Guide to Turkish Republic of Northern Cyprus Legal System

H&AH&A HASİPOĞLU & AKBİLEN PARTNERS PARTNERSPARTNERS

GUIDE TO TRNC FOREIGN INVESTMENT LEGAL SYSTEM

Hasipoglu & Akbilen Partners Law Office ……

The Guide is prepared to give general information on Turkish Republic of Northern Cyprus Legal System and practice by Hasipoglu & Akbilen Partners Law Office and it does not constitute legal advice or a legal opinion.

17 Namık Kemal Str., Kyrenia, Mersin 10, Turkey Tel: 0392-444-84-85 Fax: 0392-815–72-56 [email protected] GUIDE TO TURKISH REPUBLIC OF NORTHERN CYPRUS LEGAL SYSTEM HASIPOGLU & AKBILEN PARTNERS LAW OFFICE, ATTORNEYS AT LAW INSIDE THE GUIDE

1. Introduction …………………………………………………………...

2. Guide to Property Law ………………………………………………..

3. Guide to Corporate Law ………………………………………………

4. Guide to International Business Corporations Law …………………..

5. Guide to Incentives Law ……………………………………………...

6. Guide to Banking Law ………………………………………………..

17 Namık Kemal Str., Kyrenia, Mersin 10, Turkey Tel: 0392-444-84-85 Fax: 0392-815–72-56 [email protected] GUIDE TO TURKISH REPUBLIC OF NORTHERN CYPRUS LEGAL SYSTEM HASIPOGLU & AKBILEN PARTNERS LAW OFFICE, ATTORNEYS AT LAW

Section 1: INTRODUCTION

Although not utterly recognized by international community, Turkish Republic of Northern Cyprus (“TRNC”) attracted numerous foreign legal and individual investors after so called “Annan Plan”.

The Guide, under Section 2, is intended to provide brief information to foreign investors on Property Law issues as the number of investments in TRNC on property have increased more than 100% after 2003.

Besides investments made by the individual foreign buyers, the international companies are also interested in purchasing and developing real estates in TRNC. Section 3 of the Guide is therefore aim to give information on establishing foreign corporate entities to acquire real estate in TRNC.

Tax benefits have been created as a new tool to attract foreign investments by International Business Corporations. Section 4 is aimed to guide the foreign investors who wish to establish international business corporations and benefit from the tax incentives.

Being an island in the Mediterranean Sea, TRNC is also seen as a striking place for the tourists and is attracting more and more visitors each day. The Guide, under Section 5, intends to present legal framework for tourism investments and incentives granted by the government to such projects.

17 Namık Kemal Str., Kyrenia, Mersin 10, Turkey Tel: 0392-444-84-85 Fax: 0392-815–72-56 [email protected] GUIDE TO TURKISH REPUBLIC OF NORTHERN CYPRUS LEGAL SYSTEM HASIPOGLU & AKBILEN PARTNERS LAW OFFICE, ATTORNEYS AT LAW Section 2: GUIDE TO PROPERTY LAW

Purchasing land or residence or investing on property by way of development or in other ways are important decisions and require understanding of legal system applicable in TRNC. One should seek legal advice before making any investment on property in TRNC. Property is a significant asset for the investors all around the world and TRNC with comparably cheaper prices and continuous gains during the last 3 years from the property business TRNC has attracted numerous foreign investors of all kinds.

The Law No. 109 regulates the principles with respect to purchase of property by foreigners (i.e. non-TRNC citizens) in TRNC. This Law also regulates the purchase of property in TRNC by “foreign controlled companies”. Section 3 summarizes the procedures in relation to purchase of property by foreign controlled companies.

There are certain restrictions and conditions for foreigners wishing to acquire property in TRNC. The foreigners can only purchase one property (i.e. up to 5 donums of land (donum is a measure of land equivalent to 1600 square yards, 1,338 sq. meters or 14,400 sq. ft., 0.336 acre) or a villa or an apartment. The foreigners must obtain Council of Ministers resolution in order to acquire freehold ownership of a property.

The documents below are required in order to make this application to the Ministry of Interior in order to obtain permission;  Copy of the passport of the purchaser(s);  Permission Information Form;  Criminal Record Certificate(s) to be obtained from the police department where the purchaser(s) is/are resident.

This procedure currently takes between 9 to 18 months as a result of the work load of the Ministry of Interior and increase in the number of the applications made. The transfer of freehold ownership can only be completed once the permission is obtained, however, the possession of the property can be immediately transferred to the foreign purchasers once completed.

TRNC has created its own rules and different legal system has been constituted after division of the island, in 1974. In relation to purchase of a land or house, the first issue which has to be clarified is the “kind of the title deed”. Although all title deeds are seen as “TRNC Title”, the market differentiates the title deeds and prices wary depending on the type of the title deed. The property alternatives with different deed types are as follows:

a) Foreign or Turkish Cypriot owned properties pre-1974: These types of title deeds are considered as wholly safe. b) Greek Cypriot owned pre-1974: Given to Turkish Cypriot citizens in exchange for their properties that they left in South Cyprus or awarded to TRNC citizens by TRNC government. c) Grant Title Deeds: Granted mainly to Turkish citizens immigrated to TRNC after 1974.

17 Namık Kemal Str., Kyrenia, Mersin 10, Turkey Tel: 0392-444-84-85 Fax: 0392-815–72-56 [email protected] GUIDE TO TURKISH REPUBLIC OF NORTHERN CYPRUS LEGAL SYSTEM HASIPOGLU & AKBILEN PARTNERS LAW OFFICE, ATTORNEYS AT LAW d) Leasehold: Properties owned by TRNC and leased to individuals and/or legal entities with long term leases for 49 years.

Prior purchasing real estate, ALWAYS:

 Obtain Legal Advice in relation to the property to be purchased from an independent solicitor (preferably from a solicitor who is not advised by the Vendor and/or the estate agent);  Ask a copy of the title deed and official site plan;  Check the sheet plan – plot references and the site plan;  Look at the site plan and ascertain from its boundaries its shape and boundaries or obtain assistance from professionals on the place of the property;  Check the construction availability (from State Planning Office);  Make a land search to understand who the owner is and whether there is any encumbrance on it or not (from Land Registry);  Ask copies of the specifications and plans;  Understand the rules with respect to the maintenance of the site and the building that you are purchasing; and  Always make a contract before making any payment.

Once a property has been decided upon, ALWAYS:

 Enter into a binding contract with the Vendor;  Make all the payments under the terms of the contract which will regulate the principles on the payment terms once the stages of the construction have been completed (in case the project is an off-plan project);  Appoint a project manager to monitor the completion of the stages and check whether the stages have been completed accurately or not;  Obtain receipts from the Vendor for all your payments including the deposit payment;  Before making the last payment (i.e. on date of transfer of possession or freehold ownership) always investigate whether the property is completed in accordance with the contract, technical specifications and plans;  Obtain a release letter from the Vendor once you make the last payment and transfer the possession.

Once the permission is obtained from the Council of Ministers, the freehold ownership can be transferred in the purchaser’s name. At the time of transfer of freehold ownership, Purchase Tax should be paid to the District Land Office (6% over the valuation to be made by the District Land Office, however, this rate can be reduced to 3% if exemption right is used). In addition 1% charge of the 6% is also applicable which should be paid to the municipality where the property is located. VAT @ 5% may also be applicable if the Vendor is a professional (i.e. a construction company) and VAT is to be paid in accordance with the contract between the Vendor and the Purchaser. The capital gains tax (6.25% over the valuation of the District Land Office) is paid by the Vendor to the Tax Office at the time of the transfer of freehold ownership of the Property purchased.

GUIDE TO CORPORATE LAW

1. Company Incorporation process in Northern Cyprus:

The legal form widely used for business undertakings in the TRNC both by foreign investors and by the local businessmen, is the private limited company. The provisions concerning the limited companies are set out in the Companies Law, Cap. 113.

In relation to setting up company, TRNC laws allow %100 foreign partnership. However, if the field of activity is property development, the majority shares (i.e. 51%) should be hold by TRNC citizens. For such incorporation, 100.000 USD should be deposited as capital contribution of the company. This money is regarded as capital of the company, and the blockage on this amount is lifted once the incorporation is completed.

The incorporation process is as follow:

a) Company Name Search; b) Ministry of Economy Affairs Approval; c) Companies Registry Approval; d) Registry to Tax Office.

2. The documents required for the company incorporation are:

a) Articles of Association and by- Laws (to be prepared according to TRNC Law); b) M.S. 1, 2, 3 Forms (application forms prepared in accordance with TRNC Law); c) Letter of Intent (letter explaining the business intention of the company); d) Good character (criminal record) certificate obtained from the investor’s local “Security (Police or Court) Office” for ONLY foreign directors; e) Tax-Payment guarantee certificate for foreign director(s), obtained from the TRNC local Revenue and Tax Office; f) Approved photocopy of passport or identity card of the shareholders; g) Certificate of the deposit of the foreign capital share at a local bank for the minimum required capital on establishment of any company with foreign participation of US$ 100,000; and h) Power of Attorney (to be issued to your solicitor to follow the formalities).

If the shareholder of the company shall be a legal entity the following documents shall be required:

a) Board of directors resolution with respect to participation of the foreign company (which shall be the shareholder) in the company to be established; b) Articles of Association and by-laws of the foreign shareholder (together with the amendments made in the Articles of Association and by-laws);

17 Namık Kemal Str., Kyrenia, Mersin 10, Turkey Tel: 0392-444-84-85 Fax: 0392-815–72-56 [email protected] GUIDE TO TURKISH REPUBLIC OF NORTHERN CYPRUS LEGAL SYSTEM HASIPOGLU & AKBILEN PARTNERS LAW OFFICE, ATTORNEYS AT LAW c) The updated list of the names, addresses and the nationalities together with passport and identity card photocopies of the Board members of the foreign shareholder; d) Good character (criminal record) certificate obtained from the investor’s local “Security (Police or Court) Office” of the board members of the foreign shareholder; e) The updated list of the shareholders and their addresses together with information on the type of the shares, nominal values and number of shares they own in the foreign shareholder company; f) Updated version of the certificate of activity of the foreign shareholder obtained from the Trade Registry where the company is established proving that the company is still active;

Please note that character certificates, passport photocopies, power of attorney and the documents related to foreign company shareholder should be notarized and approved by Turkish consulate in your country or alternatively should be approved by the apostle registry. If the investor is here in TRNC, the power of attorney can be certified here.

3. Corporate Structure to Secure the Foreign Shareholders’ Interest:

As mentioned above under Section 1, the foreign shareholders can only own 49% in a company if the Company is actually register the Property in its name and the majority of the shares in the company (i.e. 51%) should be owned by TRNC citizens in accordance with the Immovable Property Acquisition (Foreigners) Law (the “Law).

It is not possible to eliminate all the risks attached to the above mentioned rule of law or under Companies Law, Section 113, however, it is possible to reduce the risks by creating certain protection mechanisms as explained below.

In order to minimize the risks, besides the below mentioned mechanisms, the shareholding percentages that the TRNC citizens own can be divided into portions. As an example, in a property company having 51% TRNC citizen shareholding, a TRNC citizen nominee may hold less than 51% (i.e. 30%) and another TRNC citizen nominee may hold 21% so that together the total shares that the TRNC citizens hold in the company become 51%. In this way, the foreign shareholders shall be in majority with 49%, however, no shareholder in the company shall be able to get a shareholders resolution by himself.

a) Trust Mechanism:

This mechanism includes a trust deed to be signed by all the TRNC citizen shareholders (hereinafter referred to as the “nominee shareholders”) and the foreign shareholder(s) that the nominee shareholders are holding the shares in the company as nominees, all the rights arising from the shares (including but not limited to voting, dividend, appointment of the directors and auditor rights etc.) belong to the foreign shareholders, the nominee shareholders shall transfer the shares to foreign shareholders and/or their nominees immediately whenever required by the foreign shareholders. We may send you a draft Trust Deed in due course upon your instructions.

b) Share Transfer Deed Mechanism:

A share transfer deed may also be obtained from the nominee shareholders stating that they transferred all their shares in the company to another TRNC citizen(s). The date in the share transfer deed should be left blank as the share transfers should be registered with the Companies’ Registry within 21 days from signature. This is a secondary security for the foreign shareholders in case the nominee shareholders refuse not to transfer the shares when the foreign shareholders require. Obviously, this new nominee shareholder should again be a Turkish Cypriot citizen.

c) Class of Shares Mechanism:

Class of Shares can also be created with the Articles of Association and the Memorandum of the Company in order to grant most of the rights to foreign shareholders and limit the rights of the nominee shareholders. In this way, the foreign shareholders holding privileged shares shall have certain rights such as receiving the dividends, decision rights in the shareholders/directors meetings, appointment of the directors. It is also possible to insert provisions in the Articles of Association and Memorandum of the Company limitations with respect to the share transfers (i.e. right of first refusal, approval of the share transfers by all the directors and/or the shareholders, put option, call option) etc.

Also, in order to limit the control of the nominee shareholders, the Articles of Association and the Memorandum may foresee aggregated voting quorums in both directors and shareholders levels so that the nominee shareholders cannot obtain any decisions in both levels without the approval of the foreign shareholders and/or directors.

We may also consider obtaining other securities with respect to the protection of the foreign shareholders by obtaining pledge over shares, bank guarantee letter and/or a charge (mortgage) etc. from the nominee shareholders if you deem necessary.

The authorized governmental institution to issue a residency permit is the Ministry of Interior. Foreigners can obtain a residency permit if they purchased a property and registered in their name and/or signed a contract to purchase a property in TRNC.

In addition to this alternative, the foreigners owning a company or being directors in the company in TRNC are also entitled to have residency and working permit in TRNC.

17 Namık Kemal Str., Kyrenia, Mersin 10, Turkey Tel: 0392-444-84-85 Fax: 0392-815–72-56 [email protected] GUIDE TO TURKISH REPUBLIC OF NORTHERN CYPRUS LEGAL SYSTEM HASIPOGLU & AKBILEN PARTNERS LAW OFFICE, ATTORNEYS AT LAW GUIDE TO IBC LAW

The International Business Corporations Law with No: 28/2005 published in the Turkish Republic of Northern Cyprus (“TRNC”) Official Gazette dated 9 August 2005 (“IBCL”) is aimed to contribute positive reflections to the economy of the TRNC.

1. Entitlement for establishing IBC:

 Foreign real persons – persons who are not TRNC citizens and the persons who are not permanently resident in TRNC;  Foreign real entities – legal entities of those who are not registered in the TRNC and whose at least 51% of shares belong to people residing outside of the TRNC; and  TRNC citizens residing abroad.

2. Minimum capital requirement and application fee to establish IBC & Operation fees:

 The paid capital of the IBC cannot be less than EURO 20,000 (Twenty Thousand Euros).

 EURO 500 (Five Hundred Euros) is charged for the applications of the IBC.

 IBC which shall operate by opening an office should pay Euro 2,000 annual operation fee and IBC which shall not operate by opening an office should pay Euro 5,000 annual operation fee within 30 days from the date of registration and in the following years until the end of January of each calendar year to the Tax Office.

 Also, IBC should pay half of the capital to the state as a fee for the registration of the company, capital increase and transfer of shares.

3. Preliminary License & Registration & Permission:

 The applications are examined and evaluated by the Ministry of Economy (the “Ministry”) within 15 days from the application the latest and those which are approved are granted licenses by the Ministry.

 Within two months from obtaining the required preliminary license, an application to the Companies Registry for registration is required.

 IBC, following their registration, should submit a copy of the Articles of Association, Memorandum, opening financial statement and a set of approval documents to the Ministry within one month the latest. This application shall be finalized within fifteen days the latest.

 IBC should notify the location to the Ministry and should initiate commercial activities within two months from obtaining the license.

4. Fields of Activities of the IBC:

 The IBC should carry out their commercial activities merely in abroad (i.e. offshore) and the income should be incurred from abroad.

 IBC cannot carry out gambling and betting activities.

 IBC cannot demand credit from TRNC government and/or TRNC citizens (Off-Shore Banks are exempted from this prohibition).

 IBC cannot derive any financial source from any bank, credit institution and/or real persons or legal entities within TRNC.

5. Tax & Financial & Customs Duty Benefits:

 Following each financial period, IBC after having their accounts audited by the competent financial consultant offices registered in the TRNC, should submit their accounts in Turkish to the Ministry and the Tax Office within four months the latest.

 The commercial activities carried out by IBC are carried out without being subject to Income Tax Law, Money and Exchange Law, Corporations Tax Law.

 IBC are not be subject to the tax and financial regulations in force in TRNC for the financial transactions carried out in the branches of the International Banks operating abroad (other than the branches registered in TRNC);

 IBC, notwithstanding the tax rates specified at the Corporations Tax Law and Income Tax Law, shall be subject to a tax at the rate of %2.5 (two and a half percent) over the base value to be determined according to the rules of Corporations Tax Law and Income Tax Law. This tax amount should be paid to the Tax Office within five months from each financial period.

 IBC can open any kind of account including a deposit account in the banks operating in the TRNC. Income stoppage tax which shall be incurred from the interest of the deposits transferred under appropriate conditions to such accounts of IBC and/or deposits to these accounts, cannot exceed the tax rate of 2.5% (two and a half percent) imposed on the IBC. The stoppage tax deducted as such constitutes the absolute tax of interest revenues of IBC and the deduction and/or return of the said tax is not possible in the event of a loss or in any other way.

 No tax is imposed on dividend allocation of the IBC.

 No stoppage tax, VAT and/or any kind of tax are imposed on copyrights and any kind of fees and service charges and interests paid by the IBC to real persons and legal entities operating outside the TRNC.

 IBC are not subject to immovable property tax;

 IBC’s shareholders and/or trustees shall not be subject to inheritance, income and/or institutions tax concerning the transfer of shares.

 The income obtained by the IBC by purchasing and selling properties outside the country, is exempted from tax.

 Notwithstanding any provisions stating the contrary in any other Law, IBC do not pay customs duty except for the contributions to Institution of Support to the Security Forces for:

(i) Motor vehicles (other than buses, motorcycles, minibuses and caravans); (ii) Office vehicles (other than air-conditions and consumer goods); (iii) Household goods (Furniture and air-conditions are not included); and (iv) Yachts and similar marine vehicles.

6. Currency in Accounting & Freedom and Transfer:

 IBC should keep their accounts in New Turkish Lira and/or with convertible currency by the Central Bank.

 The capital of Euro 20,000 and the taxes, charges and the fees mentioned under the IBCL must be paid in convertible currency and not with New Turkish Lira.

 The money and profit acquired and transferred from abroad by IBC may be transferred to abroad freely.

7. Employment:

 IBC which shall operate by opening an office should employ personnel at least one TRNC citizen. If the IBC shall employ more than one employee, then the number of the foreign personnel cannot exceed three times the number of the TRNC employees.

 IBC should appoint a trustee in case no office will be opened.

8. Trustees:

 The shareholders who do not wish their shares to be registered under their own names may deposit their shares to trustees. Trustees keep those shares on behalf of their original owners. However, the person who keeps the shares and the financial advisor who keeps the books of the corporation and /or submits them to the relevant Ministry cannot be the same person.

 It is obligatory for the person who will act as a trustee to have a License from the Ministry. The trustee must be TRNC citizen, should be resident in TRNC for the last five years and not be convicted of an infamous crime. The trustee should pay Euros 250 (two hundred and fifty euros) license fee for every year before the end of January.

 The persons with the status of a trustee should keep the share they are in charge of in a separate fund account and they cannot keep it together with any of his/her personal accounts.

 The share registered in trustee may be registered under the name of the trustee or a third party authorized by the trustee.

 The trustee is entitled to manage or sell the shares deposited to him/her based on the duties and liabilities granted to him/her by the special authority of the shareholder and also, depending on the authority granted to him/her by the Law. This authorization should be on a voluntary basis and must be prepared in writing.

 The legal power of Attorney which specifies the agreed amount and the terms and handed in to the trustee on demand is safe kept in the Ministry in line with the principle of confidentiality.

9. Cancellation of the Licenses, Inspection & Sanctions:

 The provisions of the Law concerning the Collection Method of the Debts Owed to the State shall apply to the liabilities of those IBC that failed to pay the due and tax imposed on them in accordance with Article 13, 18 and 21 of this Law and their operation shall be terminated following the cancellation of their operation license by the Ministry.  The Ministry is entitled to carry out any kind of inspection concerning the IBC within the framework of the Laws currently in force.

HASIPOGLU & AKBILEN PARTNERS LAW OFFICE CONTACT DETAILS

Hasipoglu & Akbilen Partners Law Offices

Kyrenia Office Nicosia Office 17 Namik Kemal Street 19 Mahmutpasha Street Kyrenia Nicosia North Cyprus North Cyprus Telephone No.: + 90 392 444 84 85 Telephone No.: + 90 392 227 26 20 Fax No.: + 90 392 815 72 56 Fax No.: + 90 392 228 5771

Mustafa Akbilen (Partner) E-mail: [email protected]

Oguzhan Hasipoglu (Partner) E-mail: [email protected]

Web: http://www.lawyercyprus.com

17 Namık Kemal Str., Kyrenia, Mersin 10, Turkey Tel: 0392-444-84-85 Fax: 0392-815–72-56 [email protected]