised by the Capital Market Board (CMB), (the regulatory and supervisory authority for the Turkish capital markets), which ensures the proper operation of both the Istanbul Stock Exchange and its members and protects the interests of both the public and the investing community. Empowered by the Capital Markets Law (CML), which was enacted in 1981, the CMB has been making detailed regulations for organizing the markets and developing capital market instruments and institutions for the past nineteen years in Turkey. The major objective of the CMB, is to take the necessary measures for fostering the development of capital markets, and to contribute to the efficient allocation of financial resources in the country while ensuring investor protection. CMB licenses intermediary institutions and collective investment institutions, registers corporations issuing securities, and additionally supervises the clearing organization and securities and precious metal exchanges established in Turkey. As at the end of 2002, 875 corporations registered with CMB for shares issues, of which 301 were actively traded on the Istanbul Stock Exchange were operating under the supervision of CMB. The present legal framework of the Capital Markets in Turkey is based on the Capital Market Law enacted in 1981 and amended in 1992. The objective of the Capital Market Law is to regulate and control the secure, fair and orderly functioning of capital markets and to protect the rights and benefits of the investors. Together with this law, which mainly sets the framework for primary markets, there is also the Decree-by-Law No. 91, enacted in 1983, which constitutes the regulatory base for secondary markets. The Turkish Commercial Code, enacted in 1956, regulates the establishment and operation of companies, and defines and regulates negotiable instruments in general. Thus, joint stock companies subject to the Capital Market Law are required to comply with the provisions of the Commercial Code whenever there is no provision in the Capital Market Law. Leasing The leasing market in Turkey has expanded rapidly in recent years and has given rise to the creation of new companies, both by banks and other groups specializing in finance. There are 91 leasing companies in the market and presently 30 of them are active in business production. The number of bank-owned leasing companies is 38. However, following the crisis of November 2000-February 2001 resulting in the takeover of some troubled banks by the government, at least 10 leasing companies either completely stopped or reduced the level of their activities. The market is dominated by 20 bank-owned leasing companies. On the other hand 11 Investment and Development Banks and 5 Special Finance Houses are also able to make lease finance. FIDERs (Finansal Kiralama Dernei) members represent a major part of the total market, 40 leasing companies, of which, 30 are owned by banks. There are also 4 captive leasing companies formed by manufacturers.

Factoring Factoring in Turkey is a relatively new financial service industry with its roots dating back to the late 1980s and the legal framework related to factoring transactions is still new. Factoring operations first began as departments within commercial banks and were converted into separate companies in the early 1990s. Currently, there are 97 registered factoring companies in Turkey, of which 36 are members of the Factoring Association of Turkey. Member companies account for nearly 90% of the country's total factoring turnover. Presently, the Turkish Treasury regulates the factoring industry in Turkey and the establishment of a factoring company is subject to its approval and subsequent control. There is also a minimum capital requirement for new and existing companies, which is currently set at TL3 trillion. To establish a factoring firm, a preliminary permission must be obtained from the Undersecretariat of the Treasury. Following the establishment, an operating license must be received within 180 days. However, the period of obtaining a license cannot exceed 12 months of the preliminary query. In terms of turnover, Turkey's factoring sector grew by 8.54% y/y in 2002, above the world average of 4.11%. Turkey is ranked 21st in terms of factoring sector volume in 2002. The Ministry of Finance and the Undersecretariat of the Treasury supervise the activities of factoring firms. Insurance Turkeys insurance sector is a growing industry comprising of 62 companies. Although numerous companies serve for Turkish Insurance sector, the top seven insurance companies have 60 % of the market share out of the total insurance market. Nearly 1 million 500 thousand of 2 million 500 thousand privately insured people in Turkey, pay their insurance premium regularly. The Private Pension Law came into force on 7 October 2001. Private pension is widespread in developed countries for many years. Foreign investors have been interested in private pension by taking into account the young population of Turkey. A.5 Currency and Inflation

Turkeys monetary unit is the Turkish lira (TL). Turkey follows a flexible exchange rate policy, in which the Turkish lira is convertible against other currencies. Actors of the free market mainly determine the value of Turkish Lira. Money markets, which have reached considerable volume supported by well-performing technological infrastructure, forms a solid ground for efficient flexible foreign exchange regime. The Central Bank of Turkey declares its quotations on a daily basis as official rates of foreign currency. Widely determined by the factors in the free market, Turkish Central Banks intervention to money markets is a rare occasion under current circumstances. In the year 2000, in conformity with the economic program carried out with IMF, the foreign exchange rate system was changed to a crawling peg system. However, financial and macroeconomic developments led the exchange rate system to be based on floating exchange rate system, as the result of the financial crisis faced in year 2001 mainly resulting from the current account deficit.

The below table represents the year-end buying quotations of the Central Bank for major currencies in the last five years: EXCHANGE RATES FOR MAJOR CURRENCIES USD EURO GBP JYEN 31.12.1998 313,707 521,641 2,752 31.12.1999 540,098 872,501 5,274 31.12.2000 31.12.2001 31.12.2002 31.12.2003 671,765 993,878 5,942 1,446,638 1,281,287 2.099,963 11,009 1,639,745 1,718,945 2.640,240 13,792 1,393,278 1,757.480 2.485.862 13.005

Inflation Inflation has been a chronic problem in the Turkish economy, with increases in both retail and wholesale prices. The most recent programs that have been carried with IMF mainly focused on fighting inflation, reducing government debt financing needs, while sustaining continuous economic growth. The inflation rates for years 1998 2003 have been presented in the table below. With the committed measures taken by the former and current governments, inflation has entered into a decreasing trend. As could be noted from the below Table, with the exception of the inflation rate in 2001 for wholesale and retail prices respectively were, 88.6% and 68.5%; whereas wholesale and retail prices have dropped to 30.8% and 29.7% in 2002. INFLATION RATES (%) Wholesale Price Retail Price Increase Increase 71.8 84.6 62.9 68.8 32.7 39.0 88.6 68.5 30.8 29.7 13.9 18.4

Year 1998 1999 2000 2001 2002 2003 A.6 Privatization

The privatization process in Turkey has proved to be an important source of funds for the government and brought tangible results and progress within this philosophy that the involvement and participation of international investors is highly encouraged in the massive privatization program. Many state-owned companies have already been sold to the private sector within the privatization program.

The principles, procedures, authorized agencies and other issues regarding privatization are regulated in 1994, although the privatization program was initiated in 1983. In August 2003, a new Law has been put into effect, setting out some further regulations to accelerate privatization applications within the scope of Privatization Law. Privatization implementations in Turkey have gained momentum in 1986 and since then, 167 companies have been privatized where no more state ownership exists in 153 of these. Total revenue generated from privatization program until end of 2003 amounts to approximately USD 8 billion. The Privatization High Council (PHC) is the ultimate decision-making body for privatization in Turkey. The Council, headed by the Prime Minister, is composed of four ministers. PHC is responsible from the formation of the privatization portfolio and determination of methodology and timing of the privatization procedures. PHC is the body approving the final transfer. The Privatization Administration (PA) is the executive body for the privatization process. It is a legal public entity with an exclusive budget, reporting directly to the Prime Minister. PAs major duties include the execution of PHC's decisions, advising the PHC in forming the privatization portfolio and restructuring and rehabilitation of enterprises in the portfolio in order to prepare them for privatization. A.7 Regional and International Trade Agreements and Associations

Turkey is a charter member of the United Nations and actively participates in its specialized agencies. It is a member of the North Atlantic Treaty Organization and a founding member of the Council of Europe, World Bank, International Monetary Fund, and Organization for Economic Co-operation and Development. Turkey is party to the General Agreement on Tariffs and Trade (GATT) and its successor, the World Trade Organisation. Turkey is also a shareholder in the European Bank for Reconstruction and Development, and it is a member of the Organisation of the Islamic Conference, the Islamic Development Bank and the Economic Co-operation Organisation - together with Afghanistan, Azerbaijan, Iran, Kazakhstan, Kyrgyz Republic, Pakistan, Tajikistan, Turkmenistan and Uzbekistan. Turkey was instrumental in the 1992 launch of the Black Sea Economic Co-operation (BSEC) region, which is designed to promote practical links among Albania, Armenia, Azerbaijan, Georgia, Greece, Moldova, Russia, Turkey and Ukraine. Early steps include agreement on a Black Sea Trade and Investment Bank based in Thessaloniki, Greece, and on infrastructure planning. The geographical position and cultural links between Turkey and the republics of Central Asia are underpinned by the fact that Turkish people form a majority in four of the 12 republics.

A.8

Importing and Exporting

Turkey is among the first 20 countries in the world with a total of 115 billion dollars in foreign trade volume for 2003. The State Institute of Statistics announced the foreign trade statistics for the period October 2003. According to the announcement, during the period an amount of 4,693 million US$ of exports and 6,588 million US$ of imports were realized. Compared to the same month of the previous year, exports increased by 34.1% and imports increased by 36.4%. Foreign trade deficit increased from 1,329 million dollars to 1,895 million dollars, which means an increase of 42.6%. The ratio of exports to imports was realized as 71.2%, which is a decrease, compared to the same period of the previous year in which the ratio was 72.5%. A.9 Developments in EU Accession

On March 6, 1995, the Turkish-European Community Partnership Council approved Turkey's accession to the Customs Union with the European Union (EU). This long-delayed action is expected to play an important role in Turkey's integration with Europe. Finally, the Customs Union agreement between EU and Turkey became effective on January 1st 1996, which eliminates customs duties and quantitative restrictions on goods traded between Turkey and EU countries. This has made the EU even more central to the development of the Turkish economy. Turkey was named an official candidate for accession at a EU summit meeting in Helsinki in December 1999, and the EU announced its Accession Partnership Document (APD) in November 2000, setting out the reforms required for membership. But Turkeys response, the National Programme for Adoption to the Acquis (the official name of the Turkish document), which was published in March 2001, fell far short of meeting the EUs conditions for membership detailed in the APD. Turkey had hoped to be included amongst those in the next round of EU enlargement, which was announced at the EU summit meeting in Copenhagen in December 2002. But the EU decided that, despite a raft of reforms passed in August 2002, Turkey had still not fulfilled the terms of the Acquis and postponed making a decision on possible Turkish membership until December 2004. Intellectual Property Rights Turkey has made significant progress with respect to its legislation on intellectual property rights. Law on Intellectual and Artistic Works has been amended recently, for the purpose of harmonization EU regulations on this field. Meanwhile, Turkey has established specialized courts in intellectual property matters in Istanbul. The enforcement and monitoring capacity of the competent authorities in the field of intellectual property rights, custom authorities, police and judiciary has been significantly strengthened. Further, necessary trainings are being provided for the related bodies. Turkey is still not at international standards despite the current regulations related to the protection of intellectual property rights. Intellectual property rights protection is not limited to legal regulations but requires a fight against organized crimes, and criminal measures and specialized courts makes the enforcement at international

standards difficult in many countries. It is possible to state that the enforcement in Turkey may be brought to a better level through the success that the Government achieves on its struggle with corruption and organized crimes and ground to be reached with the Justice Reform that the Government is progressing on. Industrial Property Rights Turkey fully harmonized its legislation on industrial property rights, prior to its customs union with EU countries. Turkey has enacted important laws on protection of trademarks, industrial designs, patents/utility models and geographic indications. The Turkish Patent Institute has been established for the purpose of registration and protection of such industrial property rights. The main system concerning the protection of industrial rights is based on the registration, which is similar to that of the European Union and the other countries that are party to Paris Convention. Some of the basic international conventions that Turkey is a party to in this field could be enumerated as follows: Paris Convention, Protocol relating to the Madrid Agreement Concerning the International Registration of Trade Marks, Nice Agreement Concerning the International Classification of Goods and Services for the purposes of the Registration of Trade Marks, Vienna Agreement Establishing an International Classification of the Figurative Elements of Trade Marks, "Patent Cooperation Treaty" (PCT), Strasbourg Agreement Establishing an International Patent Classification, La Hague Agreement Concerning International Deposit of Industrial Designs, Locarno Agreement Establishing an International Classification for Industrial Designs and TRIPS (Trade Related Intellectual Property Rights) Agree under WTO, and the Customs Union Decision 1/95.

B.
B.1

Enterprises for Doing Business in Turkey


Forms of Enterprises

Forms of Enterprises in Turkey can be analyzed under the Commercial Law in a broad meaning. Commercial Law is the branch of law concerned with commercial activities. Merchants, companies, checks and bonds, insurance, maritime trade and civil aviation type concepts are some primary subjects of Commercial Law. Various laws and regulations specifically regulate this field, but the main source for commercial law, which covers general principles, is the Commercial Code. Within the Civil Code and the Code of Obligations one can find the main regulations of commercial activities. In light of the Commercial Law regulations (including the Code of Obligations), the forms of Enterprise can be categorized in six sub-headings that are as follows: Companies Partnerships Joint Ventures Trusts Sole Traders Branches

B.1.a Companies Business structures with limited liability consist primarily of joint stock companies (Anonim Sirket, abbreviated as A.S.) and limited liability companies (Limited Sirket, abbreviated as Ltd.Sti.). Both are independent legal entities, with capital represented by shares and partnership rights. Shareholders are not liable for the companys obligations, except to the extent of their capital investment and in specific situations, including thin capitalization. Shareholders are not required to be Turkish. Consequently, both joint stock companies and limited liability companies may be 100% foreign owned. Minimum capital to be contributed to limited liability companies is 5 billion Turkish Liras and for joint stock companies is 50 billion Turkish Liras. A joint stock company is defined as a corporation having its own trade name and a predetermined amount of capital divided into shares. The liability of the shareholder is limited to his capital. The structure and organization of joint stock companies are subject to the regulation of the Turkish Commercial Code. However, the founders of joint stock companies are afforded significant flexibility in drafting the articles of incorporation, thereby serving the needs of the specific venture. Capital Market Board regulations also applicable for joint stock companies whose shareholders' number exceeds 250, or who have issued bonds or whose shares are quoted on the Istanbul Stock Exchange. A minimum of five shareholders, who may be either real persons or legal entities, are required for the formation of a joint stock company. Once the articles of incorporation have been drafted and signed by the incorporator shareholders, they are notarized and submitted to the local Trade Registry Office for registration within at the most 15

days after the notarization. The company is registered at the Trade Registry and this registry is published in the Trade Registry Gazette within 15 days following to the general meeting of incorporation. A company officially acquires its legal personality at the time of registration in the Trade Registry. The capital of a joint stock company is divided into shares of equal value, which are treated as negotiable commercial paper. The shares may be issued in either registered or to the bearer. Registered shares are freely transferable subject to the approval by the board of the company unless prohibited by the companys articles of incorporation. Bearer shares are freely transferable under the Code of Obligations unless otherwise agreed by the parties (Specific regulations like the ones concerning the companies acting in financial sector). By law, the General Assembly of the shareholders has ultimate control of a joint stock company because it has the most important powers such as laying down and amending the articles of incorporation, increasing and decreasing capital, electing directors and auditors, specifying the duration of employment of and the number of directors and auditors (unless otherwise stated in the articles of the incorporation) passing resolutions on the net profit, etc. Such powers are not transferable to other organs of a joint-stock company (even if it is stated in the articles of incorporation). A General Assembly must be held at least once a year within three months following the end of the fiscal year and there is a formal procedure for convening it. An Ordinary General Assembly can meet with the attendance of 25 percent of the shareholders and resolutions are passed with a simple majority unless the law or the articles of incorporation stipulate otherwise (e.g. a capital increase). The executive body of a joint stock company is the board of directors (the board), which consists of at least three members who may also be foreigners. It conducts current business and represents the company externally. The board may either manage the company directly or may arrange for the management to be carried out by the appointed members or the assigned managers. Decision-making in a joint stock company is by majority vote; but the Turkish Commercial Code includes certain provisions to protect minority interests. Minority shareholders may also request the appointment of a special auditor on their behalf. Unless a higher quorum is stipulated in the articles of incorporation, at least a majority of the eligible members must be present to convene a board meeting. Board resolutions are passed by a majority of those present at the meeting. The board is responsible for preparing the balance sheet and the statement of income unless the articles of incorporation contain other provisions. The signatures of two members of the board are generally sufficient to represent the company. The directors are authorized to enter into transactions within the scope of the powers conferred in the articles of incorporation, which spells out the company's object and scope. Transactions outside the scope of the company's articles of incorporation are null and void and are not binding. The company is audited by one or more statutory auditor(s) who has a duty to oversee its affairs by checking its transactions and accounts. A statutory auditor must verify that the statutory books have been properly kept and that the accounts have been registered in accordance with the scope of the company objectives. His duties are

confined more or less to such formal matters. However, statutory auditors' reports do not, as a rule, qualify as audits conducted in accordance with generally accepted auditing standards. The number of statutory auditors cannot exceed five and they cannot be selected from among the company employees or close relatives of the directors because of independency issues. If there is more than one auditor, the majority must be Turkish citizens. Auditors are permitted to join board meetings, and, in certain circumstances, they may call for a general meeting if the board itself does not do so. Limited liability companies require a minimum of two shareholders, but no more than 50 shareholders. Limited liability companies may not issue shares in the capital markets, and their establishment and operating procedures are simpler than those for joint stock companies. The three permissible types of corporate shares include share certificates, privileged share certificates and usufruct share certificates. Holders of privileged share certificates may receive a dividend share greater than the share of capital invested and may have a right to vote in management decisions. Holders of usufruct share certificates may receive dividends, but may not vote in management decisions. The Turkish Commercial Code (TCC) requires that joint stock companies and limited liability companies maintain two legal reserves. The legal reserves protect the rights of third parties by increasing the amount of owners equity. The reserves may not be repatriated abroad as dividends to foreign shareholders. Each year, joint stock companies and limited liability companies must allocate 5% of their corporate profits, as calculated under the provisions of the TCC, to the first legal reserve. The 5% allocation must be contributed annually until the first legal reserve equals 20% of the companys paid-up share capital. The TCC also requires that an amount equal to 10% of the amount distributed to shareholders be allocated to a second legal reserve. Branches are not subject to the legal reserve requirements. B.1.b Partnerships Entities may be formed as ordinary partnerships (Adi Sirket) or as partnerships regarded as commercial companies (Komandit Sirket and Kollektif Sirket). All ordinary partnerships and commercial companies are subject to the provisions of the Turkish Code of Obligations and the TCC. An ordinary partnership is not a legal entity, but a group of entrepreneurs who have formed an agreement. Two or more individuals may form an ordinary partnership by entering into an oral or written agreement, which has no impact on third-party relationships. Ordinary partnerships may not have their own trade name, nor may they appear in the Register of Commerce or the Register of Title Deeds. The partners of an ordinary partnership have equal rights and obligations, jointly own the assets of the partnership, and have unlimited liability for partnership debts. No statutory rules provide a detailed legal framework for the management or operation of ordinary partnerships.

A partnership regarded as a commercial company is a legal entity with a legal personality independent from its partners, and may be either a limited or general partnership. In a limited partnership (Komandit Sirket), one or more of the active general partners are liable for the partnerships debts without limitation, while one or more of the limited partners are liable only up to the amount of the partners capital contribution to the partnership. This type of business organization is rarely used. In a general partnership (Kollektif Sirket), the company is the first party liable for the partnership debts, followed by the general partners. For partnerships that are regarded as commercial companies a written agreement is mandatory. B.1.c Joint Ventures Joint ventures (Is Ortakliklari) are formed between legal entities and/or individuals to complete a certain project in a specified time according to a written agreement. One of the partners to a joint venture must be a company that is subject to corporation tax. Joint ventures are separately subject to corporation tax (if preferred), VAT and withholding tax, but they do not have legal personalities and therefore do not have ownership rights. Partnerships are generally not the preferred type of entity for joint ventures because, with the exception of limited partners, all partners must be individuals who are jointly and severally liable for the acts of the partnership. B.1.d Trusts Trusts do not exist under the Turkish law. B.1.e Sole Traders If a commercial business does not have the legal structure of a company and is not conducted in the form of a partnership, the business operation is treated as the personal assets and liabilities of the owner. The individual owner is the ultimate employer and manager of the firm. The business must be registered with the Chamber of Commerce. For tax purposes, the results of operations are reported in the sole traders individual income tax return. B.1.f Branches of Foreign Companies The following are the only rules within the Turkish law concerning branches: the name must indicate that the entity is a branch; and the branch must be registered with the local trade registry and the local chamber of commerce. Special rules apply to branches of foreign banks and insurance companies. The primary requirement for forming a branch of a nonresident company intending to run a business in Turkey is that an application must be made to the local trade registry office and local trade chamber. In accordance with the new laws the Undersecratariat of Treasury is not needed to approve a branch establishment but must be notified of the situation. The most significant difference between a company and a branch is with regards the responsibility for liabilities. A companys liabilities are limited to its capital. In contrast, a branchs obligations are limited not only to the branchs capital,

but also to its parent companys assets. Branches are treated as nonresident limited liability companies for tax purposes, and only profits generated in Turkey are subject to corporate tax. Under local foreign investment legislation, a branch of a foreign company is a type of foreign direct investment and the establishment of a branch is subject to the same requirements and procedures as a foreign company that intends to run a business in Turkey. B.2 Foreign Investment Legislation

General explanations about Foreign Investment in Turkey and Procedures to be fulfilled used to be mainly regulated within Law numbered 6224 on Encouragement of Foreign Capital, which was enacted on January 18, 1954. This ex-law was quite liberal law in comparison to the legislations of most of the other OECD countries of those times. The term "encouragement" in the name of the Law 6224 derived from the presence of some principles that were intended as real incentives, such as: "free transfer" and "national treatment". However, notions, definitions and applications concerning foreign direct investments have changed so rapidly that the Law 6224 lagged behind the contemporary demands of both foreign investors and Turkey. As a result the need for a new Foreign Direct Investment Law emerged. Therefore a new Law concerning Foreign Investment in Turkey was enacted with Law numbered 4875. This new Law came into force on the 17th of June, 2003 and mainly it emphasizes the key elements of the liberal investment environment in Turkey. The new Law is an integral part of a broader national reform program that is laying the foundation for sustainable growth and development, driven by private investments in a transparent marketplace fully open to the world and supported by a smaller but more effective State. To ensure that Turkeys bold fiscal adjustment and ambitious structural reforms translate into substantial investments, the Government of Turkey is focusing on improving the investment climate as one of the main pillars of its economic program. In addition to the introduction of a more investor-friendly new Law, the Government of Turkey has established by a decree an inter-governmental Coordination Committee for the Improvement of the Investment Climate (YOIKK), composed of a high-level representatives of relevant ministries, the private sector and NGOs to help remove remaining bureaucratic obstacles to for investment in Turkey. The Government of Turkey also intends to set up a well-funded new Investment Promotion Agency that will simultaneously work inside the government and draw private sector knowledge and market skills, to carry out a multi-year strategy to promote investment in Turkey. The objective and scope of the Law is defined as to encourage foreign direct investments; to protect the rights of foreign investors; to define investment and investor in line with international standards; to establish a notification-based system for foreign direct investments rather than screening and approval; and thus regulate the principles to increase foreign direct investments through established policies. Key features of the new Foreign Direct Investment Law include: Freedom to invest by dropping all former General Directoarte Foreign Investment-related to screening, approval, share transfer and minimum capital requirements;

Reassurance of existing guarantees to foreign investors of their rights in one transparent and stable document; Upgrading to accepted international standards for definitions of foreign investor (broadened to include Turkish national residents abroad and international organizations) and foreign direct investment (broadened to include all possible types of assets); and A policy shift from ex-ante control to a promotion and facilitation approach, with minimal ex-post monitoring to continuously improve an investor-friendly climate for growth and development.

Within the Foreign Direct Investment Law, regulations had been made in conformity with the international standards. "Foreign direct investment" and "Foreign investor" terms are defined in accordance with international standards in order to clarify the field of application of the Foreign Direct Investment Law. Within this scope: (a) Foreign Investor is defined as followed: 1) Real persons who possess foreign nationality and Turkish nationals resident abroad, 2) Foreign legal entities established under the laws of foreign countries and international institutions, who make foreign direct investment in Turkey. Foreign direct investment is defined as followed: 1) Establishing a new company or branch of a foreign company 2) Share acquisitions that is not by means of capital markets, and share acquisitions through capital markets where the foreign investor owns 10 percent or more of the shares or voting power,

(b)

By means of but not limited to the following economical assets: 1) Assets acquired from abroad by the foreign investor: Capital in cash in the form of convertible currency bought and sold by the Central Bank of Turkey, Stocks and bonds of foreign companies (other than government bonds), Machinery and equipment, Industrial and intellectual property rights 2) Assets procured from Turkey: Reinvested earnings, revenues, financial claims, or any other investment-related rights of financial value Commercial rights for the exploration and extraction of natural resources.

The most important issue covered in the Foreign Direct Investment Law is the rights of the foreign investors. The new Law guarantees national treatment and comprehensive investor rights. All companies established with foreign capital contribution and under the rules of the TCC (existing and newly established foreign companies) are regarded as Turkish companies. Therefore equal treatment both in rights and responsibilities as stated in the Constitution and other laws is applicable to all such companies (including freedom to invest, national treatment, a guarantee against expropriation without compensation, transfer of proceeds, access to real estate

and to expatriate personnel, and international arbitration or any other means of dispute settlement). The entry conditions for establishing a company in Turkey for foreign investors are the same as for comparable local Turkish companies. There is no minimum amount of capital required. It is no longer obligatory to bring a minimum of $50.000 in share capital by each shareholder. There is also an article concerning the liaison offices in Turkey, which is in the same direction with the abolished legislation. It is mentioned that the Undersecretariat of Treasury is authorized to permit, foreign companies established under the laws of foreign countries to open liaison offices, provided that they do not engage in commercial activities in Turkey. B.3 Mergers and Acquisitions (M&A)

M&A in Turkey may be analyzed within 2 sub-categories, the first being the sale and purchase of a business mainly regulated under the Code of Obligations, and the second being M&A of companies regulated under the Commercial Code. These can be schematized as follows; The sale and purchase of a business by a share transfer;
Company B can be a foreign invested company, both residing in Turkey or abroad. If Company B is residing abroad, by purchasing (acquiring) the shares of Company A, Company B becomes a foreign investor in Turkey.

Shares of Company A, transferred to Company B

M&A of companies in accordance with the Sections of Commercial Code


Company A and B, both residing in Turkey may create a new commercial company C, by merger and dissolution without winding up. All the assets and the liabilities of Company A and B, goes to the new created Company C, by the merger operation.

Company A, residing in Turkey may be absorbed by Company B, existing company also residing in Turkey. No new commercial company is established but Company A dissolutes without winding up and all the assets and the liabilities of Company A, goes to the absorbing Company B, by the acquisition operation.

There is no specific statutory law on the sale and purchase of a business by share transfer except the provisions of the Commercial Code for share transfers. Hence, the general laws on the sale of goods and rights are applicable. As the statutory regime is generally considered not to be appropriate for the sale and purchase of a business, the parties normally agree on their own set of rules, which shall apply to the specific transaction. Legal entities and resident and non-resident individuals may purchase or acquire shares or share certificates of joint stock or limited liability companies. Turkish company law permits the purchase of an existing business by a resident or foreign investor. On the other hand from a Commercial Law perspective, M&A of the companies and partnerships is regulated within the Commercial Code. As a general provision in Article 146 the following is stated: The amalgamation consists in the creation of a new commercial company by the merger of two or more commercial companies by another existing commercial company. The provisions of the following sections apply to amalgamation subject to the special provisions concerning the various commercial companies. The phrase of companies in the Article consists of both the companies (Joint Stock Company and Limited Liability companies) and the partnerships (limited partnership and general partnership). The amalgamation in accordance with the Commercial Code may be carried out only between companies or partnerships of the same kind. In the matter of amalgamation general partnerships and limited partnerships on the one-side and joint stock companies and limited partnership with capital divided into shares are considered to be of the same kind. For fulfilling the amalgamation, the companies concerned should pass a resolution in accordance with the method and conditions of alterations to their articles of incorporation and this resolution must be registered and published. Each of the amalgamating companies shall publish its balance sheet drawn up according to a uniform model to be determined jointly and published at the same time as the balance sheet a statement indicating the manner in which the companies which have ceased to exist owing to the merger will settle their debts. Unless otherwise stated in the private sections of Code, the resolutions of amalgamation become operative only three months after the date of its publication. The resolution of amalgamation becomes, however, operative as from the date of publication if, before the publication, the amalgamating companies pay their debts or deposit a sum corresponding the debt to the Central Bank of the Turkish Republic or with another notable bank or if the creditors agree to the amalgamation. It must also be announced that the equivalent of the debts has been deposited at the bank. Each creditor of the amalgamating companies may apply to the competent court and object to the amalgamation within three months after publication. The amalgamation shall not become operative until the right of objection is waived or the judgment of the court rejecting the objection becomes final or the company has given a guarantee estimated by the court. The most important issue concerning the M&A regulations in the Commercial Code is the complete succession within M&A operations. Except the objections made within

the specific Sections, the merger becomes final and the subsisting or newly created company takes the place of the dissolving company(ies) whose rights and obligations are transmitted to the remaining or newly founded company. If we take the provisions of the Commercial Code as general principles for M&A of companies, there are some more detailed and Lex Specialis regulations concerning M&A acquisition transactions for some specific companies like banks, insurance companies, and public companies. To this extent it is appropriate to take advice and consultancy from local legal and tax advisers at an early stage for the determination of the complete procedure. B.4 Competition Rules

The globalizations of modern capitalistic economic systems are based on free competition in trade and industry. It is in the public interest that quality, price and service (freedom of competition) for goods and services in an open competitive market, are the determining factors in business rivalry for customers. Therefore, law protects the freedom of competition. The Turkish law prohibits and sanctions unfair competition under the general scope of the Code of Obligations and the Turkish Commercial Code and under special laws enacted specifically for this issue, which can be counted as follows; Law No 3577, Anti-dumping Law, Law No 4054, Law on the Protection of Competition, In Article 48 of the Code of Obligations, unfair competition is prohibited in a very general manner. It provides for injunctive relief and damages to a person who suffers as a result of its competitors actions, which include misrepresentation, and other actions that are contrary to good faith principles. Article 56 of the Turkish Commercial Code defines unfair competition as, the misuse of competition in a financial sense, through misleading actions, untrue statements or any other type of action that is not in accordance with good faith principles. Using competition against the good will, which misleads the consumer is unfair competition. The cause of unfair competition can be either in form of an action or inaction. The important criteria, is whether the result prohibited by the provisions of law has been achieved. Articles 58 through 65 of the Commercial Code contain provisions regarding the sanctions imposed upon a violator of Article 56 and 57. Subject to statute of limitations restrictions, a person who is the target of a competitors actions that could constitute unfair competition under the Commercial Code and/or Code of Obligations can bring the following legal actions; A Declaratory Action or an Action for Ascertainment, An action for injunction or a prohibitory action, An action for material damages, An action for moral damages, An action to rectify.

The award rendered by the court can be, at the request of a party, published in a manner which the Court deems fit (Article 61 of the Commercial Code). Additionally, criminal actions are also allowed under Article 64 of the Commercial Code. The Statute of Limitations for the foregoing civil actions is provided for in Article 62 of the Commercial Code. These actions can be filed within one year from the date the potential plaintiff learns of the offensive act, but not more than three years from the date such acts have been committed. The Anti-dumping Law is a special law enacted specifically for foreign trade transactions. It is designed to protect the competitive nature of the market economy against foreign-sourced dumping activities or foreign-sourced trade incentives. In Article 2a of the Anti-dumping Law, dumping is defined as the importation of merchandise into Turkey at a price that is below the reasonable price of such merchandise. In addition in Article 2c of the mentioned law, trade incentives is defined as they include any direct or indirect benefit or income in accordance with the XVIth article of GATT 1994, granted by a foreign country to those who manufacture, export or transport any merchandise that is imported into Turkey. The provisions of the law are invoked if the Turkish market for a particular merchandise is jeopardized because similar or comparable merchandise is being imported into Turkey at anticompetitive dumping price levels or which enjoys foreign-based trade incentives. Sanctions imposed by the authorities against those who violate the law are generally in the form of tariffs and additional tax impositions. The other special law concerning the competition rules is the Law on the Protection of Competition. The purpose of the Law is stated within Article 1; as to provide the protection of competition by ensuring necessary regulation, supervision and the prevention of abuse of dominant position by those enterprises which are dominant in the market and the agreements, decisions and practices which prevent, restrict or distort competition within the markets for goods and services. The competition law covers in scope, all service and product markets in Turkey. Therefore, it is more general than its counterpart that only deals with import activities. Acts covered under this law are; any agreement between persons engaged in any industry in Turkey that restricts the competitive nature of the market or, any misuse of market power, and any merger or acquisition that will significantly reduce competition in the market can be the subject of preventive action by the authorities.

The anti-competitive agreements are clearly mentioned in the law as the agreements and concerted practices of the enterprises and decisions and practices of the associations of enterprises the object or effect or the possible impact of which is, directly or indirectly, to prevent, distort or restrict competition in a certain market for goods and services, are unlawful and prohibited. Some practices include, without limitation; To fix purchase or sales prices or the factors such as cost or profit which form the price or all other trading conditions concerning purchase and sales of goods and services (price-fixing agreement);

To share the markets for goods and services or to share or control the market sources and components (market and territory sharing arrangements); To control or to determine the quantities of supply or demand in the markets for goods and services outside the market conditions (exercising control over the availability of or the demand for certain products); To impede or restrict the activities of the competitors or to eliminate other enterprises operating in the market by boycotts or by other practices or to prevent the newcomers in the market (boycotts); Except exclusive dealing agreements, to apply dissimilar conditions to persons which have equivalent transactions with equal rights and obligations (discriminative trade-dealings);

Contrary to the nature of the agreement or to the commercial customary rules, to make the conclusion of contracts subject to the purchase of other goods and services or acceptance by the intermediary purchasers to display of other goods and services or acceptance of resale conditions for the goods or services concerned (typing arrangements). Misuse of market power extends to cases where one has sufficient market power to restrict or limit entry by others into that market or to limit the development of technology relating to that market to the detriment of the consumer. But it is not correct to name all the monopolies as unlawful and prohibited. A monopolist may have acquired its market share because no one else entered into that particular market. Briefly, the law does not sanction possessing monopoly power, but it sanctions misuse thereof. The most frequent application of the competition rules are the cases concerning the M&A transactions. It has to be reviewed that the facts of each transaction requires notification under Turkish antitrust laws. A merger is a notified under Turkish Competition laws, only if it meets the size criteria set by statue, which is set forth below. If a pre-merger notification is filed, the waiting period is thirty (30) days from filing. However, the governing authority of the States Competition issues, the Competition Board can also issue a no-action letter within fifteen days from filling in which case it is not necessary to wait for the expiration of the waiting period. This is regulated under the 7th Article of the Law on the Protection of Competition as Merger of two or more enterprises and acquisition, except acquisition by way of inheritance, by an enterprise or by a person, of another enterprise, either by acquisition of all or part of its assets or securities or other means by which that person or enterprise acquires a controlling power in that enterprise concerned, which creates or strengthens the dominant position of one or more enterprises as a result of which, competition is significantly impeded in the market for goods and services in the whole or part of the territory of the State, is unlawful and prohibited. The Board, shall issue communiqus to announce the categories of mergers and acquisitions which, to be considered as legally valid, require a permission by prior notification to the Board. For all orders of the Board (including its final order, orders for a fine and/or remedial action) appeal before the Council of State (Conseil Detat-Dantay) is possible, which is the highest administrative court. The Board has also the power to impose administrative fines for failure to file for the M&A transactions and some other

obligatory actions regulated within the Law and the impositions can also be appealed for before the Council of State.

C.
C.1

Tax System
Taxation Authority

Turkey levies both direct and indirect taxes. The direct taxes are two-tiered corporate tax and individual income tax. The indirect taxes consist of taxes on wealth and tax on expenditures. Taxes on wealth include inheritance and gift taxes, motor vehicle tax and property tax. Taxes on expenditures include value-added tax (VAT), banking and insurance transaction taxes, stamp duties and minor municipality taxes. The central government and Ministry of Finance are authorized to levy taxes. Local authorities impose no income taxes. Only parliament may legislate in tax matters. However, the tax laws authorize the Council of Ministers to change tax rates. The Ministry of Finance administers taxes for the central government. Local tax offices are responsible for collecting taxes. Local customs offices collect customs duties and VAT levied on imported goods. Municipal authorities collect property taxes and municipality taxes. C.2 Individuals

Income Tax Who Is Liable Individuals who are resident in Turkey are considered fully liable and are subject to tax on their worldwide income. Nonresidents are taxed on their earnings and revenue arising in Turkey only. The Civil Law defines residency as an intention to settle down. Although the law does not include any objective criteria for this requirement, factors including purchasing an apartment in Turkey and closing business operations abroad may be considered in determining Turkish residency. Persons in Turkey who work for nonresident entities and are compensated in foreign currency are not taxed on their salaries if the following two conditions are met simultaneously: The nonresident entity pays their salaries out of earnings abroad; and The salary payments are not charged as expenses against profits taxable in Turkey. Income Subject to Tax Turkey has a unitary taxation system, under which income derived from different sources is aggregated, and the tax due is computed on the total aggregate income. Under the unitary system, withholding taxes are considered advance payments of tax and are credited against the tax due in the annual return. Taxable income includes commercial and agricultural profits, remuneration, professional services income, real estate income, income from capital investments and other income.

Nonresidents are taxed on Turkish-source income only. Trade or business income from a permanent establishment located in Turkey is considered commercial income and is taxed at the rates set forth in Rates Employment Income Taxable remuneration includes salary, other compensation for services and benefits paid in cash or in kind. Fees paid to a companys chairman or a member of the board of directors is treated as employment income. Certain payments made by the employer on behalf of the employee, including payments for rent and utilities, are grossed up and taxed at the rates discussed in Rates. In determining taxable income, expenses allowable under the income tax law are deducted from gross revenue. Employment income is not reported in the annual income tax return if the employer has withheld taxes on the income. The withheld taxes are the final tax. Professional Services Income Professional services include services rendered by a person who works on behalf of himself in his name, using his own professional knowledge without attachment to an employer. Income from professional services is subject to individual income tax at the progressive income tax rates. The recipient of the services must withhold tax on amounts paid to the professional at a rate of 22% and submit the withholdings to the tax office on behalf of the professional. The withheld amounts are deductible against the professionals total tax liability. Investment Income Companies distribute dividends to shareholders after payment of corporation tax and dividend withholding tax. In general, dividends paid to nonresidents are subject to the same withholding taxes as those imposed on dividends paid to residents. Royalties for patents and copyrights are subject to an effective withholding tax rate of 22%. The withholding tax on interest income received from government securities issued after December 1, 1999 is currently set at zero percent. Deposit interest income is subject to withholding tax. Rates vary from 7% to 25% according to time/kind of deposits. However, tax treaties may reduce the withholding tax rates for investment income. Capital Gains and Losses Capital gains are generally taxed as part of ordinary income. However, capital gains derived from transfers of shares are exempt from income tax if the securities, which are transacted in the Istanbul Stock Exchange, are held for three months or longer prior to disposal. The holding period for the securities, which are not transacted in the Istanbul Stock Exchange, is at least a year. In general, capital losses incurred from one type of income may be offset against other types of income if the income is reported in the annual income tax return. However, capital losses incurred from the sale of marketable securities may be offset only against income from other transactions in marketable securities. Taxation of Employer-Provided Stock Options No specific rules govern the tax treatment of employer-provided stock options in Turkey. Under the general tax provisions, options are taxable as fringe benefits at the time of exercise. In addition, stock options are subject to stamp tax at a rate of 0.6% and may be subject to social security contributions.

Deductions Personal Deductions and Allowances A resident individual is granted an annual deduction of TL 262,800,000. In addition, for employment income, some portion of total annual health, food, education, rent and clothing expenses may be deducted from the annual income tax base, up to a certain threshold. This portion changes dependently on the total amount of annual health, food, education, rent and clothing expenses in a range between 8% and 4%. Deductible Expenses An individual may deduct the following expenses from taxable income. Deductions for Commercial Income. An individual may deduct general expenses incurred to conduct business operations, employees food and accommodation expenses, insurance premiums, indemnities paid against agreements or court cases, business-related travel expenses, property and municipality taxes and dues, and depreciation on fixed assets. Deductions for Professional Services Income. An individual who renders independent professional services may deduct from taxable income ordinary business expenses, including salaries, rental payments, fees and the cost of utilities. Depreciation on fixed assets is also allowed. Deductions for Investment Income. Custody and insurance expenses, expenses incurred to collect dividends and interest, taxes and dues paid are deductible. Deductions for Rental Income. An individual with real estate income may deduct heating, electricity and administration expenses, real estate insurance premiums, taxes and dues, expenses for repairs and depreciation. Alternatively, real estate owners may deduct 25% of the total annual rental income as a lump-sum amount. Rates The individual income tax rates on salary income obtained in the 2003 calendar year for both single persons and married persons are set forth in the following table. Taxable Income Exceeding Not Exceeding TL (millions) TL (millions) 0 6,000 14,000 28,000 70,000 140,000 6,000 14,000 28,000 70,000 140,000 Amount TL (millions) 0 900 2,500 6,000 18,600 43,100 Tax on Lower Excess % 15 20 25 30 35 40 Rate on

Filing The declaration of the income tax is submitted until March 15th of the following year and the tax is paid in March and July in two equal installments. There are provisions to offset withholding taxes already paid and any prepaid taxes against one's total tax liability. Within the current year, 25 percent of provisional income tax calculated on commercial profit and professional service income, determined at the end of three month period is filed before the 10th day of the second month following the relevant quarter and paid before the 17th of the same following month. The tax so paid is netted off against the taxes paid in the subsequent year. Accordingly, the temporary tax periods to be valid for taxpayers whose account periods are calendar year and the periods of declaration and payment have been determined as follows: Taxes collected through withholding are reported by means of a separate return filed on the 20th of the following month and they must be paid on the 26th of the following month. Those with a limited" tax liability must file tax returns and pay all outstanding tax obligations fifteen days before they leave the country. Relief for Losses Self-employed individuals engaged in a business may carry forward business losses for five years. Losses may not be carried back. C.3 Companies

Corporate Income Tax Companies whose legal or business headquarters (as stated in their articles of association) are located in Turkey or whose operations are centered and managed in Turkey are subject to corporation tax on their worldwide income. Turkish tax legislation describes these companies as full liability taxpayers, also known as resident companies. Taxable income of limited liability taxpayers (nonresident companies or taxpayers other than full liability taxpayers) includes the following: Salaries obtained in Turkey; Professional fees obtained in Turkey; Profits from commercial, agricultural and industrial enterprises that have an establishment or a permanent representative in Turkey; Income derived from the rental of real estate, rights and movable property in Turkey; Income obtained in Turkey from various types of securities; and Other income and revenue obtained in Turkey.

Corporate Taxes at a Glance Corporation Income Tax Rate (%) 33 (i) Capital Gains Tax Rate (%) 33 Branch Tax Rate (%) 33 Withholding Tax (%) Dividends 10 (a) Interest From Repurchase (REPO) Agreements 22 (b)(c)(d) From Certain Turkish Government Bonds and Treasury Bills 0 From Private Sector Bonds 12 (b)(c) Other Interest VARIES (b)(c)(e) Royalties from Patents, Know-how, etc. 22/25 (b)(f) Professional Fees Petroleum-Exploration Activities 5 (b)(g) Other Activities 22 (b)(g) Salaries 25 (b) Progress Billings on Long-Term Construction and Repair Contracts 5 (b)(h) Payments on Financial Leases 1 (b) Real Estate Rental Payments 22 (b) (a) Branch Remittance Tax 10 Net Operating Losses (Years) Carryback 0 Carryforward 5 (a) Profits derived by Group B securities investment funds and securities investment companies are subject to a 10% withholding tax, regardless of whether the profits are distributed. The withholding tax is applied on the remitted amount to the headquarter by non-resident branch. (b) This tax applies to nonresident companies. (c) This withholding tax applies to resident companies, and to resident and nonresident individuals. (d) This tax applies if the repurchase agreement is based on a state bond or treasury bill. (e) This is the general withholding tax rate for interest. Interest is tax-exempt if any of the following apply: it is paid on state bonds or treasury bills; it is paid with respect to credits extended by foreign states, international institutions or foreign banks and institutions; or it is paid on deposit accounts to resident and nonresident banks operating in Turkey. The statuary withholding tax rates applied to the deposit interest opened and renewed and held by residents, non-residents and non-bane investors are as follows: For income derived from foreign currency denominated deposits; Maturity less the one-year %24 Maturity one year and over %18 For income derived from Turkish Liras denominated deposits; Demand deposit accounts %18 Maturity up to three months %18

Maturity up to six months Maturity between six to twelve months Maturity one year and over

%16 %12 %7

(f) The 22% rate applies to payments under licenses of rights. The 25% rate applies to payments on sales of rights. (g) This tax comprises an optional final tax imposed on these payments. Alternatively, net income is subject to corporation tax at a rate of 33% and a dividend withholding tax (h) This tax is credited against final tax liability. (i) 30% for the year 2005 Dividend Taxation 10% withholding shall apply on dividends distributed by resident corporations to following real and legal persons. Accordingly, dividend distributions by resident corporations; Resident real persons Those who are not income and corporation tax liable Those exempted from income and corporation tax Non resident real persons Non-resident corporations (excluding those that acquire dividends through a permanent establishment or permanent representative in Turkey) Non-resident corporations exempted from income and corporation tax.

shall be subject to 10% withholding tax. Dividend distributions by resident corporations to resident corporations are not subject to a withholding tax. Furthermore, in the event the profit is not distributed or included in capital, no withholding tax shall be applicable. Dividends distributed out of earnings; obtained in the year 1998 and before, originated from exempt income obtained between 1.1.1999-31.12.2002, corresponding to the investment allowance calculated over investments realized within the scope of incentives certificates granted prior to 24.4.2004 after deducting 19.8% withholding tax applied on the investment allowance amount

are not subject to withholding tax.

For a sample tax calculation for a corporation, see Appendix 6. For a sample tax calculation for a branch, see Appendix 7. Tax Incentives Investment Allowances Fundamental changes have been realized on investment allowance provisions to become effective as of 24.04.2003. Accordingly, the obligation to obtain an Investment Incentive Certificate to benefit from investment allowance has been abrogated and the investment allowance rate to apply over all expenses that are entitled to investment allowance has been determined as 40%. Fixed asset expenses other than those incurred in relation with the following commercial assets shall benefit from investment allowance: Commercial assets with a value lower than TL 5 billion Commercial assets previously used either overseas or locally (excluding floating docks and vessels aged less than twelve) Intangible assets Tools, equipment, furnishings and fixtures and office indispensables that are not directly related with production of goods and rendering of services Commercial assets acquired free of charge Buildings acquired through purchase or built (excluding those that are built to be used as a place for production of goods and rendering of services) Lands and plots Passenger vehicles and similar land vehicles, yachts, cutters, boats and similar motor vessels as well as air vehicles such as planes and helicopters Commercial assets purchased to be used in overseas investments.

However, investment expenses relating to investments within the scope of Investment Incentive Certificates issued upon the applications filed before 24.04.2003. Tax Exemption for Disposal of Participation Certificates and Immovable Properties Applicable until the end of 2004,the portion of the gains derived by corporations from the discharge of their participation certificates of their immovable properties that is added to the company capital at the year on which the sales transaction have been conducted, is excluded from corporation tax. The above exemption is also applicable on the contribution as capital in kind of all or a part production or tourism investment facilities, or of the tourism facilities that own certificate of operation, and all or a part of the real property held under the ownership of such facilities, to a joint stock company to be newly established with the participation of foreign capital, for the purpose making investments supported investment incentive certificates. Gains that emerge from the contribution of capital in kind of all or a part of the production or tourism facilities and the real properties belonging to such facilities, for the purpose of making investments supported with an incentive certificate, or to a share capital company to be newly established, or to a joint stock company to be newly established with the participation of foreign capital, and that are exempted from corporation tax. In this case, the investment amount must be at least US$ 5 million,

the foreign shareholders share capital must be at least US$ 1 million and the share percentage represented by the foreign shareholders investment must be at least % 20. Capital Gains and Losses Capital gains derived by all companies, including branches of foreign companies, are included in ordinary income and are subject to corporation tax (see Rates of Corporate Tax, page xx). Capital gains are generally computed by subtracting the cost of the asset, including the related expenses paid by the seller, from the selling price. To account for the effects of inflation on the amount of capital gains on disposals of assets, the historical cost is increased by applying the rate of increase in the wholesale price index published by the Institute of State Statistics from the date of acquisition, excluding the month of disposal. Capital gains derived from sales of depreciable fixed assets are not taxable to the extent that the gains are reinvested in new fixed assets. Capital gains used for reinvestment are transferred to a special reserve account. If this reserve is not used to finance the purchase of similar new assets in the following three years, the balance in the reserve is included in taxable income. Capital gains derived from sales of shares by nonresident companies without a permanent establishment in Turkey are subject to corporation tax. In computing these gains, difference in exchange rates are not taken into account, and the indexing of the cost basis does not apply. Capital gains and losses incurred by companies established in Turkey are treated as ordinary income or losses in calculating taxable profits. Filing Corporation tax for a given year is reported by filling a declaration before the 15th day of the fourth month of the following calendar year. The tax is payable in one installment before the end of the fourth month of the following calendar year. Capital gains derived by nonresident companies must be reported on a special tax return filed within 15 days after the conclusion of the relevant transaction. Assessment Corporations have to pay a provisional corporation tax at a rate of 33 percent over their incomes determined according to the financial statement that they draw up for every three months within the current year. The quarterly profits of the corporation shall be declared before the 10th day of the second month following each three-month period and will be paid as a provisional corporation tax before the 17th day of the same month. In this manner, the tax paid within the current year will be deducted from the corporation tax computed over the annual corporate profit. Penalties and Interest Major tax offenses as defined in the Tax Procedural Code, and applicable penalties are as follows. a. Penalties from general irregularities: This type of penalty is applicable when taxpayers fail to fulfill their prescribed duties in full and within the specified period. The ceiling determined for penalties of irregularity is TL 60.000.000, and the minimum limit for this kind of penalty is TL 1.380.000. Unless an

arrangement to the contrary is made by the Council of Ministers, the amount determined for such penalties is increased commensurate with the revaluation rate. b. Penalties for special irregularities: in some cases where documents specified in the Tax Procedural Code are prepared defectively or not prepared at all, the applicable penalties will depend on the type document involved. c. Penalty for tax loss: Penalty for tax loss becomes applicable when the taxpayer fails to carry out his duties as a taxpayer or carries them out incompletely, leading to the full or partial impossibility of accrual. Taxpayers who fail to fulfill their tax obligations in the manner stated above are fined for the tax loss. The calculation of the tax loss penalty is executed by adding one half of the total default interest determined over the amount of the tax loss for the period between the date of the concerned notification until the day the penalty is paid, to the one-fold of this tax loss amount. This penalty is increased by the factor of three folds for those that resort to fraud in accounting in book and records, those that falsify books, records and documents, and those that draw up false or misleading documents in context and those that use them. Penalty for tax evasion: Those that apply to accounting and calculation fraud in books and records, that open accounts in the names of non-existent or irrelevant people, those that record transactions in a way that will reduce the tax base, those that falsify book records, destroy accountings books, draw up false or misleading documents as regards to context or those that use the above-mentioned are subject to imprisonment. In some cases, it may be possible to convert imprisonment to a fine. The statute of limitations on tax liability is five years after the end of the relevant financial year. The five-year period for tax collection begins from the due date of the tax payment. Under the tax laws, accounting records and legal books must be retained for five years. Foreign Tax Relief Resident companies may credit against corporation tax foreign taxes paid on income earned abroad and received in Turkey, but the amount of the credit may not exceed the Turkish corporation tax payable on such income. Turkey has entered into double tax treaties with many other countries. For a table of withholding tax rates under these treaties, see Appendix 8, page xx. Determination of Taxable Income Starting Point for Determining Taxable Income A companys corporation tax base equals the revenues earned by the enterprise after the deduction of expenses. The following items are not subject to corporation tax: Dividends derived from shares held in other full liability taxpayers; Proceeds derived by a corporation from the sale of its preferred shares; and Profits derived by a joint stock company from the sale of its shares that are issued when the company is established or from the sale of its shares at a price exceeding the par value of the shares. The following corporation tax exemptions apply to Turkish and foreign investment funds and companies:

Profits derived by securities investment funds and securities investment companies from transactions involving their operating portfolio if at least 25% of their portfolio consists of stock certificates. Funds and companies meeting this condition are called Group A securities investment funds and securities investment companies. Profits derived by securities investment funds (excluding foreign-exchange investment funds) and securities investment companies, other than the funds and companies described in the preceding item, from transactions involving their operating portfolio. These funds and companies are called Group B securities investment funds and securities investment companies. The profits described in this item are subject to withholding tax at a rate of 10%. Profits derived by risk capital investment funds or companies from transactions involving their operating portfolio. Profits derived by real estate investment funds or companies from transactions involving their operating portfolio. Profits derived from construction, repair, assembling and other technical services that are given outside of Turkey. Deductions All business-related expenses are deductible, except for the following items: Interest on shareholders equity or on advances from shareholders; Reserves set aside from profits (except technical reserves of insurance companies and doubtful debts from debtors against whom legal proceedings have been instituted); Corporation tax, including all monetary and tax penalties and interest imposed on such tax; Discounts or other losses arising from selling the corporations own securities for less than par value; and For nonresident companies, commissions, interest and other charges paid to headquarters or other offices outside Turkey on purchases or sales made on their behalf, as well as allocated charges to contribute to losses or expenses of headquarters or branches outside Turkey. Inventories Inventory includes goods purchased for resale, produced goods, agricultural products and animals. Inventory is valued at cost. For tax purposes, the cost of inventory includes expenditures incurred to acquire or increase the value of an asset and all related expenditures. The Ministry of Finance has ruled that interest expense and foreign exchange losses may be included in the cost of inventory for tax purposes. Provisions Tax-deductible provisions include provisions for bad debts, for abandoned claims and for insurance technical reserves. Depreciation Depreciation is provided on assets that are used in the entity for more than one year and that are subject to wear and tear. Assets up to 440 million TL can directly be written as an expense (empty land is not subject to depreciation.). The rates of depreciation to be applied in the amortization of the economic assets, shall be determined and announced by the Ministry of Finance in due consideration of the economic lives of the concerned assets.

Except for cars, depreciation is provided on a full-year basis irrespective of which month of the year the asset was actually acquired. Taxpayers are required to calculate depreciation for cars in the year of acquisition on a partial basis, unless they are engaged in the business of leasing such vehicles or the vehicles are otherwise related to their commercial operation. Partial depreciation is calculated by taking the month in which the purchase was made as a complete month. For company automobiles, tax depreciation for the year of purchase is calculated on a monthly basis. For example, if an automobile that was purchased for TL 1 billion and the economic life of the car is 5 year, the regular depreciation for a full year is TL 200 million. Under the applicable rules, if the automobile is acquired in November, taxdeductible depreciation for the year of acquisition is calculated as follows: 2 months TL 200 million = TL 33,333,333 12 months The balance of the regular depreciation for the year of acquisition is deductible in the last year of depreciation of the asset, together with the regular depreciation for that year. Relief for Losses In general, losses may be carried forward for five years. Losses may not be carried back. Losses and exemptions to offset taxable income for the year must be applied in a particular order: the past years losses must be used first, then exemptions, and finally investment allowances. Inflation Adjustment The Turkish economy has been exposed to soaring rates of inflation since 1970s, and due to the inflationary environment that continued for many years, the unreal profits became subject to taxation, resulting in the occurrence of substantial damages on the capital structures of the enterprises. Although the Tax Administration has introduced numerous regulations in the tax legislation to date for purposes of the elimination the inflationary effects of inflation on financial statements and the taxable gains, such regulations have proven to remain inadequate in the taxation of the actual gains. Due to the ineffectiveness of the existing regulations in the legislation in the elimination of the effects of inflation on the financial statements, in response to the demands that were received from the taxpayers and the international corporations, studies concerning inflation accounting were initiated and the regulations concerning inflation accounting application, have been put into force effective as of 01.01.2004.Those who are income tax and corporation tax liable and maintain their books on a balance sheet basis, shall be allowed to restate their financial statements, only if the increase in the price index (the General Wholesale Price Index calculated and announced for Turkey on the whole) is higher than 100% for the last three accounting periods including the current accounting period, and higher than 10% for the current accounting period. The restatement application shall not be allowed to be made if one of two conditions do not apply. The inflation adjustment method is similar to what is required by international accounting standards and is based on the restatement of non-monetary assets and liabilities according to inflation rates

Although the above-mentioned conditions are required for future applications, the restatement of 2003 financials is compulsory. However, the difference that is calculated as a result of the subtraction of the restated capital, restated surplus capital (issuance premium) of the share certificates, the restated share certificate redemption profits and the liabilities total from the restated assets total in the balance sheet dated 31.12.2003, shall be disclosed in the previous years profits/losses account and the previous years profits calculated in this manner shall not become subject to tax, and the previous years losses shall not be treated as losses. Transfer Pricing Transactions between related parties specified in the Corporation Tax Law must be carried out at arms length. The Turkish tax authorities may adjust the taxable income of a company by substituting arms length income and expense amounts for transactions between related parties not carried out at arms length. Consolidated Returns Companies may not file consolidated tax returns. Each company is regarded as a separate taxpayer and must file separately. C.4 Value-added tax

Value added tax (VAT) was introduced in Turkey in 1985. The implementation of VAT in Turkey is similar to practices in force in the other European Union countries. As a rule, all deliveries of goods and services that take place in Turkey are subject to this tax. This means that VAT is payable on every transaction involving production or the performance of a service. Goods and services imported into the country are also subject to VAT. The person liable for the payment of VAT is the one delivering the goods or services and in the case of imports, the importer. The VAT that a taxpayer pays for goods and services purchased can be offset against (deducted from) the VAT received on deliveries of goods and services made. When the amount of VAT on sales is greater than the amount on purchases, it is this positive difference that the taxpayer pays to the tax office. Where the reverse is true-i.e. input VAT is more than output VAT-the difference is not, as a rule, (there are exceptions however) refunded to the taxpayer. Instead, it is carried forward and can be offset against future VAT collections. VAT is reported and paid monthly. Each month's VAT return must be submitted to the tax office by the 20th of the following month. If the return shows a VAT payable, that amount must be paid 26th of the month that the return is filed. VAT rate in Turkey is 18 percent but there are a number of exceptions: Vat Rates 1% Deliveries of newspapers and magazines (VAT is 25% during the delivery of the items that are sold in polythene bags pursuant to the provisions of Law No. 1117 amended by Law No. 3266)

1% 1% 1% 8% 8% 8% 8% 8%

Second-hand cars Processing and deliveries of agricultural commodities Leasing transactions (except for transport vehicles) Basic foods Leasing transactions involving land transport (but not passenger vehicles) Deliveries of natural gas Deliveries of books and similar publications Cinema, theater, opera, etc. admission fees

The Council of Ministers has the authority to raise VAT rates four times or to reduce them to one percent. Circumstances warranting a value added tax Liability for VAT occurs as soon as a delivery of goods or services takes place. In situations where invoices (or similar documents) are issued prior to such delivery, VAT is payable only on the amounts shown on them. When goods are shipped, the VAT liability occurs when shipment begins. Exemption from value added tax Exported goods and services: Goods and services that are exported from the country are not subject to VAT. A delivery of goods is considered an act of exportation if; The delivery is made to a customer outside the country, The goods delivered pass through Turkish customs. Situations in which the manufacturer delivers goods to the exporter are also considered to be within the scope of this exemption; however in this case, the exporter must actually export the goods within three months of their delivery to the exporter. A performance of services is considered an act of exportation if; The service is rendered for a customer, who is outside the country, The benefit of the service is derived outside the country. Tourists purchase goods: Goods purchased in Turkey and taken out of the country by tourists are exempt from VAT. At the time of the actual sale, the seller collects the VAT from the customer who, before leaving the country, may reclaim the VAT from customs. The goods and their associated documents must be presented. Alternatively, sales to tourists over TL 250.000.000 and against foreign currency may be exempted from VAT directly provided that items subject to sale exceed personal conception.

Conveyances and petroleum exploration: VAT exemption is provided on purchases of marine, air, and rail conveyances, and floating dry-docks and their equipment if they are to be used by the enterprise making the purchase for commercial purposes. This exemption also extends to payments made for their maintenance and repair services as well. Through the recent changes in the law, services and deliveries in connection with the production and construction of the vehicles in question are included in the scope of the exemption. Another VAT exemption is provided for goods and services purchased by those engaged in petroleum exploration. - Investments within the scope of the Investment Incentive Certificate: Deliveries of machinery and equipment within the scope of the investment incentive certificate to the taxpayers who own an investment incentive certificate are exempt from VAT. Transportation services: Transit transportation services between Turkey and other countries are not subject to VAT, on condition of reciprocity. Diplomatic personnel: Deliveries made and services provided to diplomatic representations and consulates of foreign countries in Turkey as well as to their members who possess diplomatic rights are exempt from VAT on condition of reciprocity. The same applies to deliveries made and services provided to international organizations and their personnel that have been granted a tax exemption based on international agreements. Banking and insurance transactions: Banking and insurance transactions are exempt from VAT (Such activities are already subject to a five percent banking and insurance transaction tax). Others: Other deliveries that are exempt from VAT include: Deliveries of gold, silver, foreign exchange, cash, tax stamps, stocks, and bonds, Movements of crude oil, oil, and oil-based products through pipelines, Deliveries made and services provided by military factories and shipyards that are in accordance with the purposes for which they were established, Delivery and leasing of assets, which have been included within the scope of privatization.

Deliveries of land and places of business by economic enterprises that were set up for the purpose of the establishment of organized industrial zones and minor industrial sites and deliveries of housing units to the members of housing cooperatives. VAT assessment base The basis for the VAT assessment is the price paid against the goods and services received. In this case, "the amount paid" is defined as money and goods received as well as any benefits, services, etc. that are capable of being represented in terms of money. The VAT assessment base also includes various types of income such as credit charges, interest charges, and premiums, shipping, loading, unloading, and similar charges made by the seller for delivery to a point specified by the recipient; packing charges, insurance, commission fees and similar outlays. On the other hand, neither calculated amounts of VAT nor discounts shown on invoices and similar documents that are made in amounts in keeping with normal commercial practice are to be included in the VAT assessment base. In the case of transactions where the price is not determined and where the price is obviously too low compared with comparable prices and/or charges, the comparable prices are taken as the VAT assessment base. Deductible VAT The VAT that taxpayers pay for the deliveries of goods and services that are directly related to their business activities and the amounts of VAT that they collect for the same reasons can be offset against each other. In the case of imports, the VAT that is paid can be offset against output VAT if the import transaction is directly related to their business activities. The right to deduct VAT is normally exercised during the month in which the documents pertaining to the transaction are recorded in the legal books of account. VAT on tax-exempt goods and services, VAT paid in the generation of such goods and services, VAT on goods that have been lost (excluding earthquake of flood), VAT paid on passenger vehicles (except by those who are engaged in the business of renting/operating passenger vehicles and acquire them for that purpose), and VAT paid for expenditures which are not deductible in the determination of profit as specified in the income and corporation tax codes is not deductible. In order for VAT to be deductible at all, it must be separately itemized on an invoice or a similar document. Another requirement is that such documents must be recorded in the legal books of account. When determining the basis for the corporation or income tax assessment, the amounts of VAT cannot normally be taken into consideration as expenditure items. In the case of VAT paid on passenger vehicles purchases, there is an option of declaring it as an expense or including it in the cost of acquisition. VAT refund Taxpayers who deliver goods and/or perform services that fall within the scope of VAT-exempt categories (specifically exports, conveyances, petroleum exploration,

transport services and diplomatic exemptions) are allowed to deduct VAT paid in the generation of such goods and services from the amounts of VAT collected. Where such deduction is not possible (in other words, where the output VAT is less than the input VAT), the tax related to the tax-exempt activities can be refunded to the taxpayer. C.5 Special Consumption Tax

Special Consumption Tax has been in place since 01.08.2002 with the Law numbered 4760. 16 different types of indirect taxes and similar responsibilities have been canceled and those taxes have been combined under Special Consumption Tax. With the application of Special Consumption Tax, the increased VAT rates (26-40%) have been reduced to the general VAT rate (18%). A Special Consumption Tax is levied on the delivery, first acquisition or imports of 210 different kinds of goods determined in four different kinds of lists. The contents of the lists and the applicable Special Consumption Taxes are shown in the below table: Content of the list Natural gas, petroleum products, LPG, petrol derivatives, base oil, etc. Solvent and derivatives of solvent and similar kind of goods Subject to registration Vehicles Not subject to registration Taxable Event Import and manufacturing (including refineries) of the goods Import and manufacturing (including refineries) of the goods First acquisition Import, delivery of the good by the manufacturer or auction sale of the good before special consumption tax levied on Import, delivery of the good by the manufacturer or auction sale of the good before special consumption tax levied on Import, delivery of the good by the manufacturer or auction sale of the good before special consumption tax levied on A proportional between 1-50% tax variable Special Consumption Tax A fixed amount depending on the kind of the good A fixed amount depending on the kind of the good

A List I B

List II

List III

Non-alcoholic beverages, alcoholic drinks, cigarettes, tobacco products Goods subject to increased VAT rate (2640%) before Special Consumption Tax C.6 Other taxes

A proportional between 25-212%

tax

variable

List IV

6,7%

Banking and insurance transactions tax Income received by banks such as commissions, interest, and premiums collected by insurance companies are subject to a five percent banking and insurance transaction tax. Such tax is usually borne by customers.

A return has to be filed and the tax paid by the 15th of the month that follows the return. The tax rate on interbank deposit transactions, repo gains and gains received from the sales of government bonds and treasury bills before their maturity is one percent and it is 0.1 percent on income derived from the sale of foreign currency. Real estate tax Property and wealth taxes may be imposed on the prices of property (payable by the owner) and thus be impersonal; or they may be imposed on the combined property holdings of a person, or his/her net worth thus being in the nature of a personal tax. The real estate tax levied on immovable property is a special form of wealth tax. An annual real estate tax on the estimated market value applies to residences (0.1%), buildings other than residence (0.2%), cultivated lands (0.3%), and uncultivated lands (0.1%). The tax base reported for real estate tax purposes cannot be less than the one determined by the government authorities. The tax is paid in two equal installments; the first installment is in March, April and May and the second one is in November. Real estate tax returns must be filed every four years. Inheritance tax Gratuitous transfers by inheritance or by donations constitute the subject of this tax. Tax rate ranges between one to30 percent depending upon the amount and nature of the transfer (gratuitous or non-gratuitous). The tax is paid over three years, twice a year in May and November in equal installments. Stamp tax The Stamp tax is applied to a wide range of legal documents such as contracts, agreements, notes payable, capital contributions, letters of guarantee, financial statements, and tax returns. The tax base differs depending upon the nature of the document. Stamp duty can be either lump sum or proportional. In other words, there is either a fixed amount of tax to be paid or the amount is computed as a percentage of the value of the transaction evidenced by the document. Municipal taxes Other than the real estate tax, the municipalities can assess different taxes and duties such as advertisement tax, entertainment tax, business registration fees, etc. Motor vehicle tax Motor vehicle owners pay this tax twice a year. The amount to be paid as motor vehicle tax varies according to the features and age of the vehicle.

D.
D.1

Financial Reporting and Auditing


Method of Accounting

The accrual method of accounting is generally required in Turkey. D.2 Sources of Accounting Principles

Accounting practices for businesses, including self-employed individuals engaged in business as well as public and the Turkish Commercial Code (TCC) and the Turkish Procedural Tax Law regulate nonpublic companies. The Banking Regulation and Supervision Agency (BRSA), the Undersecretariat of Treasury, and the Capital Market Board (CMB) have issued additional important regulations that set forth standards for accounting, financial reporting and auditing for banks, insurance companies and companies registered on the stock market. They provide the general rules and principles required for maintaining official books of account and set forth a general framework for financial reporting in Turkey. The Uniform Chart of Accounting System Communiques (the Communiques) issued seperately for banks, companies and financial intermediaries amplify this general framework. The Communiques regulate the form and content of annual financial statements and sets forth certain general accounting principles required to prepare annual financial statements and note disclosures. D.3 Fundamental Concepts

In accordance with the Turkish Procedural Tax Law financial statements of all companies should be prepared under the historical cost convention except the revaluation of fixed assets (see Significant Accounting Concepts for Investors). However, beginning from January 1, 2004 only those who are income tax and corporation tax liable and maintain their books on a balance sheet basis will be entitled to benefit from the restatement of financial statements based on inflation Under the Communiques, the following are the fundamental accounting concepts required in Turkey: Prudence; Accrual basis Understandability Relevance Materiality Reliability; Going concern; Substance over form Faithful representation Neutrality Comparability Completeness Matching income and expenses; True and fair representation.

D.4

Significant Accounting Concepts for Investors

Inflation accounting A CMB communique concerning inflation accounting, which is effective for periods ending after December 2003, establishes the standards and principles regarding the restatement of historical cost based financial statements of the companies and financial intermediaries, which are subject to CMB regulations, with inflation rates in highly inflationary environments. Also banks restate their financial statements, which are prepared under the historical cost basis, in accordance with the banking law. Inflation adjustment regulations are also adapted to Turkish Tax system by the beginning of 2004. Inventory Inventories are valued at the lower of cost and net realizable value The methods most frequently used for valuing inventories are the average cost method and the first-infirst-out (FIFO) method. Under the Capital Market Law, cost of inventories may include borrowing costs and term differences (after the elimination of the inflation impact). However, financing expenses incurred after the acquisition and recording of inventories may not be capitalized. Fixed Assets In accordance with the Turkish Procedural Tax Law fixed assets are stated at historical cost or at a revalued amount (except land, for which no revaluation is permitted). Companies may revalue the cost and accumulated depreciation of their depreciable fixed assets. The tax law prescribes the revaluation procedure, and the Ministry of Finance announces the revaluation percentages annually. The difference between the revalued amount and the cost of the assets is credited to a revaluation fund account, and companies may issue capital shares for the amount in the account. Neither the company nor the shareholders are taxed on the issue of these shares. In accordance with the Capital Market Law and Banking Law fixed assets are valued with inflation adjusted cost and the provision for impairment (if any). By the beginning of 2004 inflation accounting is adapted to Turkish tax system. Depreciation The rates of depreciation to be applied in the amortization of the economic assets, shall be determined and announced by the Ministry of Finance in due consideration of the economic lives of the concerned assets. Depreciation applies on a full-year basis to all property, plant and equipment, with the exception of vehicles, which must be depreciated on a monthly, pro -rata basis. In accordance with the Capital Market Law and Banking Law depreciation is computed over its estimated useful live on pro-rata basis. Intangible Assets Intangible assets are stated at cost (inflation adjusted cost under the Capital Market Law and Banking Law) and are amortized over their useful lives. If the intangible assets useful lives cannot be clearly determined, they may be amortized over five

years. Capitalization of preoperational costs associated with intangible assets is optional. Non-patented inventions, know-how reflected in the development cost of products and brand names are not recognized as assets for this purpose. Government Grants Government grants related to capital investments for certain industries might either be recorded as income or deducted from the cost of fixed assets. Each company must adopt a consistent accounting policy for the treatment of incentives. Companies that elect to record incentives, as income must credit a separate account entitled deferred income in shareholders equity in accordance with the Capital Market Law. This deferred income is amortized to operating income within the depreciation period of the related capital investment The Turkish Procedural Tax Law requires the government grants which are not deducted from the cost of fixed assets to be written directly as income. Capitalization of Financial Expenses Turkish Procedural Tax Law requires that financial expenses incurred before the capitalization of fixed assets must be included in the cost of related fixed assets. Financial expenses incurred after the capitalization of fixed assets may be included in the cost of the fixed assets or charged to an expense account. Under Capital Market Law, it is possible to add the real portions of financial expenses to the cost of the assets that are subject to depreciation until the capitalization of fixed assets. The real portions of financial expenses, meaning the borrowing cost that is above the rate of inflation in the related period, is computed as the excess portion of the decrease in the real value of borrowing cost related with a loan. Foreign exchange differences are also included in the computation of the real portion of financial expenses of foreign currency borrowings. Financial expense incurred after the capitalization of fixed assets should be charged to an expense account. Pensions Under the Capital Market Law, a provision is made for the maximum amounts payable to employees, in the event of their retirement or termination other than by recognition or for misconduct, based on their accumulated periods of service at the balance sheet date on the basis of 30 days pay, in accordance with Turkish Social Security Legislations. In accordance with the Banking Law, banks set provision for pensions by taking the actual payment rates for the previous 5 years into consideration Investments in Securities Under the Turkish Procedural Tax Law, common stocks and investments in mutual funds that have 51% or more of their total portfolios comprised of common stocks of companies that are founded in Turkey are valued at cost; all other investments in mutual funds are stated at market value. Treasury bills, government bonds and private sector bonds traded in organized financial markets are stated at market value. Investments with no quoted market prices are valued with cost plus accrued interest. Listed companies and insurance companies value common stocks at their weightedaverage market value for the last five days prior to the balance sheet date. Treasury bills, government bonds and private sector bonds are stated at cost plus accrued interest. Mutual funds are stated at market price on the balance sheet date.

Mutual fund companies value common stocks at market price on the balance sheet date. The valuation and classification of investments in securities per Banking Law is in line with the International Accounting Standards with the exception that the difference between the initial cost and fair value of the available for sale securities has to be recorded under the shareholders equity. Consolidation There are no requirements for parent enterprises to apply consolidation accounting under the Turkish Procedural Tax Law. Only companies, which are subject to CMB regulations, have to prepare their consolidated financial statements, beginning from December 2003, in accordance with a new CMB communique Turkish Banks with financial subsidiaries must prepare consolidated financial statements, which must be submitted to the Undersecretariat of the Treasury on a quarterly basis. Accounting for Deferred Tax Differences may exist in the tax treatment and the accounting treatment applied by companies, which are subject to CMB regulations. For example, allowances for doubtful accounts are not deductible if legal action is not taken in the same year. Deferred tax liabilities resulting from timing differences are accounted partially, whereas no deferred tax asset is allowed in accordance with CMB regulations. Banks calculate and record deferred tax assets and liabilities related to timing differences. However no deferred tax assets and liabilities are calculated over the effects of inflation accounting both for CMB and BRSA purposes. Related Party Transactions There are no specific rules requiring disclosure of transactions with related parties other than shareholders, subsidiaries and other equity participations. Leases For the leasing transactions incurred before July 1, 2003 the leased property is recorded in the balance sheet of the financial leasing company. Its depreciation is recorded in the leasing company in accordance with the provisions of the Turkish Procedural Tax Law, and the financial leasing firm also records its revaluation. No allocation is made between the capital cost and the interest cost elements of the lease rentals and the entire amount is recorded as income by the financial leasing firm and expense by the lessees. Leasing transactions incurred beginning from July 1 2003 will be accounted generally in line with the International Accounting Standards. D.5 Disclosure, Reporting and Filing Requirements

Disclosure Requirements Various Decrees (Turkish Commercial Code, Banking Regulations and The Capital Markets Board) prescribes the standard format that must be used in preparing annual and supplementary financial statements. Financial statements must be prepared in Turkish lira.

The annual financial statements include the following: Balance sheet; Profit and loss statement; and Notes to the financial statements. Supplementary financial statements include the following: Statement of changes in shareholders equity; Cash flow statement; Cost of sales statement; Profit distribution statement and Net monetary position statement (effective for December 31, 2003 for listed companies) The Ministry of Finance requires that all business entities use the Uniform Chart of Accounts. The chart establishes the standard format for accounts, but some variations are permitted to suit each companys needs. Certain specified entities that use different accounting procedures due to the nature of their operations are not required to conform to certain methods under this Uniform Chart of Accounts. However, these entities must comply with the provisions of the Main Concepts of Accounting, Disclosures of Accounting Policies and Principles of Financial Statements Communiques. The following are the specified entities: Banks; Insurance companies; Certain finance corporations; Leasing companies; Factoring companies; Security portfolio investment funds; Mutual funds; and Financial intermediaries.

Small businesses that use single-entry accounting to maintain their records are required to comply only with the provisions of the Main Concepts of Accounting Communique. Reporting and Filing Requirements A companys board of directors must prepare an annual report, which includes annual and supplementary financial statements and an auditors report, and then submit it to all shareholders 15 days before the annual general shareholders meeting. The companys annual report, including the annual and supplementary financial statements, must be filed with the Trade Registry within 30 days after the annual general shareholders meeting. Listed companies must file their audited financial statements and auditors reports with the CMB and the stock exchange within 10 weeks after the end of their fiscal years. Listed companies must file their reviewed mid-year interim balance sheets, income statements and supplementary financial statements with the CMB and stock exchange within 6 weeks after the end of their mid-year. Listed companies must file their quarterly financial statements with the CMB. Companies that are not listed but

are considered open to the public by the CMB must file their audited financial statements and auditors reports with the CMB within a month after their annual shareholders meeting. Financial intermediaries must file their audited financial statements and auditors reports with the CMB and the stock exchange within 10 weeks after the end of their fiscal years. Financial intermediaries also file their reviewed midyear interim financial statements with the Stock Exchanges within 6 weeks after the end of the midyear (effective from June 30, 2003). Listed companies, financial intermediaries and companies that are not listed but are considered open to the public by the CMB must publish their annual reports in at least two local newspapers within a month after the annual shareholders meeting. Banks must send their reviewed quarterly interim unconsolidated and consolidated financial statements within 45 days and 60 days, respectively, to the Undersecreteriat of Treasury after the end of each quarter. Banks are required to deliver to the Agency and Banks Association of Turkey and publish in the Official Gazette, within five months following the accounting period, a copy each of the year end balance sheet, annual income statement, cash flow statement, statement of changes in shareholders equity and profit distribution statement including the footnotes of these statements, together with auditors reports and reports of the board of directors. Banks Association of Turkey shall publish the financial statements delivered to it in accordance with the procedure to be determined by the Banks Association of Turkeys Board of Directors. A copy each of these financial statements is published in a newspaper published nationwide, together with auditors reports and reports of the board of directors, without footnotes. Insurance companies must file their audited annual financial statements within 10 weeks after the end of the financial year with the Undersecreteriat of Treasury. Mutual funds must file their audited financial statements and auditors reports with the CMB within three months after their year-end. In addition, mutual funds must file their reviewed mid-year interim balance sheets, income statements and supplementary financial statements with the CMB and stock exchange within 6 weeks after the end of their mid-year. Mutual funds must publish their financial statements and auditors reports within three months after their year-end. D.6 Books and Records

All individuals engaged in business as well as public and nonpublic companies must maintain their books of account and prepare their financial statements in accordance with the Uniform Chart of Accounting System. Banks maintain their books of account and prepare their financial statements in accordance with the Banking Law and related communiqus. The TCC requires that accounting books, records and business documents be kept for 10 years.

D.7

Audit Requirements

Entities Requiring Audits All joint stock companies are required to appoint statutory auditors to examine their financial statements on behalf of the shareholders. Audits performed by statutory auditors are limited in nature compared with Western external audits. Limited liability companies with more than 20 shareholders must have at least one statutory auditor who is subject to the rules that apply to joint stock companies. Under the CMB regulations, the financial statements of joint stock companies traded on the Istanbul Stock Exchange, financial intermediaries, mutual funds, investment partnerships and companies not listed but considered open to the public by the CMB, must be audited by independent external auditors in accordance with generally accepted auditing standards in Turkey. Accounting principles issued by the CMB must be applied in these audits. BRSA requires all banks to be audited by independent external auditors annually. In addition, quarterly financial statements are reviewed for all banks. Auditors must also give opinions on the banks consolidated financial statements, which include the financial statements of financial subsidiaries only, at year-end as well as a review report at the end of each quarter. Under insurance regulations, the Undersecretariat of the Treasury requires that independent and external auditors audit all insurance companies in Turkey. Statutory Auditors Statutory auditors are initially appointed under the provisions of the articles of association for a one-year term. Subsequently, shareholders of a company may appoint up to five statutory auditors at the general meeting for terms of up to three years. The auditors are paid a fee fixed by the articles of association or by a decision of the shareholders. Under special circumstances, the shareholders may appoint special auditors in addition to the regular auditors. The TCC disqualifies the following individuals from being hired for the position of statutory auditor: Members of the board of directors Relatives of members of the board of directors Employees of the corporation Persons who have previously been declared bankrupt Civil servants.

In general, auditors are not required to be shareholders or professional experts. However, statutory auditors for banks must have university degrees and banking experience. If a corporation has only one auditor, the auditor must be a Turkish national. If it has more than one auditor, a majority of the auditors must be Turkish nationals. Statutory auditors perform their duties in the name of the shareholders and represent the shareholders. The auditors submit their report at the general shareholders meeting. Statutory auditors examine the activities and transactions of the company and report at the general shareholders meeting on the financial statements, the proposed distribution of profits and the general financial condition of the company. If

necessary, the auditors may call a special meeting. However, the scope of work of a statutory auditor typically is not an examination in accordance with generally accepted auditing standards. Companies generally view statutory auditors as persons fulfilling a legal requirement, not as actual auditors. If a limited liability company has more than 20 shareholders, the rules concerning statutory auditors also apply to these companies.

E.
E.1

Labor Law and Social Security Law


Labor Law

The Previous Labor Code (Law No. 1475) has been amended by the Law No. 4857. The new Labor Code (Law No. 4857) has made important alterations to the previous Labor Law numbered 1475. First of all the new Labor Code has been prepared as being parallel to the International Labor Organization (ILO) Conventions. The new employment relations, the terminations of the employment agreement, the annual vacation have been re-regulated. In summary, the major provisions in the law are as follows: E.1.a) Employment Agreements As a rule, the employment agreements may be for a definite period of time or for an indefinite period. These are the general types of agreements organized within the employment regulation. However, with respect to the new Labor Code, new employment relations such as part time work, and on call work have been regulated and have hereby found a legal source. The agreement with a definite period of time should be concluded in writing between the employer and the employee in respect of works for definite terms or subject to the objective conditions such as the accomplishment of a certain job or the occurrence of a certain event. A Part-time employment agreement shall mean an agreement when the normal weekly working period of an employee is determined to be considerably shorter in comparison with the peer employed under a full-time employment agreement. In the preamble of the new Labor rules, an employment relationship should be accepted as a part-time working relationship if the working weekly period has been stated at least 2/3 of the normal weekly working period. With respect to the new Labour Law, on-call work shall mean an employment relationship where it is agreed by a written agreement that the act of performing a job will be fulfilled in the case the employee is needed in respect of the work to be undertaken thereby. E.1.b) Trial Period The trail period has been re-regulated with respect to the new Labor Code. In case the parties insert the trial clause in the employment agreement, its duration may be a maximum two months. However, the trial period may be extended up to four months with the collective labor agreements. The parties may, during the trial period, terminate the employment agreement without notice and compensation. The rights of the employee related to wages and other benefits for the days worked thereby shall be reserved.

E.1.c) Notification Period The new Labor Code has not brought any amendment with regards to the notification periods. If either party wishes to terminate the employment agreement, the other party must be given advance notice. The notice periods are as follows: Length of employment Less than 6 months 6 1.5 year 1.5 years 3 years More than 3 years Notice period 2 weeks 4 weeks 6 weeks 8 weeks

These periods are the minimum limits and may be increased by mutual agreement. A party that fails to comply with these notice periods must pay the other an amount equal to the pay that the employee would receive during the notice period. In practice, an employee may terminate an employment agreement at any time by the notice period entitlement. However, at the working places where thirty or more employees are employed, the employer, who terminates the employment agreement with an indefinite term of an employee having at least six months of seniority, is obliged to base on a valid reason arising from the qualifications or the behavior of the employee or the requirements of the enterprise, working place or business. The employer is obliged to give the termination notice in writing and state the reason for termination clearly and accurately. The employment agreement, for an indefinite term, cannot be terminated due to any reason regarding the behavior or productivity of an employee before receiving the defense of the said employee against the allegations with respect to himself/herself. The employee whose employment agreement is terminated shall be entitled to file a lawsuit before the labour court within one month following the notification of termination notice claiming that no reason was indicated in the termination notice or that the indicated reason was not a valid reason. E.1.d) Severance Payment The new Labor Code does not regulate directly the service amount, it has only been referred to within article 14 of the previous Labor Code numbered 1475. The service payment procedure will keep its validity until the Severance Payment Fund Draft Law comes into force. When an employment agreement is terminated, an employee may be entitled to a severance payment if he/she has been employed for more than a year. The severance payment is equivalent to 30 days wages for each full year of service starting from the date of employment.

To be entitled to this benefit, the employee must have worked for more than one year in the same place of business or in different places of business belonging to the same employer. The amount of a severance payment is based on the most recent gross salary of the employee. The gross salary also includes the following payments if made regularly: Fringe benefits, Premiums and bonuses, Meal allowances and any other such allowances provided regularly (monthly, annually, etc), The gross salary may also include certain other payments in addition to those mentioned above. Payments for overtime, maternity, non-regular allowances, bonuses, and travel expenses are excluded from the salary base in the calculation of the severance payment. The government fixes a ceiling, which is periodically adjusted on the severance payment calculation base. Should the actual gross wage exceed the ceiling, the amount determined as the current ceiling is taken as the basis for the calculation. As of January 1, 2004 the ceiling is TL 1.485.430.000 As a general rule, if the employee terminates the employment agreement, a severance award does not have to be paid. However, there are exceptions. An employee is entitled to a severance payment if he resigns for reasons of military service or retirement or if he can prove that he was being involuntarily employed under conditions detrimental to his health or safety or that his employer had acted unethically or in bad faith. In addition, women who resign within one year of marriage are also entitled to their severance payment. If the employer, as a rule, terminates the employment agreement the employee is normally entitled to a severance payment. The employee may lose this right if he was terminated for a cause, generally defined as unethical conduct and/or acting in bad faith, as well as for certain reasons of health set forth in the law. We would like to emphasize that the rules stated above related to the severance payment should be effective until the Severance Payment Draft Law becomes effective. E.1.e) Annual Vacation The new Labor Law has increased the Annual Vacation periods. After one year of employment, employees become entitled to be paid annual vacation.

The periods of paid annual leave that must be given to personnel are as follows: Length of Employment 1 - 5 years (including year 5) 5 Less then 15 years 15 years (including year 15)-over Paid annual vacation (Working days) 14 20 26

These periods are the minimum limits determined by law and may be increased by the mutual intention of the parties. However the paid annual vacation should not be less then 20 days for the employees, which are 18 year, or less and 50 years or more in age. If the employment agreement is terminated either by the employer or the employee, the vacation entitlement earned as of that date must be paid to the employee. E.1.f) Work in the case of Maternity and hereafter Concerning new Labor Code, female employees are permitted not to work for a total period of eight weeks prior to and eight weeks after giving birth, thus granted leave for a total period of sixteen weeks. In multiple pregnancies, the leave of eight weeks before delivery shall be increased by two weeks. However, health conditions permitting, the female employee shall be allowed to work until three weeks before delivery if approved by a medical doctor. In such cases, the periods worked shall be added to the period after delivery. The birth vacation after and before the birth has been increased 2 weeks with respect to the new Labour Code. E.1.g) Obligation to Employ the Disabled Handicapped, Ex-Convicts Employers Having more than fifty employees must employ certain number of disabled, handicapped and ex-victims persons. The number is defined by the Council of Minister for each year (3-6% of total employees). E.1.h) Wage With respect to the new Labor Code it has been stated that wages shall be paid in Turkish Liras at the working place or to a special bank account. In cases where the wages were agreed upon in terms of any foreign currency, it may be paid in Turkish Liras calculated on the basis of the foreign currency rate at the payment date. Wages shall be payable at the latest once a month. The payments may be made as frequently as once a week pursuant to employment agreements or collective work agreements.

The other important point is that the wages shall not be paid in promissory notes (bonds), coupons or any instrument that is deemed negotiable in the country or in any other manner whatsoever. The new Labour Code has regulated also the legal result of the non payment of the wage on due time. Concerning new regulations, employees, whose wages were not paid within twenty days following the payment date thereof for reasons other than force majeure, shall be allowed to refrain from complying with their duty to work. E.1.i) Overtime Pay Within the new Labour Code, overtime shall mean hours of work in excess of fortyfive hours per week within the scope of the provisions of the Code. Wages payable for each hour of overtime shall be fifty percent more than the wages payable to one standard hour of work. In cases where an employment agreement stipulates that the total hours of work in a week is to be less than forty-five hours (etc part-time works), any work that exceeds the average weekly hours of work, which are subject to the foregoing principles, up to forty-five hours shall be deemed as overtime. The wages payable for each hour of overtime shall be twenty-five percent more than the wages payable to one standard hour of work. The employee who works overtime or for extra hours shall, at his/her own discretion, be entitled to use one hour thirty minutes of free time for each hour of overtime, and one hour and fifteen minutes of free time for each hour of extra work instead of receiving increased wages. The consent of the employee must be obtained for overtime and the total period of overtime may not exceed two hundred and seventy hours per annum. E.1.j) Compensation Work The employer shall be requested to provide compensation work to be performed for hours not worked in a period of two months in cases where the employee has been given leave upon the request thereof or when the standard hours of work at the working place have been reduced considerably or the working place has been closed due to reasons such as stoppage of work because of force majeure, or closure of the working place before or after national or general holidays, or other similar reasons. Any such work shall not be considered as overtime or extra hours of work. Compensation work shall not exceed three hours in a day, provided that it does not exceed the maximum daily hours of work. No compensation work shall be allowed on holidays. E.1.k) Short time work and Payment For Short Time Work The employer who, due to a general economic crisis or force majeure, temporarily makes a significant reduction in the weekly hours of work at the working place or

who temporarily stops the operations at the working place in part or in whole, shall immediately notify, in writing, the Turkish Employment Institution as well as the Union who is a party to the collective labour agreement, if any, of the circumstances with the justification thereof. The determination of appropriateness of the request shall be made by the Ministry of Labour and Social Security. The principles and procedures related thereto shall be governed by the regulation. E.1.l) Employees personal file According to the new Labor Code the employers shall make a personal file for each of their employees, in which they shall include, in addition to the identification details of the employee, all of the documents and records that the employers are obliged to keep pursuant to this Code and other laws and present them to the authorized officials and offices as and when requested. E.1.m)Principal Employer-Sub Employer Relation The new Labor Code has re-regulated the principal employer - sub-employer relationship. It shall mean the relationship between an employer, who undertakes a job from the other employer with respect to his/her auxiliary works regarding the production of goods or services carried out at his/her working place or works requiring expertise at a part of the main job by reason of the necessity of the enterprise and job or by reason of technology and who employs the employees charged with this job only at the job undertaken at this working place, and the other employer from whom an employer undertakes a job. In such a relation, the principal employer is jointly responsible against the employees of sub-employer with respect to that working place for the liabilities arising from this Code, the employment agreement and the collective labour agreement of which the sub-employer is a party. The rights of the employees of the principal employer cannot be restricted through maintaining to employ by means of recruitment by the sub-employer or no subemployer relation shall be established with a person who was previously employed at that working place. Otherwise, the principal employer sub-employer relation is deemed to be based on a transaction with simulation and the employees of the subemployer are treated by being considered as the employees of the principal employer as from the beginning. The main job cannot be awarded to the sub-employers by division, save the works requiring expertise by reason of the necessity of enterprise and job or by reason of technology. E.1.n) Right of Employee to Terminate The agreement Immediately On Justified Grounds In the case of agreements of permanent employment for definite or indefinite term, the employee may, in the following circumstances terminate the agreement without notice at discretion, prior to its expiry or without waiting for the period of notice: Reasons of Health:

a)

If the performance of the work covered by the agreement of employment is dangerous for the health or the life of the employee for a reason unknown at the time of conclusion of the agreement and resulting from the nature of the work, If the employer or another employee with whom the employee is regularly, closely and directly in contact is suffering from a disease which is contagious or does not agree with his/her work,

b)

Circumstances incompatible with morals, goodwill and the like: If the employer has deceived the employee when concluding the agreement of employment by giving him/her wrong details or conditions regarding and essential particular of the agreement, or by giving information or stating words which do not correspond to truth. If the employer makes statements or acts in any way, which is damaging to the honour and integrity of the employee or of any member of the family thereof; or sexually harasses the employee. If the employer molests or threatens the employee or a member of his/her family or encourages, incites or induces the employee or a member of his/her family to commit an illegal action or if he/she commits towards the employee or a member of his/her family an offense liable to prison, or if he/she indulges against the employee in serious accusation which are dishonoring and groundless. If the employee is sexually harassed by another employee or a third party at the working place and no precautions are taken although the employee has informed the employer. If the employer does not calculate or pay the wage of the employee in accordance with the law or the terms of the agreement of the employment. If it has been decided that the wage would be paid on piece-work or job work basis and the employer gives to the employee less work than what he/she can do and the difference in pay is paid on time basis and does not compensate the difference of pay of which the employee is short or if the conditions of the work are not implanted to. Force majeure: In the case of force majeure in the working place where the employee is employed, involving the stoppage of work for over a week. E.1.o) Right of Employer to Terminate the Agreement Immediately on Justified Grounds In the case of permanent employment agreements for definite or indefinite term, the employer may terminate the agreement, at his/her discretion, prior to its expiry or without waiting for the period of notice in the following circumstances.

Reasons of Health: If the employee catches a disease or suffers an injury due to his/her own or his/her irregular life or his/her addiction to drink, and his/her absence due to these reasons lasts longer than the consecutive office days of five office days in one month. If the Health Board decides that the employee suffers from an incurable illness and that the employment thereof shall create problems at the working place. The right of the employer to terminate the agreement of employment without notice for such cases as illness, accident, birth and pregnancy, which may not be attributed to the fault of the employee, with the exception of the reasons enumerated under paragraph (a) shall commence six weeks after the expiry of notice of Article 17 depending on the period of employment in the working place, in case of disease. In case of birth and pregnancy, this period shall start to run after the expiry of the period in Article 74. However no wage shall be paid during the period in which the employee does not go to his/her work. Circumstances incompatible with morals, goodwill and as such: If the employee has deceived the employer at the time of concluding the agreement of employment by pretending to possess as regards one of the essential points of the agreement, qualifications conditions which he/she does not possess or by giving information or making statements which do not correspond the truth. If the employee speaks words or acts in a manner liable to cast a slur on the employer or on a member of his/her family or if he/she indulges in slander or denunciations without any foundation liable to cast a slur on the employer. If the employee sexually harasses another employee of the employer. If the employee teases the employer or any member of the family thereof or any other employee of the employer; or acts in breach of Article 84. If the employee indulges in acts incompatible with loyalty and honesty such as breach of trust towards the employer, theft divulging the professional secrets of the employer. If the employee commits in the working place an offence liable to more than seven days imprisonment without reprieve. If the employee is absent, without having obtained the permission of the employer or without a peremptory reason for two consecutive days, or twice during the same month, on the morrow of any holiday, or three office days in the course of one month. If the employee does not execute the work he/she has been given, in spite of a warning. If the employee, intentionally or through neglect, compromises the security of the work, if he/she causes to machinery equipment or other articles or materials belonging

to or in the possession of the employer without being his/her property, damage or loss to an extent impossible to cover with his/her ten days wages. III - Force Majeure: Force majeure preventing the employee from working at the working place for a period exceeding one week. IV- The absence of an employee exceeds the notice period specified in Article 17 in cases where he/she is under house arrest or arrest. E.1.p) Unions and Collective Bargaining Agreements The rules regarding the formation of unions are codified in the Unions Act (Law No. 2821) while the rules regarding collective bargaining agreements are contained in the Collective Bargaining Agreements, Strikes, and Lock-Outs Act (Law No. 2822). In Turkey, there is no obligation for a worker to be a member of any union, and there is no obligation to make a collective bargaining agreement for any sector of business or for any work place. Unions are established on an industry-wide basis. The formation of labor unions for a specific work place is not allowed. Collective bargaining agreements can be signed between one or more authorized representatives and either the employers union or an employer who is not a member of any union. In order to be covered by a bargaining labor agreement, a worker must be a member of a union. There is no such requirement for the employer. For the labor union to be regarded as union that is authorized to negotiate a collective bargaining agreement, it must have a membership of more than half of the workers employed in the work place or in each of the work places to be included within the scope of the agreement. Its membership must also include at least 10 percent of the workers employed in that sector. Personnel employed in the public sector do not have the right to form unions or to become parties to collective bargaining agreements. E.2 Social Security Law

There are four laws governing social security in Turkey: 1- Social Security Law 2- Unemployment Law 3- Pension Fund Law 4- "Bag-Kur" Law (Law No. 506) (Law No. 4447) (Law No. 5434) (Law No 1479)

Public sector workers with private law employment contracts and private sector workers who are employed by one or more employers are covered by the Social Security Law.

Both the employees and the employers contribute social security premiums. The contribution rates for employee and employer are 15% and 21.5% respectively (contribution rates for veterans are lower) The premiums, calculated as a percentage of gross salary, are paid within an upper and lower limit, which are TL 2.290,079,100 and TL 458,015,820 (approximately USD 1,635 and 325), respectively, to be applicable between July 2003 and March 2004. Upper and lower limits for social security premiums are updated periodically for inflation adjustment purposes. The coverage of the Social Security System: - Illness - Maternity - Disability - Old age - Death Premium rates for each risk group is presented in the table below: Employers Share (%) 1.5-7 6 1 11 2 Employees Share (%) 5 9 1

Occupational accidents and disease insurance Illness Maternity Insurance Disability, old age and death insurance Unemployment Insurance

Besides the workers themselves, their dependents may also be entitled to certain benefits under certain circumstances. E.3 Unemployment Law

Until 01.06.2000, there was no provision in Turkish social security legislation for unemployment compensation. The following people will be covered within the scope of the unemployment contract; (i) (ii) Those that are considered insured pursuant to be the Social Insurance Law, Insured people, which are covered within the scope of banks, insurance and reinsurance companies, chambers of commerce, chambers of industry and stock exchange markets or funds constituted by the unions of them. Foreign workers.

(iii)

The payments and services that shall be rendered within the scope of unemployment insurance have been determined as follows. Unemployment appropriation, Illness and maternity insurance premiums,

Finding a new job, Professional development, acquisition and cultivation training. Unemployment insurance premium is at a rate %1. E.4 Pension Fund Law

This law relates to the social security arrangements of public sector employees. In order to be eligible for inclusion within the scope of the Pensioners' Fund, the employee must be: a citizen of the Republic of Turkey, over 18 years of age, employed in one of the workplaces specified in the law, employed in one of the fields of work specified in the law. A portion of the benefits provided to personnel covered by the fund is contributed by the government and the remaining portion is contributed by the pension fund itself. The major types of contributions provided by the fund are as follows: Health contributions Family contributions Death contributions Veterans' pensions Widows' and orphans' pensions E.5 Bag-Kur Law

The Bag-Kur Law governs the social security provisions for the self-employed. It specifies those who fall within its scope either by obligation or voluntarily. However, foreigners who are residents in Turkey may be included within the scope of the law if they choose to do so. The principal source of income of Bag-Kur consists of premiums paid by the persons covered by the law. There are 24 categories or classifications within the system and premiums payable are based on the individuals category. E.6 Private Pension

A study regarding the Individual Pension Saving and Investment System, which was carried-out for the supply of additional income to the individuals in Turkey during their retirement was finalized and put into practice through the Individual Pension Saving and Investment System Law numbered 4632 and published on 28.03.2001 (the Law) and became effective on 07.10.2001. The Law determines the rights and obligations of the participants regarding collection of the contribution shares and utilization of same in the accounts of pension investment fund (the Fund), participation in and separation from system, conditions for retirement and provides regulations regarding the the the the

establishment, commencement of activities and management of pension companies and pension investment funds. According to the system indicated in the Law, the voluntary participants shall deposit contribution shares determined by agreement to the individual pension accounts to be opened before the pension companies to be established according to the conditions foreseen in the draft. The contribution shares provided by the participants and their employers, if any, shall be kept in the pension investment funds to be constituted by the pension companies and to be operated according to the principles of distribution of risk and ownership of trust. Pension companies shall establish at least three pension investment funds formed of capital market instruments and having different fund structures. These funds do not have legal personalities. In order for the funds established by the pension companies to be active, a fund management agreement should be signed with at least one fund manager and the fund could be managed only by fund managers apart from the obligations of registration, entry into records, etc. foreseen by legally. The fund managers are liable to manage the fund in accordance with the Individual Pension Law, Capital Market Law and the provisions of the Internal Regulation of the fund, Pension Agreement and other legislation to be prepared and registered by the pension company upon obtaining the permission of the Capital Market Board (the Board). As it is understood from the general information given, the Law regulates the system only with the main lines and decides on the application issues regarding the principles, to be regulated by the regulations-in line with the general norms hierarchy, to be enacted within 6 months following the publication of the Law. If we look at the general framework of the law we can point out the main properties of the individual retirement system as followed: The Main Properties of the Individual Retirement System: The system will be supplementary to the existing state pension plans as an additional system but an alternative one. The system will be voluntary and will be based on defined contribution plans. The contributions collected from the individuals will be transmitted to pension funds, which will be established as the structure of a mutual fund. Anybody who is able to use his civil rights can enter the system. Only retirement companies (which have been introduced to the financial markets with this new law) will establish the pension funds. Retirement companies will be established with permission of the Underscreteriat of Treasury. Retirement companies need an initial capital of at least 20 trillion TL for establishment. Half of this amount should be paid in cash when the company begins to operate. At least 3 different funds with different portfolio structures must be established. (In this way individuals will be able to choose a fund according to their personal risk and yield expectations).

Although not stated in the law clearly, both employees and employers, if any, as well as individuals can make contributions to the pension funds. The rights of the investors are portable and accumulations can be transferred into another retirement company. At retirement, the investors can take their accumulations as lump sum or they can withdraw the accumulations, partially. They have an option of either buying an annuity from an insurance company or leaving the money in the funds to be invested. Retirement age is 56 provided that, people make contributions to the fund for at least 10 years. Portfolio management companies according to the Law, which will be authorized by Capital Markets Board, will manage the fund. The assets of the fund will be deposited in a custodian bank, which will be approved by the Board. The custodian that is selected by the pension company and approved by the Board will be a bank, which operates in accordance with the Law on Banking. An Advisory Board will coordinate the system. Relevant institutions, Undersecreteriat of Treasury and Capital Markets Board, will make the regulations. There are two regulatory bodies of the system, which are the Undersecretariat of Treasury and the Capital Market Board. In general, the Undersecreteriat of Treasury will regulate the following issues. Undersecreteriat of Treasury shall lay down principles and procedures relating to the following subjects; The standards of legal documents related with the retirement company such as pension contracts , procedures regarding transfer of accumulations, entrance to the system and retiring from the system, the fees, entrance fees for individuals, operating fees for the retirement companies.., the establishment and operations of the retirement companies, internal audit of the retirement companies, the qualification requirements for the staff of the retirement companies, independent audit of retirement companies.

Further to the above-mentioned issues, in general the Capital Markets Board will regulate the following issues. The Board shall lay down principles and procedures relating to the following subjects: The standards of legal documents related with the pension fund such as; fund prospectuses, internal statute, application forms, the establishment and operation procedures of the pension funds, the registration and sale of the fund shares, internal audit of the fund,

the organization structure of the fund, public disclosure, portfolio restrictions of the funds, the minimum and maximum percentages of the assets that will be invested in each asset class having different risk and yield structure, evaluation of the funds assets, licensing portfolio management companies, mergers of the funds, independent audit of the funds, setting up performance standards.

The general process of the private pension system can be elucidated as followed;
CAPITAL MARKETS BOARD

MINISTRY OF SOCIAL SECURITY Supervision of Social Security side of the system Contribution payment EMPLOYER EMPLOYEE INDIVIDUAL CONTRIBUTOR

INDEPENDENT AUDIT FIRM

Management of Funds PORTFOLIO MANGEMENT FIRM

Fund establishment permission, supervision of activities. ADVISORY BOARD

Tax arrangements

MINISTRY of FINANCE

Stock exchange transactions TREASURY UNDERSECRETARY Pension firm establishment permission, supervision of activities. STOCK EXCHANGE FUND 1 INTERMEDIATE FIRMS

Custodians SPK approved preserving method TAKASBANK

PENSION FIRM

FUND 2

FUND 3 ...number of funds having different risk and return compositon may be more than three...

F.

Incentives

Turkey provides various incentives and grants to the investors for the purpose of facilitating larger investments and capital contributions by the local and foreign investors and eliminating the regional imbalances. The current incentive regime is in line with Turkeys commitments under the WTO and customs union, hence, it does not breach the international liabilities and commitments of Turkey. There is no discrimination between the local and foreign investors with respect to the application of incentives. The incentives granted to the investors under the current regime can be classified as follows. F.1 Investment Incentives Investment Allowance This incentive provides a deduction of 40% of the purchase price of the brand-new fixed asset purchases exceeding TL 5 billion, from the corporate tax base. Incentive certificate is not required for investment allowance. Taxpayers are allowed to apply the investment allowance to their corporate income automatically, provided that the qualifications of the fixed asset(s) purchased meet the criteria set forth in the Law. Investment allowance is carried forward indefinitely, if the corporate tax base is negative, or not sufficient to meet the investment allowance. Carried forward investment allowance is indexed for inflation on annual basis. The investment allowance system does not have an impact on the depreciation. In other words, an investment allowance is given in addition to the depreciation of the asset for tax purposes. Any brand new fixed asset exceeding TL 5 billion is eligible for investment allowance, except for cars, aircraft, sea vessel, intellectual property (purchase of licenses, royalties, trademarks), purchase of lands and lots, construction and purchase of buildings that will not be utilized as a place of business or production facility, furniture and fixtures that are not directly relevant to the production of goods and services. Exemption from Customs Duties and Fund Levies This incentive measure ensures that imported machinery and equipment within the scope of an incentive certificate are imported to Turkey with full exemption from custom duties and fund levies. Since most machinery and equipment imported from the EU has been exempt from customs duties due to the customs union, this exemption applies to imports from outside the European Union. Passenger cars, buses, truck trailers, truck tractors, trailers, furniture, yachts, transmixers, uninterrupted power supplies, concrete plants, forklifts, concrete pumps, construction materials, and ceramic or porcelain kitchen apparel, as well as raw, intermediate or operating materials are not eligible for customs exemption.

Exemption from VAT Machinery and equipment within the scope of an incentive certificate, both imported and purchased from domestic market, are exempt from VAT. Raw materials, spare parts and vehicles (except trucks heavier than 45 tons and certain other trucks used in specified activities) may not benefit from this exemption. Exemptions from Certain Taxes, Duties and Fees Investors who undertake an export commitment of USD10,000 upon the completion of the investment are granted exemptions from stamp taxes, duties, and fees related to the company establishments, land registration, capital-in kind contributions transactions. There are also exemptions from taxes on credit charges for investment credits with at least one-year term. Subsidized Credits Credits mat be granted to following investments based on certain criteria; -Research and development -Environmental protection projects -Priority technology investments determined by the Science and Technology High Council -Investments in technology parks -Regional development investments Credits are offered at 50% of the investment cost up to a maximum of TL 4.5 trillion for regional development investments and TL 500 billion for others, at subsidized interest rates (20-30%) with grace periods of 1 to 3 years. However, the grant of a subsidized credit is limited due to shortage of available funds. F.2 Export Incentives

Current export incentive measures indirectly assist exporters through extending export credits and insurance and by providing some aids for certain export related expenses. There are also exemptions from taxes, charges and fees. Export Credits Turkeys efforts in promoting exports are mainly concentrated in facilitating credits through Turk Eximbank (the export credit bank of Turkey) to exporter companies or to manufacturers of export goods. Turk Eximbank has fully adopted its credit conditions to that of the EU after the customs-union agreement. Exporters may obtain pre-export loans both in TL and foreign exchange. The pre-export loan extended to exporters is a maximum 100% of the FOB value of export commitments, with a ceiling of TL 6 trillion for TL credits and USD10 million for fx credits. The maximum maturity of export loans is 360 days. The interest rates vary between LIBOR+1.50 and LIBOR+3.0 depending on the amount, type and principal amount of the loan and existence of an insurance scheme.

Furthermore, companies operating in priority development regions benefit from even lower interest rates. Exemption from Taxes, Duties and Charges All types of export credits, including letters of guarantee, letters of credits and all other export-related transactions are exempt from all taxes and charges. Insurance of Export Receivables Turk Eximbank insures receivables of exporters, which are derived from export proceeds, against commercial and political risks. Commercial risks in specific are; bankruptcy of the buyer, buyers failure in paying the export amount or rejection of the goods shipped to buyer. Political risks are considered as cancellation of buyers import permission, state of war, civil war, seizure of goods during shipment and transfer difficulties. Exporters, who have their export proceeds insured, may also use these insurance policies as collateral in obtaining export loans from other commercial banks. All shipments made by exporters to countries that are short-listed by Turk Eximbank within a payment period of 360 days are eligible to benefit from the insurance scheme. 90% of the losses that arise from reasons of commercial and political risks are compensated. Exemption from VAT and Customs Duties for Raw Materials and Intermediary Goods Import raw materials, intermediary goods, packaging materials to be used in the production of goods to be exported are exempt from customs duties, VAT and other charges. A letter of guarantee is submitted to the customs authorities during the importation of these materials, which is returned to the exporter when the goods are exported. State Aids for Certain Expenses State aids are provided for, management and promotional expenses for new foreign offices, registration expenses of patents and other industrial property rights, personnel training expenses, trade fair and show expenses. However, these subsidies are very minor measures. F.3 Free-Trade Zones

Turkey has a very attractive application of Free Trade Zones (FTZ). FTZ are regions where a more attractive investment climate is offered to investors. Both local and foreign capital companies may equally benefit from the incentives granted in Free Trade Zones. Registration rules and procedures to apply during the operational phases are minimized.

The most important advantage given to investors in the free trade zones is the exemption from all kinds of taxes. Profits derived from commercial activities in the FTZs are exempted from corporate and any other income tax. Similarly, all kinds of transactions within the FTZ are exempt form VAT, stamp duty and other indirect taxes. Furthermore, salaries paid to employees working in the zones are exempted from income tax. However, salaries paid to employees are subject to social security contributions. FTZ earnings can be transferred freely to any country, including Turkey, without any prior permission from a competent authority and are not subject to any kind of taxes, duties and fees. Free Trade Zones, even though established within the political boundaries of Turkey, are considered and treated as outside of Turkish customs territory. Hence, sales from FTZs to Turkey are treated as imports and VAT and customs duty are charged depending on the country of origin of goods imported. The sales made from Turkey to FTZs are treated as exports. Contrary to the applications of most free trade zones of other jurisdictions, there are no restrictions on import of goods from FTZ into domestic market. There is a fee payable at a rate of 0.5% over the CIF values of goods that are brought into FTZs from abroad and CIF values of the goods imported to Turkey from FTZ. Both local and foreign investors are required to obtain an operation license in order to operate in a FTZ, from the General Directorate of Free Trade Zones, Undersecratariat of Treasury. The application fee for obtaining the operation license is USD 5,000, which is refunded in case of refusal of the application. The validity period of operation licenses are granted for 15-30 years, which can be extended further at the expiration of the license. Investors who receive an operation license pay rental fees ranging between USD 511/m2/month for office, warehouse, factory buildings and USD 4/m2/month for open storage areas in the FTZ. It is possible for investors to build their own factories/premises in some FTZ. Infrastructure of any FTZ is comparable with international standards. Loading, unloading and transport services for goods coming to a zone are performed by the operator company of the FTZ. Loading/unloading fees are around USD 5/ton. In line with the incentives introduced in the FTZ, trade volume in FTZs has reached considerable figures. Whilst total trade volume in Turkish FTZ reached USD 17 billion between years 1988 1997, only in year 2000, a trade volume of USD 11.3 billion USD has been reached. Due to the very attractive conditions available for FTZs, there are some pressures on the Government to re-examine the exemptions. Hence, the current exemptions and

advantages of FTZs would be restricted in future, however the vested rights for the existent investors, are not expected to be eliminated immediately. Within the recent information available concerning the draft law which is expected to amend the current free trade zone legislation, it is expected that the tax exemption practice will be limited until the expiration of the entities operation licenses in FTZs (dividend withholding tax may become applicable for dividends paid out such corporate earnings). F.4 Technology Development Zones

Law no 4691 concerning Technology Development Regions grantes significant advantages to investors who will carry out research and development activities in the science and technology fields in special zones- known as techno parks. Techno parks are required to be established on land near to universities, advanced technology institutes or research and development centers. Advanced technology firms within the techno parks are required to conduct research and development activities to develop technology or software products or to transform a technological invention into a product, model or a service, through efficient use of the resources of the universities or institutions that the techno parks are established nearby. The incentives provided to techno parks are as follows; - The earnings derived from the software or products developed as a result of the research and development activities are exempt from corporate income tax for 5 years following the establishment of a techno park. - The salaries of researchers, software developers, and research and development personnel are exempt from income tax for 10 years following the establishment of a techno park. F.5 Research And Development Incentives

State Aids for R&D Activities The state aids for R&D activities comprise a mix of reimbursement of certain expenses and grants of subsidized credits. The R&D activities to benefit from state aids are the following: -Concept development -Technologic and economic feasibility studies -Design and drawing studies -Prototype production -Establishment of pilot facility -Pilot production -Patent and license studies -Post-sales solutions studies for problems arising from product design -Laboratory studies in the transition stage from design to implementation

Personnel expenses, cost of machinery, equipment and software, consultancy and other service fees, fees paid to scientific institutions, registration fees for patent and industrial designs to the Patent Institution, cost of R&D related materials are reimbursed up to 60%, as a State aid to the R&D activities. State aid is provided for 3 years for each project. The Scientific and Technical Research Council of the Turkish Republic evaluates each project and determines whether the State aid would be granted along with the ratio to be applied. R&D projects for the purpose of developing a new product of commercial value, improving the competitiveness of an existing product, or developing a production management system technique may qualify to benefit from the capital support 50% of the total project costs, up to USD 1 Million, for a term of 2 years. The repayment terms and conditions of the capital support are determined in the project agreement. Evaluations of projects to benefit from capital support are made by the Technology Development Foundation of Turkey. Corporate Tax Deferral For the purpose of encouraging the companies to engage in R&D activities, Corporate Tax Law provides a deferral of 20% of corporate tax, not exceeding the annual R&D activities of the taxpayers in a tax year. The deferred tax is payable in 3 years in equal installments, free of interest. R&D expenses shall be made in search of a new technology. Companies are required to apply to Ministry of Finance to defer their corporate tax before the due date for the submission of its corporate tax return. The Ministry of Finance evaluates the applications through counseling the science institutions. Promoting Investment in Less Developed Regions As it is expected to be introduced in the year 2004, a special regulation concerning promoting investment and employment in less developed regions of the country will define the direct state aid applicable in the coming years. In particular, it is expected that state aids will be classified under four main topics; - elimination of 80% of income tax over the salary income of new employees working in these areas , - elimination of 80% of social security premiums for covered employees, - granting of free land for entities starting operation in these areas and having more than ten employees, - subsidizing 20% of electricity cost for entities starting new operation and having more than ten employees in these areas.

APPENDICES
Appendix 1: Useful Addresses and Telephone Numbers When dialing from an international location, the international telephone country code for Turkey, 90, must be used as a prefix. When dialing long distance within Turkey, the number 0 must be added before the area code. Capital Market Board (CMB) SPK Doc. Dr. Bahriye Ucok Cd. No. 13 Besevler-Ankara Telephone: (312) 212 62 80 Facsimile: (312) 221 33 23 Website: www.spk.gov.tr T.C. Merkez Bankasi Istiklal Cad. No. 10 Ulus-Ankara Telephone: (312) 310 36 46 Facsimile: (312) 310 74 34 Website: www.tcmb.gov.tr Istanbul Ticaret Odasi Resadiye Cd. 34378 Eminonu-Istanbul Telephone: (212) 455 60 00 Facsimile: (212) 513 15 65 Website: www.ito.org.tr Istanbul Sanayi Odasi 80050 Mesrutiyet Cad. No. 118 Tepebasi-Istanbul Telephone: (212) 252 29 00 Facsimile: (212) 245 50 84 Website: www.iso.org.tr Istanbul Borsasi 34467 Resitpasa Mah. Tuncar Altun Cad. Emirgan-Istanbul Telephone: (212) 298 21 00 Facsimile: (212) 298 25 00 Website: www.imkb.gov.tr Ministry of Finance Maliye Bakanligi Ilkadim Cad. TBMM Karsisi Dikmen-Ankara

Central Bank of Turkey

Istanbul Chamber of Commerce

Istanbul Chamber of Industry

Istanbul Stock Market

Telephone: (312) 415 29 00 Facsimile: (312) 425 00 58 Website: www.maliye.gov.tr Ministry of Foreign Affairs Disisleri Bakanligi 06100 Balgat-Ankara Telephone: (312) 292 10 00 Facsimile: (312) 287 16 83 Website: www.mfa.gov.tr Sanayi ve Ticaret Bakanligi Eskisehir Yolu 7. Km ODTU Karsisi No.154 Ankara Telephone: (312) 286 03 65 Facsimile: (312) 286 53 25 Website: www.sanayi.gov.tr Icisleri Bakanligi 06659 Inonu Bulvari Kizilay-Bakanliklar Ankara Telephone: (312) 425 72 14 Website: www.icisleri.gov.tr Adalet Bakanligi 06659 Kilzilay-Bakanliklar Ankara Telephone: (312) 417 77 70 Website: www.adalet.gov.tr Calisma Bakanligi

Ministry of Industry and Commerce

Ministry of Interior Affairs

Ministry of Justice

Ministry of Labor Inonu Bulvari No. 42 Emek-Ankara

Telephone: (312) 212 97 00 www.calisma.gov.trUndersecretariat for Foreign TradeDis Ticaret Mustesarligi 06510 Inonu Bulvar No:36 Emek-Ankara Telephone: (312) 212 88 00 Website: www.foreigntrade.gov.tr Undersecretariat of the Treasury Hazine Mustesarligi 06510 Inonu Bulvar No:36 Emek-Ankara Telephone: (312) 212 88 00 Website: www.treasury.gov.tr Bankalar Birligi 34440 Nispetiye Cad. Akmerkez B3 Blok Telephone: (312) 212 09 73 Facsmile: (312) 282 09 46 Website: www.tbb.org.tr

Union of Banks Kat 13 Etiler-stanbul

Union of Chambers and Markets (a semi-official organization composed of local chambers of commerce and industry) 418 32 68 Union of Chambers of Certified Public Accountants Facsmile: (312) 232 50 73

Odalar Ve Borsalar Birligi Ataturk Bulvari No.149 Bakanliklar-Ankara Telephone: (312) 413 80 00 Facsmile: (312) Turmob Genlik Cad. No. 107 Anttepe-Ankara Telephone: (312) 232 50 60 Website: turmob.gov.tr

Appendix 2: Economic Performance Statistics The following table presents leading indicators of Turkeys economic performance from 1999 to 2002. 1999 Change in real GNP (%) GNP (TL billions) Retail price inflation (%) GNP per capita (US$) Total external debt (US$ billions) Exports (US$ billions) Imports (US$ billions) Trade balance (US$ billions) (6.4) 111,684,000 62.9 2,878 102.11 26.59 40.69 (14.1) 2000 6.3 125,596,129 39 2,987 119.69 27.77 54.50 (26.73) 2001 (9.4) 2002 7.8

179,480,078 273,463,168 68.5 2,143 115.19 31.33 41.40 (10.07) 29.7 2,584 127.47 35.7 51.7 (16)

Source: State Institute of Statistics, State Planning Office, International Financial Statistics 2002.

Appendix 3: Exchange Rates The table below provides the exchange rates of the Turkish lira (TL) against major currencies at 31 December from 1999 through 2002. TL per Unit of Foreign Currency 1999 British pound French franc Japanese yen (100) Swiss franc U.S. dollar Euro 872,501 82,642 5,274 337,292 540,098 542,096 2000 2001 2002

993,878 2,099,963 2,640,240 94,299 5,942 407,884 195,331 11,009 13,792

864,185 1,180,579

671,765 1,446,638 1,639,745 618,561 1,281,287 1,718,945

Source: Central Bank of Turkey.

Appendix 4: Trading Partners The following table presents Turkeys major trading partners in 2002. Exports Country Germany United States United Kingdom Italy France Russian Federation Netherlands Israel Belgium-Luxembourg Greece Romania Saudi Arabia Algeria UAE Bulgaria Austria Denmark Poland Egypt Ukraine US$ (millions) 5,811 3,229 2,987 2,237 2,108 1,163 1,026 833 667 573 552 535 503 440 338 363 363 341 321 309

Country Iran Germany Italy United States France United Kingdom Switzerland Japan Spain Netherlands China Belgium-Luxembourg Algeria Ukraine Iran South Korea Saudi Arabia Libya Romania Austria India Sweeden Source: State Planning Office.

US$ (millions) 300 6,976 4,102 3,050 3,007 2,416 2,076 1,445 1,386 1,303 1,364 1,266 1,049 969 919 900 788 754 649 579 564 534

Appendix 5: Import and Export Statistics The following table shows Turkeys leading exports and imports by commodity group in 2002. Exports Commodity Group Industrial products Agriculture and forestry Mining and quarrying US$ (millions) 33,297 2,057 374

Imports Commodity Group Industrial products Agriculture and forestry Mining and quarrying Source: State Planning Office.

US$ (millions) 41,967 1,698 7,192

Appendix 6: Corporation Tax Calculation The following is a corporation tax calculation for a Turkish resident company for the year ending on 31 December2003. TL (millions) Calculation of Taxable Income Net profits per financial statements Investment allowance Dividend income Corporation tax base Calculation of Tax Corporation tax (TL 300,000 million x 30%) Total tax payable Net after-tax profits Calculation of Dividends Paid to Shareholders Total dividend distributed to shareholders Dividend withholding tax (TL 810,000 x 10 %) Net dividends 81,00 (*) 729,000 900,000 (300,000) (300,000) 300,000

90,000 90,000 810,000 810,000

(*) In case the shareholders are resident real person, non-resident company or person, % 10 withholding tax calculated over the distributed dividend by the resident company, the dividend distribution to resident company are not subject to withholding tax.

Appendix 7: Branch Tax Calculation The following is a corporation tax calculation for a Turkish branch for the year ending on 31 December2003. TL (millions) Calculation of Taxable Income Net profits per financial statements Calculation of Corporation Tax Corporation tax (TL 100,000 million x 30%) Calculation of Withholding Tax Tax base subject to withholding tax Withholding tax (TL 70,000 million x 10%) Total taxes withheld Calculation of Total Tax Corporation tax Withholding tax Total tax 100,000

30,000 70,000

7,000 7,000

30,000 7,000 -37,000

(**) It is assumed that all profits are repatriated to headquarter, the withholding tax will be applied on the profits of non-resident branch that are repatriated to headquarter

Appendix 8: Treaty Withholding Tax Rates The following table presents the maximum withholding rates for dividends, interest and royalties under Turkish tax treaties. Dividends % Albania Algeria Austria Azerbaijan Belarus Belgium Bulgaria China Croatia Denmark Egypt Finland France Germany Hungary India Indonesia Israel Italy 5/15 12 25/35 12 10/15 15/20 (a) 10/15 10 10 15/20 5/15 15/20 15/20 15/20 10/15 15 10/15 10 15 Interest % 10 10 15 10 10 15 10 10 10 15 10 15 15 15 10 10/15 10 10 15 Royalties % 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 15 10 10 10

Dividends % Japan Jordan Kazakhstan Korea Kyrgyzstan Kuwait Lithuania Macedonia Malaysia Moldova Mongolia Netherlands Northern Cyprus Norway Pakistan Poland Romania Russian Federation Singapore Slovak Republic Sweden Tajikistan Tunisia 10/15 10/15 10 15/20 10 10 10 5/10 10/15 10/15 10 5/10 15/20 25/30 10/15 10/15 15 10 10/15 5/10 15/20 10 12/15

Interest % 10/15 10 10 10/15 10 10 10 10 15 10 10 10/15 10 15 10 10 10 10 7,5/10 10 15 10 10

Royalties % 10 12 10 10 10 10 5/10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10

Dividends % Turkmenistan Ukraine United Arab Emirates United Kingdom United States Uzbekistan Bangladesh Sudan Czech Republic Letonia Spain Nontreaty countries 10 10/15 5/10/12 15/20 15/20 10 10 10 10 10 5/15 10(b)

Interest % 10 10 10 15 10/15 10 10 10 10 10 10/15 7/24 (c)

Royalties % 10 10 10 10 5/10 10 10 10 10 5/10 10 20/25(d)

(a) 5% or 10% is applied under certain conditions mentioned in the protocol attached to the agreement (b) The local rate is applicable in case it is lower than treaty rates (c) For details regarding these rates, see C3 (d) 25% applies on permanent sales of intangible rights, 20% applies for their use

Appendix 9: Individual Income Tax Calculation The following example illustrates the calculation of tax for an individual earning selfemployment income for2003. TL (millions) Calculation of Taxable Income Self-employment earnings Less allowable deductions Losses incurred in2000 Life and health insurance premiums Taxable income Calculation of Tax Payable Income tax:* TL 5,000million at 20% TL 7,000million at 25% TL 6,500million at 30% TL 18,500million Total tax . TL (millions) 20,000 (1,000) (500) 18,500

1,000 1,750 1,950 4,700 4,700

Appendix 10: Social Security Contributions The table below presents the social security contributions as percentages of salary for employers and employees of service companies, if the employees are Turkish citizens. Employers Share (a) % Type of Insurance Accident Maternity Sickness Pension, disability and death Subtotal Unemployment insurance premium (b) Total contribution 1.5 1.0 6.0 11.0 19.5 2 21.5 5.0 9.0 14 1 15.0 Employees Share (a) %

(a) The contribution percentages are applied to salaries of Turkish citizens earning up to TL 2.290 million a month from July 2003 to March 2004. (b) The state contributes an additional 1% of an employees gross salary for unemployment insurance.

Ernst & Young in Turkey Ernst & Young is one of the leading professional services firms in Turkey. The practice in stanbul was established in 1983. Ernst & Young has 4 offices in 4 cities. (stanbul, Ankara, zmir, Bursa). As of today there are 5 member firms of Ernst & Young International: Kuzey Yeminli Mali Mavirlik A.., Gney Serbest Muhasebecilik Mali Mavirlik A.., ney Serbest Muhasebecilik Mali Mavirlik A.., Ernst & Young nsan Kaynaklar Danmanlk A.., Ernst & Young Kurumsal Finansman Danmanlk A.. in Turkey. These five firms, who are members Ernst & Young International are providing services to our clients established in different areas of Turkey through 29 partners and more than 700 professionals and support staff recruited in our stanbul, Ankara, zmir and Bursa Offices. Ernst & Young in Turkey currently employs highly motivated and well educated professionals; many of whom have gained experience from working abroad as part of their standard professional career development program and who committed themselves to show our clients that Ernst & Young is better in responding accurately and timely to their needs, if necessary by providing outstanding multinational clientservice teams anytime and anywhere in the world. Ernst & Young offices have been able to create a client edge based on technical precision and professional dedication. Ernst & Young offices serve its clients with custom-made solutions directed towards the specific needs of clients. As a member of Ernst & Young International, our Turkish firm can draw upon the resources of the worldwide network of Ernst & Young, which ensures prompt and continuous access to a great team of experts. Tax Consulting: We design and implement domestic and international tax planning strategies to help our clients operate efficiently and effectively and minimize their taxes worldwide. We assure compliance with tax regulations and assist in dealing with tax authorities. Accounting: We help develop and improve accounting systems and controls, comply with industry and fiscal requirements, as well as changing regulations, and we account for complex transactions. We provide owner-managed companies with bookkeeping, accounting, internal audit and reporting services. Auditing Services: An Ernst & Young audit is individually tailored, cost-effective and focused on the clients areas of highest risk. We provide suggestions for improvement in controls, productivity and management. Inbound Investment: We help clients design market-entry strategies and identify potential local partners and suppliers. We advise on legal structure, financing, management structure, information systems, expatriate remuneration and employment issues. Corporate Finance: We help companies initiate, structure and manage transactions; raise money through debt, equity and development capital; negotiate joint ventures and strategic alliances; conduct business valuations; and conform to stock market requirements. Mergers and Acquisitions: We help our clients locate suitable business partners, targets for mergers or acquisitions, or purchasers for all or part of their companies. We assist with integrating acquired operations into existing companies.

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Publications Ernst & Young produces many publications that examine the challenges encountered by companies doing business across borders. The International Business Series, which includes the Worldwide Corporate Tax Guide, The Global Executive, TaxNews International and the Doing Business In series, is available on CD-ROM as EY/Passport. In addition, the firm produces a range of other publications that will be of interest to companies doing business in Turkey. International Publications Worldwide Corporate Tax Guide: An annual publication summarizing the corporate tax systems in more than 130 countries. The Global Executive: An annual publication summarizing the personal tax systems and immigration rules and procedures in more than 130 countries. Doing Business In books: A series of books that survey the investment climate, taxation, forms of business organization, and business and accounting practices in more than 20 countries. Local Publications Tax Circulars: A regular bulletin providing information regarding developments in local tax laws and other related legislation. Special Tax Reports: A periodic publication that includes a detailed analysis of certain topics that may be of interest to taxpayers. Annual Tax Guide: An annual publication that includes some interesting questions and answers regarding taxation. Tax Agenda: A monthly publication that includes articles on current issues of that month which are prepared by our professionals, tax news from the world and some basic practical information Private Pension: A monthly publication that includes articles on the newly established private pension regulations and applications. Web Sites www.insankaynaklari.com www.vergidegundem.com

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