Ruling Number: 62030549-125[30-2015/6]-104552 Introduction In a private ruling dated August 1, 2016, the Istanbul Tax Office (Taxpayer Services Income Taxes Group Directorate) addressed the tax treatment of payments made for services received from a Moldovan resident company. The taxpayer stated that their company is engaged in computer software activities. They received software services from a Moldovan resident company. The Moldovan company’s employees stayed in Türkiye for less than 183 days. Transportation and accommodation expenses of these employees were covered by the taxpayer. The taxpayer requested clarification on VAT and withholding tax responsibilities regarding payments made against invoices issued by the Moldovan company. Part I – Corporate Tax Withholding 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 30 – Withholding Tax for Limited Liability Taxpayers (Paragraph 1(b)): Withholding tax applies to payments made for professional service income. Council of Ministers Decree No. 2009/14593: The withholding tax rate for professional service income is 20%. Double Taxation Treaty Provisions Türkiye-Moldova Double Taxation Treaty (Effective January 1, 2001 – entered into force July 28, 2000) Article 14 – Professional Services (Paragraph 1): Income derived by a resident of one Contracting State from professional services or other independent activities shall be taxable only in that State unless the individual has a fixed base regularly available in the other State for performing the activities. If the individual has such a fixed base, the income may be taxed in that other State but only so much of it as is attributable to that fixed base. Article 5 – Permanent Establishment (for determining “fixed base” under Article 14): A “fixed base” (or “permanent establishment”) means a fixed place of business through which the business of an enterprise is wholly or partly carried on. Examples include: Place of management Branch Office Factory Workshop Mine, oil or gas well, quarry, or other place of extraction of natural resources Article 12 – Royalties (Paragraphs 2 and 3): 2. Royalties arising in one State and paid to a resident of the other State may be taxed in that other State. However, such royalties may also be taxed in the State in which they arise. But if the beneficial owner is a resident of the other State, the tax charged shall not exceed 10% of the gross amount of the royalties. 3. The term “royalties” includes payments for the use of, or the right to use, any copyright, patent, trademark, design, plan, secret formula, manufacturing process, know-how, or industrial, commercial, or scientific equipment. Article 22 – Elimination of Double Taxation (Paragraph 2): Taxes paid in Türkiye may be credited against Moldovan tax on the same income. Part II – Corporate Tax Ruling Conclusion Step 1 – Determine whether the services are professional services The software services (analysis, design, development, and maintenance) provided by the Moldovan company are characterized as professional services under Article 14. Step 2 – Determine whether the Moldovan company has a “fixed base” in Türkiye The ruling provides detailed guidance on what constitutes a “fixed base” (which is interpreted similarly to “permanent establishment” for this purpose): Condition for Fixed Base Explanation Place A location used for the business (regardless of ownership – owned, rented, or placed at the enterprise’s disposal) Fixed Sufficiently permanent (not merely temporary); even if used for short periods but on a regular basis over a long period, it may still be considered fixed Business carried on The enterprise’s business is wholly or partly carried on from that place If the Moldovan company has no fixed base in Türkiye: Factor Determination Where are the services performed? Moldova (remote) and/or Türkiye (without a fixed base) Taxing right under Article 14 Only Moldova Withholding tax required in Türkiye? No (treaty exemption) If the Moldovan company has a fixed base in Türkiye: Factor Determination Where are the services performed? Türkiye (through a fixed base) Taxing right under Article 14 Both Moldova and Türkiye (limited to fixed base-attributable income) Withholding tax required in Türkiye? Yes – on payments attributable to the fixed base (20% domestic rate) Step 3 – Special consideration: Royalties If the services involve the transfer of know-how or intangible rights, the payments may be characterized as royalties under Article 12. Scenario Characterization Withholding Tax Rate Services involve general professional services (no IP transfer) Professional services (Art. 14) 20% (if PE exists) / 0% (if no PE) Services involve know-how/intangible rights transfer Royalties (Art. 12) 10% Royalties connected to a PE in Türkiye Business profits (Art. 7) Taxed as PE profits (20%) Part III – Value Added Tax (VAT) Analysis VAT Law No. 3065 Article 1(1): Supplies and services performed in Türkiye 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. 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. VAT Ruling Conclusion: Factor Determination Where is the software service benefited? Türkiye (the taxpayer uses the software services in Türkiye) Is the service subject to VAT? Yes (import of service – Article 1/2 and Article 6(b)) Who is liable for VAT payment? The taxpayer as a withholding agent Which VAT return to file? 2 No. VAT Return Can the VAT be deducted as input VAT? Yes (deductible in the same period using the 1 No. VAT Return) Summary Table Tax Type Scenario Withholding Required? Rate / Notes Corporate Tax – Professional services (no fixed base in Türkiye) Services performed without fixed base No Taxable only in Moldova Corporate Tax – Professional services (fixed base exists) Services performed through fixed base Yes 20% (domestic rate) Corporate Tax – Royalties (know-how/IP transfer) No connection to PE Yes 10% (treaty rate) Corporate Tax – Royalties (connected to PE in Türkiye) PE connection Yes Taxed as PE profits (20%) VAT – All services benefited from in Türkiye Import of service Yes (by recipient) Standard VAT rate (18%) – declare on 2 No. VAT Return; deduct on 1 No. VAT Return Required Documentation for Treaty Benefits To benefit from the treaty provisions (exemption from Turkish withholding tax or reduced royalty rate), the Moldovan resident company must: Obtain a Certificate of Residency from the competent Moldovan authorities proving that it is fully liable to tax in Moldova 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 on professional service income) will apply instead of the treaty provisions. Important Notes The key distinction for corporate tax withholding is whether the Moldovan company has a fixed base in Türkiye. The ruling provides detailed guidance on the three elements: place, fixed, and business carried on. The fact that the Moldovan company’s employees stay in Türkiye for less than 183 days does not automatically mean no fixed base exists. The fixed base determination depends on the place, permanence, and business activity criteria, not merely the 183-day rule (which applies to dependent personal services under Article 15, not professional services under Article 14). If the services involve know-how transfer, the payments may be characterized as royalties (10% rate). VAT is always applicable because the services are benefited from in Türkiye (import of service). 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.