Ruling Number: 62030549-125[30-2015/226]-72250 Introduction In a private ruling dated June 3, 2016, the Istanbul Tax Office (Taxpayer Services Income Taxes Group Directorate) addressed whether taxes withheld abroad from temporarily assigned personnel can be refunded. The taxpayer stated that their company (which had tax registration until November 2014) temporarily assigned an employee to the People’s Republic of China starting from the beginning of the 2014 calendar year. During the employee’s assignment in China, the employment contract with the company continued. The employee’s full salary was paid by the company and was subject to income tax withholding in Türkiye. The same wages were also taxed in China. The taxpayer requested clarification on whether the taxes withheld abroad can be refunded and, if so, how the refund procedure works. Domestic Law – Income Tax Law (Law No. 193) Article 1 – Scope: Real persons’ incomes are subject to income tax. Article 3 – Full Liability (Paragraphs 1 and 2): The following real persons are taxed on their worldwide income: 1. Those resident in Türkiye; 2. Turkish citizens residing abroad who are affiliated with official institutions or organizations whose headquarters are in Türkiye (provided that if they are subject to income tax or a similar tax abroad, they are not taxed again in Türkiye on those earnings). Article 4 – Residence in Türkiye: The following persons are considered resident in Türkiye: Those whose domicile is in Türkiye; Those who stay continuously in Türkiye for more than six months in a calendar year. Article 61 – Definition of Wages: Wages are cash, benefits in kind, and other advantages provided to employees dependent on an employer and affiliated with a specific workplace in return for services. Article 94(1) – Withholding Tax Obligation: Wages paid to employees are subject to income tax withholding under Articles 103 and 104 (progressive tax brackets). Article 123 – Foreign Tax Credit: Full liability taxpayers may deduct taxes paid abroad on foreign-source income from the Turkish tax attributable to that foreign income, subject to certain conditions and procedures. Double Taxation Treaty Provisions Türkiye-China Double Taxation Treaty (Effective January 1, 1998) Article 1 – Personal Scope: The treaty applies to persons who are residents of one or both Contracting States. Article 4 – Resident (Paragraphs 1 and 2): 1. “Resident of a Contracting State” means any person who, under the laws of that State, is liable to tax therein by reason of their home, domicile, place of management, or any other criterion of a similar nature. 2. Where an individual is a resident of both Contracting States, the tie-breaker rules (permanent home → center of vital interests → habitual stay → citizenship) shall apply. Article 15 – Dependent Personal Services (Paragraphs 1 and 2): 1. Salaries, wages, and other similar income derived by a resident of one Contracting State in respect of employment shall be taxable only in that State unless the employment is exercised in the other Contracting State. If the employment is exercised in the other State, such income may be taxed in that other State. 2. Notwithstanding paragraph 1, income derived from employment exercised in the other State shall be taxable only in the first-mentioned State if: (a) The recipient stays in the other State for a period or periods not exceeding 183 days in the relevant calendar year; (b) The payment is made by or on behalf of an employer who is not a resident of the other State; and (c) The payment is not borne by a permanent establishment or fixed base that the employer has in the other State. Article 23 – Elimination of Double Taxation (Paragraph 1): For residents of Türkiye, where a resident of Türkiye derives income which, under this Treaty, may be taxed in both Türkiye and China, Türkiye shall allow as a credit against its tax on that income an amount equal to the tax paid in China on the same income. However, such credit shall not exceed the amount of Turkish tax calculated on the income that may be taxed in China. Ruling Conclusion Step 1 – Residency Status of the Employee Factor Determination Employee’s domicile Türkiye Employment contract With Turkish company Salary payment source Türkiye Residency under domestic law (Article 3/1) Türkiye (full liability taxpayer) Step 2 – Treaty Residency (If Dual Residency Claimed) If China also claims the employee as a resident under its domestic law, Article 4(2) tie-breaker rules apply. Since the employee’s permanent home, center of vital interests, and habitual stay are likely in Türkiye, the employee is deemed a resident of Türkiye under the DTT. Step 3 – Application of Article 15 (Dependent Personal Services) Condition (Article 15(2)) Met? Notes (a) Stay in China ≤183 days To be determined based on actual stay If yes → condition met (b) Employer is not a resident of China Yes (employer is Turkish resident) Condition met (c) Payment not borne by a PE in China Yes (no PE in China for the Turkish employer) Condition met Scenario Analysis: Scenario China’s Taxing Right Turkish Tax Treatment All three conditions of Article 15(2) met (stay ≤183 days + Turkish employer + no PE in China) No (exclusive taxing right of Türkiye) Türkiye taxes; no foreign tax credit needed (China should not have taxed) Any condition of Article 15(2) not met (e.g., stay >183 days) Yes (China may tax) Türkiye taxes; foreign tax credit available under Article 23 Step 4 – Foreign Tax Credit (If China Taxed Properly) If China had the right to tax under Article 15(1) (e.g., stay >183 days) and actually taxed the wages: Türkiye will allow a foreign tax credit for the taxes paid in China. The credit shall not exceed the amount of Turkish tax attributable to that income. The credit is claimed under Article 23 of the DTT and Article 123 of the Income Tax Law. Step 5 – Refund of Taxes Withheld Abroad (If China Had No Taxing Right) If the employee stayed in China for 183 days or less and the other conditions of Article 15(2) are met, China had no right to tax the wages under the DTT. In such a case: The Chinese tax withheld was not legally due. The employee (or employer on behalf of the employee) should apply for a refund from the Chinese tax authorities, not from Türkiye. Türkiye will tax the wages fully (as it already does) and does not provide a refund for taxes improperly withheld by China. Summary Table Stay in China China’s Taxing Right Under DTT Turkish Tax Treatment Refund from China? Refund from Türkiye? ≤183 days (with all conditions of Art. 15(2) met) No (exclusive taxing right of Türkiye) Full Turkish tax (already withheld) Yes (apply to Chinese authorities) No >183 days (or other condition fails) Yes (China may tax) Full Turkish tax, with foreign tax credit No (tax was properly due) N/A (credit, not refund) Foreign Tax Credit Mechanism (If Applicable) Under Article 23 of the DTT and Article 123 of the Income Tax Law: Calculate Turkish tax on the worldwide income (including the China-source wages). Determine the portion of Turkish tax attributable to the China-source wages. Credit the Chinese tax paid, up to the amount of Turkish tax attributable to those wages. The excess Chinese tax (if any) is not refundable in Türkiye but may be carried forward or refunded by China. Required Documentation for Treaty Benefits To benefit from the treaty provisions (including the foreign tax credit), the taxpayer must: Obtain a Certificate of Residency from the Turkish competent authorities proving Turkish residency. Provide documentation proving the taxes paid in China (e.g., Chinese tax withholding certificate, tax return, payment receipts). Submit the certificate and supporting documents to the Turkish tax office when claiming the foreign tax credit. Important Notes The key fact to determine China’s taxing right is the employee’s stay duration in China (≤183 days or >183 days). If the stay is ≤183 days and the employer is Turkish (not Chinese resident) and no PE in China, China has no taxing right under Article 15(2). In this case, the Chinese tax should be refunded by China, not credited in Türkiye. If the stay is >183 days, both countries may tax, and Türkiye will provide a foreign tax credit. The employee remains a Turkish resident (full liability taxpayer) regardless of the temporary assignment abroad. 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.