Turkey for Foreign Companies: Branch, Liaison Office, or Company

Pick Your Poison

One of the first decisions for a foreign company wishing, for whatever reason, to operate in Turkey is which legal structure to choose. There are really only three options: a branch, a liaison office, or a separate company in Turkey.

Which one? The answer depends on what you need. Before asking which one is better, you first need to decide what you actually intend to do in Turkey.

There is a nice English expression for situations where you have to choose between difficult options: Pick your poison. For a foreign investor, perhaps we can make a small typo and call it Pick your position. None of these options is universally better for every company. The choice depends on the legal position the foreign company wants to take in Turkey and the activities it intends to carry out.

If the company will make direct sales in Turkey, enter into contracts and generate commercial income, a branch or a separate company may be appropriate. If the plan is to study the Turkish market, inspect suppliers, promote products or coordinate activities on behalf of the parent company, a liaison office may be the better choice.

The Turkish approach to foreign investment is summed up quite neatly in Article 3(a) of Law No. 4875 on Foreign Direct Investments:

Unless otherwise provided by international agreements and special laws;

1- Foreign investors are free to make foreign direct investments in Turkey. 2- Foreign investors shall be subject to equal treatment with domestic investors.

Nice lines.

Instead of establishing a general permission regime for foreign investors, the Law adopts the principles of freedom of investment and national treatment.

1. Opening a Branch in Turkey

A foreign company may conduct commercial activities in Turkey through a branch connected to its head office without establishing a new and independent company in Turkey. A branch does not have a separate legal personality from the foreign parent company; it is an extension of the parent company in Turkey. It may nevertheless conduct commercial activities, enter into contracts, employ personnel and generate income in Turkey.

The main provision governing branches of foreign companies is Article 40/4 of the Turkish Commercial Code No. 6102:

Branches in Turkey of commercial enterprises whose headquarters are located outside Turkey shall be registered in the same manner as domestic commercial enterprises, without prejudice to the provisions of the laws of their own countries concerning trade names. A fully authorised commercial representative residing in Turkey shall be appointed for such branches. If the commercial enterprise has more than one branch, branches opened after registration of the first branch shall be registered in the same manner as branches of domestic commercial enterprises.

A foreign company does not need a Turkish partner to open a branch in Turkey. Turkish law does not impose a local-shareholder requirement for branches. One of the main requirements is the appointment of a fully authorised representative residing in Turkey.

Compared with some countries, this gives foreign companies a relatively easy way in. There is no insistence that you must have a Turkish partner holding X percent of the shares. The requirement is much simpler: there must be a resident representative in Turkey whom the authorities can deal with. Being able to conduct business directly in Turkey without bringing a local shareholder into the company is one of the useful features of the branch structure.

The trade name of the branch must also make its position in relation to the parent company clear. Article 48/3 of the Turkish Commercial Code contains a specific rule:

The trade name of a Turkish branch of an enterprise headquartered in a foreign country must indicate the locations of both the headquarters and the branch and must state that it is a branch.

Is a Branch a Separate Company?

No.

A branch does not have a legal personality separate from the parent company, and this is one of the fundamental differences between a branch and a limited liability or joint-stock company established in Turkey. The lack of separate legal personality does not prevent the branch from carrying out commercial activities.

Article 118 of the Trade Registry Regulation defines a branch as a place where industrial or commercial activities are independently carried out, regardless of whether it has separate capital or separate accounting from the commercial enterprise to which it belongs. Therefore, if a foreign company wants to trade directly in Turkey but does not want to establish a separate Turkish company, a branch can be a strong option.

2. Is Opening a Branch Considered Foreign Direct Investment?

Yes.

Article 2 of Law No. 4875 on Foreign Direct Investments includes both the establishment of a new company and the opening of a branch within the concept of foreign direct investment. A foreign company branch is therefore not merely a Trade Registry registration; it also falls within Turkey's foreign direct investment legislation.

The obligations do not end once the branch is established. Companies and branches falling within the scope of the Law have various reporting obligations concerning investors, activities, capital and related changes through E-TUYS, one of the electronic systems used for foreign investment notifications. The current regulatory framework also requires certain changes to be updated electronically.

By this point, it should be clear that opening a branch is not simply a matter of walking into the Trade Registry with a few documents. The parent company's corporate resolutions, the scope of the representative's authority, preparation of foreign documents for use in Turkey, registration and subsequent notifications are all connected parts of the process.

What the poet is trying to say is this: you may start with the idea that you will go to the Trade Registry, submit a few papers and open the branch. Yet even the corporate resolutions and authorisation documents can create problems later if they are not prepared properly. There is therefore some sense in having the process followed by a lawyer in Turkey from the beginning.

3. Opening a Liaison Office in Turkey

Not every foreign company wants to enter the Turkish market by immediately making direct sales.

A company may first want to study the market, meet potential customers or business partners, find manufacturers and suppliers in Turkey, inspect its existing suppliers, promote its products or simply understand the country and the way business is done before making a larger investment.

In other words, it may not want to dive in before checking how deep the water is.

In that case, a liaison office may make more sense than a branch or a separate company.

Article 3(h) of Law No. 4875 allows companies established under the laws of foreign countries to open liaison offices in Turkey, provided that they do not engage in commercial activities. Article 6 of the Regulation repeats the same restriction:

The Ministry is authorised to permit companies established under the laws of foreign countries to open liaison offices in Turkey, provided that they do not engage in commercial activities, and to extend the duration of such permits.

The key phrase defining the limits of a liaison office is provided that it does not engage in commercial activities. Three of the clearest differences between a branch and a liaison office can therefore be summarised as time limitations, the prohibition on commercial activity and a different permission procedure.

A liaison office, just like a branch, does not have a legal personality separate from its foreign parent company. Unlike a branch, however, it cannot engage in commercial activities in Turkey.

4. What Can a Liaison Office Do?

The fact that a liaison office cannot conduct commercial activities does not mean that it is merely a passive office sitting in Turkey doing nothing. The permitted activities can allow a foreign company to build a serious commercial infrastructure and presence in the Turkish market.

Under the Regulation, liaison offices may be used for market research, promotion of the foreign company's products and services, representation and hosting, quality and standards control of suppliers in Turkey, supplier sourcing, technical support, communication and transfer of information, and regional management centre activities. The Regulation also provides different extension periods for some of these activities.

This structure can be useful for foreign companies sourcing goods from Turkey.

For example, a U.S.-based company may already be purchasing products from Turkish manufacturers and may want to monitor production and quality processes on site, find new suppliers and maintain continuous communication between its headquarters and manufacturers in Turkey. It may not need to establish a separate commercial company immediately. Provided that the limits of its activities are properly defined, a liaison office can serve this purpose.

Put differently: instead of discovering the problems at U.S. Customs, the company may prefer to see them in Turkey before the goods even leave the country.

A liaison office cannot, however, make sales or carry out revenue-generating commercial activities in Turkey. If its actual activities exceed the scope of its permit, the Ministry has inspection and permit-cancellation powers. Article 8 of the Regulation provides a corrective procedure where activities outside the permitted scope are detected and may impose consequences if the relevant obligations are not fulfilled.

5. How Is a Liaison Office Established?

The establishment procedures for a branch and a liaison office are different. A liaison office requires a permission process before the Ministry of Industry and Technology.

Under Article 6 of the current Regulation, complete applications are expected to be concluded within fifteen business days from the date of application.

For newly established foreign companies, the Ministry may also take into account factors such as the company's field of activity, capital and number of employees and require that at least one year has passed since the foreign parent company was incorporated in its home country before granting permission for a liaison office. This is not a mandatory waiting period applied to every application; it is a discretionary assessment available to the Ministry for newly established foreign companies. It would not be wrong to say that this is quite exceptional in practice.

Article 7 of the Regulation also lists the documents required for the application. These include the application form, a declaration describing the activities to be carried out by the liaison office and confirming that it will not conduct commercial activities — yes, you literally sign a statement saying that you will not issue invoices or trade — evidence of the signatory's authority, the duly certified certificate of activity of the foreign company, its annual report or balance sheet and income statement, the authorisation granted to the person who will manage the liaison office and, where the process is handled by another person, a power of attorney.

Depending on the country and the type of document, documents issued abroad may also require an apostille or consular certification and a Turkish translation.

There is also an unwritten in my opinion part of the process.

The authority reviewing the application may request additional explanations or documents depending on the nature of the file. Completing every document listed in the legislation does not necessarily mean that nothing further will be requested from you. The in my opinion part is, to some extent, the way the administration and the officer reviewing the file interpret the legislation. You may hear phrases such as this is how we do it or this is how the practice works in our office. We cannot say that administrative applications in Turkey consist solely of completing the document list published on a website.

There is a further distinction for financial activities. Under Article 6 of the Regulation, applications for liaison offices in areas subject to special legislation, such as money and capital markets, insurance and similar financial activities, are assessed by the competent authority under the relevant special legislation.

6. How Long Can a Liaison Office Operate?

A liaison office is not established under an indefinite operating permit.

Under Article 8 of the Regulation, an initial permit may be granted for a maximum period of three years within the scope of the declared activity. An extension may be requested at the end of this period. The General Directorate evaluates such requests by considering the office's previous activities, the foreign company's future plans for Turkey, current and projected expenditures and the number of employees.

The operating periods of liaison offices permitted for market research or promotion of the foreign company's products and services cannot be extended.

The type of activity directly affects the possible extension period. For representation and hosting, supplier control and sourcing, technical support, and communication and information transfer activities, extensions of up to five years may be granted. For regional management centre activities, the extension may be up to ten years.

These are not automatic extension periods. They are maximum periods that may be granted following the General Directorate's assessment.

For that reason, how the scope of activity is defined in the original application matters not only for the initial permit but also for whether the liaison office can continue operating in Turkey in later years.

7. Branch or Liaison Office?

The main differences can be summarised as follows:

*Special permissions and regulations applicable to particular fields of activity are reserved.

The decision should not be based solely on which structure is cheaper or easier to establish. If the company intends to make sales in Turkey, the lighter structure of a liaison office offers little benefit because it cannot be used for that activity in the first place. On the other hand, establishing a commercial branch may create unnecessary obligations for a foreign company that only wants to study the Turkish market and monitor its suppliers locally.

8. Establishing a Separate Company in Turkey

The third option is for the foreign investor to establish a joint-stock company or limited liability company directly in Turkey.

Unlike a branch or liaison office, this creates a Turkish legal entity separate from the foreign parent company.

For entirely emotional reasons, we tend to find the joint-stock company a reasonable choice. The fact that joint-stock companies above a certain capital threshold are required to retain a lawyer may have something to do with that view.

A foreign investor does not need a Turkish partner in order to establish a company in Turkey. All shares may be held by foreign individuals or legal entities. A joint-stock company may be established with a single shareholder, and a limited liability company may have a single member.

Article 125/1 of the Turkish Commercial Code puts the legal position rather simply:

Commercial companies have legal personality.

A separate company may make more sense where long-term and extensive operations are planned in Turkey, a certain number of employees will be hired or new shareholders may be brought in later.

It may also be preferred over a branch where the Turkish operation is intended to be conducted within a structure legally separate from the foreign parent company and not directly attributable to the parent company.

9. Which One Should You Choose?

Back to the original question.

A branch may suit a company that intends to conduct direct commercial activities in Turkey. A liaison office may suit a company that wants to study the market, represent the foreign company, inspect manufacturers or suppliers and prepare for a future investment. A separate Turkish company may suit an investor seeking a more independent and permanent commercial organisation in Turkey.

The decision should take into account more than establishment costs. The intended commercial activity, the liability of the parent company, taxation, number of employees, work permits, contractual structure, size of the investment and the intended duration of operations in Turkey should all be considered.

In other words:

Pick Your Poison — Or Perhaps, Your Position

The point is not simply to choose one of the three.

It is to choose the legal position that fits what you actually intend to do in Turkey.

Conclusion

Law No. 4875 on Foreign Direct Investments permits foreign investors to make direct investments in Turkey and adopts the principle of equal treatment with domestic investors. The same Law includes the establishment of a new company and the opening of a branch within the scope of foreign direct investment.

Article 40/4 of the Turkish Commercial Code regulates the establishment of branches in Turkey by commercial enterprises headquartered abroad and provides that such branches are registered in the same manner as domestic commercial enterprises. For foreign companies wishing to study the Turkish market or carry out certain activities on behalf of their parent company before commencing commercial operations, Law No. 4875 and the Regulation on the Implementation of the Foreign Direct Investments Law provide the liaison office model.

The structure selected at the establishment stage affects the activities the company may conduct in Turkey, its legal relationship with the parent company, its tax and reporting obligations and the structure of any future investment.

It appears that getting a little more detailed advice from a lawyer before choosing your operating model might be a good idea. Onur Puğ Attorney at Law İzmir, Türkiye