Establishing a Defense Company in Türkiye: Advanced Insights

International defense contractors are increasingly drawn to Türkiye’s booming defense sector, but succeeding in this market requires navigating complex legal requirements and strategically leveraging local opportunities. This advanced guide (a sequel to our earlier overview) explores manufacturing and R&D strategies, regulatory navigation, tax and investment incentives, and case studies of successful ventures – all tailored for foreign firms aiming to set up defense operations in Türkiye. There will be no repetition of basic points; instead, we delve into legal complexities, constraints, and practical solutions to help investors work through challenges and capitalize on Türkiye’s defense industry growth.

Manufacturing and R&D Opportunities in Türkiye

Türkiye’s defense industry has undergone a remarkable transformation, with a government push for self-reliance yielding over 70% domestic supply of defense needs by 2024 (projected to exceed 80% by 2025). This means foreign entrants who invest in local manufacturing and R&D will join a robust ecosystem of Turkish suppliers and research institutions rather than starting from scratch. Over 3,500 Turkish defense companies are engaged in some 1,100 projects, supported by an annual R&D budget of around $3 billion. The country also hosts more than 1,500 certified R&D and design centers, employing over 70,000 engineers and technicians. This strong innovation base represents a major opportunity for international firms to collaborate, hire skilled talent, and co-develop new technologies.

Organized Industrial Zones and Technoparks: Türkiye has dozens of Organized Industrial Zones (OSBs) and Technology Development Zones (technoparks) that cater to high-tech manufacturing and research. Defense investors can establish production facilities in defense industry clusters around Ankara, Eskişehir, Konya, and Istanbul, where major Turkish contractors and suppliers operate. For example, Konya Tech Valley and Ankara OSTİM are specialized zones that bring together defense SMEs, making it easier to build a local supply chain. Being part of such clusters not only provides ready infrastructure and skilled subcontractors, but also helps meet local content and offset requirements (as discussed later).

R&D Collaboration: Foreign defense companies are encouraged to set up local R&D units or partner with Turkish entities to innovate jointly. The government’s support for R&D is substantial – Law No. 5746 (recently extended to end of 2028) offers generous incentives for private sector R&D and design activities. Companies operating approved R&D centers in Türkiye can deduct 100% of their R&D expenditures from the corporate tax base. They also enjoy income tax exemptions of 80–95% for salaries of R&D personnel (the highest relief for employees with Ph.D. degrees). In addition, the Technology Development Zones Law (No. 4691) provides that profits from software development or R&D activities in designated technoparks are completely exempt from corporate income tax. Salaries of R&D and support staff in these zones are 100% exempt from income tax until at least December 2028. These incentives dramatically lower the cost of doing advanced development work in Türkiye. They also allow foreign firms to co-locate R&D near production, which can speed up prototyping and customization for the Turkish market.

To maximize these opportunities, international defense investors should plan to integrate into Türkiye’s industrial and academic network. This could involve sponsoring university research programs, tapping into TÜBİTAK (the Scientific and Technological Research Council) funding calls, or joining consortiums in government-sponsored projects. The bottom line is that Türkiye offers a cost-effective and resource-rich environment for defense manufacturing and innovation – but foreign firms must be ready to localize production, share know-how, and contribute to the ecosystem in exchange for market access.

Navigating the Regulatory Landscape and Legal Complexities

Entering Türkiye’s defense sector comes with layered regulatory controls designed to protect national security. Foreign companies must navigate a stringent licensing regime administered by the Ministry of National Defense and the Presidency of Defense Industries (SSB). Early planning and compliance are essential – as is finding the right local partners – to work through these constraints.

Licensing and Permits: Under Turkish law (notably Law No. 5201), any company that will produce or export military goods in Türkiye needs to obtain a series of permits from the Ministry of National Defense (often in consultation with SSB). The process involves several stages and approvals:

• Establishment Permit: First, the company must be incorporated in Türkiye (meeting Turkish Commercial Code requirements) and then apply for an establishment permit from the General Directorate of Technical Services (Ministry of Defense). Authorities will review the company’s ownership, business plan, and facility plans for legal compliance and security considerations. This step essentially vets the prospective investment at a high level before physical setup begins.
• Facility Security Clearance: Next, the firm must secure a Facility Security Certificate confirming that its site meets strict defense security standards. Inspectors will audit physical security measures (fencing, cameras, guards), IT/network security (e.g. isolated networks with no internet for classified systems), and personnel vetting procedures. For example, defense facilities in Türkiye must implement TEMPEST measures to prevent eavesdropping on electronic emissions. Key staff may require personal security clearances. Passing this stage signifies the plant or R&D center is trustworthy to handle sensitive defense work.
• Production Permit: Finally, with a security-certified facility, the company applies for the production permit to officially license the manufacturing of specified defense articles. Detailed product information, technical capacity reports, and proof of security compliance are submitted. Once approved, the company can legally begin production and even export of defense products from Türkiye. It is important to note that these permits are product- and site-specific; any expansion of scope (e.g. adding a new weapons system) may require amendments or new approvals.

These procedures can be time-consuming (several months at minimum) and require local expertise. Missing documents or inadequate security protocols can lead to delays or denials. Working with experienced Turkish legal counsel and consultants is highly advisable to manage the paperwork and liaise with the Ministry. As one advisory notes, completing the establishment, facility clearance, and production permit process “without any omissions” is critical, and expert guidance can ensure a “faster and smoother process.”

Foreign Ownership Restrictions: While Türkiye allows 100% foreign ownership in many industries, the defense sector is treated as strategic. In practice, certain defense projects impose foreign equity caps for security reasons. For example, critical platforms like missile systems or encrypted military communications often limit foreign shareholding to 49%, ensuring Turkish control of the venture. This is not a blanket ban on majority foreign ownership, but rather a policy applied case-by-case to safeguard national interests. International investors should be prepared for the possibility that, for the most sensitive defense categories, they may need a Turkish partner holding at least 51% equity. Early talks with the SSB will usually signal whether a proposed project triggers such a requirement.

Joint Venture (JV) Strategy: In light of the above, the preferred market entry route for foreign defense firms is through joint ventures with Turkish companies. JVs offer multiple advantages: the local partner likely already has the necessary facility security clearance and production licenses, as well as established relationships with the SSB and military clients. By teaming up, a foreign company can piggyback on these credentials and more seamlessly participate in projects that involve classified information or state procurement. Typically, JVs in this sector are structured with the foreign partner holding a minority (up to 49%) stake along with veto rights over critical decisions like technology use or export compliance. Management boards often have parity between foreign and Turkish sides, though the chair is usually a Turkish national to satisfy governance expectations. Major Turkish defense firms such as ASELSAN, Roketsan, TAI, HAVELSAN, BMC, etc., have entered numerous JVs with international companies, forming a network of collaborations across land, air, naval, and electronics domains. The SSB plays a central role in vetting and approving JV agreements, reviewing ownership structure, intellectual property arrangements, and end-use control plans. Investors should approach JV negotiations with flexibility – balancing control with compliance. A well-designed JV can mitigate many regulatory hurdles by aligning the foreign investor’s goals with Türkiye’s industrial priorities.

Technology Transfer and Offset Obligations: Another defining feature of the Turkish defense market is the enforcement of industrial participation (offset) requirements on foreign-involved projects. Whenever a foreign firm sells defense systems to the Turkish Armed Forces or enters co-development programs, the SSB will mandate a certain portion of the contract value to be reinvested in Türkiye’s defense industry. Commonly, an offset ratio of 50–60% is applied. This means the foreign company must source half or more of the project value through local subcontracting, local manufacturing of components, training of Turkish engineers, or transfer of technology that benefits Turkish defense capabilities. For instance, in programs involving missiles or advanced electronics, foreign partners are expected to localize key subassemblies (propulsion systems, guidance software, etc.) or establish local assembly lines. SSB may also specify a minimum local content percentage and even name certain qualified Turkish SMEs or research institutes that should be involved. These offset commitments are written into contracts and closely monitored – performance shortfalls can trigger penalties or payment holds.

For international firms, offset obligations represent both a constraint and an opportunity. They do raise the upfront complexity and may require sharing sensitive know-how with Turkish partners. However, by fulfilling offsets, a foreign company effectively invests in building a local supply chain and often gains a cost advantage (due to Türkiye’s competitive manufacturing costs). The key to working through offset constraints is early planning: identify capable Turkish suppliers or JV partners from the outset, and include them in the project proposal. Türkiye has developed programs like the “Program to Evaluate and Support Industrial Competency” (PERİSİ/PESIC) which helps match defense projects with local companies and provides growth plans to upgrade local supplier capabilities. Leveraging these programs can help foreign investors meet their offset targets more smoothly and align with Turkey’s indigenization goals.

Export Controls and Security Compliance: Operating a defense company in Türkiye also means complying with both Turkish and international export control laws. Turkish law requires that all defense and dual-use items moved across borders (import or export) be registered in the TAREKS system (a risk-based trade control platform) and receive prior approval. Companies must obtain specific licenses for each export or import of controlled goods, supported by end-user certificates and technical data. Failure to do so can lead to serious penalties including seizure of goods or criminal charges. Foreign investors should establish rigorous internal compliance teams to handle TAREKS registrations and liaise with Turkish customs and SSB’s export control department.

Additionally, any U.S.-origin components or technology integrated in your Turkish operations will invoke US regulations like ITAR/EAR, even if the final product is made in Türkiye. A prominent example is Turkey’s T129 ATAK attack helicopter, co-developed by Turkish Aerospace Industries and AgustaWestland. The helicopter’s engines were produced under license from a US-UK joint venture, which meant the US government held veto power over exports to third countries. Indeed, the Turkish company could not export the T129 to certain markets until it developed a new indigenous turboshaft engine to replace the ITAR-restricted component. This case underscores the importance of planning for export compliance: foreign defense firms in Türkiye must ensure that their supply chain and IP rights are structured to avoid unwanted export blockages. Working through these constraints might involve developing Turkish alternatives for critical components, obtaining prior approvals from home authorities for tech transfer, and transparently disclosing all foreign-origin content to the Turkish SSB.

Tax Advantages and Investment Incentives

Beyond the strategic rationale, Türkiye also makes a compelling business case for defense investors through various tax breaks and investment incentives. With careful structuring, foreign companies can significantly reduce their operating costs and upfront capital expenditure when setting up in Turkey.

Corporate Tax Context: Türkiye’s general corporate income tax rate is 25% (for 2023 and onwards), which is moderate by international standards. However, defense companies rarely pay the full rate in practice thanks to incentive schemes. The government has identified defense and aerospace as priority sectors, meaning investments in these fields often qualify for generous tax reductions or exemptions. Notably, a recent Presidential Decree (No. 9903 of 2025) updated Turkey’s investment incentive system to focus on high-tech and strategic industries. Under this system, “investments in the field of defense” that obtain project approval from the Presidency of Defense Industries (SSB) are explicitly listed as priority investments. In practice, this designation allows defense projects to access the highest tier of incentives regardless of where in Turkey they are located.

Investment Incentive Programs: Turkey’s incentives are organized under several programs – recently reformed as the “Century of Türkiye” Development Initiative and the Sectoral Incentive System. The exact support a defense investor can get will depend on the project size, location, and qualification as strategic/priority. However, some common incentives available include:

• VAT and Customs Exemptions: Machinery and equipment imported or purchased domestically for an investment can be exempt from value-added tax and customs duties. This is especially beneficial for setting up production lines, as expensive manufacturing equipment can be brought in tax-free.
• Corporate Tax Relief: Projects can receive either full tax exemptions for a period or permanent tax reductions (e.g. paying corporate tax at a reduced rate) depending on incentive certificates. For example, a large defense manufacturing investment might enjoy a 0% corporate tax on profits for the first several years, or a 50% reduction until a certain portion of the investment cost is recovered via tax savings.
• Social Security Premium Support: The government may cover the employer’s share of social security contributions for employees at the new facility, for a designated number of years. This lowers the payroll burden for the company. In some cases, even employees’ own social security contributions are subsidized, effectively reducing salary costs.
• Support for Financing: Turkey offers interest rate support on loans for investment – meaning the government will pay a portion of your loan’s interest, or provide grants to lower financing costs. For very strategic projects, partial capital contribution is possible: the state can inject equity capital up to 49% of the investment amount (usually in large, critical projects). There are even cases of the government providing a purchase guarantee for the output of certain investments (relevant if you produce a defense item that the Turkish military commits to buying). These forms of support drastically improve project viability and ROI for investors.
• Infrastructure and Land: Depending on location, local authorities may provide ready-to-use industrial land or infrastructure support (utilities, roads) for defense investments. In defense industry parks, it’s common to get long-term leases on favorable terms, or even free land allocation for high-priority projects.
• R&D and Innovation Incentives: As discussed earlier, if your operation involves research and development, you can tap into additional incentives. Beyond the R&D tax deductions and technopark exemptions (which essentially can bring your effective corporate tax rate to zero for R&D-related profits), the government also provides grants and rebates for R&D projects through TÜBİTAK and KOSGEB. There are cash support programs for developing certain advanced technologies, especially in defense electronics, AI, cybersecurity, etc., aligned with national priorities. Defense companies can collaborate on government-funded R&D challenges or benefit from the HIT-30 program, which targets high-impact tech projects with comprehensive incentives.

To take full advantage, an international defense firm should obtain an Investment Incentive Certificate by applying to the Investment Office or Ministry of Industry and Technology with a detailed investment plan. The application will outline the project scope, tech involved, location, and demand specific supports. If the project is defense-related, securing a support letter or approval from SSB (to confirm it’s in line with defense industry objectives) can fast-track priority status. It’s also wise to strategize the location of the investment: Turkey is divided into regions (1 through 6) for incentive purposes, with less-developed regions (5 and 6, mostly in Eastern Turkey) granting the most generous perks like longer tax holidays and higher subsidy rates. A defense investor might weigh locating a parts factory in a Region-5 province to maximize supports, versus the logistic benefit of being in Ankara (Region-1 but can be overridden by the priority status). In some cases, free zones are an option – these zones allow companies to import inputs duty-free and are exempt from VAT, and if you manufacture products in a free zone and export them, you can be exempt from corporate tax on those profits. Defense companies do operate in free zones, but note that all the national licensing requirements still apply and extra security protocols might be needed.

In essence, Türkiye’s incentive system is a major benefit that offsets some of the regulatory burdens. By combining defense-specific incentives (like SSB-backed credits) with general investment supports, foreign companies can significantly lower their cost of entry and operation. It’s recommended to conduct a thorough incentives analysis – often with the help of local advisors – to quantify the savings (tax break value, cash supports, etc.) and incorporate those into your business model. Many investors are pleasantly surprised to find that, with incentives, Türkiye becomes one of the most cost-effective places to produce advanced defense systems.

Successful Case Studies of Foreign–Turkish Defense Ventures

Perhaps the best way to appreciate the opportunities and navigate the challenges is to learn from companies that have successfully established defense businesses in Türkiye. Below we highlight several case studies demonstrating how foreign partners worked within Turkey’s system to achieve notable outcomes.

Figure: FNSS PARS 8×8 armored vehicle on display at a Turkish defense expo. FNSS, a joint venture of BAE Systems (UK) and Nurol Holding (Turkey), exemplifies successful technology transfer and local manufacturing. Founded in 1988 with BAE (then FMC) as a 49% partner, FNSS has since produced over 4,000 armored vehicles, integrating British design expertise into a thriving Turkish company that exports globally. This JV allowed BAE Systems to leverage Turkey’s cost-effective production base and skilled workforce while Nurol provided domestic networks and compliance with local rules. Over the decades, FNSS developed new vehicles like the PARS 8×8 (pictured) and the Kaplan MT tank, evolving into one of Turkey’s top defense exporters. The venture navigated ownership constraints by keeping foreign equity at 49% and focusing on licensed production – a model which delivered technology gains for Turkey and profitable market access for the foreign partner. Today FNSS’s success is a case study in win-win collaboration: Turkey gained self-reliant capability in land systems, and BAE Systems (until it sold its stake in 2025) benefited from a steady stream of contracts and a share of export revenues.

Another notable success is TUSAŞ Engine Industries (TEI) – a partnership in aerospace. TEI was established in 1985 as a joint venture between General Electric (USA) and Turkish Aerospace Industries (plus Turkish state entities). GE took a 46% stake and transferred know-how to set up a modern aircraft engine plant in Eskişehir. This investment became “the foundation of Turkey’s aircraft engine industry”, and today TEI is a world-class facility employing around 1,900 people. TEI has produced engine components and assembled engines for F-16 fighters, helicopters, and UAVs, both for Turkey’s needs and for export programs. GE leveraged TEI as a hub to fulfill offset obligations (e.g. manufacturing parts for GE’s global engine programs in Turkey) and to access skilled Turkish engineers for design work. In return, Turkey gained critical skills and is now developing indigenous turbine engines. TEI illustrates how long-term joint investments in manufacturing and R&D can flourish: starting with licensed production, then moving up the value chain to design and innovation. Over nearly four decades, the JV navigated changing incentive regimes and export regulations but endured as a profitable and strategically important enterprise for both sides.

Co-production programs can also yield advanced platforms. The T129 ATAK attack helicopter is a prime example of turning a foreign partnership into a locally sustainable product. Turkish Aerospace Industries (TAI) and Italy’s AgustaWestland (now Leonardo) teamed up to co-develop the T129 based on an Italian design. The agreement gave Turkey full intellectual property and marketing rights for the helicopter (except in Italy/UK) and mandated extensive localization. As a result, about 95% of the T129’s parts were eventually manufactured in Turkey during serial production. TAI produced the airframes and integrated Turkish mission systems, while its engine JV (TEI) built the engines under license. This allowed Turkey not only to equip its own armed forces with dozens of attack helicopters but also to export the T129 to other countries (the Philippines became the first export customer in 2022). A legal hurdle did emerge: the T129’s engine contained US technology, requiring US export permission for third-party sales. When geopolitical frictions led to delays in U.S. licensing, Turkey responded by accelerating development of a homegrown engine (the TS1400) to eventually replace the foreign engine. This shows how a foreign-Turkish project can overcome constraints – through proactive technology development – and turn an initial dependency into an opportunity for further innovation. The T129 program, despite challenges, is a success story demonstrating Turkey’s ability to absorb foreign tech and then indigenize it for greater autonomy.

Finally, it’s worth noting the broader trend of foreign defense companies increasing their footprint in Turkey through various forms of partnership. For instance, Rolls-Royce and Turkey’s Kale Group formed a joint venture in the late 2010s to develop aircraft engines for Turkey’s next-gen fighter, recognizing the long-term potential despite intellectual property negotiation challenges. Leonardo not only co-developed helicopters but also invested in surveillance and training systems with Turkish firms. And more recently, BAE Systems agreed to provide design assistance on Turkey’s TF-Kaan (TF-X) fighter jet project – a collaboration that, while not a joint venture, underscores the importance of foreign technical input in ambitious Turkish programs. These cases highlight that international companies can find multiple avenues to engage: from equity joint ventures and licensed production to R&D cooperation agreements. Each mode comes with its own legal nuances (e.g. how IP is shared, export rights, profit repatriation), but Turkey has shown flexibility in structuring deals that attract foreign know-how while advancing its national industry goals.

Conclusion

Türkiye today offers a dynamic but complex environment for defense industry investments. International defense contractors and suppliers stand to gain significant benefits – access to a fast-growing market, cost-effective manufacturing, abundant engineering talent, and a range of government incentives that enhance profitability. At the same time, they must contend with strict regulations, security clearances, and expectations of local contribution. The advanced insights discussed – from obtaining permits and choosing the right JV structure, to leveraging tax breaks and meeting offset duties – all point to a common theme: success in Turkey comes from aligning with Turkey’s strategic interests. Companies that invest in local capacity, transfer technology, and build trust with Turkish stakeholders tend to thrive, whereas those seeking a quick sale without local integration face obstacles.

In the end, the constraints can be transformed into opportunities. Legal complexities such as ownership caps or export licenses force a long-term approach, but they also create stable partnerships and local loyalty. Incentives reduce initial costs, allowing more resources to be put into training and infrastructure. And the experiences of FNSS, TEI, and others show that with patience and commitment, a foreign defense firm can become an integral part of Turkey’s defense ecosystem – contributing to its self-reliance vision while tapping into global markets together. For international clients eyeing Türkiye, the message is clear: the door is open for defense industry collaboration, but one must walk through it with eyes open, respect for the rules, and a readiness to grow in Turkey, not just into Turkey. The reward for doing so is a strong foothold in one of the world’s most vibrant defense hubs.