Ruling Number: 62030549-125[30-2014/253]-13805 Introduction In a private ruling dated February 18, 2016, the Istanbul Tax Office (Taxpayer Services Income Taxes Group Directorate) addressed the corporate tax and value added tax (VAT) treatment of services obtained from abroad for the purpose of providing advertising and promotional services to domestic and foreign customers via the taxpayer’s own websites. The taxpayer requested clarification on the taxation of services procured from abroad to enable these advertising and promotional activities. Corporate Tax Analysis 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)(a) – Income Subject to Limited Liability: Commercial income derived by foreign corporations having a place of business or permanent representative in Türkiye in accordance with Tax Procedure Law No. 213. 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: A 15% withholding tax applies to certain types of income listed in the article. However, payments falling within the scope of commercial income are NOT subject to withholding tax. Double Taxation Treaty Provisions The ruling references three double taxation treaties: Country Effective Date Ireland January 1, 2011 Australia January 1, 2014 United States January 1, 1998 Note: For periods prior to these dates, taxation is based solely on domestic law. Article 5 – Permanent Establishment: Defines when a permanent establishment exists in the other State. 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 12 – Royalties: Country Maximum Withholding Tax Rate on Royalties Ireland 10% Australia 10% United States 5% (for use of industrial/commercial/scientific equipment) / 10% (for other royalties) Ruling Conclusion – Corporate Tax The ruling distinguishes between two scenarios based on the nature of the services obtained: Scenario 1 – Services NOT Constituting Royalties (e.g., standard advertising/promotional services, technical support not involving know-how or equipment use) Factor Determination Nature of services Standard advertising/promotional services (no know-how, no equipment use) Characterization Commercial income (Article 7 – Business Profits) Does the foreign company have a PE in Türkiye? Not stated (presumably no) Taxing right (if no PE in Türkiye) Only the country of residence (Ireland, Australia, or USA) Withholding tax required in Türkiye? No (commercial income not subject to withholding) Exception: If the foreign company has a permanent establishment in Türkiye to which the income is attributable, Türkiye may tax the profits attributable to that PE. Scenario 2 – Services Constituting Royalties (e.g., use of know-how, industrial/commercial/scientific equipment, or intangible rights) Factor Determination Nature of services Services involving know-how, use of equipment, or intangible rights Characterization Royalties (Article 12) Withholding tax required in Türkiye? Yes Applicable rates: – Ireland resident company 10% – Australia resident company 10% – US resident company (equipment use) 5% – US resident company (other royalties) 10% Note: If domestic law provides a lower rate than the treaty rate, the lower domestic rate applies. Foreign Tax Credit Under the “Elimination of Double Taxation” articles of the respective treaties, taxes paid in Türkiye may be credited against tax payable in Ireland, Australia, or the USA on the same income. VAT Analysis Value Added Tax Law (Law No. 3065) Article 1(1): Supplies and services performed in Türkiye within the scope of commercial, industrial, agricultural, or professional activities are subject to VAT. Article 1(2): All imports of goods and services are subject to VAT. Article 6(b): A transaction is deemed performed in Türkiye if the service is performed in Türkiye or benefited from in Türkiye. Article 9(1): If the taxpayer has no residence, workplace, legal center, or business center in Türkiye, the Ministry may hold the counterparty (recipient) liable for VAT payment. Article 26: If the consideration is calculated in foreign currency, the foreign currency shall be converted into Turkish Lira at the exchange rate prevailing at the time the tax liability arises. VAT General Application Communiqué (Section I/C-2.1.2.1): For services performed in Türkiye by persons whose residence, workplace, legal center, and business center are not located in Türkiye, as well as services performed abroad but benefited from in Türkiye, VAT shall apply. Since the service provider has no residence, workplace, legal center, or business center in Türkiye, the full amount of VAT shall be declared and paid by the domestic recipient as a withholding agent using the 2 No. VAT Return. Ruling Conclusion – VAT Factor Determination Where are the services benefited? Türkiye (the taxpayer uses the services to operate its websites and provide advertising/promotional services) Are the services subject to VAT? Yes (import of service – Article 1/2 and Article 6(b)) Scenario A: Foreign supplier has residence/workplace/legal center/business center in Türkiye Supplier files 1 No. VAT Return (shows VAT on invoice) Scenario B: Foreign supplier has NO residence/workplace/legal center/business center in Türkiye Taxpayer files 2 No. VAT Return as withholding agent Summary Table – Corporate Tax Scenario Nature of Service Characterization Withholding Tax Required? Rate 1 Standard services (no know-how, no equipment use) Commercial income (Art. 7) No (if no PE in Türkiye) 0% 2 Royalties (know-how, equipment use, intangible rights) – Ireland Royalties (Art. 12) Yes 10% 2 Royalties – Australia Royalties (Art. 12) Yes 10% 2 Royalties (equipment use) – USA Royalties (Art. 12) Yes 5% 2 Royalties (other) – USA Royalties (Art. 12) Yes 10% Summary Table – VAT Condition VAT Liability Which Return? Foreign supplier has residence/workplace/legal center/business center in Türkiye Supplier (as taxpayer) 1 No. VAT Return Foreign supplier has NO residence/workplace/legal center/business center in Türkiye Taxpayer (recipient) as withholding agent 2 No. VAT Return Required Documentation for Treaty Benefits To benefit from the treaty provisions (including the reduced royalty rates or exemption for commercial income), the foreign resident companies must: Obtain a Certificate of Residency from the competent authorities of Ireland, Australia, or the USA proving that they are fully liable to tax in their country of residence on their 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 on royalties) will apply instead of the treaty provisions. Important Notes For countries other than Ireland, Australia, and the USA, a separate assessment must be made based on the specific treaty (if any) with that country. The classification of services as “royalties” vs. “commercial income” is critical and depends on the specific nature of the services (whether they involve know-how, equipment use, or intangible rights). The taxpayer must withhold tax at the time of payment for royalty payments. For VAT, the taxpayer must file a 2 No. VAT Return for services benefited from in Türkiye when the foreign supplier has no presence in Türkiye. 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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