Ruling Number: B.07.1.GİB.4.42.16.01-KVK-2/1377–59   Introduction In a private ruling dated July 29, 2011, the Konya Tax Office (Revenue and Corporate Taxes Department) addressed the withholding tax rate applicable to profit distributions made to a company resident in Spain. The taxpayer stated that 38.25% of its share capital was owned by a company resident in Spain. A general assembly meeting held in 2010 resolved to distribute profits for the fiscal year. The taxpayer requested clarification on the withholding tax rate to be applied to the dividend payment to the foreign shareholder, taking into account the relevant double taxation treaty. Legal Framework Corporate Tax Law (Law No. 5520) Article 3 – Full and Limited Liability: The second paragraph defines limited liability, stating that corporations whose legal and business centers are not both located in Turkey are subject to taxation only on their income derived from Turkey. Article 30 – Withholding Tax: Paragraph 1 imposes a 15% withholding tax on certain income and proceeds paid or accrued to limited liability corporations. Paragraph 3 stipulates a 15% withholding tax on dividends distributed by full-liability corporations to limited liability corporations (except those receiving dividends through a permanent establishment or representative in Turkey). This applies to profit distributions covered under Article 75, paragraphs (1), (2), and (3) of the Income Tax Law, excluding those already subject to withholding under Article 15, paragraph 3. Double Taxation Treaty Provisions Turkey-Spain Double Taxation Treaty (Published in the Official Gazette No. 25320 on December 18, 2003, effective January 1, 2004) Article 10 – Dividends: Dividends paid by a company resident in one Contracting State to a resident of the other Contracting State may be taxed in that other State. Such dividends may also be taxed in the State where the paying company is resident, according to its domestic laws. However, if the beneficial owner is a resident of the other State, the tax charged shall not exceed: 5% of the gross amount of the dividends, if the beneficial owner is a company (excluding partnerships) holding directly at least 25% of the capital of the paying company, provided the profits have been subject to full corporate tax. 15% of the gross amount of the dividends in all other cases. For the purposes of paragraphs 2 and 4, profits are considered to be taxed in Turkey if they have been subject to full corporate tax without exemption. Ruling Conclusion The tax authority concluded that since the Spanish resident company holds a 38.25% stake in the Turkish company’s capital, the dividend payment qualifies for the reduced withholding tax rate. Therefore, a 5% corporate withholding tax should be applied to the profit distribution made to the Spanish resident company. Prevention of Double Taxation Under Article 22, paragraph 1(b) of the treaty (Elimination of Double Taxation), the income taxed in Turkey may be exempt from taxation in Spain, thereby preventing double taxation. Required Documentation To apply the treaty benefits, the Spanish resident company must prove its full residency status in Spain (liable to tax on its worldwide income) by providing a Certificate of Residency issued by the competent Spanish authorities. The original document, along with its notarized or Turkish Consulate-certified Turkish translation, must be submitted to the withholding agent or the relevant tax office. Important Notes This private ruling is based on Article 413 of the Tax Procedure Law No. 213. The ruling becomes invalid if incorrect information is provided, or if there is ongoing tax audit, litigation, or reconciliation related to this matter. Acting in accordance with this ruling protects the taxpayer from tax penalties and default interest for the related transactions. Legal Notice: The information in this article is intended for information purposes only. It is not intended for professional information purposes specific to a person or an institution. Every institution has different requirements because of its own circumstances even though they bear a resemblance to each other. Consequently, it is your interest to consult on an expert before taking a decision based on information stated in this article and putting into practice. Neither MuhasebeNews nor related person or institutions are not responsible for any damages or losses that might occur in consequence of the use of the information in this article by private or formal, real or legal person and institutions.