Ruling Number: 38418978-125[5-16/31]-150384 Introduction In a private ruling dated May 15, 2017, the Istanbul Tax Office (Taxpayer Services Income Taxes Group Directorate) addressed whether profits derived from construction, repair, and assembly works performed in Turkmenistan are exempt from corporate tax under Article 5(1)(h) of the Corporate Tax Law No. 5520. The taxpayer stated that: Their company entered into a subcontract agreement with the Turkmenistan branch of a Turkish resident company (the main contractor) for pipe manufacturing, assembly, and welding construction works for a project in Turkmenistan. Due to Turkmenistan’s laws and special conditions, the taxpayer was unable to register officially in Turkmenistan. Machinery and equipment were sent abroad through the main contractor. Materials obtained from Türkiye were also cleared through customs and sent in the name of the main contractor. Some materials were procured from abroad and sent directly to the construction site without being imported into Türkiye. Additionally, some materials and services were purchased from local suppliers in Turkmenistan. All income and expenses related to the project were recorded in the taxpayer’s legal books in Türkiye using separate account codes. The taxpayer requested clarification on whether the profit from this project qualifies for the corporate tax exemption under Article 5(1)(h) of the Corporate Tax Law. Part I – Corporate Tax Analysis Corporate Tax Law (Law No. 5520) Article 3 – Full Liability: Corporations whose legal or business center is located in Türkiye are taxed on their worldwide income. Article 5(1)(h) – Exemption for Foreign Construction, Repair, and Assembly Works: Profits derived from construction, repair, and assembly works, as well as technical services performed abroad, and transferred to the general results accounts in Türkiye, are exempt from corporate tax . Corporate Tax General Communiqué No. 1 (Section 5.9) – Conditions for the Exemption: Condition Explanation 1. Type of work Construction, repair, assembly, or technical services  2. Location Performed abroad (in a foreign country)  3. Through a PE The work must be performed through a permanent establishment (or branch) abroad  4. Transfer to Turkish accounts The profit must be transferred to the general results accounts in Türkiye (no physical repatriation required)  5. Taxed abroad The income must be taxed abroad (no minimum tax rate requirement)  Important Clarifications: No requirement to physically bring the profit to Türkiye: It is sufficient that the profit is credited to the general results accounts in Türkiye . Foreign tax rate: There is no minimum tax rate requirement for the foreign tax paid . Timing: The profit is recognized when the foreign tax return is finalized according to the foreign country’s tax laws . Application to the Case: Factor Determination Type of work Construction, pipe manufacturing, assembly, and welding (inşaat, montaj, kaynak) – qualifies Location Turkmenistan – qualifies Is there a PE in Turkmenistan? Yes – under the Türkiye-Turkmenistan DTT, a PE is created if the construction project lasts more than 45 months (Article 5(2)(g)) . The project length will determine whether a PE is deemed to exist. Profit transferred to Turkish accounts? Yes (recorded in Turkish books) – qualifies Taxed in Turkmenistan? To be confirmed – if yes, qualifies Conclusion Regarding the Exemption: If the project duration exceeds 45 months, a PE is deemed to exist in Turkmenistan under the DTT, and the profit will be taxable in Turkmenistan. In such a case, the profit is exempt from Turkish corporate tax under Article 5(1)(h) . If the project duration is 45 months or less, no PE is created in Turkmenistan, and Türkiye has the exclusive taxing right (taxable under domestic law, not exempt) . Material Procurement (Türkiye to Turkmenistan): Transaction Tax Treatment Materials sent from Türkiye to the project Treated as export – profit from this transaction is not exempt from corporate tax  Materials procured abroad (not imported into Türkiye) Part of the project cost – affects the profit calculation in Turkmenistan Invoicing and Documentation: Invoices issued by the main center in Türkiye for the foreign project should contain a note stating that the invoice is for the project in Turkmenistan . The taxpayer must be able to prove with official documents that the work was undertaken and performed abroad . Part II – Double Taxation Treaty Analysis Türkiye-Turkmenistan Double Taxation Treaty (Effective January 1, 1998) Article 5 – Permanent Establishment (Paragraph 2(g)): A construction site, assembly, installation, or erection project, or supervisory activities in connection therewith, lasting more than 45 months constitutes a permanent establishment . Calculation of the 45-Month Period: Start Date End Date The date the contractor begins work in the foreign country (including preparatory work) The date the work is completed or permanently abandoned  Article 7 – Business Profits (Paragraph 1): Profits of an enterprise of one Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If it does, the profits may be taxed in the other State but only so much as is attributable to that PE . Article 22 – Elimination of Double Taxation (Paragraph 1): Where a resident of one Contracting State derives income that may be taxed in the other Contracting State under this Treaty, the first-mentioned State shall exempt such income from tax (exemption method) . Ruling Conclusion – Treaty Analysis: Duration of Project in Turkmenistan PE in Turkmenistan? Taxing Right Turkish Tax Treatment ≤45 months No Only Türkiye Taxable in Türkiye (no exemption) >45 months Yes Both Türkiye and Turkmenistan Exempt in Türkiye (Article 22 – exemption method)  Note: Even if Turkmenistan does not actually exercise its taxing right, the exemption in Türkiye applies as long as the income “may be taxed” in Turkmenistan under the treaty . Part III – Summary Table Scenario Duration in Turkmenistan PE? Taxing Right Corporate Tax in Türkiye? A ≤45 months No Only Türkiye Taxable (no exemption) B >45 months Yes Both Türkiye and Turkmenistan Exempt (Article 5/1-h)  Required Documentation for Treaty Benefits To benefit from the treaty provisions, the taxpayer must: Obtain a Certificate of Residency from the Turkish tax authorities (Ankara Tax Office) proving that the company is fully liable to tax in Türkiye on its worldwide income. Submit the certificate to the Turkmenistan tax authorities . Important Notes The 45-month threshold under the Türkiye-Turkmenistan DTT is critical for determining whether a PE exists and whether the exemption applies. The profit from the foreign project is exempt from Turkish corporate tax if the project exceeds 45 months, regardless of whether Turkmenistan actually taxes the profit . Profits from export of materials from Türkiye are not exempt . The exemption applies only to the net profit from the foreign project (revenue minus expenses). VAT is not addressed in this ruling, but generally, services performed and benefited from abroad are not subject to Turkish VAT (per KDV Circular No. 60). 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. 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