Turkey became acquainted with franchising as a new business model in 1985 with the entry of McDonald’s into the Turkish market, and franchising has grown since. In 1991, the National Franchise Association of Turkey (UFRAD) was established with a mission to support the growth of the franchising market in Turkey. UFRAD has also become a member of the World Franchise Council and the European Franchise Federation (EFF).
According to the most recent UFRAD and EFF statistics, there were 1,850 brand chains found in Turkey as of 2014 (the latest available information from UFRAD and EFF). Of these brands, 34 per cent were foreign and 64 per cent were national brands.2 Franchising was used by 78 per cent of these brands. These numbers put Turkey, with 1,471 franchisor chains, ahead of France and Germany according to EFF reports. The total number of franchisors in Turkey has tripled over the past five years. The number of branches of franchisors has reached 47,000 countrywide. Preliminary forecasts show that the volume of Turkey’s franchise market has exceeded US$43 billion and was expected to reach US$50 billion for 2015 (up-to-date data are not yet available). The sector distribution of the chains is 24 per cent in foods, 27 per cent in merchandise, 16 per cent in services and 33 per cent in the clothing sector.
These huge numbers keep growing and recent developments such as the rapid increase of the number of shopping malls all over Turkey are encouraging for the market. This has meant that both national and international chains are eager to realise Turkey’s potential. At present, Turkey’s foreign franchisors include global brands such as McDonald’s, Domino’s Pizza, Burger King, Subway and Caffè Nero. In addition to the foreign franchisors, local giants like Simit Sarayi (food), Koton (clothing) and Istikbal (furniture) are using franchising as their primary business model.
Despite the lack of any governmental reports on franchising, UFRAD and other related associations publish annual reports on the franchising market in Turkey.
II MARKET ENTRY
Turkey’s market is open to foreign franchisors. Pursuant to the Foreign Direct Investment Law No. 4875, foreign investors are free to make foreign direct investments in Turkey and are subject to the same treatment as domestic investors.
Despite the equal treatment of foreign and domestic investors, some bureaucratic formalities are required of foreign investors by the General Directorate of Incentives Implementation and Foreign Investment (the General Directorate). A foreign franchisor intending to enter the Turkish market has to establish an equity company or a branch office in Turkey. The two main vehicles, and those most used by foreign franchisors, are the limited liability company and the joint-stock company. Once they establish a presence in Turkey through one of these vehicles, foreign franchisors have to complete some bureaucratic formalities. The first of these is the submission of the Foreign Direct Investment Operations Data Form to the General Directorate, which then has to be resubmitted by the end of May on a yearly basis. The second form required by the General Directorate is Information on Foreign Direct Investment’s Capital, which should be submitted within the first month of the date in which the payment is made to the company’s capital account.
The foreign franchisor may authorise a local entity to grant a master franchise to other local entities. According to the EFF reports, as of 2012, master franchising was the most used method of entry for foreign franchisors as there are no restrictions or formalities for the foreign entity granting a master franchise.
There are no restrictions on foreign franchisors owning equity in a local business. However, the owning of real property by foreign franchisors is subject to certain conditions and restrictions in Turkey.
Foreign companies that are established according to the relevant laws of their country of origin can acquire property and limited rights in rem within the provisions of special laws. Despite the restrictions imposed on foreign-based companies, companies with foreign capital that are located in Turkey may acquire real estate under certain conditions. Companies with foreign capital may buy property in Turkey in accordance with Article 36 of Land Registry Law No. 2644 and the Decree on Acquisition of Property and Limited in Rem Rights by Companies and Corporations within the Context of Article 36 of Land Registry Law No. 2644, dated 16 August 2012:
- a if the foreign investors hold, individually or collectively, 50 per cent or more shares of the company; or
- b if the foreign investors do not hold any shares of the company, but have a right to assign or remove the managers of the company.
ii Foreign exchange and tax
Foreign investors can freely transfer abroad net profits, dividends, proceeds from the sale or liquidation of all or any part of an investment, compensation payments, amounts arising from licensing, management and similar agreements, reimbursements and interest payments arising from foreign loans through banks or special financial institutions. However, there is a reporting requirement for the banks pursuant to Decree No. 32 regarding the Protection of the Value of the Turkish Currency. Accordingly, banks are required to report outbound flow of Turkish lira and foreign currency exceeding certain amounts (for example, US$50,000) to the Central Bank of Turkey.
If the foreign franchisor decides to enter the Turkish market through the establishment of a company, it will qualify as a Turkish resident and be subject to tax on its income derived both in Turkey and abroad. On the other hand, if the foreign franchisor opts for the master franchising model without establishing any presence in Turkey (legal and business centres should not be located in Turkey), it will qualify as a non-resident, subject to tax only on its income derived in Turkey.
III INTELLECTUAL PROPERTY
i Brand search
Formal registration is required for protection of intellectual property such as trademarks, patents and industrial design protection. A search can be effected through the official website of the Turkish Patent Institute (TPE).3 The website is also accessible in English and provides the necessary information and related links.
Copyright is granted automatically by the Turkish Code on Intellectual and Artistic Works and thus no registration is required for protection of such rights other than for cinematographic and musical works and video games. For purposes of personal data protection, the database listing registered copyrights maintained by the General Directorate of Copyright and Cinematography is not publicly accessible.
ii Brand protection
Brand protection is accomplished through filing with the TPE a trademark application, which is done electronically. The application can be made personally or through a trademark attorney. Non-residents of Turkey are, however, required to appoint a trademark attorney to act on their behalf to file such an application. Current application and registration fees as well as information on how to apply for protection are available on the TPE website.4 A trademark will be cancelled in the event it is not used without any justification for a period of five years starting from the registration date or the use thereof is suspended for five years.
As mentioned above, registration of a copyright is not mandatory, unless it is for cinematographic and musical works and video games, but it is recommended for convenience of proof. The registration application is made to the General Directorate of Copyright and Cinematography by submission of a letter of undertaking together with other application documents.
Pursuant to Industrial Property Law No. 6769, trademark-related intellectual property rights are enforceable and cannot be used by others without the consent of the owner of the right provided that the trademarks are registered with the TPE.
As to the enforcement of copyrights, the Law on Intellectual and Artistic Works provides for both the civil and criminal liability of infringers.
iv Data protection, cybercrime, social media and e-commerce
Data protection, cybercrime, social media and e-commerce are regulated under various provisions.
Turkey has recently enacted a framework law concerning the protection of personal data, which is inspired by the European Union Data Protection Directive 95/46/EC. This framework law on personal data protection entered fully into force in October 2016, and it requires processing of personal data to be legitimised on the grounds stipulated, including, in summary, the explicit consent of the data subject, performance of a contract, compliance with legal obligations, and legitimate interests of the data controller. Further, transfer of personal data from Turkey to abroad must be legitimised by either of the following means:
- a by the explicit consent of the data subject, which by itself would suffice; or
- b by one of the other grounds stipulated under the framework law without obtaining consent, in which case, the destination country must have an adequate level of protection; if there is no such protection, both sides of the transfer must commit, in writing, to provide adequate protection and the approval of the Data Protection Board must be obtained.
This area is also regulated by various applicable provisions under, for example, the Turkish Criminal Code, the Turkish Labour Code, the Turkish Code of Obligations, the Turkish Civil Code and the Electronic Commerce Law.
Cybercrime, social media and e-commerce
Franchisors and franchisees should be aware of the following rules regulated under the Turkish Electronic Commerce Law and its secondary legislation:
- a commercial electronic messages (i.e., messages sent for purposes of introducing, marketing and increasing recognition of goods and services) require explicit prior consent by the recipients. Such marketing-related messages, however, can be sent to merchants without prior consent;
- b easy and free tools shall be available providing access to the right to opt out without having to present any reason whatsoever; and
- c service providers (i.e., franchisors or franchisees) shall take measures to protect information obtained through services provided by means of e-commerce.
IV FRANCHISE LAW
There is neither a specific law regulating franchise contracts nor a statutory or legal definition of franchise contracts under Turkish law. However, the Turkish Court of Appeal, in decision No. 819/4917, dated 25 June 2001, has defined franchising as a long-term and continuous contractual relationship between two independent parties where the party who holds the concession right of a product or service grants this right to the other party by providing information and support relating to the commercial business to be carried out, under certain conditions and limitations, for a definite period.
Since both agency and franchise agreements have similar characteristics, the agency provisions under the Turkish Commercial Code will by analogy be applied to franchise agreements to a large extent. As well as the general provisions of the Turkish Code of Obligations, the provisions scattered among various laws and regulations governing proxy and brokerage agreements will be applied to franchise agreements in respect of termination, notice periods, compensation and non-compete clauses.
ii Pre-contractual disclosure
Pursuant to the relevant provisions of Turkish civil law, agreements shall be concluded based on mutual declarations of intent by the parties, who shall agree on all essential terms that are not defined under the law and act in good faith in exercising their rights and in fulfilling their obligations. Although there is no specifically regulated culpa in contrahendo provision under Turkish law, precedents established by the Turkish courts provide that even where the distributorship relationship has not been set up by concluding an agreement, the distributor’s reliance on the relationship arising from the contractual negotiations will be protected by law on the basis of principles of culpa in contrahendo.
Furthermore, pursuant to the Turkish Code of Obligations, in the event that a person enters into a contract as a result of deception by the other party, the contract will be invalid.
In light of the foregoing, the franchisor may be exposed to a damages claim over pre-contractual statements by the civil courts, if the franchisee proves that (1) even though the parties have not entered into a franchise agreement, there exists conduct by the parties on which they relied during their contractual negotiations, (2) there was misconduct by the franchisor during the pre-contractual period by means of misrepresentation or concealment, (3) the franchisee itself incurred loss because of the misconduct of the franchisor, and (4) there is a causal link between the franchisor’s misconduct and the loss suffered by the franchisee.
The franchisee, for instance, may prove a pre-contractual relationship through royalty receipts (or any other document with conclusive force) issued by the franchisor.
In Turkey, every legal entity is required to be registered with the Trade Registry, the local chamber of commerce and the relevant tax office and social security institute. Although there is no requirement for franchisors or franchisees to register the agreement, trademarks must be registered with the TPE (see Section III.ii, regarding trademark registration).
iv Mandatory clauses
There are no mandatory clauses for franchise agreements. However, Turkish law recognises some general contractual rules that parties must abide by. Pursuant to the Turkish Code of Obligations, clauses contrary to the imperative provisions of the law, ethics, public order and personal rights shall be deemed null and void.
Also, trademark transactions are required to be in writing, otherwise the licensing agreement will be considered invalid.
v Guarantees and protection
In principle, guarantees provided by individuals are enforceable as long as the written consent of their spouse has been obtained.
The Turkish Code of Obligations, which was amended of necessity in March 2013, provides for an exemption to spousal consent for guarantees, namely that it will not be required provided that the guarantor is the shareholder or the manager of the company that will benefit from the guarantee, and that is registered with a trade registry. The relevant Article makes no distinction between local and foreign trade registries and it is not clear whether the exemption would also apply to companies registered with foreign trade registries. The prevailing view in this regard is that the Turkish Code of Obligations can only refer to the Turkish Trade Registry and therefore this exemption cannot apply to companies registered with foreign trade registries.
i Franchisor tax liabilities
Turkish tax law does not impose specific tax liabilities for either franchise operations or for franchise agreements. However, any type of documents involving a sum of money, such as agreements, undertakings and deeds of assignment, that are signed in Turkey are subject to stamp duty of 0.948 per cent of the monetary value. If such a document is signed abroad, there will be no tax liability until the document is submitted to Turkish official authorities or until the terms of the document are performed within Turkey, or the terms of the same are benefited from within Turkey. Parties to a taxable document are jointly responsible for the stamp tax.
Pursuant to the Turkish Corporate Tax Law, if the franchisor is neither registered nor has any place of residence, registered office or place of business in Turkey, it will be taxed solely on its earnings sourced in Turkey. In the event of sale, transfer or assignment of copyright, privilege, invention, business, commercial name, brand and other incorporeal rights, then withholding tax will be withheld in respect of the fees paid by the franchisee.
As to value added tax (VAT), franchise services obtained from non-resident companies will be subject to VAT on the franchise fee. If the franchisor has no place of residence in Turkey through any means of establishment, the franchisees may be held liable for VAT by the Turkish Ministry of Finance as the parties to such a transaction can be held responsible if the principal taxpayer is non-resident.
These provisions will be applicable unless stipulated otherwise by double-taxation treaties.
If the franchisor is registered in Turkey by means of either a resident company or a branch, it will be deemed as a domestic franchisor and therefore will be subject to corporate tax over the royalty determined under the franchise agreement.
Because franchising consists of a long-term agreement and requires a continuous relationship, the royalty paid by the franchisee to the franchisor will be subject to VAT.
ii Franchisee tax liabilities
Corporate tax will similarly be applied to franchisees on their earnings sourced both abroad and in Turkey. In the event that the franchisor is not registered in Turkey, franchisees may be held liable to pay VAT.
iii Tax-efficient structures
There are no specific tax-efficient structures for franchisors or franchisees. In Turkey, entities are generally established either as joint-stock companies or limited liability companies. In joint-stock companies, shareholders’ liability is limited to their capital contribution while the limited liability companies’ shareholders remain liable for public receivables such as taxes with all their assets. It would, therefore, be advisable for both franchisors and franchisees to perform their activities through joint-stock companies.
Minimising the royalty stipulated under the franchise agreement will also reduce the franchisors’ exposure to excessive tax. Double taxation treaties should also be taken into account before determining tax efficient structures.
VI IMPACT OF GENERAL LAW
i Good faith and guarantees
Despite the lack of any duty of good faith specifically applicable to the franchise agreements, Article 2 of the Turkish Civil Code stipulates a general duty of good faith. Pursuant to the aforesaid article; ‘Every person is bound to exercise her or his rights and fulfil her or his obligations according to the principles of good faith.’ Because of the ‘general’ nature of the good faith duty, it is for the courts to determine what steps should be taken by the parties of a franchising agreement acting in good faith.
ii Agency distributor model
There is no legislation under Turkish law that specifically regulates franchising agreements or the relationship between the franchisor and the franchisee. In Turkey, franchisors or franchisees are not treated as agents or distributors. However, all the aforesaid business models have similarities and because of these similarities, the agency rules stipulated by the Turkish Code of Commerce might be applicable to both franchise and distribution relations.
iii Employment law
Despite the fact that a franchising agreement may encompass elements of different types of contracts, employment is not one of these. The relationship between the franchisor and the franchisee has not been treated as an employer–employee relation by the Turkish courts.
iv Consumer protection
Franchise agreements are concluded between two ‘business persons’ and therefore franchisees are not treated as consumers under existing laws nor by the courts in Turkey.
v Competition law
The Competition Law and the relevant secondary legislation are similar to the European Union competition legislation. According to Article 4 of the Competition Law, all agreements that have as their objective, effect or likely effect the prevention, distortion or restriction of competition directly or indirectly in a particular market for goods and services are illegal and prohibited. Despite this restriction, the Block Exemption Communiqué on Vertical Agreements (the Communiqué) regulates the relationship between a franchisor and a franchisee as franchising agreements are generally considered to be vertical agreements.
A franchising agreement that contains the restrictions listed below would be excluded from the exemption provided in the Communiqué:
- a It is forbidden for the franchisor to set a fixed or minimum sale price for the franchisee. However, recommended or maximum sale prices are allowed to the extent that they do not amount to indirect means of achieving resale price maintenance.
- b It is forbidden to restrict the territory into which, or the customers to whom, the buyer may sell. However, some exceptions are stipulated by the Communiqué; (1) restrictions on active sales by a buyer into an exclusive territory or to an exclusive consumer group reserved either to itself or to another buyer, (2) restrictions on active and passive sales to end users by a buyer at the wholesale level, (3) restrictions on sales to unauthorised distributors by the members of a selective distribution system, and (4) restrictions on active and passive sales of components for incorporation into another product to competitors of the supplier.
- c It is forbidden to set restrictions on active and passive sales to end users by the members of a selective distribution system operating at the retail level, except for the right to impose restrictions on the operations of such a buyer in a territory where it is not authorised to operate.
- d It is forbidden to set restrictions on cross-suppliers of a selective distribution system.
- e Finally, it is also forbidden to set restrictions on sales of components by a supplier to customers or repairers that have not been authorised by the buyer to repair or service its goods.
Apart from these requirements, the franchisee is also under the obligation not to compete with the franchisor during the term of the agreement. This obligation is a result of the ‘loyalty obligation’ of the franchisee. In the event of such a violation, the franchisor will be entitled to claim damages arising from the same and, most importantly, will also be entitled to terminate the franchising agreement for just cause.
vi Restrictive covenants
In Turkey, non-compete, confidentiality and exclusivity are the most used restrictive covenants during the term of a franchising agreement. If the franchisor violates any of these restrictive covenants during the term of the agreement, the franchisor may terminate the agreement and will also be entitled to ask for damages arising from the franchisee’s breach.
A franchising agreement made for a definite period expires automatically at the end of the term. There is no mandatory renewal right. However, the parties are free to determine a renewal clause. In such cases, if a party does not wish to renew the agreement on the expiry of the term, it should declare its intention to the other party.
After the franchise agreement expires, the franchisee is not, by law, under a non-compete obligation and the Turkish courts are reluctant to grant post-term non-compete injunctions. However, in practice the parties to the franchise agreement can explicitly agree to such a clause. In the event the franchise agreement includes a post-term non-compete obligation, it is only valid in certain conditions. Post-term non-compete obligations set forth in the franchise agreement should be limited in terms of time, place and subject. Further, under the Communiqué, a post-term non-compete obligation is only valid if all the following apply:
- a it does not exceed a term of one year after the expiry of the agreement, with the condition that the prohibition relates to goods and services in competition with the goods or services that are the subject of the agreement;
- b it is limited to the facility or land where the franchisee operates during the agreement; and
- c it is required to protect the know-how transferred by the franchisor to the franchisee.
Besides, the courts are less reluctant to grant injunctions in the event that the franchisee continues to operate the business and use the assets and intellectual property rights transferred or made available for the sole purpose of running the franchised business. In such cases, the franchisee would be liable for ‘unfair competition’.
viii Anti-corruption and anti-terrorism regulation
In Turkey, fraud, anti-corruption and money laundering are considered criminal offences and the Turkish Criminal Code No. 5237 prohibits such activities. As there are no provisions specifically applicable to franchising agreements, the general legislation would apply.
ix Dispute resolution
Parties to franchise deals tend to opt for litigation via the local courts. Since 2012, mediation has become a recognised form of alternative dispute resolution as the Law of Mediation for Civil Law Disputes No. 6325, entered into force on 22 June 2012. Local courts recognise and uphold foreign choice of law or jurisdiction clauses. Pursuant to Article 47 of the Code concerning Private International Law and Civil Procedure; parties are able to choose a different jurisdiction in the agreement, provided that there is a foreign element in the case and the court assigned by law is not exclusively competent.
There are no specific procedures nor industry practices for franchising disputes. Turkey’s only franchise association, UFRAD, does not offer mediation or arbitration services.
It is accepted in Turkish doctrine that the franchisee should terminate the use of intellectual property rights after the term of the franchising agreement. If the franchisee continues to use these rights, it will have responsibility according to the culpa post contrahendum principle stipulated by the Turkish Code of Obligations; further this conduct will create unfair competition. In such cases, the franchisor can obtain an interim and permanent injunction to prevent the former franchisee from violating the franchisor’s rights.
Damages for breach of contract are calculated after a report by experts. However, these expert reports are not binding, and the courts and the judges are the ultimate decision-makers.
The litigation costs in Turkey are not capped; after the court’s final judgment, the losing party becomes responsible for all costs incurred.
Turkey is a signatory to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention). Furthermore, Turkey also has reciprocity agreements with non-New York Convention signatories. In such cases, Turkish courts readily recognise arbitral awards granted by these non-signatory countries.
Under Turkish law, enforcement of a foreign judgment is subject to the following conditions, which are set out in the Turkish International Private and Civil Procedure Code.
- a there shall be reciprocity between the country wherein the judgment is obtained and Turkey;
- b the judgment shall not be issued on a matter over which Turkish courts have exclusive jurisdiction;
- c the judgment shall not be against the public order of Turkey;
- d the defendants should be duly served with the points and claim, and requested (and thus granted the opportunity) to serve their defences; and
- e the judgment shall be binding and finalised.
Despite the general acceptance of the conformity of post-term, non-compete clauses with the law in certain respects, the Eleventh Chamber of the Supreme Court has held that such clauses violate the principle of the freedom of work secured by the Turkish Constitution.
VII CURRENT DEVELOPMENTS
Because of the increase in public awareness regarding the benefits of franchising and the importance of brand loyalty, a recent trend has been for new entrepreneurs to enter into a franchise agreement with either a local or an international franchisor rather than establishing a market presence from the very beginning.
Further, although not specifically related to franchising, the Industrial Property Law entered into force on 10 January 2017. Previously, the protection of industrial rights (including trademarks, geographical indications, designs, patents, utility models and conventional product names) was mostly governed by separate decree laws. The Industrial Property Law harmonised all industrial rights under one uniform law, and its reforms relating to trademark law include the ability to register new kinds of marks, shorter registration periods, trademark co-existence, administrative invalidation, and the regulation of procedures relating to international applications in accordance with the Common Regulations under the Madrid Agreement Concerning the International Registration of Marks and the Protocol Relating to that Agreement 2004.
1 İlknur Pekşen is a partner at ErsoyBilgehan Lawyers and Consultants.
2 European Franchise Federation (EFF). Franchise Statistics Europe (2014). Retrieved from http://www.eff-franchise.com/Data/FRANCHISE%20STATISTICS%20-%20EUROPE%20-%20source-EFF.pdf.