in Legal Success
| Reading Time: 11 Minutes
Receivables Arising in Turkey From Foreign Currency Exchange Rates
In the context of a globalizing economy and increasing international trade, foreign currency debts and the resultant exchange rate claims hold critical importance within the Turkish Legal System. Our article comprehensively addresses the legal processes related to commercial transactions in foreign currencies and the exchange rate issues that arise during these transactions in light of the Turkish Code of Obligations (TCO) and the decisions of the Court of Cassation. From the prohibition of contracts in foreign currencies to the nuances of issuing invoices in foreign currencies, these complex and often overlooked issues serve as a vital guide for business professionals, legal practitioners, and academics. We have prepared an important resource for everyone seeking a deep understanding of the subject.
The Concept of National Currency and Performance With National Currency in Turkish Law
In the globalized world trade, the question of which country’s currency the payment will be made in inevitably needs to be answered. In this regard, the relevant regulations are included in Chapter Two, Section One of the Turkish Code of Obligations (TCO). Pursuant to Article 99 of the TCO;
“Debts concerning money matters are paid in the currency of the country. If it is agreed to be paid in a currency other than the national currency, unless the contract expressly states ‘payment in kind’ or contains a phrase to that effect, the debt can also be paid in the national currency at the exchange rate on the payment day. If a debt is determined in a currency other than the national currency and the contract does not contain a clause for ‘payment in kind’ or a similar expression, then, if the debt is not paid on the due date, the creditor may demand that this debt be paid either in kind or in the national currency based on the exchange rate on the due date or the actual payment day.“
Decrees issued based on Law No. 1567, dated February 20, 1930, concerning the Protection of the Value of Turkish Money, include the definition of national currency as per Article 3 of Decree No. 17, which was repealed in 1983. It states, “Turkish money consists of metal and paper currencies that are in circulation in Turkey according to Turkish Laws, or even if they are withdrawn from circulation, as long as the exchange period has not expired.” Turkish money is still in use in the form of paper and metal currency, and its unit of currency is the “lira“.
Regardless of its type and amount, paper money possesses absolute payment capability. Unless contrary to the principle of honesty, the amount of debt to be paid is irrelevant; it can be settled with paper money. However, if the parties in a debt relationship agree that the debt be paid in a specific currency, this condition is considered valid and must be fulfilled. Nonetheless, metal coins have a limited payment capacity.
Foreign Currency Debt
A foreign currency debt is a debt where the currency of the debt is not the same as the currency of the place of performance.
According to Article 99/2 of the Turkish Code of Obligations:
“If it is agreed to make payments in a currency other than the national currency unless the contract explicitly states payment in kind or implies the same, the debt can be paid in Turkish currency based on the prevailing exchange rate on the day of payment.“
As can be understood from the Article’s regulation, this provision is not imperative. In the case of foreign currency debts to be paid in Turkey, the wording of the Law grants the debtor an optional right; the debtor may choose to pay in foreign currency or national currency based on the exchange rate value on the day of payment.
Furthermore, if the contract specifies that the foreign currency debt will be “paid in kind” as a condition, the debtor does not have this choice and is obliged to pay the debt in the same foreign currency.
Issue of Which Exchange Rate to Apply for Foreign Currency Debts to be Converted into Turkish Lira
It can be said that the principle of contractual freedom is accepted in Article 99 of the Turkish Code of Obligations (TCO), subject to certain exceptions mentioned below, regarding the currency in which payment is to be made.
This provision allows parties to agree on the contract they conclude to determine the contract price in a currency other than the national currency.
In cases where the contract price is determined in a foreign currency, if it is not agreed that the payment shall only be made in the determined foreign currency, the debtor can be released from his debt by paying the TL equivalent of the debt.
In this case, the question arises as to which exchange rate should be applied when converting foreign currency debt into Turkish lira. Indeed, the currency conversion could be based on the exchange rate on the contract date, invoice date, or payment date.
Although tax legislation is guiding in this matter, the terms of the contract between the parties and commercial customs can also be decisive.
According to Article 215 of the Tax Procedure Law (TPL) No. 213, it is mandatory to show the equivalent in Turkish lira on an invoice issued by a company that is a tax resident in Turkey.
The Central Bank of the Republic of Turkey exchange rate on the invoice date should be the basis from a tax perspective.
According to the Value Added Tax Implementation General Communique, if the exchange rate difference arising between the invoice date and the date of collection of the amount is in favor of the buyer, the buyer should issue an invoice to the seller and calculate VAT based on the rate on the date of delivery or service. If the exchange rate difference is in the seller’s favor, and the amount has been paid in part or in full after the tax-triggering event, these exchange rate differences are included in the VAT base. For this difference, the seller should issue an invoice, and VAT should be calculated by applying the valid rate for the transactions on the delivery date or service.
Regardless of the debates about which rate to apply related to the rates announced on the same day, it should be noted that if the debtor does not make the payment on the required date, the third paragraph of Article 99 of the Turkish Code of Obligations shall be applied and the creditor can demand payment in Turkish lira at the current exchange rate on the due date or the actual payment date.
Apart from this, the parties can also agree to fix the exchange rate at a certain rate. Indeed;
“In terms of fixed exchange rate implementation, although payment in foreign currency was agreed upon in the contract, due to the excessive increase in exchange rates during the performance of the contract, correspondence and meetings were held on which date’s rate should be applied for payments. Following the defendant’s letter dated 03.05.2001, the plaintiff responded on 02.11.2011 with a counter-proposal to apply a fixed rate increase of 10%. As the work continued in stages, it must be accepted that the plaintiff’s proposal to fix the rate with a 10% increase was accepted, and the binding contract conditions were changed accordingly.” (Supreme Court 15th Civil Chamber, 2016/2802 E, 2016/4633 K, 10.11.2016.)
Prohibition of Contracting in Foreign Currency
Amendments to Decree No. 32 on the Protection of the Value of Turkish Currency through Presidential Decree No. 85 dated 12.09.2018 have introduced certain prohibitions and limitations regarding payments in foreign currency.
The addition of paragraph “g” to the fourth article titled “Foreign Exchange” of Presidential Decree No. 32 prohibits the execution or indexing to foreign currency of real estate and movable sales, all kinds of leasing, business, service, and work contracts among people residing in Turkey.
The regulation, which came into force, has been detailed by the Ministry of Treasury and Finance through the Communique 2018-32/51 published in the Official Gazette No. 30557 dated 06.10.2018. This Communique amends the 8th article of the Communique No. 2008-32/34 related to the Decree No. 32 on the Protection of the Value of Turkish Currency, outlining the scope of the prohibition and the business transactions that cannot be determined in or indexed to foreign currency, with subsequent clauses addressing exceptions to the prohibition.
With the Communique No. 2018-32/52, which amends the Communique No. 2008-32/34 related to the Decree No. 32 and was published in the Official Gazette No. 30597 dated 16.11.2018, the exceptions to the foreign exchange prohibition have been further expanded.
Accordingly, the prohibition of contracting in foreign currency, which was previously applicable only to individuals residing in Turkey, has been revised to allow the following types of contracts to be determined in or indexed to foreign currency, even if the parties include non-citizen foreigners residing in Turkey, companies operating in free zones, and branches of individuals residing in foreign countries in Turkey:
- Real estate sales contracts where they are the buyers,
- Lease contracts where they are the tenants,
- Salaries in employment contracts performed abroad and in seafarers’ employment contracts,
- Salaries in employment contracts where companies operating in free zones and branches of individuals residing in foreign countries in Turkey are the employers,
- Salaries in employment contracts where foreigners residing in Turkey but not citizens are parties,
- Work contracts involving costs in foreign currency,
- All movable sales and leasing contracts, excluding vehicle sales and rentals.
Issuance of Invoices in Foreign Currency
A tax liability arises from the profit earned in a commercial debt relationship. The assessment and collection of tax are regulated in the Tax Procedure Law (TPL). The issue of how to issue an invoice when the profit is in foreign currency is addressed in Article 215 of the TPL:
“a) Turkish currency is used in records and documents. Documents can be arranged according to a foreign currency, provided that the equivalent in Turkish money is shown. However, documents issued for customers abroad are not required to show the equivalent in Turkish money.“
As seen, the requirement to show the Turkish lira equivalent in the invoice varies depending on whether the recipient is a Turkish national. In this context, if the recipient of the invoice is not a Turkish citizen or a Turkish-origin legal entity, there is no obligation to show the exchange rate equivalent in the invoice as per the TPL, as the transaction subject to the invoice would have been conducted in foreign currency with a foreign national. Conversely, if the invoice recipient is a Turkish citizen or a Turkish-origin legal entity, the foreign currency equivalent must be shown in the invoice as of the invoice date.
The absence of the exchange rate equivalent in a commercial invoice, despite the present conditions, does not constitute a deficiency in the contract or payment. The only consequence that may arise in this case is an administrative sanction against the issuer of the invoice for tax irregularities. According to the provisions of TPL Article 215 and subsequent articles, failing to show the exchange rate equivalent in invoices results in a secondary irregularity penalty, creating a tax obligation.
If the parties have determined the exchange rate in the contract, it is possible to convert the foreign currency amount into Turkish lira based on the exchange rate difference in the contract and record it in the books.
Provision Related to Exchange Rate Difference in The Contract
In contracts involving foreign currency, parties can agree to pay the difference arising from the exchange rate change within a certain period.
In contracts concluded between the parties, a special arrangement can be made on how the exchange rate difference will be calculated and paid, or it is sufficient to simply state that the exchange rate difference will apply.
In this case, the Supreme Court acknowledges the existence of a claim for the exchange rate difference. Indeed;
“According to the allegations, defenses, and evidence collected, the relationship between the parties was in … currency, payments would be made with TL checks issued 120 days after the invoice date, and any exchange rate difference arising would be paid separately as per the contract. The court dismissed the lawsuit on the grounds that it was possible for the defendant to claim an exchange rate difference from the plaintiff according to the contract, and the plaintiff’s lawyer appealed the decision… the decision, which was found to be in accordance with the procedure and law, was UNANIMOUSLY AFFIRMED.” (Supreme Court 19th Civil Chamber, 2015/10974 E, 2016/4258 K, 08.03.2016.)
As seen in the case law, in cases where the contract between the parties includes a claim for the exchange rate difference, this claim has been accepted as valid and justified.
In The Absence of a Clause Related to Exchange Rate Difference in The Contract
Even if there is no written agreement between the parties that the payment will be made in foreign currency, the invoice creditor can claim an exchange rate difference. However, it is required that the creditor legally prove the commercial sale that generates the exchange rate claim and separately prove that this sale was made in foreign currency. In other words, the existence of a commercial custom that exchange rate differences will be paid between the parties does not infer that all sales are made in foreign currency; each sale must be proven to be conducted in foreign currency. In this regard, the Supreme Court 19th Civil Chamber has ruled as follows;
“Although the three exchange rate difference invoices totaling 28,110.27 TL, which are the basis of the claim, are recorded in the plaintiff’s ledger, they are not recorded in the defendant’s ledger. The plaintiff must prove that these three exchange rate difference invoices were rightfully issued, in other words, that there is an exchange rate difference claim equal to the amount in these invoices. For this, it must be proven which sales in foreign currency are related to these exchange rate difference invoices, and the defendant’s payments in TL terms for these invoices must be shown, and accordingly, it must be proven that the plaintiff’s claim for exchange rate difference has arisen. The acceptance of the lawsuit with reasoning such as the existence of a custom of exchange rate difference payments between the parties and the defendant’s payment of 11 invoices necessitates the payment of the remaining 3 is not correct.” (Supreme Court 19th Civil Chamber, Decision Date 25.12.2018, File No. 2017/2595 E., Decision No. 2018/6803 K.)
Issue of Claiming Exchange Rate Difference for Payments Made by Check
The Supreme Court has prohibited the claim of exchange rate differences for payments made by check. There is no difference between a check issued directly by the invoice debtor and one transferred by endorsement. It is widely accepted that creditors who accept checks issued in Turkish lira waive their right to claim an exchange rate difference and, therefore, cannot subsequently claim it.
“A check is a payment instrument and can be issued in foreign currency, or its amount can be calculated based on the foreign exchange selling rate at the time of issue. Nevertheless, the acceptance by the plaintiff that the payment is made in Turkish lira by check implies that they cannot claim an exchange rate difference thereafter, and the judgment made in writing due to an error in evaluating the evidence is not deemed correct.” (Supreme Court 19th Civil Chamber, 2015/11192 E, 2016/2097 K.)
“The plaintiff has made payments by check. Since the exchange rate difference cannot be claimed in these payments, the acceptance of the lawsuit is not correct, and the decision should have been overturned.” (Supreme Court 19th Civil Chamber, 2016/6067 E, 2017/842 K.)
While this is the case for checks, claiming an exchange rate difference for payments made by another type of negotiable instrument, promissory notes, is possible. The Supreme Court, in this regard, states;
“If the exchange rate difference arises at the date of payment for payments made by promissory notes, the difference can be claimed.” (Supreme Court 19th Civil Chamber, 2018/965 E, 2019/5447 K.)
The provisions and practices concerning exchange rate difference issues encountered in commercial relations where payments are made in foreign currency are evaluated across a broad spectrum. Article 99 of the Turkish Code of Obligations stipulates that monetary debts should be paid in national currency; in this context, it is stated that Turkish lira is accepted as the payment unit. However, in the case of foreign currency debts, if not specified in the contract and if a dispute arises between the parties, it is foreseen that the payment should be made in Turkish lira based on the prevailing exchange rate. Contracts to be made in foreign currency or indexed to foreign exchange are required to be executed in compliance with the prohibitions and scopes defined by Presidential Decrees and communiques published by the Ministry of Treasury and Finance; non-compliance is subject to administrative monetary fines.
According to the precedents of the Supreme Court, exchange rate differences cannot be claimed in payments made by check. However, an exchange rate difference can be claimed if promissory notes are involved. Furthermore, in commercial relations, contracts may contain special clauses related to exchange rate differences. In case of disputes between the parties, courts can make decisions based on the terms of the contract.
It is important to indicate the Turkish lira equivalent in invoices issued in foreign currency to avoid penalties for irregularities. Additionally, in the absence of a clause related to exchange rate differences in contracts, it should be emphasized that courts can decide based on the parties’ mutual agreement and ongoing practices as to which date’s exchange rate will be applied for the payment.
- INCEKAS Saim, Article 99 of the Turkish Code of Obligations, (SGT: 01.10.2023).
- CIRCLE Erol, What Should be Considered in Invoices Issued in Foreign Currency, (SGT: 30.09.2023).
- If Pay by Cheque is Accepted, No Exchange Rate Difference Can be Requested – Decisions of the Court of Cassation, Kutel Law, (SGT: 01.10.2023).
- Exchange Rate Difference Demand Conditions in Foreign Currency Indexed Commercial Relations, Kutel Law, (SGT: 01.10.2023).
- The Exchange Rate Will Receive the Difference, Lexis Law, (SGT: 29.09.2023).