Ruling Number: 27575268-105[253-2015-126]-149763 Introduction In a private ruling dated June 27, 2016, the Ankara Tax Office (Taxpayer Services Procedural Group Directorate) addressed the tax treatment of technical support services received from a Czech Republic-based company for the evaluation of nuclear power plant construction license application documents. The taxpayer (a Turkish public institution) entered into a contract with a Czech resident company for technical support services related to the evaluation of construction license application documents for a nuclear power plant. The taxpayer requested clarification on the tax obligations of both the taxpayer and the Czech company. Part A – 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): Commercial income derived by foreign corporations having a place of business or permanent representative in Türkiye. Article 3(3)(c): Professional service income derived in Türkiye. Article 30 – Withholding Tax for Limited Liability Taxpayers: Type of Professional Service Income Withholding Tax Rate Petroleum exploration 5% Other professional service income 20% Part B – Double Taxation Treaty Analysis Türkiye-Czech Republic Double Taxation Treaty (Effective January 1, 2004) Article 5 – Permanent Establishment (Paragraph 3(b)): The term “permanent establishment” also includes: (b) The provision of services (including consultancy or management services) by an enterprise of one Contracting State through its employees or other personnel, where such activities continue for a period or periods aggregating more than six months (183 days) in any 12-month period. 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 (Paragraphs 2 and 4): 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. 4. If the beneficial owner carries on business through a PE in the other State and the right or asset giving rise to the royalty is effectively connected with that PE, then Article 7 shall apply instead of Article 12. 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 State. If 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 any 12-month period; (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 PE or fixed base that the employer has in the other State. Protocol Article 2 – Calculation of 183 Days for Article 15: The following days shall be included in calculating the 183-day period: (a) All days physically present, including arrival and departure days; (b) Saturdays, Sundays, national holidays, and vacation days spent outside the State where the activity is performed but in connection with continued activity in that State, as well as days spent on business trips directly related to employment in that State. Article 22 – Elimination of Double Taxation: Taxes paid in Türkiye may be credited against Czech tax on the same income. Part C – Ruling Conclusion – Corporate Tax C.1 – Permanent Establishment Determination Factual Finding: The contract had a planned duration of 24 months. The Czech company would maintain an administrative contact person and two continuous experts in Ankara (under Work Package 1). This exceeds the 6-month (183-day) threshold under Article 5(3)(b). Factor Determination Duration of services in Türkiye 24 months (exceeds 6 months / 183 days) Does this create a PE in Türkiye under Article 5(3)(b)? Yes Taxing right under Article 7 Türkiye may tax profits attributable to the PE Withholding tax treatment Services are professional services in nature → 20% withholding tax on payments attributable to Türkiye-performed services C.2 – Services Performed Entirely in the Czech Republic (No Personnel in Türkiye) Factor Determination Location of service performance Czech Republic (entirely) Does this create a PE in Türkiye? No Taxing right Only Czech Republic Withholding tax in Türkiye? No C.3 – Separable vs. Non-Separable Work Packages Scenario Treatment Work package can be separated into distinct Czech-performed and Türkiye-performed portions, and Czech portion can be performed independently Czech portion: No Turkish tax; Türkiye portion: Subject to 20% withholding tax Work package cannot be separated (Czech portion is complementary, not independent) Entire work package may be subject to Turkish taxation (20% withholding tax) C.4 – Know-How / Royalty Characterization Certain services may constitute transfer of know-how: Service Type Potential Characterization IP1: Continuous senior and senior technical experts in Ankara Professional services (PE) IP3: Technical training to Turkish personnel Know-how transfer IP8: Review of differences between reference plant and safety impact assessment Know-how transfer If characterized as know-how (royalties): Factor Determination Treaty article Article 12 (Royalties) Withholding tax rate 10% Exception (Article 12(4)) If the know-how is effectively connected with a PE in Türkiye → taxed under Article 7 (Business Profits) instead C.5 – Taxation of Employee Wages (Czech Personnel Assigned to Türkiye) Scenario Tax Treatment Same personnel throughout project (≥183 days in Türkiye) Türkiye may tax wages (Article 15(1)) Different personnel rotated (each <183 days) Taxable only in Czech Republic (Article 15(2) – all conditions met) Administrative personnel based in Ankara Taxable only in Türkiye (Article 15(1) – employment exercised in Türkiye) Part D – Value Added Tax (VAT) Analysis VAT Law No. 3065 Article 1(1): Supplies and services performed in Türkiye 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 8(1)(b): For imports, the importer of goods or services is the VAT taxpayer. 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 29(1): Taxpayers may deduct VAT shown on invoices and VAT paid on imported goods and services, subject to certain conditions. 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. 2 No. VAT Return – No Deduction Allowed: The withheld VAT must be paid in full. However, if the taxpayer has VAT deduction rights, the amount declared on the 2 No. VAT Return can be deducted on the 1 No. VAT Return for the same period. Conclusion: The technical support services are benefited from in Türkiye, so VAT applies at the general rate (18%). The taxpayer must withhold VAT and declare it on the 2 No. VAT Return. Part E – Stamp Tax Analysis Stamp Tax Law No. 488 Article 1: Documents listed in the attached tables are subject to stamp tax. Article 3: Taxpayers are those who sign the documents. Law No. 2690 – Turkish Atomic Energy Authority Law (Article 15): (a) The Authority is authorized to execute contracts related to its duties. (b) Procurement, sales, repair, and construction services related to nuclear research shall not be subject to Law No. 2490, Law No. 1050, or audit by the Court of Accounts, and shall be exempt from all taxes, duties, and fees. Conclusion: If the contract falls within the scope of Law No. 2690 (nuclear research and activities of the Turkish Atomic Energy Authority), it is exempt from stamp tax. Part F – Tax Procedure Law – Documentation Requirements Tax Procedure Law No. 213 Article 227 – Documentation Requirement: Records relating to transactions with third parties must be substantiated with documents. Article 229 et seq: Specifies acceptable documents (invoices, receipts, etc.). General Communiqué No. 253 – Section B (Documents Received from Abroad): Taxpayers who make payments for works or services performed by foreign resident persons/entities may record valid foreign documents (invoices) as expenses in their books. The amounts shall be converted to Turkish Lira at the Central Bank buying rate on the date the document was issued. If requested during an audit, the taxpayer must have the document translated. Conclusion: The taxpayer must obtain valid foreign invoices (documents) from the Czech company to substantiate the expenses/costs in their accounting records. Summary Table Tax Type Treatment Rate / Notes Corporate Withholding Tax – Türkiye-performed services (PE created) Subject to withholding 20% (professional services) Corporate Withholding Tax – Czech Republic-performed services (no PE) Not taxable in Türkiye 0% Corporate Withholding Tax – Know-how (royalties) Subject to withholding 10% (unless PE connected → 20%) Corporate Withholding Tax – Wages of same personnel ≥183 days Subject to Turkish income tax Progressive rates Corporate Withholding Tax – Wages of rotated personnel <183 days Taxable only in Czech Republic 0% VAT Subject to VAT (import of service) 18% (general rate) – declared on 2 No. VAT Return Stamp Tax Exempt If within scope of Law No. 2690 Documentation Valid foreign invoices required For expense/cost substantiation Required Documentation for Treaty Benefits To benefit from the treaty provisions (reduced withholding tax rates, exemption), the Czech resident company and its personnel must: Obtain a Certificate of Residency from the competent Czech authorities proving that they are fully liable to tax in the Czech Republic 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. Important Notes The 24-month project duration automatically creates a PE in Türkiye under Article 5(3)(b) for the portion of services performed in Türkiye. Services performed entirely in the Czech Republic are not taxable in Türkiye. VAT applies because the services are benefited from in Türkiye (import of service). Stamp tax exemption applies if the contract is within the scope of the Turkish Atomic Energy Authority’s nuclear research activities. The taxpayer must obtain valid foreign invoices to substantiate expenses/costs. 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.