Before making a direct capital investment in the Turkish market, a company established abroad will more often than not wish to come to know that market at close quarters. The legislation provides a structure that answers precisely this need: the liaison office. Closed to the earning of commercial profit but performing a research and representative function, this structure offers the foreign investor a low-cost and controlled means of entry.
The limits of the liaison office are as pronounced as its attractions. The operating permission is framed around defined subjects, it is limited in duration and it is subject to administrative supervision. An office that steps outside this framework will not merely lose its permission; it may also find itself facing a tax position it did not anticipate.
In this note we address, in turn, the legal nature of the liaison office, the legislation on which it rests, the procedure for permission and for the extension of its term, the documents required for establishment, the rules governing the employment of staff, bookkeeping and tax obligations, and the circumstances in which the office comes to an end.
The Concept of the Liaison Office
A liaison office is a structure that examines market conditions in the country in which it operates, gathers data on that country’s legal order and commercial environment, establishes contact with individuals and institutions, and monitors emerging business opportunities and reports them to the parent undertaking; in return, it carries out no transaction of a commercial character. Social, cultural and promotional work falls within the natural field of this structure; activities pursued for profit fall entirely outside it.
This form of establishment, known in English as a "liaison office", may be opened subject to permission obtained from the Ministry of Economy and to compliance with the prescribed legal procedure. Its term of operation may be extended by permission of the Ministry; in return, the office bears certain restrictions whose contours are drawn by the legislation.
The fact that they are barred from economic activity is the principal reason why liaison offices are kept under close observation in Türkiye. That observation does not, however, amount to a burdensome supervisory regime that impedes their functioning; as we note below, this structure carries significant advantages for the investor.
Applicable Legislation
The legal framework for liaison offices is not gathered in a single text; several complementary instruments apply together. The basic foundation is the Foreign Direct Investment Act No. 4875. The detailed rules on establishment, permission and supervision are set out in the Implementing Regulation No. 25205 of the Foreign Direct Investment Act.
Alongside these two texts, two further statutes come into play. Disputes arising out of the private law relationships of foreigners in Türkiye are resolved in accordance with the provisions of the Act on Private International Law and Procedural Law No. 5718. Disputes arising between the office and the Republic of Türkiye, on the other hand, fall within the province of the administrative courts and are heard within the framework of the Administrative Procedure Act No. 2577.
Term of Operation and Requests for Extension
The permission granted on the initial application is not open-ended; it is granted for a term subject to an upper limit of 3 years. Unless an application is made to the General Directorate of Incentive Implementation and Foreign Investment before the expiry of that term, operations cannot be continued.
A request for extension is submitted by way of a petition and is subjected by the General Directorate to a multi-faceted assessment. In that assessment, the office’s work over the past period, the forward-looking business plan and objectives of the company to which it belongs in relation to Türkiye, the amounts of expenditure realised and projected and the number of staff employed are all considered together. The additional term to be granted is determined on the basis of the schedule of periods laid down in the legislation according to the subject of the activity.
Fields of Activity and the Annual Notification
Before turning to the conditions of establishment, it is necessary to consider the fields in which the office may work, since permission is granted only for those fields. The restrictions to which we referred above derive from Article 8 of the Implementing Regulation of the Foreign Direct Investment Act, and the subjects of activity are enumerated categorically in that article.
A further, continuing obligation is the annual notification. Each year, by the end of May at the latest, the "Information Form on the Activities of Liaison Offices" showing the previous year’s activities must be completed and submitted to the Ministry together with its accompanying documents. Where this notification is not made, a petition for extension of the term will not be processed; and because the term is not extended, the office’s operations are brought to an end and the permission is cancelled by the administration of its own motion (ex officio), without any request being awaited.
Ministerial supervision. Both the legislation and the permission documents impose a series of obligations on liaison offices. Whether those obligations are complied with is examined by way of inspections conducted by the Ministry of its own motion or upon written notifications received from the relevant institutions and bodies.
Stepping outside the scope of the permission. If an inspection establishes that the office is working in a field for which permission has not been granted, a period of 30 days is allowed for it to apply for permission in respect of the activity it is in fact carrying on. In particular circumstances where there are justified grounds, a further 30 days may be added to that period. If no application is made once the period has expired, the office’s other existing operating permissions are also cancelled.
Finding of commercial activity. If an inspection reveals that the office has engaged in commercial activity, the consequence is graver: the operating permission is cancelled and the matter is reported to the relevant authorities.
Conditions Required for Establishment
The Regulation makes the opening of a liaison office conditional upon the fulfilment of several conditions together.
The first of these concerns incorporation: the applicant company must have been established in a foreign country under the legislation of that country. The second, and the most decisive, is the prohibition on activity; no commercial activity may be carried on in Türkiye through the office. It is open to the foreign company concerned to trade through other legal structures, but the liaison office cannot be the vehicle for that. The third condition is permission from the Ministry of Economy; permission is granted for defined subjects, and just as no office may be established without permission, the sanctions described above come into play where the scope of the permission is exceeded.
Two further conditions are added to these. Following its examination, the Ministry may require that at least 1 year has passed since the incorporation of the applicant company; this is not a rule applied automatically to every application, but a condition sought by the administration where it considers it necessary in the light of the particular circumstances. Lastly, the documents and information in the application file must be submitted in full; a schedule of those documents is set out separately below.
Liaison offices in the financial sector. Where it is sought to open an office in the money and capital markets, in insurance or in other financial fields having their own special legislation, the request is assessed not by the Ministry but by the official institutions empowered to do so under the special legislation governing that field.
In applications from other sectors, too, the Ministry has power to determine the application after obtaining the opinion of the institutions and bodies that grant the permission, licence or similar authorisation, where such an authorisation is required for the activity.
Documents Required in the Application File
Which documents are to be required on establishment is regulated in the Implementing Regulation of the Foreign Direct Investment Act. Where a foreign company wishes to open a liaison office in Türkiye, the file must contain the following:
- The application form relating to the establishment
- The text of the declaration setting out the scope of the work the office is to carry on and containing an undertaking that no commercial activity will be engaged in
- A document evidencing the signing authority of the officer of the foreign company who signs that declaration
- A certificate of activity belonging to the foreign company, certified by the relevant Turkish Consulate or in accordance with the provisions of the Convention Abolishing the Requirement of Legalisation for Foreign Public Documents
- An activity report or a balance sheet together with an income statement drawn up in respect of the company
- A power of authority issued in the name of the person or persons appointed to conduct the work of the office
- Where the process is being conducted through a representative, for example through a lawyer, the power of attorney relating to that
In addition to this file, documents must also be submitted separately in the application before the tax office and in the notification to be made to the General Directorate. We do not here enter into the particular features of each of those documents individually, but confine ourselves to referring to the relevant schedule.
Where the originals of the documents in the application file and of those to be provided to the General Directorate are handed over, a certified copy of each is returned to the applicant. The authority empowered to carry out the certification is the General Directorate of Incentive Implementation and Foreign Investment.
Some of the documents listed above, such as the application form and the declaration, are annexed to the Regulation in draft form. The application is prepared on the basis of those annexes.
It is important that the process be conducted with legal support. The position of the office to be established, the characteristics of the company to which it belongs and the legal requirements of its functioning should be assessed together, so as to produce a structure of establishment that will not give rise to difficulties later on.
Where the file is complete, the application is determined within 15 days following its submission.
The obligation following the grant of permission. After the establishment permission has been granted, a copy of the tax office registration document and of the lease agreement for the office must be sent to the General Directorate of Incentive Implementation and Foreign Investment within 1 month at the latest.
Issues Arising in Practice
Changes of Address, Representative and Company Name
Just as the address of the office or the persons authorised to act for it may change over time, so too may the name of the foreign company to which it belongs. In the case of changes of this kind, notification must be given to the General Directorate of Incentive Implementation and Foreign Investment within a period of 1 month following the change.
The document to be attached to the notification differs according to the type of change: on a change of address, a copy of the lease agreement showing the new address; where a new person has been appointed to the office, the power of authority issued in that person’s name; and where the name of the foreign company has changed, the information and documents establishing that change.
Funding of Expenditure and Transfer of Profit
Since liaison offices have no revenue-generating activity, their expenses are met from the foreign currency remitted by the company abroad.
Transfer of profit. As the natural consequence of the prohibition on economic activity, liaison offices are likewise unable to transfer profit. The sole exception to this rule arises where the office comes to an end: the balance arising at the liquidation stage may be transferred abroad.
Employment of Staff and Social Security
Liaison offices opened in Türkiye frequently require more than one employee, and those employees may be Turkish nationals or foreign nationals alike.
Notification to the SGK. The office is obliged to make a notification to the Social Security Institution (SGK) in respect of everyone it employs, whether Turkish or foreign. Like any ordinary employer, it must declare and pay contributions regularly each month; in this respect it is subject to the Labour Act and the associated legislation.
Where the employee is a Turkish national, no income tax is withheld from the wage paid; employee and employer contributions are, by contrast, deducted and paid over to the Insurance Directorate.
For a foreign employee not to be treated as insured in Türkiye — that is, for no SGK contribution to be paid in that person’s name — two conditions must be satisfied together: there must be a social insurance agreement with the country of which the person is a national, and the information and documents showing that the person is insured in that country must be kept available by the employer. Where those conditions are met, no contribution need be paid in Türkiye; where they are not met, that is, where the employee has no social insurance in his or her own country, the contribution must be paid in Türkiye.
Those documents are required to have been certified by the authorities of the foreign state. It is at this point that the apostille becomes decisive. The same requirement applies to the establishment documents listed above; it is important that documents obtained from abroad bear an apostille.
Method of payment. The office’s payments are met from the earnings of the company to which it belongs and are made in foreign currency. The sums transferred to employees are in law of the character of wages and are paid in foreign currency. Since liaison offices are exempt from income tax, no entitlement to the minimum living allowance (AGİ) arises in respect of employees.
Employment of Foreign Staff
Foreign employees working in the office act in the name and on the account of a company whose centre lies outside Türkiye. The general rule on the employment of foreigners in Türkiye is that the company must employ 5 Turkish employees for each foreigner it employs.
That quota does not apply to employees regarded as key personnel. In practice, the character of key personnel is seen to be determined by the following criteria: holding authority to manage the company as a whole or a defined part of it; serving in the senior management or the executive unit of the company; possessing a defined level of knowledge regarded as fundamental in relation to the company; supervising and controlling the work of staff or of auditors; holding authority to recruit or to terminate the employment contracts of existing employees; and having had a power of authority issued in one’s name by the company.
It should be underlined at this point that, whether or not the quota applies, a work permit must be obtained for every foreigner to be employed in the office. The details of the work permit fall outside the scope of this note.
Books, Records and Documents
Liaison offices opened in Türkiye have the status of limited taxpayers. We address the tax position separately below; limited tax liability does not, however, remove the obligation to keep records. In order for the office to be able to document the expenditure it makes and the taxes and charges it pays in consequence, it must register its taxpayer status.
Within that framework, care must be taken over the keeping of books, the issuing of documents and their retention. Which books and documents are to be kept is determined according to the nature of the activity, the structure of the expenditure and the circumstances of the particular case. In practice, the journal, the general ledger and the inventory book may come into question.
As we have noted above, since expenditure is met from foreign currency coming from outside Türkiye, this flow of funds must be documented if inspections are to proceed without difficulty. Bank receipts, transfer documents and foreign currency purchase documents should be drawn up and retained for that purpose.
Tax Position
Since liaison offices are unable to engage in commercial activity or to carry out transactions directed at obtaining profit, these structures have been exempted from income tax. In law they bear the character of an employer with limited tax liability whose registered office and place of management are not in Türkiye, and in that capacity they fall among the income tax exemptions provided for in the Act.
That exemption is not absolute. An office that obtains profit in breach of the prohibition on activity will, alongside the other statutory sanctions, be taxed on the income it obtains and a tax loss penalty will be applied to it.
Furthermore, under the Stamp Duty Act, wage payments made to the office’s employees are subject to stamp duty withholding. That withholding must be declared by way of a withholding tax return and paid within time.
Termination of the Office
A liaison office may come to an end in two ways. The first is a decision by the company of its own volition to close it; the purpose for which the office was established may have been achieved, the need may have disappeared, or the company itself may have closed down.
The second route is administrative in character: the operating permission of an office that carries out prohibited work is cancelled by the Turkish administrative authorities and its existence is thereby brought to an end. The provisions on termination are regulated in Article 8(e) of the Implementing Regulation of the Foreign Direct Investment Act.
Under that provision, an office that ceases its operations is obliged to obtain a cessation-of-business inspection slip from the tax office to which it is attached and to send it to the General Directorate of Incentive Implementation and Foreign Investment. The liquidation process then begins, and at that stage the transfer of the remaining assets to the company becomes possible.
Advantages Offered by the Liaison Office
The prohibition on commercial activity, restrictive though it is, also affords a significant measure of relief in tax terms. Beyond that, the liaison office prevents the company from embarking on unnecessary investment; the preliminary research carried out with data gathered in the field contributes directly to the planning done at head office.
The office likewise prepares suitable ground in the market for the commercial activity the company is to carry on in the future. Because it constitutes foreign investment, it also falls among the fields to which the Republic of Türkiye attaches particular importance; certain incentives and legal protection therefore become available.
Distinction Between a Branch and a Liaison Office
Where a foreign company opens a branch in Türkiye, this means that it has embarked directly on commercial activity. We do not enter here into the detail of branches; the fundamental distinction, however, lies precisely at this point. A branch is established in order to obtain profit and is subject to a tax regime that follows from that; a liaison office, by contrast, cannot obtain profit and for that reason occupies a different tax position.
Matters to Be Considered Before Establishment
We have set out above the general framework relating to the liaison office. It should be noted, however, that the process does not consist of this alone; every particular case carries its own features touching on different points of the legislation.
Whether the structure in question is a company, a branch or a liaison office, the legal ground must be prepared before any act of establishment. Erroneous or negligent acts at that stage may turn into serious legal difficulties later on.
Independent Legal Assessment
The liaison office is a low-cost and flexible model of entry for foreign companies contemplating access to the Turkish market; that flexibility, however, is conditional upon scrupulous compliance with the limits on its activity. The greater part of the difficulties encountered in practice stems from stepping outside the scope of the permission and from a mistaken construction of the limits of the prohibition on commercial activity. Acts such as the signing of a contract, the issuing of an invoice or entering into a direct relationship with a customer are capable of placing the office’s permission regime in jeopardy.
The second area of risk is the management of time limits. A failure to submit the annual information form by the end of May is an omission capable, on its own, of bringing the office’s operations to an end. For that reason the post-establishment calendar must be monitored within an institutional order just as carefully as the establishment itself.
Where a particular establishment is being planned, we recommend that the following matters be given priority:
- Clarifying, before the application is made, whether the work planned to be carried on coincides with the subjects of activity for which permission may be granted
- Checking from the outset that the certificate of activity and the powers of authority to be obtained from abroad satisfy the requirements of apostille or consular certification
- Placing in the calendar the one-month notification following the grant of permission and the activity notification due by the end of May each year
- Assessing in advance, where foreign staff are to be employed, the character of key personnel and the work permit process
- Investigating, on the social security side, whether a bilateral social insurance agreement exists and whether the necessary documents can be obtained
- Devising in advance a scenario for transition to the establishment of a branch or a company against the possibility that the activity acquires a commercial dimension in the future
Independent Legal provides advisory services throughout the whole of the process, from the determination of foreign investors’ structuring preferences in Türkiye to the conduct of the liaison office permission process and the monitoring of the obligations of the subsequent period.