Ruling Number: 62030549-125[30-2015/219]-97110 Introduction In a private ruling dated November 24, 2015, the Istanbul Tax Office (Taxpayer Services Income Taxes Group Directorate) addressed the taxation of payments made for the financial leasing of aircraft and movable property from a French resident company. The taxpayer stated that a French resident bank (fully licensed to conduct banking activities under French law) owns 100% of a French resident company that is authorized to conduct financial leasing activities. This financial leasing company will provide aircraft financial leasing services to Turkish taxpayers. The taxpayer requested clarification on the taxation of payments to be made for these leasing services. 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 3(3)(d) – Income Subject to Limited Liability: Income derived from leasing movable and immovable property and rights in Türkiye constitutes corporate income subject to limited liability taxation. Article 3(4): The determination of whether income is derived in Türkiye and whether a permanent representative exists follows the relevant provisions of the Income Tax Law No. 193. Article 30 – Withholding Tax for Limited Liability Taxpayers (Paragraph 1(c)): Withholding tax applies to real estate capital income (rental income) paid or accrued to limited liability corporations. Council of Ministers Decree No. 2009/14593 – Withholding Tax Rates: Type of Lease Withholding Tax Rate Financial leasing activities under former Law No. 3226 (now Law No. 6361) 1% All other rental income 20% Income Tax Law No. 193 Article 70(1)(8) – Definition of Real Estate Capital Income: Income derived from leasing motor vehicles, all types of motorized vehicles, machinery, equipment, and their accessories by their owners, trustees, possessors, usufructuaries, or lessees constitutes real estate capital income. Article 7 – Income Deemed Derived in Türkiye (for limited liability persons): 1. Paragraph 5: For real estate capital income, the income is deemed derived in Türkiye if: The immovable property is located in Türkiye, or The property or rights of such nature are used or utilized in Türkiye. 2. “Utilization” means the payment being made in Türkiye, 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 Türkiye, or separated from profits. Financial Leasing Law Framework Law No. 6361 (Financial Leasing, Factoring, and Financing Companies Law) – Effective December 13, 2012 Article 52: Repealed former Financial Leasing Law No. 3226. Article 52(2): References in other laws to Law No. 3226 are deemed references to the relevant articles of Law No. 6361. Article 2(1): Financial leasing, factoring, and financing companies established in Türkiye are subject to this Law. Article 2(5): For airline companies engaged in passenger and cargo transportation, the leasing of air transport vehicles, engines, and their components and parts from abroad for a period of at least two years, by companies, organizations, or financial leasing companies authorized to lease them under the laws of the country where they are established, based on a financial leasing contract, shall be considered financial leasing under this Law. Important: The 1% withholding tax rate for financial leasing continues to apply under Law No. 6361. Double Taxation Treaty Provisions Türkiye-France Double Taxation Treaty (Effective January 1, 1990) Article 12 – Royalties: 1. Royalties arising in one Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2. However, such royalties may also be taxed in the State in which they arise, according to its domestic laws. But if the payee is the beneficial owner of the royalties, the tax charged shall not exceed 10% of the gross amount of the royalties. 3. The term “royalties” includes payments of any kind for the use of, or the right to use: Any copyright of literary, artistic, or scientific work (including cinema films, radio and television recordings, films, and tapes), Any patent, trademark, design, plan, secret formula, or manufacturing process, Industrial, commercial, or scientific know-how, Industrial, commercial, or scientific equipment. 4. If the beneficial owner of the royalties carries on business in the other State through a permanent establishment, and the right or asset giving rise to the royalties is effectively connected with such permanent establishment, then Article 7 (Business Profits) shall apply instead of Article 12. Article 23 – Elimination of Double Taxation (Paragraph 2 – France): 2. In France: (a) Where a resident of France derives income that may be taxed in Türkiye under this Treaty, France shall allow as a credit against the tax on that person’s income an amount equal to the tax on income paid in Türkiye. However, such credit shall not exceed the amount of tax calculated before the credit on the income that may be taxed in Türkiye. (b) For the purposes of subparagraph (a), “income tax paid in Türkiye” includes any amount of tax that would have been payable under Turkish tax law but is subject to exemption, exclusion, or reduction under Turkish incentive legislation aimed at accelerating Türkiye’s economic development. Notwithstanding the preceding sentence, the income tax paid in Türkiye on royalties shall be calculated at 10% (as per Article 12(2)) for the purpose of the foreign tax credit. Ruling Conclusion Step 1 – Domestic Law Characterization Under Article 30(1)(c) of the Corporate Tax Law and the Council of Ministers Decree: Type of Lease Domestic Withholding Tax Rate Financial leasing (qualifying under Law No. 6361) 1% Ordinary rental (non-financial leasing) 20% The leasing of aircraft for at least two years from an authorized lessor qualifies as financial leasing under Law No. 6361, Article 2(5). Therefore, the domestic withholding tax rate would be 1%. Step 2 – Treaty Characterization – Royalties Under Article 12(3) of the Türkiye-France DTT, payments for the use of industrial, commercial, or scientific equipment (including aircraft) are characterized as royalties. Step 3 – Treaty Rate Under Article 12(2) of the DTT, since the beneficial owner is a resident of France, the withholding tax in Türkiye shall not exceed 10% of the gross amount of the royalties. Step 4 – Interaction Between Domestic Rate and Treaty Rate Rate Type Percentage Domestic financial leasing rate 1% Treaty maximum rate 10% Since the domestic rate (1%) is lower than the treaty rate (10%), the domestic rate applies (more favorable to the taxpayer). Step 5 – Deemed Tax Credit for French Foreign Tax Credit Purposes Under Article 23(2)(b)(iv) of the DTT, for the purpose of claiming a foreign tax credit in France, the tax paid in Türkiye is deemed to have been paid at 10% (regardless of the actual 1% paid). Actual Tax Paid in Türkiye Deemed Tax Paid for French Credit Purposes Credit Available in France 1% (actual) 10% (deemed) 10% credit against French tax Exception (Article 12(4)): If the French resident company carries on business in Türkiye through a permanent establishment and the asset giving rise to the royalty is effectively connected with that PE, then Article 12 does not apply. Instead, the royalties are taxed under Article 7 (Business Profits), and the domestic rate (1% or 20%) applies without the treaty limitation. Summary Table Question Answer What is the nature of the payment? Royalty (use of industrial/commercial equipment – aircraft) Does the lease qualify as financial leasing under Law No. 6361? Yes (aircraft, at least 2 years, authorized lessor) Domestic withholding tax rate (financial leasing) 1% Treaty maximum rate (Article 12(2)) 10% Applicable withholding tax rate in Türkiye 1% (domestic rate is lower) Deemed tax rate for French foreign tax credit purposes 10% (Article 23(2)(b)(iv)) Foreign tax credit available in France? Yes (on deemed 10%) Exception (PE in Türkiye with effective connection) Taxed under Article 7 (domestic rates apply) Practical Example Scenario Actual Turkish Withholding Tax Deemed Turkish Tax for French Credit Net Effect French company receives €100,000 lease payment €1,000 (1% of €100,000) €10,000 (10% deemed) French company claims €10,000 credit against French tax Required Documentation for Treaty Benefits To benefit from the treaty provisions (including the deemed 10% credit in France), the French resident company must: Obtain a Certificate of Residency from the competent French authorities proving that it is fully liable to tax in France 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 (1% or 20%) will apply, but the deemed 10% credit in France may not be available. Important Notes The 1% rate applies only if the lease qualifies as financial leasing under Law No. 6361, Article 2(5). The key requirement is that the leasing is from an authorized lessor (under the laws of the country where it is established) for a period of at least two years. The ruling includes a “deemed tax credit” mechanism that is highly favorable to French lessors (actual 1% tax in Türkiye, but deemed 10% credit in France). 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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