OFAC revokes so-called U-turn authorization for Cuba-related financial transactions
OFAC published a final rule that modifies the Cuban Assets Control Regulations to revoke the so-called "U-turn" authorization.
As explained in our previous legal update, the Turkish Council of Ministers made amendments to the Decree No. 32 on the Protection of the Value of the Turkish Currency (the Decree No. 32), which became effective on May 2, 2018. The Decree amending Decree No. 32 introduces new regulations on foreign currency loans borrowed by Turkish resident persons both from within Turkey and from outside Turkey.
On the same day as the amendments to Decree No. 32 became effective the Central Bank of the Republic of Turkey (the Central Bank) published further details on the new regime in a new capital movements circular (the Capital Movements Circular) which revokes the earlier Capital Movements Circular of January 2, 2002. The Capital Movements Circular has been amended three times since its promulgation on May 2, by letters issued by the Undersecretariat of Treasury.
Under the amended Decree No. 32, save for certain exceptions, foreign currency income is now a prerequisite to obtain foreign currency loans. The Decree No. 32 defines foreign currency income as revenue generated from: (i) export; (ii) transit trade; (iii) sales and deliveries deemed as export; and (iv) services and activities generating foreign currency income. The Capital Movements Circular provides further clarification of these items.
In particular, the Capital Movements Circular clarifies that foreign currency income generated from Turkish residents will not qualify as foreign currency income unless it is generated from sales, services and activities falling within scope of the Communiqué on Tax, Duty and Charge Exceptions on Export, Transit Trade, Sales and Deliveries Deemed as Export numbered 2017/4 (the Communiqué No. 2017/4).
The Capital Movements Circular also refers to the Communiqué No. 2017/4 for the scope of sales and deliveries deemed as export and services and activities generating foreign currency income (items (iii) and (iv) referred to above).
Communiqué No. 2017/4 lists the following as falling within scope: (i) sales and deliveries by companies undertaking manufacturing works or research and development projects in the defense industry, security or intelligence fields; (ii) construction; consultancy, software and engineering services, whose recipient is located outside of Turkey; (iii) activities of and services by companies undertaking investment projects; or (iv) construction and renovation of facilities under the public-private partnership (PPP) model.
Subject to approval by the relevant Ministry, other revenues generated from commercial activities may also qualify as foreign currency income so long as they are collected from persons resident outside of Turkey (including revenues in Turkish Liras).
Revenues generated from the export and transit trade to free zones will qualify as foreign currency income provided that the subsequent sale of the relevant goods to a third country are certified.
Foreign currency income of a company is declared under the Foreign Currency Income Declaration Form annexed to the Capital Movements Circular and submitted to banks and other financial institutions, together with supporting documents. The form must be prepared and certified by an accountant based on the past three years’ unconsolidated financial statements of the relevant company.
Foreign currency income must be declared on an individual and not on a consolidated basis. In other words, each company within a group must provide its foreign currency income declarations separately.
As set out in our previous client alert, legal entities which cannot generate foreign currency income are not allowed to obtain foreign currency loans, unless one of the exceptions applies (e.g. borrowing under an investment incentive certificate, for a PPP project, defense industry project etc.).
The Capital Movements Circular repeats the general rule introduced by the Decree No. 32 regarding the utilization of foreign currency loans, and introduces three new exceptional circumstances where Turkish legal entities with no foreign currency income may utilize foreign currency loans. Accordingly, foreign currency loans can be obtained:
While the first three exceptions apply to foreign currency loans obtained from both inside and outside of Turkey, the last exception only applies to foreign intra-group loans.
The Capital Movements Circular also clarifies the scope of the exceptions, with respect to loans to be obtained:
The Capital Movements Circular imposes certain monitoring and reporting requirements on Turkish banks and financial institutions acting as a lender or intermediary in relation to foreign currency loans extended to Turkish residents. For example, Turkish banks and financial institutions must notify the Risk Center of foreign currency loans extended to Turkish residents. The Risk Center, organized under the Banks Association of Turkey, gathers information on customer risk of financial institutions. Similarly, they must monitor the repayments of foreign currency loans and notify the Risk Center of the repaid amounts by deducting the same from the borrower’s foreign currency credit balance. They are also under the obligation to monitor the SWIFT messages in relation to foreign currency moneys transferred to their clients’ accounts to determine whether there is an indication that the transferred amount is a loan or not. In case the Turkish bank determines that the transferred amount is a foreign currency loan, it will request documents relating to such loan and it will process the same as a foreign currency loan.
The Capital Movements Circular clarified that the foreign currency borrowing restrictions provided thereunder and under the amended Decree No. 32 will not apply to non-cash loans (e.g. letters of guarantee) obtained from abroad where the applicant and beneficiary are Turkish residents. The non-cash loans become subject to restrictions provided under the Capital Movements Circular when they are converted into cash loans.
Turkish banks and financial institutions may also provide non-cash loans (in Turkish Lira or in a foreign currency) to Turkish residents or foreign residents for Turkish beneficiaries, or to Turkish residents for Turkish beneficiaries, provided that, in the latter case, the non-cash loan relates to an international tender launched in Turkey.
The Capital Movements Circular further clarified that Turkish banks can provide non-cash foreign currency indexed loans to Turkish residents for commercial or professional purposes.
In relation to onshore loans, as per the Capital Movements Circular, Turkish residents can only obtain loans from banks and financial institutions. Therefore, foreign currency loans between Turkish legal entities other than banks and financial institutions will no longer be permitted. Turkish banks will be under an obligation to monitor compliance with this rule and notify the Undersecretariat of Treasury in case of a breach either by way of bridge loans or any other similar transactions.
The same prohibition is not foreseen for loans to non-Turkish residents. In this regard, it is possible to interpret that Turkish legal entities will be able to obtain foreign currency loans from foreign companies subject to the restrictions provided under the amended Decree No. 32 and the Capital Movements Circular.
The Capital Movements Circular clarifies the principles for the utilization of foreign currency loans by ordinary partnerships, the partners of which are legal entities.
If all partners of an ordinary partnership are legal entities, it will be considered as a Turkish legal entity for the purposes of the amended Decree No. 32. Foreign currency loans utilized by such ordinary partnership will be considered as a loan utilized by the partners in proportion to their liabilities in the partnership.
When calculating foreign currency income, the total foreign currency income of the partners corresponding to their shares in the partnership will be taken into account.
Banks and financial institutions, acting as lender or intermediary, will calculate the foreign currency credit balance of ordinary partnerships by taking into account the total foreign currency credit balance of the partners corresponding to their shares in the partnership by checking the records of the Risk Center.
Foreign currency loans utilized by ordinary partnerships will be added to each partner's foreign currency credit balance in proportion to its share and the Risk Center will be notified by the relevant bank and financial institution.
When utilizing a foreign currency loan, ordinary partnerships are required to provide the Turkish bank, acting as lender or intermediary, with a notarized copy of their partnership agreements.
The Capital Movements Circular introduces a provisional regime for foreign currency loans to be extended to: (i) holding companies whose main purpose is to participate into other companies; and (ii) companies that are part of a holding company. Accordingly, when calculating the foreign currency income and foreign currency credit balance of a holding company and its subsidiaries, the aggregate of the credit balances and incomes of all companies will be taken into account. If the aggregate loan balance exceeds US$15 million, each company may utilize a foreign currency loan. The foreign currency loan extended to a holding company or a company, operating under a holding company, will be added to the foreign currency credit balance of the company that utilizes the loan. If the aggregate balance is lower than US$15 million as of the utilization date, the sum of the current credit balance and the amount of the loan planned to be used by the borrower may not exceed the total amount of the foreign currency income in the past three financial years.
The provisional regime will be in force until a further legislation in relation to companies whose credit balance exceeds US$15 million is introduced.
On 5 September 2019, Professor John McMillan AO’s Final Report (Report) on the operation of the Narcotic Drugs Act 1967 (ND Act) was tabled in Parliament. Section 26A of the ND Act required the Minster to cause a review of the operation of the ND Act to be undertaken.