• Partnerships
• Corporations

The legal differences between the two, concern the allocation of liability and the legal identity of the
entity. In principle, both partnerships and companies are available as vehicles for foreign investment
although for partnerships only a few practically available. Corporations established by foreign joint
venture partners with or without a Turkish joint venture partner are treated as Turkish corporations, and
are entitled to all rights available to Turkish companies under the Turkish Commercial Code.

The law requires that all operations involving foreign capital must first apply to the Foreign
Investment Directorate ("FID") for approval.

Partnerships

A partnership is formed by two or more real persons entering into a contract. There is no separate
and distinct legal entity and the partners share equal rights and obligations. The partners are jointly
and severally liable to the creditors of the partnership.

A partnership is that formed for specific (i.e. construction) projects over a certain period either in
the form of a consortium or so-called Joint Ventures. While the first is a general partnership, the latter
is treated as a single entity for corporate tax purposes.

Partnerships are not often the preferred vehicle for foreign investors in Turkey. Firstly, they are not
regarded as eligible for most of the incentives practically. Secondly, because the partners have joint
and separate liability for the acts of the partnership, a foreign partner must first establish another entity
in Turkey. Finally, the operational elements of the partnership are not provided statutorily and must
b e established contractually.

Corporations

A corporation may exist in one of four forms:

• Limited Liability Company;
• Joint Stock Company;
• Kollektif (a type of unlimited company);
• Komandit ( a type of unlimited company);

The first two forms are the only types of organisation open to foreigners. They exist as a separate
legal entity and offer their shareholders limited liability. The most common type of business entity in
Turkey is the joint stock company and generally, foreign investors establish such a corporation for doing
business in Turkey.

Limited Liability Company

Limited liability companies (limited sirket) may be composed of real persons or legal entities and
must consist of no more than 50 partners. The minimum capital contribution of a foreign joint venture
partner is the equivalent of US$ 50,000 per foreign partner. Where there are two or more foreign joint
venture partners, the aggregate amount can be shared in any proportion. All partners are personally
liable for the debts of the company up to a maximum of their contribution, however, partners are not
held liable for the unpaid portions of others' contributions. The overall share capital must be a
minimum of 500 million TL with effect from 27 June 1995.

Shares held in a limited liability company are non-negotiable and may be transferred only with the
approval of the other partners. Transfers must be approved by a 75% majority vote, with at least 75%
of the total capital represented. Limited liability companies are also prohibited from engaging in
banking or insurance business. A limited liability company differs from the joint stock company in that its
capital is not divided into shares of stock nor represented by share certificates. There is no board of
directors for a limited company. Instead the appointed manager has authority to run the company.

Joint Stock Company

A joint stock company is defined as a corporation having its own trade name and a predetermined
amount of capital divided by shares. The liability of the shareholders is limited to their capital.

The structure and organisation of joint stock companies are subject to regulation by the Turkish
Commercial Code. However, the founders of joint stock companies are afforded significant flexibility in
drafting the articles of association, thereby serving the needs of the specific venture. Capital Market
Board (CMB) regulations also apply to joint stock companies whose shareholder's number at least
250, 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. The minimum capital contribution by each foreign joint venture
partner (shareholder) is US$ 50,000. The overall share capital must be a minimum of TL 5 billion
with effect from 27 June 1995.

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 bearer form. (the issuance
of the latter being dependant on the payment of the registered shares). Registered shares are freely
transferable on condition to be approved by the board of the company, unless such is prohibited by the
company's articles of association. Bearer shares are freely transferable under the Code of
Obligations, unless otherwise agreed by the parties

Decision making in a joint stock company is by majority vote. The Turkish Commercial Code
includes certain provisions to protect minority interests. These provisions allow shareholders holding at least 10% of the capital of the company to bring legal actions against the board of directors in the
following circumstances: to oppose efforts to release the directors and auditors from liability; to obtain an
explanation of questionable activities, to obtain the financial statements of the company; and to gain
access to the company's books and correspondence. Minority shareholders may also request the
appointment of a special auditor on their behalf.

Whether a company is subject to full or limited tax liability depends on its status of residence. A
company whose statutory domicile and place of management are established in Turkey will have full tax
liability; in this case worldwide income is taxable. If a non-resident company conducts business
through a branch or a joint venture, it will have limited tax liability i.e. fully subject to corporate tax on
profits earned in Turkey on an annual return basis. If there is no presence in Turkey, withholding tax will
be charged on its income earned in Turkey. Withholding tax is required if it is an independent
consulting service. Services in general are subject to 22% withholding tax. However, if there is double tax
treaty and if the conditions in the treaty allow, withholding does not apply.

A Summary of the main differences between joint stock company and limited liability company are
attached as Appendix A.

Branches and Liaison Offices

Foreign companies may also operate through liaison offices or branch offices providing they are
established in accordance with the relevant legislation. The income of a branch derived in Turkey is taxed
in the same way as resident corporations. Although investment incentives will be granted, branch
offices of overseas companies are less commonly used in Turkey. While there are no particular
advantages as opposed to establishing a Turkish company, the major disadvantages of branch offices are
they will be more exposed to tax audits on recharges from the parent company than Turkish
corporations and that legal liability will rest with the parent company.

Liaison offices may be used to establish a presence in Turkey, but may not carry on any commercial
activity (i.e. no power to conclude contracts) and, in addition, must be funded by the parent
company outside Turkey.