Ruling Number: B.07.1.GİB.4.34.16.01-KVK 30-1151 Introduction In a private ruling dated August 1, 2011, the Istanbul Tax Office (Taxpayer Services Income Taxes Group Directorate) addressed whether withholding tax is required on payments made to a German resident company for yarn quality testing services. The taxpayer stated that they would make payments to a company based in Germany for quality testing of yarn on goods to be exported. They requested clarification on whether withholding tax should be applied to such payments. Legal Framework Corporate Tax Law (Law No. 5520) Article 3 – Full and Limited Liability: Paragraph 2 defines limited liability: corporations whose legal and business centers are not both located in Turkey are subject to taxation only on their income derived from Turkey. Paragraph 3 specifies which types of income constitute corporate earnings for limited liability taxpayers. Paragraph 4 states that the determination of whether income is derived in Turkey and whether a permanent establishment exists shall be governed by the relevant provisions of the Income Tax Law No. 193. Income Tax Law (Law No. 193) Article 7 – Income Deemed Derived in Turkey: Paragraph 4 stipulates that for limited liability taxpayers, professional service income is considered derived in Turkey if the services are performed or utilized in Turkey. The final paragraph defines “utilization” as the payment being made in Turkey, or if the payment is made abroad, it being credited to the accounts of the payer or the person on whose behalf the payment is made in Turkey, or being separated from profits. Corporate Tax Law (Law No. 5520) – Article 30 – Withholding Tax Payments made to limited liability corporations for professional services derived in Turkey are subject to withholding tax. The withholding tax rate for such payments was set at 20% by the Council of Ministers Decree No. 2009/14593. Double Taxation Treaty Provisions Turkey-Germany Double Taxation Treaty (Applicable between January 1, 1990 – December 31, 2010) Article 14 – Professional Services: Paragraph 3 states: “Notwithstanding the provisions of paragraphs 1 and 2, income derived by an enterprise of the Federal Republic of Germany from professional services shall be taxable only in the Federal Republic of Germany unless such services are performed in Turkey and: a) The individual deriving the income stays in Turkey for a period or periods exceeding 183 days in any calendar year; or b) The payment is made from a place of business or fixed base owned in Turkey by a person not resident in Turkey.” Ruling Conclusion Case 1 – Services Performed in Germany: If the German resident company performs the yarn quality testing services in Germany without entering Turkey, the payments made by the taxpayer are not subject to withholding tax in Turkey. Case 2 – Services Performed in Turkey: If the activities are performed in Turkey and either: The service provider stays in Turkey for more than 183 days in a calendar year, or The payment is made from a place of business or fixed base owned by a non-resident in Turkey, then Turkey has the right to tax these incomes. Since the treaty does not specify a withholding tax rate for professional service income, a 20% withholding tax must be applied to the payments. Practical Implementation Withholding agents who are required to withhold tax on professional service payments may not know at the time of payment whether the service provider will stay in Turkey for more than 183 days. Therefore, they must withhold tax at the time of payment. If the service provider believes that the income should not be taxed in Turkey under the treaty, they may apply to the relevant tax office for a refund of the withheld tax, either personally or through a representative. Required Documentation To benefit from the treaty provisions, German residents must obtain a Certificate of Residency from the competent German authorities. The original document, along with a notarized or Turkish Consulate-certified Turkish translation, must be submitted: To the tax office, or To the withholding agent (if withholding tax is applied at the time of payment). Withholding agents must retain these certificates and present them to the authorities when required. If the certificate is not provided, domestic tax provisions will apply instead of the treaty. 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. 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