License Deadlock In Free Zones

In the February 25, 2025 issue of the newspaper you're reading, an article titled “License Deadlock in Free Zones: Two-Way Export at Risk” was published. The article stated: “Companies operating in free zones are at risk of losing their licenses due to the classification of domestic transactions as imports. Companies are warning that if export-recorded sales are not exempted, there will be a billion-dollar decline in exports.”

As someone who has spent years in the customs industry, I found the topic intriguing and tried to analyze it. First, I believe it would be helpful to briefly touch upon the concept of free zones and the inward processing regime to better understand the subject.

What is a Free Zone?

In general, free zones can be defined as areas where legal and administrative regulations related to commercial, financial, and economic matters that apply within the country are not applied or are partially applied, where broader incentives for industrial and commercial activities are provided, and physically separated from other parts of the country.

In the Customs Law, free zones are defined as:

• Areas where goods that are not in free circulation are placed without being subject to any customs regime and without being put into free circulation, and are considered outside the Turkish customs territory in terms of import duties and trade policy measures.
• Areas where goods in free circulation, by being placed in a free zone, benefit from opportunities normally associated with the export of goods.

Free zones are located within the political borders of the country, but in terms of foreign trade, tax, and customs regulations, they are considered outside the customs line. Free zones are regulated by both the Customs Law No. 4458 and the Free Zones Law No. 3218, and there are areas where these two regulations conflict.

The European Union's progress reports continuously criticize the incompatibility of the EU regulations with Turkey’s Free Zones Law No. 3218. In response to this criticism, the Free Zones Law has been adjusted to state that until Turkey becomes a member of the European Union, the Free Zones Law will be the guiding regulation in practice.

When a free zone is established and operated by the private sector, the entity that establishes and operates the region is referred to as the “region founder and operator.” A “user” is a natural or legal person who has obtained an operating license and has a workplace in the free zone. An operating license is mandatory for conducting activities within the free zone.

What is Inward Processing?

The inward processing regime is a customs regime in which non-free circulation raw materials or semi-finished goods are imported under a guarantee for taxes, processed, and then the final products obtained are exported. The guarantee is refunded when the export takes place.

Instead of securing the taxes by guarantee, it is also possible for the taxes to be collected during importation and refunded when the processed products are exported, but this method is not preferred.

The inward processing regime is an instrument used to encourage exports by allowing exporters to obtain the raw materials used in production without paying taxes. Therefore, goods imported under the inward processing regime also benefit from the tax exemptions granted to exports.

The Intersection of Inward Processing Regime and Free Zones

The intersection of these two practices is the use of free zones in obtaining the inputs utilized under the inward processing regime. Free zones are used in two different operations.

A fabric manufacturer in Turkey, for example, imports fiber under the inward processing regime and first produces yarn, then fabric. The fabric produced is sold to a branch located in a free zone or to another company. This completes the inward processing regime. Later, a clothing manufacturer imports the fabric again under the inward processing regime, produces a clothing item (such as a suit) from it, and directly exports it from Turkey. Essentially, the inward processing regime is split into two parts, and exports are made under two different certificates. In this process, free zones are used.

In another method, fabric procured either from within the free zone or abroad is stored in a warehouse of a company operating in the free zone. This fabric is then imported from the free zone into Turkey under the inward processing regime to be used in clothing production.

The common point of these two operations is that the fabrics are imported from the free zone into Turkey under the inward processing regime to be used in clothing production, and the finished products are directly exported.

Why Are Licenses Being Canceled?

The purpose clause of the Free Zones Law No. 3218 states, “to encourage investment and production for export, accelerate foreign direct investments and technology entry, guide businesses toward export, and develop international trade...” In the amendment made by Law No. 5810, dated November 12, 2008, the expression “to provide the economy’s input needs in a cheap and regular manner” was removed from the purpose clause, aiming to prevent the use of free zones for import purposes.

At this point, even though goods entering Turkey from a free zone are under the inward processing regime, they are still considered imports. To prevent imports from free zones, operating licenses are being canceled.

Evaluation

According to the Inward Processing Regime Communiqué, if goods exported to free zones are imported into the Turkish Customs Territory under another inward processing permit within 3 months, the export commitment related to the permit is closed. This clear provision creates a contradiction between the export incentives granted to goods that are treated as exports and then considered imports, as if they were products to be sold on the market, and the legislation of the same Ministry.

While the possibility of transferring an inward processing permit from one to another has been introduced to resolve such issues, this application is not working effectively. This is because, in the transfer from one document to another, the delivery by the first document holder is not considered an export. The second document holder is unwilling to take on the obligations of the first document holder. Due to the fact that the first document cannot be closed until the second document is closed, and because there are many documents for a single batch, closing the first document is very challenging and time-consuming.

The concept of import in customs legislation is a broad term that includes all goods entering the country’s borders. Therefore, goods entering the country under the inward processing, customs-controlled processing, or temporary import regimes are also considered imported goods. Import, depending on the situation, also covers goods that are brought into the country by paying customs duties and, previously, were nationalized, making them available for market supply. However, these types of goods are qualitatively very different. From this perspective, the import that is intended to be prevented under the Free Zones Law No. 3218 refers to goods subject to the free circulation regime.