Ruling Number: 17192610-KV-12-4-252 Introduction In a private ruling dated November 25, 2015, the Bursa Tax Office (Taxpayer Services Income Group Directorate) addressed whether withholding tax applies to payments made for computer software purchased from a Dutch resident company. The taxpayer stated that software was purchased from a Dutch resident company to be used in the Pattern Design class to be established under a European Union-funded project within the scope of a grant program. The taxpayer requested clarification on whether withholding tax is required at the time of payment. Legal Framework – Domestic Law Corporate Tax Law (Law No. 5520) Article 3(2) – Limited Liability: Corporations whose legal and business centers are both not located in Türkiye are taxed only on their income derived from Türkiye. Article 30 – Withholding Tax for Limited Liability Taxpayers: Paragraph 1(b): Withholding tax applies to professional service income. Paragraph 2: Withholding tax applies to payments made for the sale, transfer, or assignment of intangible rights (copyrights, patents, trademarks, trade names, etc.), regardless of whether they are included in commercial or agricultural income. Council of Ministers Decree No. 2009/14593 (effective February 3, 2009): Type of Payment Withholding Tax Rate Professional service income (petroleum exploration) 5% Other professional service income 20% Intangible rights (royalties) 20% Double Taxation Treaty Provisions Türkiye-Netherlands Double Taxation Treaty (Effective January 1, 1989 – entered into force September 30, 1988) Article 5 – Permanent Establishment: Defines when a permanent establishment exists in the other State. Article 7 – Business Profits: 1. Profits of an enterprise of one State shall be taxable only in that State unless the enterprise carries on business in the other State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits may be taxed in the other State but only so much of them as is attributable to that permanent establishment. 2. Where an enterprise carries on business through a permanent establishment, there shall be attributed to that PE the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities. Article 12 – Royalties: 1. Royalties arising in one State and paid to a resident of the other State may be taxed in that other State. 2. However, such royalties may also be taxed in the State in which they arise. But the tax charged shall not exceed 10% of the gross amount of the royalties. 4. The term “royalties” includes payments for the use of, or the right to use, any copyright of literary, artistic, or scientific work (including cinema films and radio/television recordings), any patent, trademark, design, plan, secret formula, manufacturing process, know-how, or industrial, commercial, or scientific equipment. Article 13 – Capital Gains: 4. Gains from the alienation of any property other than those referred to in paragraphs 1, 2, and 3 shall be taxable only in the State where the alienator is resident. Additional Protocol – Article 11 (as referenced in the ruling): For the purposes of Articles 12 and 13, Article 12 shall apply to payments for the alienation of an asset unless it is proven that the asset has truly been alienated. If this is proven, Article 13 shall apply. Article 23 – Elimination of Double Taxation (Paragraph 2): Taxes paid in Türkiye may be credited against Dutch tax on the same income. EU IPA Framework Agreement (Pre-Accession Assistance) IPA Framework Agreement (signed July 11, 2008, published in Official Gazette No. 27090 on December 24, 2008) Article 26(2)(c): Income derived by real persons who are not Turkish citizens and do not reside in Türkiye, from the performance of services, works, grants, or twinning contracts financed by the Community and the Beneficiary’s co-financing contribution, shall not be subject to income tax in Türkiye. Legal persons shall also be subject to the same provision, provided they have no place of business or fixed base in Türkiye. If such persons have a place of business or fixed base in Türkiye, profits/gains shall be taxed according to Turkish tax law, subject to applicable double taxation treaties. Communiqué No. 1 on the IPA Framework Agreement (published in Official Gazette No. 27222 on May 8, 2009): AT contractors (legal persons) are exempt from corporate tax on profits derived from the execution of an AT contract, provided they have no place of business or fixed base in Türkiye. Ruling Conclusion – IPA Exemption Not Applicable The taxpayer is the beneficiary of the EU-funded project. The Dutch company is the supplier (not the contractor executing the AT contract). Factor Determination Who is the AT contractor/supplier? The Dutch resident company (supplier) Is the Dutch company the contractor executing the AT contract? No (it is a supplier) Does the IPA exemption apply to suppliers? No (only to contractors executing the AT contract) Conclusion: The Dutch company cannot benefit from the IPA tax exemption. The transaction must be evaluated under the double taxation treaty. Ruling Conclusion – Treaty Analysis The ruling distinguishes between three scenarios based on the nature of the rights acquired: Scenario 1 – Off-the-Shelf Software (No Modification or Reproduction) Factor Determination Nature of the transaction Purchase of ready-made software, used without modification or reproduction Characterization Commercial income (sale of goods) Applicable treaty article Article 7 (Business Profits) Does the Dutch company have a PE in Türkiye? Not stated (presumably no) Taxing right Only Netherlands (if no PE in Türkiye) Withholding tax required in Türkiye? No Scenario 2 – Acquisition of Copyright Rights (Reproduction, Modification, Distribution, Display, etc.) – True Sale Factor Determination Nature of the transaction The Turkish company acquires copyright rights (reproduction, modification, distribution, etc.) and ownership of the intangible right truly passes to the buyer Characterization Capital gains (Article 13) Applicable treaty article Article 13(4) (with Additional Protocol Article 11) Condition The taxpayer must prove that the asset has truly been alienated (ownership transferred) Taxing right Only Netherlands Withholding tax required in Türkiye? No (provided true sale is proven) Note on “True Sale” Test: A true sale of an intangible right exists only if the buyer acquires the right to lease the intangible to any person (permanently or temporarily). If the buyer does not acquire such leasing rights, there is no true sale. Scenario 3 – Acquisition of Use Rights (No Transfer of Ownership) Factor Determination Nature of the transaction The Turkish company acquires only the right to use the software (no ownership transfer of copyright) Characterization Royalties (Article 12) Applicable treaty article Article 12 Domestic withholding tax rate 20% Treaty reduced rate (Article 12(2)) 10% Withholding tax required in Türkiye? Yes Applicable rate 10% Summary Table Scenario Nature of Rights Characterization Treaty Article Withholding Tax in Türkiye? Rate 1 Off-the-shelf software, no modification/reproduction Commercial income Art. 7 No 0% 2 Copyright rights acquired (true sale) Capital gains Art. 13(4) + Protocol No (if proven) 0% 3 Use rights only (no ownership transfer) Royalties Art. 12 Yes 10% Required Documentation for Treaty Benefits To benefit from the treaty provisions (exemption or reduced rates), the Dutch resident company must: Obtain a Certificate of Residency from the competent Dutch authorities proving that it is fully liable to tax in the Netherlands on its worldwide income. Provide the original certificate along with a notarized or Turkish Consulate-certified Turkish translation to the withholding agent (the taxpayer) or the relevant tax office. If the Certificate of Residency cannot be provided: Domestic law provisions (20% withholding tax) will apply instead of the treaty provisions. Additional Notes on True Sale (Scenario 2) Under the Additional Protocol to the DTT: Article 12 (royalties) applies to payments for the alienation of an asset unless it is proven that the asset has truly been alienated (ownership transferred to the buyer). If true alienation is proven, Article 13 (capital gains) applies instead of Article 12. A true sale exists only if the buyer acquires the right to lease the intangible right to any person. Mere acquisition of use rights does not constitute a true sale. Important Notes The IPA tax exemption does not apply to suppliers; it applies only to contractors executing the AT contract. The classification depends critically on the nature of the rights acquired under the software license agreement. 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.