This article explains how foreign investors in Türkiye are protected under investment treaties, and how to structure an investment to secure that protection.
Foreign investors entering Türkiye usually focus on the contracts: the shareholders' agreement with a local partner, the EPC contract, the supply agreements, the financing documents. These contracts protect the investor against its commercial counterparties. They do much less against the risks that come from the state itself: changes in regulation, withdrawal of licences, measures that affect the value of the investment, or restrictions on moving funds. For those risks, international law offers a second layer of protection that many investors overlook until a problem arises: bilateral investment treaties and the investor-state arbitration they make available. This article explains how that protection works for foreign investors in Türkiye, how it interacts with Turkish domestic law, and how to structure an investment so that the protection is actually available when it is needed.
1. A Second Layer of Protection: Treaty v Contract
Commercial arbitration rests on an arbitration clause in a contract and binds the contracting parties. Investor-state arbitration rests on a treaty between two states. In the treaty, each state makes a standing offer to arbitrate disputes with investors from the other state. When a dispute arises, the investor accepts that offer by commencing arbitration. The investor therefore does not need a contract with the host state to bring a claim against it.
The differences matter in practice:
- Source of the right: a contract in commercial arbitration; an international treaty in investment arbitration.
- Parties: the contracting parties in commercial arbitration; the investor and the host state in investment arbitration.
- Applicable law: the law governing the contract in commercial arbitration; primarily the treaty and international law in investment arbitration.
- What must be shown: a breach of contract in commercial arbitration; a breach of the state's treaty obligations in investment arbitration.
The same facts can give rise to both kinds of claim. A public authority's failure to pay under a contract is ordinarily a contractual matter, but the arbitrary exercise of sovereign power to terminate a contract, seize assets or deny an investor access to justice may amount to a treaty breach. Identifying which route is available, and which is stronger, is one of the first strategic questions in any dispute with a state.
2. Türkiye's Treaty Framework
Türkiye has signed bilateral investment treaties with more than one hundred countries, a large number of which are in force, covering most of Europe, the Middle East, Central Asia, the Caucasus, Africa and Asia. In addition, Türkiye:
- is a party to the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (the ICSID Convention);
- is a party to the Energy Charter Treaty, which protects investments in the energy sector, although investors from the European Union and certain European states that have withdrawn from the treaty should check their position carefully; and
- has included investment provisions in some of its free trade and economic partnership agreements.
Turkish domestic law complements this framework. The Foreign Direct Investment Law No. 4875 guarantees foreign investors treatment equal to that of domestic investors and allows investment disputes to be resolved through international arbitration. Article 125 of the Turkish Constitution expressly permits international arbitration for disputes with a foreign element arising from public service concession contracts. For a foreign investor, therefore, the question is rarely whether international arbitration is possible, but which route offers the best protection in the circumstances.
3. What the Treaties Protect Against
Most investment treaties follow a similar pattern, but the precise wording of each treaty determines the outcome. The core standards are:
- Expropriation: the state may expropriate only for a public purpose, on a non-discriminatory basis, in accordance with due process and against prompt, adequate and effective compensation. Protection extends to indirect expropriation, where regulatory measures destroy the value of an investment without any formal transfer of title.
- Fair and equitable treatment: the most frequently invoked standard. It covers protection against arbitrary conduct, respect for the investor's legitimate expectations based on specific assurances given by the state, transparency and due process.
- Full protection and security: the state's obligation to protect the investment physically and, under some treaties, legally.
- National treatment and most-favoured-nation treatment: the investor must be treated no less favourably than domestic investors or investors from third countries.
- Free transfer of funds: the right to transfer capital, profits and sale proceeds abroad freely and without delay. For investors managing currency risk in Türkiye, this guarantee deserves particular attention.
- Umbrella clause: where included, it brings the state's specific undertakings to the investor under the protection of the treaty, so that certain contractual breaches can also be pursued as treaty breaches.
4. Qualifying for Protection
To benefit from a treaty, the claimant must be a protected investor and hold a protected investment.
- Investor: individuals who are nationals of the other contracting state and companies incorporated there. Some treaties also require the company to have substantial business activities or its seat in that state. Dual nationals who also hold Turkish citizenship face additional hurdles, depending on the treaty and the rules chosen.
- Investment: treaties typically adopt a broad definition covering shares, movable and immovable property, claims to money, intellectual property rights, concessions and licences, and often rights under long-term construction and service contracts. In ICSID arbitration, criteria such as a contribution of capital, a certain duration, the assumption of risk and a contribution to the host state's development may also be examined.
- Legality: many treaties protect only investments made in accordance with the host state's laws. Gaps in permits or irregularities at the establishment stage can later undermine treaty protection. Getting the Turkish regulatory approvals right at the outset is therefore part of securing international protection.
5. Bringing a Claim: Procedure
- Notice and cooling-off period: the investor must usually notify the state of the dispute in writing and seek an amicable settlement for a period, typically three to six months.
- Local remedies: some treaties require the dispute to be submitted to the host state's courts for a period before arbitration. Others contain "fork-in-the-road" clauses under which choosing the local courts forecloses arbitration. Before starting any proceedings in the Turkish courts, the investor should therefore review the applicable treaty carefully.
- Forum: treaties typically offer a choice between ICSID, ad hoc arbitration under the UNCITRAL Arbitration Rules and institutions such as the ICC. The choice affects enforcement, the available challenges and transparency.
- Time limits: some treaties require claims to be brought within a set period after the investor knew of the breach.
6. Enforcement and State Immunity
ICSID awards are not subject to annulment by national courts; they can be challenged only through the limited annulment mechanism within the ICSID system. Every contracting state must recognise the pecuniary obligations of an ICSID award as if it were a final judgment of its own courts. Awards rendered outside ICSID are recognised and enforced under the 1958 New York Convention and may be challenged before the courts of the seat.
State assets nevertheless benefit from immunity from execution, which the ICSID Convention leaves to national law. Assets dedicated to public purposes, such as embassy accounts and central bank reserves, are generally protected. A realistic recovery strategy should therefore be considered from the outset, including where the state holds commercial assets and how state-owned enterprises are structured.
7. Structuring an Investment in Türkiye for Treaty Protection
Treaty protection is largely decided before the investment is made:
- Choice of investment vehicle: the jurisdiction of the company that holds the Turkish investment determines which treaty applies. Holding the investment through a company in a jurisdiction with a strong treaty with Türkiye can materially improve the investor's position.
- Timing: structuring should be done before any dispute arises or becomes foreseeable. Tribunals have treated restructurings carried out mainly to gain treaty protection for a foreseeable dispute as an abuse of process.
- Substance: where the treaty requires substantial business activity in the home state, a shell company may not suffice.
- Alignment of contracts and treaty: dispute resolution clauses in contracts with Turkish public bodies should be drafted so as not to undermine treaty rights. An exclusive jurisdiction clause in favour of local courts can, in some cases, give rise to arguments about treaty claims too. We discussed drafting arbitration clauses under Turkish law in this article.
- Documentation: keep a complete record of the investment, the permits obtained, any assurances given by Turkish authorities and any subsequent interference. Investment arbitration is a document-driven process.
- Complementary tools: political risk insurance and export credit agency cover can sit alongside treaty protection.
8. Conclusion
For foreign investors in Türkiye, investment treaties provide a layer of protection that sits above their contracts and covers risks those contracts cannot. The key points can be summarised as follows:
- Investor-state arbitration rests on a treaty, not a contract; the investor needs no contract with the state to bring a claim.
- Türkiye has an extensive treaty network and is a party to the ICSID Convention and the Energy Charter Treaty; Turkish law itself is open to international arbitration.
- The core protections cover expropriation, fair and equitable treatment, full protection and security, non-discrimination and free transfer of funds; the wording of each treaty is decisive.
- Cooling-off periods, local remedies requirements and fork-in-the-road clauses must be respected, particularly before turning to the local courts.
- ICSID awards cannot be set aside by national courts and must be recognised in all member states, but state immunity shapes recovery.
- Protection depends largely on how and when the investment is structured; restructuring after a dispute becomes foreseeable may not be respected.
For advice on treaty protection for investments in Türkiye, structuring investments, disputes with the Turkish state and public bodies, and investment arbitration under ICSID, UNCITRAL and other rules, please contact us at info@guzeloglu.legal.