This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 12 ANKARA 000304 
 
SIPDIS 
 
STATE FOR EB/IFD/OIA 
TREASURY FOR OASIA 
DEPT PLEASE PASS USTR 
FAS FOR ITP/PAUL SPENCER 
USDOC FOR ITA/MAC/DDEFALCO 
 
E.O. 12958: N/A 
TAGS: EINV KTDB EFIN TU
SUBJECT:  2005 INVESTMENT CLIMATE STATEMENT FOR TURKEY 
 
Ref: STATE 250356 
 
This is the first of two cables transmitting e following 
is the 2005 Investment Climate Statement for Turkey: 
 
¶1.  OPENNESS TO FOREIGN INVESTMENT 
 
The Government of Turkey (GOT) views foreign direct 
investment as vital to the country's economic development 
and prosperity.  Accordingly, Turkey has one of the most 
liberal legal regimes for FDI in the OECD.  With the 
exception of some sectors (see below), areas open to the 
Turkish private sector are generally open to foreign 
participation and investment.  However, all companies - 
regardless of nationality of ownership - face a number of 
obstacles:  excessive bureaucracy, weaknesses in the 
judicial system, high and inconsistently collected taxes, 
weaknesses in corporate governance, sometimes 
unpredictable decisions taken at the municipal level, and 
frequent, sometimes unclear changes in the legal and 
regulatory environment.  Historically, investment has also 
been discouraged by high inflation and political and 
macroeconomic uncertainties, though Turkey has become much 
more stable in the years following the 2001 economic and 
financial crisis. 
 
As a result, FDI inflows, at well below one percent of GDP 
over the last decade, have been far below FDI received by 
more investor-friendly emerging markets and also below 
Turkey's potential.  The GOT's far-reaching economic 
reform program agreed with the World Bank and IMF, and 
motivated also by multilateral agreements and EU 
accession, has begun to address these problems and should 
allow FDI inflows to grow. 
 
Regulations governing foreign investment are, in general, 
transparent.  Legislation approved by Parliament in 2003 
(Law 4875 on Direct Foreign Investment) repealed 1954 
legislation on foreign investment.  The 2003 law 
liberalized the foreign direct investment regime by 
eliminating screening of foreign investors in favor of a 
notification system and providing national treatment in 
acquisition of real estate by foreign-owned entities 
registered under Turkish law.  The law also abolished 
specific minimum capital requirement for foreign 
investments (general capital requirements apply to all 
companies); the requirement to seek permission from 
Treasury if a capital increase would change the 
participation ratio between the foreign investor and any 
local partners; and the requirement for Turkish companies 
to register with Treasury any licensing, management, or 
franchising agreements concluded with foreign persons. 
 
Foreign investors are subject to restrictions on 
establishment in certain sectors.  The equity 
participation ratio of foreign shareholders is restricted 
to 20 percent in broadcasting and 49 percent in aviation, 
maritime transportation, and many value-added 
telecommunication services (though telecommunications 
legislation has been amended to allow certain company- 
specific exceptions to these limits).  However, companies 
receive full national treatment once they are established. 
Establishment in financial services, including banking and 
insurance, and in the petroleum sector requires special 
permission from the GOT for both domestic and foreign 
investors. 
 
The GOT privatizes State Economic Enterprises through 
block sales, public offerings, or a combination of both. 
Foreign investors generally receive national treatment in 
privatization programs.  Law 5189 of 2004 removed the 
limit on foreign ownership of  Turk Telecom, the dominant 
provider of voice and other telecommunications services. 
The company's privatization plan foresees a block sale of 
55 percent of the company. 
 
The Turkish Parliament passed legislation in 2003 
streamlining the company registration process (see Section 
8 - Transparency of the Regulatory System).  Another 2003 
law on work permits for foreign citizens gave the Labor 
and Social Security Ministry additional authority in this 
area (see Section 5 - Performance 
Requirements/Incentives).  Inflation accounting was 
introduced at the end of 2003.  Law 5177, published in 
June 2004, amended existing legislation on mining with a 
view toward making this sector more accessible to foreign 
investment by streamlining permit requirements and 
procedures and removing limits on mining on certain types 
of land. 
At the end of 2003, Parliament replaced a complex series 
of taxes on financial instruments with a 15 percent tax on 
all of them.  In 2005, Turkey also plans to reduce the 
rate of corporate tax and to broaden the set of goods and 
services eligible for lower value added tax rates. 
 
Turkish law and regulation affecting the investment 
climate continues to evolve.  Potential investors should 
check with appropriate Turkish government sources for 
current and detailed information.  The following web site 
provides the text of regulations governing foreign 
investment and incentives as well as other useful 
background information: 
http://www.treasury.gov.tr/for_inv.htm.  Additional 
information is available at: 
http://www.investinginturkey.gov.tr 
 
¶2.  CONVERSION AND TRANSFER POLICIES 
 
Turkish law guarantees the free transfer of profits, fees 
and royalties, and repatriation of capital.  This 
guarantee is reflected in Turkey's Bilateral Investment 
Treaty with the United States, which mandates unrestricted 
and prompt transfer in a freely usable currency at a legal 
market-clearing rate for all funds related to an 
investment.  There is no difficulty in obtaining foreign 
exchange.  However, as the result of a 1997 court 
decision, the Turkish Government has blocked full 
repatriation of investments by oil companies under Article 
116 of the 1954 Petroleum Law, which protected foreign 
investors from the impact of lira depreciation.  Affected 
companies have challenged the 1997 decision and the case 
is currently in the Turkish court system. 
 
¶3. EXPROPRIATION AND COMPENSATION 
 
Under the 1990 Bilateral Investment Treaty with the United 
States (codifying existing Turkish law), expropriation can 
only occur in accordance with international law and due 
process.  Expropriations must be for public purpose and 
non-discriminatory.  Compensation must be reasonably 
prompt, adequate, and effective.  Under the Bilateral 
Investment Treaty, U.S. investors have full access to the 
local court system and the ability to take the host 
government directly to third party international binding 
arbitration to settle investment disputes.  There is also 
a provision for state-to-state dispute settlement. 
 
As a practical matter, the GOT occasionally expropriates 
private property for public works or for State Enterprise 
industrial projects.  The GOT agency expropriating the 
property negotiates and proposes a purchase price.  If the 
owners of the property do not agree with the proposed 
price, they can go to court to challenge the expropriation 
or ask for more compensation.  There are no outstanding 
expropriation or nationalization cases. 
 
¶4.  DISPUTE SETTLEMENT 
 
There are several outstanding investment disputes between 
U.S. companies and Turkish government bodies, particularly 
in the energy and tourism sectors. 
 
Turkey's legal system provides means for enforcing 
property and contractual rights, and there are written 
commercial and bankruptcy laws.  The court system is 
overburdened, however, which sometimes results in slow 
decisions and judges lacking sufficient time to grasp 
complex issues.  The judicial system is also perceived to 
be susceptible to external influence and to be biased 
against outsiders.  Judgments of foreign courts, under 
certain circumstances, need to be reconsidered by local 
courts before they are accepted and enforced.  .  Monetary 
judgments are usually made in local currency, but there 
are provisions for incorporating exchange rate 
differentials in claims. 
 
Turkey is a member of the International Center for the 
Settlement of Investment Disputes (ICSID), and is a 
signatory of the New York Convention of 1958 on the 
Recognition and Enforcement of Foreign Arbitral Awards. 
Turkey ratified the Convention of the Multinational 
Investment Guarantee Agency (MIGA) in 1987. 
 
Turkish law accepts binding international arbitration of 
investment disputes between foreign investors and the 
state; this principle is included in the U.S.-Turkish 
Bilateral Investment Treaty (BIT).  In practice, however, 
Turkish courts have on at least one occasion failed to 
uphold an international arbitration ruling involving 
private companies. 
 
¶5.  PERFORMANCE REQUIREMENTS/INCENTIVES 
 
Turkey is a party to the WTO Agreement on Trade Related 
Investment Measures (TRIMS). 
 
Turkey provides investment incentives to both domestic and 
foreign investors.  These include a corporate tax 
exemption of 40 percent of specified investment expenses 
deductible from future taxable profits for investments 
greater than 5,000 new TL (approximately USD 3,700).  (New 
Turkish currency was issued on January 1, 2005, with 1 new 
Turkish lira equal to 1,000,000 (old) Turkish lira.) 
Certain other incentives may require an incentive 
certificate from the Turkish Treasury Undersecretariat. 
 
Law 5084, which went into effect in early 2004, encourages 
investment in provinces with annual per capita income 
below USD 1,500 as well as to high priority development 
regions.  For low income provinces and under certain 
conditions, the law provides for withholding tax 
incentives on income tax; social security premium 
incentives; free land; and electricity price support. 
These incentives will remain in effect until the end of 
2008, except for allocation of free public land, which has 
no expiration date.  The same law also limits certain tax 
preferences previously enjoyed by Turkey's free zones (see 
below).  The Turkish Government is reported to be 
considering expanding the number of provinces eligible for 
the investment incentives. 
 
There are no performance requirements imposed as a 
condition for establishing, maintaining, or expanding an 
investment.  There are no requirements that investors 
purchase from local sources or export a certain percentage 
of output.  However, domestic or foreign investors who 
commit to realizing USD 10,000 of exports upon completion 
of the investment may be exempt from certain fees and 
taxes, such as those related to land registration or 
company establishment.  Investors' access to foreign 
exchange is not conditioned on exports. 
 
There are no requirements that nationals own shares in 
foreign investments, that the shares of foreign equity be 
reduced over time, or that the investor transfer 
technology on certain terms.  There are no government 
imposed conditions on permission to invest, including 
location in specific geographical areas, specific 
percentage of local content - for goods or services - or 
local equity, import substitution, export requirements or 
targets, employment of host country nationals, technology 
transfer, or local financing. 
 
The GOT does not require that investors disclose 
proprietary information, other than publicly available 
information, as part of the regulatory approval process. 
Enterprises with foreign capital must send their activity 
report, submitted to the general assembly of shareholders, 
auditor's report, and balance sheets to the Treasury's 
Foreign Investment Directorate every year by May. 
 
With the exceptions noted under Section 1 "Openness to 
Foreign Investment" and Section 8 "Transparency of the 
Regulatory System", Turkey grants all rights, incentives, 
exemptions and privileges available to national capital 
and business to foreign capital and business on an MFN 
basis.  American and other foreign firms can participate 
in government-financed and/or subsidized research and 
development programs on a national treatment basis. 
Expatriates may be assigned as managers or technical 
staff.  We are aware of one case in the tourism sector in 
which denial of a residence permit has hindered operations 
for a foreign investor.  A 2003 law (no. 4817) on work 
authorizations for foreign nationals gave the Ministry of 
Labor and Social Security more authority over work 
permits. 
 
Outside of the agricultural sector and many services, 
Turkey generally has a liberal foreign trade regime. 
There are no discriminatory or preferential export or 
import policies directly affecting foreign investors. 
Turkey harmonized its export incentive regime with the 
European Union in 1995, prior to the start of the Customs 
Union.  Turkey currently offers a number of export 
incentives, including credits through the Turkish 
Eximbank, energy incentives, and research and development 
incentives.  Foreign investors can participate in these 
export incentive programs on a national treatment basis. 
More information on Turkey's trade regime can be found at 
www.foreigntrade.gov.tr. 
 
Military procurement generally requires an offset 
provision in tender specifications.  The offset guidelines 
were modified to encourage direct investment and 
technology transfer. 
 
¶6.  RIGHT TO PRIVATE OWNERSHIP AND ESTABLISHMENT 
 
With the exceptions noted in Section 1, private entities 
may freely establish, acquire, and dispose of interests in 
business enterprises, and foreign participation is 
permitted up to 100 percent. 
 
Competitive equality is the standard applied to private 
enterprises in competition with public enterprises with 
respect to access to markets, credit, and other business 
operations.  Turkey is adopting the EU's competition 
policy; a Competition Board was established in 1997 to 
implement the 1994 competition (anti-monopoly) law. 
 
¶7.  PROTECTION OF PROPERTY RIGHTS 
 
Secured interests in property, both movable and real, are 
recognized and enforced.  There is a recognized and 
reliable system of recording such security interests.  For 
example, there is a land registry office where real estate 
is registered.  Turkey's legal system protects and 
facilitates acquisition and disposal of property rights, 
including land, buildings, and mortgages, although some 
parties have complained that the courts are slow in 
rendering decisions and that they are susceptible to 
external influence (see "Dispute Settlement"). 
 
Turkey's intellectual property rights regime has improved 
in recent years, but still presents serious problems. 
Turkey was elevated from the Special 301 Watch List to the 
Priority Watch List in 2004, due to concerns about lack of 
pharmaceuticals data exclusivity protection and continued 
high levels of piracy and counterfeiting of copyrighted 
and trademarked materials. 
 
Turkey's 2001 copyright law substantially modernized the 
legal regime, providing deterrent penalties for copyright 
infringement.  However, it does not prohibit circumvention 
of technical protection measures, a key feature of the 
World Intellectual Property Organization (WIPO) "Internet" 
treaties.  In addition, the Turkish courts have generally 
not rendered deterrent penalties to pirates as provided in 
the copyright law.  Legislation enacted in March 2004 
contains several strong anti-piracy provisions, including 
a ban on street sales of all copyright products and 
authorization for law enforcement authorities to take 
action without a complaint by the rightholder.  However, 
the law also reduces potential prison sentences in piracy 
convictions. 
 
In 1995, new patent, trademark, industrial design, and 
geographic indicator laws revamped Turkey's foundation for 
industrial property protection.  Turkey also acceded to a 
number of international conventions, including the 
Stockholm Act of the Paris Convention,  the Patent 
Cooperation Treaty, and the Strasbourg Agreement.  The 
Turkish Patent Institute (TPI) was established in 1994 to 
support technological progress, protect intellectual 
property rights and provide public information on 
intellectual property rights, but its effectiveness has 
reportedly been limited by lack of resources. 
 
In accordance with the 1995 patent law and Turkey's 
agreement with the EU, patent protection for 
pharmaceuticals began on January 1, 1999.  Turkey has been 
accepting patent applications since 1996 in compliance 
with the TRIPS agreement "mailbox" provisions.  The patent 
law does not, however, contain interim protection for 
pharmaceuticals in the R&D "pipeline." 
 
Parliament amended the Patent Law in June 2004.  The new 
law provides for penalties for infringement of up to 3 
years or 47,000 new TL (approximately USD 35,000) in 
fines, or both, and closure of the business for up to one 
year.  However, some companies in the pharmaceutical 
sector have criticized provisions that give judges wider 
discretion over penalties in infringement cases, delay the 
initiation of infringement suits until after the patent is 
approved and published, and permit use of a patented 
invention to generate data needed for the marketing 
approval of generic pharmaceutical products. 
 
The Health Ministry has accepted applications to register 
generic copies of products which have a valid patent in 
Turkey; in the absence of a system for patent linkage, it 
may become possible for generics manufacturers to register 
a copy of a brand name drug with a valid Turkish patent, 
damaging the interests of the patent owner. 
 
The key intellectual property concern for research-based 
pharmaceutical companies is Turkey's lack of data 
exclusivity protection for confidential test data.  U.S. 
industry contends that numerous products infringing data 
exclusivity have been approved or are pending review by 
the Turkish Health Ministry. 
 
Trademark holders also contend that there is widespread 
and often sophisticated counterfeiting of their marks in 
Turkey, especially of apparel, pharmaceuticals, film, 
cosmetics, detergent and other products. 
 
In 2004, Turkey published its first Plant Variety 
Protection (PVP) Law.  However, at least one subsidiary of 
a U.S. seed company has been unable to obtain protection 
for its commercial seed under this new law. 
 
Further information on the intellectual property situation 
in Turkey is available in the National Trade Estimate 
report, available at the U.S. Trade Representative's 
website:  www.ustr.gov. 
 
¶8.  TRANSPARENCY OF THE REGULATORY SYSTEM 
 
The GOT has adopted policies and laws that in principle 
should foster competition and transparency.  However, 
foreign companies in several sectors claim that 
regulations are sometimes applied in a nontransparent 
manner. 
 
Turkish legislation generally requires competitive bidding 
procedures in the public sector.  In 2003, Law 4734 on 
Public Procurement entered into force.  The law 
established a board to oversee public tenders, and lowered 
the minimum bidding threshold at which foreign companies 
can participate in state tenders.  The law gives 
preferences to domestic bidders, Turkish citizens and 
legal entities established by them, as well as to 
corporate entities established under Turkish law by 
foreign companies.  The public procurement law may be 
further amended in the future. 
 
In general, labor, health and safety laws and policies do 
not distort or impede investment, although legal 
restrictions on discharging employees may provide a 
disincentive to labor-intensive activity in the formal 
economy.  Certain tax policies distort investment 
decisions.  High taxation of cola drinks discourages 
investment in this sector.  Generous tax preferences for 
free zones have provided a stimulus to investment in these 
zones, though these preferences will be trimmed in the 
future (see free zones section).  Similarly, incentives 
for investment in certain low-income provinces appear to 
be stimulating investment there (see Performance 
Requirements/Incentives Section). 
 
Bureaucratic "red tape" has been a significant barrier to 
companies, both foreign and domestic.  Law 4884 of June 
2003 simplifies company establishment procedures.  The law 
repeals the permit requirement from the Industry and 
Commerce Ministry for certain firms, institutes a single 
company registration form and enables individuals to 
register their companies through local commercial registry 
offices of the Turkish Union of Chambers and Commodity 
Exchanges.  The goal is to enable registration to be 
completed in as little as one day and to encourage 
electronic sharing of documents.  The government is also 
considering other measures to streamline other business 
procedures as part of its effort to improve the business 
climate. 
 
¶9.  EFFICIENT CAPITAL MARKETS AND PORTFOLIO INVESTMENT 
 
The government has taken a number of important steps in 
recent years to strengthen and better regulate the banking 
system, whose weaknesses had contributed to macroeconomic 
instability over the previous decade and played an 
important role in the 2000-2001 financial crisis. 
 
A 1999 banking law established an independent Banking and 
Regulation and Supervision Agency (BRSA) to monitor and 
supervise Turkey's banks.  The BRSA, which began 
functioning in 2000, is headed by a board whose seven 
members are appointed by the cabinet for six-year terms. 
The law's provision's also toughened conditions for 
establishing new banks or branches, set credit limits to 
protect bank solvency, and strengthen regulatory and 
sanctioning powers, including authorizing the board to 
merge weak banks with stronger ones. 
 
The law also created an independent deposit insurance 
agency, the State Deposit Insurance Fund (SDIF).  Until 
2004, BRSA and SDIF had the same board and shared staff 
and offices, though they were separate legal entities. 
Since the beginning of 2004, BRSA and SDIF's boards and 
staffing have been separated and SDIF's headquarters moved 
to Istanbul. 
 
During and after the 2000-2001 financial crisis, many 
Turkish banks became insolvent or undercapitalized, and 
SDIF, in coordination with BRSA, took over 21 financial 
institutions.  This includes Imar Bank, which was taken 
over on July 4, 2003.  The SDIF has recapitalized these 
banks, and has been selling or liquidating them, at the 
same time as it is negotiating repayment agreements from 
the banks' former owners covering these banks' portfolio 
of credits to affiliated companies.  The BRSA also has 
issued a regulation limiting the extent of connected 
lending (between a bank and related corporate entities) 
and requiring frequent BRSA on-site monitoring. 
 
In early 2005, the government is preparing a new banking 
law that helps to bring the bank regulatory framework in 
line with European Union norms.  Once enacted, the new law 
is expected to further tighten bank regulation, notably by 
broadening the range of expertise inspectors can draw on 
when conducting on-site inspections. 
 
Following the 2001 crisis, the government restructured 
state-owned banks, minimizing the scope for political 
interference, liquidating one of the banks, and slating 
these banks for eventual privatization.  However, the 
process of privatizing the three remaining state-owned 
banks has stalled. 
 
Because of high local borrowing costs and short repayment 
periods, both foreign and local firms frequently seek 
credit from international markets to finance their 
activities.  As of end-2004, there were 48 commercial 
banks (including 12 foreign banks) and 14 development or 
investment banks operating in Turkey.  Total sectoral 
assets were approximately USD 184 billion, or about 70 
percent of GNP, as of July 2004 according to data from the 
Banking Regulation and Supervision Board.  The three state- 
owned commercial banks and the top 4 privately-capitalized 
banks hold approximately 74 percent of total assets. 
 
There is a regulatory system established to encourage and 
facilitate portfolio investments, though it needs 
improvements in transparency, accounting, and enforcement 
provisions to bring it up to EU and U.S. standards.  The 
Istanbul Stock Exchange (ISE), formed in 1986, is becoming 
a significant emerging market stock exchange.  As of 
January 2005, 276 companies were listed on the exchange. 
However, Turkey has yet to develop other capital markets. 
The Capital Markets Board is responsible for overseeing 
the activities of capital markets, including activities of 
ISE-quoted companies, and securities and investment 
houses.  A new Capital Markets Law is under consideration. 
 
The Turkish private sector is dominated by a number of 
large holding companies, whose upper management is family- 
controlled.  Most large businesses continue to float 
publicly only a minority portion of company shares in 
order to limit outside interference in company management. 
There has been no attempt at a hostile takeover by either 
international or domestic parties in recent memory. 
 
There are no laws or regulations that specifically 
authorize private firms to adopt articles of incorporation 
or association in order to limit or prohibit foreign 
investment, participation, or control.  Neither is there 
any attempt by the private sector or government to 
restrict foreign participation in industry standard- 
setting consortia or organizations. 
 
¶10.  POLITICAL VIOLENCE 
 
Terrorist bombings -- some with significant numbers of 
casualties -- over the past two years have struck 
religious, political, and business targets in a variety of 
locations in Turkey. The potential remains throughout 
Turkey for violence and terrorist actions against U.S. 
citizens and interests, both by transnational and 
indigenous terrorist organizations. 
In November 2003 the Al-Qa'ida network was responsible for 
four large suicide bombings in Istanbul that, among other 
targets, hit western interests.  Indigenous terrorist 
groups also continue to target Turkish as well as U.S. and 
Western interests.  In June 2004 the indigenous terrorist 
group PKK/KADEK/KONGRA GEL announced an end to their 
"unilateral ceasefire."  Since the announcement, there 
have been repeated attacks against Turkish targets in the 
southeast region of Turkey, where the group has 
traditionally concentrated its activities.  In addition, 
there have been bombings and other incidents in Istanbul, 
Bodrum, Antalya, and Mersin.  Other terrorist groups, 
including the Turkish group Revolutionary People's 
Liberation Party/Front (DHKP/C), continue to target 
Turkish officials and various civilian facilities and may 
use terrorist activity to make political statements.  In 
2002, 2003, and 2004, civilian venues such as courthouses 
and fast food restaurants were the targets of minor bomb 
attacks, which have resulted in small numbers of 
casualties among bystanders. Similar, random bombings are 
likely to continue in unpredictable locations.  Americans 
traveling to Southeastern Turkey, the site of 
PKK/KADEK/KONGRA GEL actions, should exercise caution. 
 
Although the Turkish government takes air safety seriously 
and maintains strict controls, particularly on 
international flights, hijacking attempts have occurred as 
recently as 2003.  For the latest security information on 
Turkey and throughout the world, travelers should monitor 
the State Department web site http://travel.state.gov, 
where the current Worldwide Caution Public Announcement, 
Travel Warnings, and Public Announcements can be found. 
 
¶11.  CORRUPTION 
 
CORRUPTION IS PERCEIVED TO BE A MAJOR PROBLEM IN 
TURKEY BY PRIVATE ENTERPRISE AND THE PUBLIC AT 
LARGE, PARTICULARLY IN GOVERNMENT PROCUREMENT. 
AMERICAN COMPANIES OPERATING IN TURKEY HAVE 
COMPLAINED ABOUT BEING SOLICITED, WITH VARYING 
DEGREES OF PRESSURE, BY MUNICIPAL OR LOCAL 
AUTHORITIES FOR "CONTRIBUTIONS TO THE COMMUNITY". 
PARLIAMENT CONTINUES TO PROBE CORRUPTION 
ALLEGATIONS INVOLVING SENIOR OFFICIALS IN PREVIOUS 
GOVERNMENTS, PARTICULARLY IN CONNECTION WITH ENERGY 
PROJECTS.  IN 2003, AFTER THE GOVERNMENT INTERVENED 
IN A BANK OWNED BY THE UZAN GROUP, EVIDENCE OF 
CORRUPT PRACTICES AT THE BANK EMERGED. 
Recent public procurement reforms were designed to make 
procurement more transparent and less susceptible to 
political interference, including through the 
establishment of an independent public procurement board 
with the power to void contracts.  The judicial system is 
also perceived to be susceptible to external influence and 
to be biased against outsiders to some degree. 
 
Turkish legislation outlaws bribery and some prosecutions 
of government officials for corruption have taken place, 
but enforcement is uneven.  Turkey ratified the OECD 
Convention on Combating Bribery of Public Officials, and 
passed implementing legislation in January 2003 to provide 
that bribes of foreign officials, as well as domestic, are 
illegal and not tax deductible.  In 2003, Turkey signed 
the UN Convention Against Corruption. 
 
The Prime Ministry's Inspection Board, which advises a new 
Corruption Investigations Committee, is responsible for 
investigating major corruption cases.  Nearly every state 
agency has its own inspector corps responsible for 
investigating internal corruption.  The National Assembly 
can establish investigative commissions to examine 
corruption allegations concerning Cabinet Ministers for 
the Prime Minister; a majority vote in the parliament is 
needed to send these cases to the Supreme Court for 
further action. 
 
Transparency International has an affiliated NGO in 
Istanbul. 
 
¶12.  BILATERAL INVESTMENT AGREEMENTS 
 
Since 1985, Turkey has been negotiating and signing 
agreements for the reciprocal promotion and protection of 
investments.  Turkey has signed or initiated negotiations 
on bilateral investment treaties with 69 countries.  Fifty- 
two of these agreements are now in force, including with 
the United States, United Kingdom, Germany, the 
Netherlands, Belgium, Luxembourg, Denmark, Austria, 
Sweden, Switzerland, Spain, Finland, Italy, Portugal, 
Hungary, Poland, Romania, Tunisia, Kuwait, Bangladesh, 
China, Japan, South Korea, Indonesia, Croatia, Cuba, the 
Czech Republic, Estonia, Russian Federation, Azerbaijan, 
Kazakhstan, Georgia, Tajikistan, Ukraine, Uzbekistan, 
Belarus, Lithuania, Latvia, Slovakia, Macedonia, Pakistan, 
Turkmenistan, Moldova, Kyrgyzstan, Albania, Bulgaria, 
Argentina, Bosnia, Malaysia, Egypt, Mongolia, Greece and 
Israel. 
 
Turkey's bilateral investment treaty with the United 
States came into effect on May 18, 1990.  A bilateral tax 
treaty between the two countries took effect on January 1, 
¶1998.  Turkey has signed avoidance of double taxation 
agreements with 59 countries; 39 of these are in force. 
 
¶13.  OPIC AND OTHER INVESTMENT INSURANCE PROGRAMS 
 
The Overseas Private Investment Corporation (OPIC) offers 
a full range of programs in Turkey, including political 
risk insurance for U.S. investors, under its bilateral 
agreement with Turkey.  OPIC is also active in financing 
private investment projects implemented by U.S. investors 
in Turkey.  OPIC-supported direct equity funds, including 
the USD 200 million Soros Private Equity Fund can make 
direct equity investments in private sector projects in 
Turkey.  Small- and medium-sized U.S. investors in Turkey 
are also eligible to utilize the new Small Business Center 
facility at OPIC, offering OPIC finance and insurance 
support on an expedited basis for loans from USD 100,000 
to USD 10 million.  In 1987, Turkey became a member of the 
Multinational Investment Guarantee Agency (MIGA). 
 
The U.S. Government annually purchases approximately USD 
24 million of local currency.  Embassy purchases are made 
at prevailing market rates, which fluctuate in accordance 
with Turkey's free floating exchange rate regime. 
 
¶14. LABOR 
 
The Turkish labor force numbers 25.3 million (22.9 million 
employed and 2.4 million unemployed); 35.9 percent of the 
workforce is in agriculture.  The official unemployment 
rate was 9.5 in the third quarter of 2004. 
 
Students are required to complete eight years of schooling 
and to remain in school until they are 15 years old. 
Turkey has an abundance of unskilled and semi-skilled 
labor.  However, there is a shortage of qualified workers 
for highly automated high-tech industries.  Individual 
high-tech firms, both local and foreign-owned, have 
generally conducted their own training programs for such 
job categories.  Vocational training schools for some 
commercial and industrial skills exist in Turkey at the 
high school level.  Apprenticeship programs, both formal 
and informal, remain in place, although they are dying out 
in some traditional occupations.  Turkey's labor force has 
a reputation for being hardworking, productive and 
dependable. 
 
Labor-management relations have been generally good in 
recent years.  Employers are obliged by law to negotiate 
in good faith with unions that have been certified as 
bargaining agents.  Strikes are usually of short duration 
and almost always peaceful.  Since 1980 Turkey has faced 
criticism by the ILO, particularly for shortcomings in 
enforcement of ILO Convention 87 (Convention concerning 
Freedom of Association and Protection of the Right to 
Organize) and Convention 98 (Convention concerning the 
Application of the Principles of the Right to Organize and 
to Bargain Collectively). 
 
IN 2002, PARLIAMENT APPROVED A JOB SECURITY BILL, 
PROVIDING BASIC JOB SECURITY FOR WORKERS AND REQUIRING A 
VALID REASON FOR THE TERMINATION OF THE LABOR CONTRACT AT 
THE INITIATIVE OF THE EMPLOYER. THE LAW CAME INTO EFFECT 
ON 15 MARCH 2003. IN 2003, THE LABOR LAW OF 1971 (NO.1475) 
WAS REPLACED BY A NEW LABOR LAW (NO.4857), WHICH PROVIDED 
EMPLOYERS WITH GREATER FLEXIBILITY IN THE ORGANIZATION OF 
WORK AND WEAKENED TO A CERTAIN EXTENT THE JOB SECURITY 
PROVIDED BY THE 2002 LAW. 
 
In 1995 and 2001, constitutional amendments reduced 
restrictions on freedom of association and political 
activity of trade unions.  However, the restrictions on 
the right to strike under Article 54 of the Constitution 
were preserved intact.  Under the Law on Collective Labor 
Agreements, Strikes and Lockouts, some restrictions on the 
right to strike were repealed in 1988.  Civil servants 
(defined broadly as all employees of central government 
ministries, including teachers) are allowed to form trade 
unions and to engage in limited collective negotiations, 
but are prohibited from striking. 
 
¶15.  FOREIGN TRADE ZONES/FREE PORTS 
 
Firms operating in Turkey's free zones have historically 
enjoyed many advantages, but these will be limited in the 
future by recent legislation.  Twenty-one zones have been 
established since passage of the Turkish law on free zones 
in 1985.  The zones are open to a wide range of 
activities, including manufacturing, storage, packaging, 
trading, banking, and insurance.  Foreign products enter 
and leave the free zones without payment of any customs or 
duties.  Income generated in the zones is exempt from 
corporate and individual income taxation and from the 
value-added tax, but firms are required to make social 
security contributions for their employees.  Additionally, 
standardization regulations in Turkey do not apply to the 
activities in the free zones, unless the products are 
imported into Turkey.  Sales to the Turkish domestic 
market are allowed, with goods and revenues transported 
from the zones into Turkey subject to all relevant import 
regulations.  There are no restrictions on foreign firms 
operations in the free zones.  Indeed, the operator of one 
of Turkey's most successful free zones located in Izmir is 
an American firm. 
 
Law 5084 revised the free zones law to effectively 
eliminate certain income and corporate tax immunities for 
the zones.  Under the new rules, taxpayers who possessed 
an operating license as of February 6, 2004 will not have 
to pay income or corporate tax on their earnings in the 
zone for the duration of their license.  Earnings based on 
sale of goods manufacturing in a zone will be exempt from 
income and corporate tax until the end of the year in 
which Turkey becomes a member of the European Union. 
Earnings secured in a free zone under corporate tax 
immunity and paid as dividends to real person shareholders 
in Turkey or to real person or legal-entity shareholders 
abroad will be subject to 10 percent withholding tax.  The 
tax immunity of the wage and salary income earned by 
persons employed in the zones by taxpayers possessing an 
operating license as of February 6, 2004 will remain in 
effect until December 31, 2008, or the expiration date of 
the operating license, whichever is earlier.  The 
implications of the new rules are complex, and interested 
parties may want to consult with a tax advisor and/or the 
Foreign Trade Undersecretariat (web site: 
www.dtm.gov.tr). 
 
¶16.  FOREIGN DIRECT INVESTMENT STATISTICS 
 
With the foreign investment permit requirement in place 
until 2003, the Turkish Treasury collected detailed 
sectoral and country of origin data for authorized FDI. 
Data collected since the abolition of the permit 
requirement, by the Central Bank and other entities, is 
not directly comparable to data collected prior to 2003. 
 
According to Turkish Treasury data, as of June 2003, there 
are 6,511 foreign firms invested and are operating in 
Turkey.  The Turkish government has provided permits for 
foreign capital since 1980 amounting to USD 35.2 billion, 
and aggregate actual inflows reached USD 16.4 billion.  In 
2003, EU countries accounted for 74.3 percent of 
authorized new foreign investment, OECD countries 
accounted for 93.7 percent, and Islamic countries for 3.7 
percent.  Over the past two decades, France (16.4 percent) 
has been the top source of foreign investment, followed by 
the Netherlands (15.8 percent), Germany (13.0 percent) and 
the U.S. (11.5 percent)  (Note that these figures are 
based on the amount of authorized investment, not on 
actual capital inflows.)  Because of the absence of a 
bilateral tax treaty until 1998, much U.S.-origin capital 
was invested in Turkey through third-country subsidiaries. 
According to U.S. Commerce Department data, U.S. company 
investment amounted to about USD 2 billion in 2003.  By 
unofficial estimates, the U.S. may be one of the largest 
sources of foreign investment in Turkey. 
 
In 2003, about 58.9 percent of authorized foreign 
investment took place in manufacturing, 30.23 percent in 
services, 10.3 percent in mining and 0.6 percent in 
agriculture.  The sub-sectors with the greatest amount of 
authorized foreign investment include banking (10.6 
percent); communications (9.4 percent); food, beverage and 
tobacco processing (8.0 percent); and trade (6.5 percent). 
Between 1980 and June 2003, 53.0 percent of actual capital 
inflows were invested in manufacturing,  44.0 percent in 
services, 1.8 percent in agriculture, and 1.2 percent in 
mining.  The finance and communications sectors received 
the highest share of increased foreign direct investment 
permits in 2003. 
 
FDI Inflow by Years (million USD) 
 
Year           Actual    Inflow/GDP      No firms 
                Inflow                   (Cumulative) 
1980-1988      1,172 
1989             663        0.80           1,525 
1990             684        0.67           1,856 
1991             907        0.69           2,123 
1992             911        0.78           2,330 
1993             746        0.56           2,554 
1994             636        0.64           2,830 
1995             934        0.66           3,163 
1996             914        0.53           3,582 
1997             852        0.54           4,068 
1998             953        0.49           4,533 
1999             813        0.41           4,950 
2000           1,707        0.85           5,328 
2001           3,288        2.21           5,841 
2002           1,042        0.48           6,280 
2003           1,702        0.71           6,511 
2004(*)        2,216             1.02            N/A 
TOTAL          20,140                      6,511 
 
Source: Central Bank of Turkey, State Institute of 
Statistics, 
(*)January through November 2004. 
(**) Includes capital inflows, foreign loans and real 
estate investment. 
 
FDI Inflow by Source Country (1999-2002/ million USD) 
 
Country        Cumulative Value    Share (percent) 
 
Italy               1,968               30.9 
Netherlands           962               15.1 
U.S.A.                793               12.4 
United Kingdom        647               10.1 
Germany               514                8.1 
Bahrain               323                5.1 
Japan                 267                4.2 
France                263                4.1 
Switzerland           104                1.6 
Belgium-Luxemburg      25                0.4 
Spain                  23                0.4 
Others                488                7.7 
 
Total               6,377              100.0 
 
Source:  Turkish Treasury Undersecretariat, General 
Directorate of Foreign Investment.  Updated information 
has not been issued for the period following 2002. 
 
Sectoral Breakdown of FDI Permits (1980-2003*/ million 
USD) 
Sector         Cumulative Value    Share (percent) 
 
Manufacturing       18,641           53.0 
Services            15,453           44.0 
Agriculture            616            1.8 
Mining                 442            1.2 
 
Total               35,152           100.0 
 
Source: General Directorate of Foreign Capital 
(*) as of June 2003 
 
 
Main Manufacturing Industry Sub-Sectors Receiving FDI 
Permits 
 
Industry Sub-Sector        Share in Manufacturing 
                                   Industry (percent)* 
 
Chemical Products                    18.3 
Food                                 14.7 
Transport Equipment                  12.3 
Electrical Machinery                  5.8 
Garment Industry                      3.9 
Iron and Steel                        3.4 
 
Source: General Directorate of Foreign Capital 
(*) as of June 2003 
 
Turkey's External Investment by Country (As of December 
2004) 
 
Country              Amount       Share 
                 (USD millions) 
Netherlands         2,248.8       34.8 
Azerbaijan          1,043.6       16.1 
United Kingdom        524.2        8.1 
Germany               472.1        7.2 
Kazakhstan                 434.5        6.7 
Luxembourg            248.7        3.9 
United States         179.8        2.8 
Russia                159.7        2.5 
France                 93.4        1.4 
Switzerland            84.9        1.3 
Others                976.5       15.1 
 
Total               6,466.2       100.0 
Source: General Directorate of Banking and Foreign 
Exchange, 
Treasury 
 
Major foreign investors 
 
Turkey's foreign investors include Telecom Italia, 
Renault, Toyota, Fiat, Castrol, Enron Power, Citibank, 
Pirelli Tire, Unilever, RJR Nabisco, Philip Morris, United 
Defense, Honda, Hyundai, Bosch, Siemens, DaimlerChrysler, 
Chase Manhattan, AEG, Bridgestone-Firestone, Cargill, 
Novartis, Coca Cola, Colgate-Palmolive, General Electric, 
ITT, Ford Motor Co., Lockheed Martin, Goodyear, Aventis, 
McDonald's, Nestle, Mobil, Pepsi, Pfizer, Procter and 
Gamble, InterGen, Abbot Laboratories, Aria, Bechtel, 
Shell, Delphi-Packard, Toreador/Madison Oil, AES, GE, NRG, 
Normandy Mining, Marsa-Kraft-Jacobs Suchard, ESBAS A.S., 
Archer Daniels Midland, Merck, Sharp Dohme, Bunge, and 
Bausch and Lomb. 
Edelman