Ruling Number: 39044742-130-105820 Introduction In a private ruling dated August 2, 2016, the Istanbul Tax Office (Taxpayer Services Value Added Tax Group Directorate) addressed the taxation and withholding tax treatment of payments made for advertising and reporting services received from a US resident company via the internet. The taxpayer requested clarification on payments made to a US resident company for: Online advertising services, and Monthly usage reports (e.g., from sites such as TwitterCounter, showing user statistics, retweet counts, etc.) 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 3(3)(a): Commercial income derived by foreign corporations having a place of business or permanent representative in Türkiye. Article 30 – Withholding Tax for Limited Liability Taxpayers: A 15% withholding tax applies to certain types of income. Commercial income is NOT subject to withholding tax. Professional service income is subject to 20% withholding tax. Double Taxation Treaty Provisions Türkiye-US Double Taxation Treaty (Effective January 1, 1998 – published in Official Gazette No. 23217 on December 31, 1997) 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 14 – Professional Services (Paragraph 2): Income derived by an enterprise of one Contracting State from professional services or other independent activities shall be taxable only in that State unless the services are exercised in the other State. If exercised in the other State, the income may also be taxed in that other State if: (a) The enterprise has a permanent establishment in the other State for performing the services; or (b) The services are performed for a period or periods exceeding 183 days in any continuous 12-month period. In such a case, Türkiye may tax by withholding. However, the recipient may elect to be taxed on a net basis under Article 7 as if the income were attributable to a PE. Article 5 – Permanent Establishment: Defines when a permanent establishment exists in the other State. Server as Permanent Establishment: A server located in Türkiye may constitute a permanent establishment. Part II – Ruling Conclusion – Advertising Services Factor Determination Nature of service Online advertising (commercial activity) Characterization Commercial income (Article 7 – Business Profits) Does the US company have a PE in Türkiye? If the services are provided through a server located in Türkiye, a PE may be created Taxing right (if no PE) Only the US Withholding tax required? No (commercial income not subject to withholding) Taxing right (if PE exists) Türkiye may tax PE-attributable profits Part III – Ruling Conclusion – Monthly Reporting Services Factor Determination Nature of service Monthly usage reporting (data analysis, social media statistics) Characterization Professional services (Article 14) Does the US company have a PE in Türkiye? If the services are performed through personnel in Türkiye for ≥183 days or through a PE, then yes Taxing right (if no PE and <183 days) Only the US Withholding tax required? No (if no PE and <183 days) Taxing right (if PE exists or ≥183 days) Türkiye may tax (by withholding at 20%) Practical Note for Withholding Agents: At the time of payment, the withholding agent may not know whether the US company will stay in Türkiye for 183 days or more. Therefore, withholding tax may be applied (20%) and refunded later if it is determined that no PE was created. Part IV – 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: The person performing the service is the 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. 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: Service Benefited in Türkiye? VAT Treatment Advertising services Yes (used for the taxpayer’s business in Türkiye) Subject to VAT – withheld by taxpayer (2 No. VAT Return) Reporting services Yes (used for the taxpayer’s business in Türkiye) Subject to VAT – withheld by taxpayer (2 No. VAT Return) Services benefited outside Türkiye No Not subject to VAT Important – Pass-Through Payments: Scenario VAT Treatment Payments made to foreign provider and passed through to Turkish customers at the same amount (no markup) No VAT on the pass-through amount Additional amount charged for the service (markup) Subject to VAT at the general rate (18%) Summary Table Service Type Characterization Treaty Article Withholding Tax in Türkiye? VAT in Türkiye? Online advertising Commercial income Art. 7 No (unless PE exists) Yes (2 No. VAT Return) – if benefited in Türkiye Monthly reporting (social media stats) Professional services Art. 14 No (unless PE or ≥183 days) – but withholding may be applied and refunded later Yes (2 No. VAT Return) – if benefited in Türkiye Pass-through payments (no markup) Not applicable N/A N/A No VAT (pass-through only) Markup on services Taxpayer’s own service N/A N/A Yes (18% VAT on markup) Required Documentation for Treaty Benefits To benefit from the treaty provisions (exemption from withholding tax), the US resident company must: Obtain a Certificate of Residency from the competent US authorities (IRS) proving that it is fully liable to tax in the USA 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) will apply instead of the treaty provisions. Refund Mechanism for Withholding Tax If withholding tax is applied (20%) but it is later determined that the US company had no PE in Türkiye and the 183-day threshold was not met, the US company may apply for a refund of the withheld tax from the relevant Turkish tax office. Important Notes Advertising services are characterized as commercial income (not subject to withholding tax), provided the US company has no PE in Türkiye. Reporting services are characterized as professional services (subject to withholding tax only if a PE exists or services are performed in Türkiye for ≥183 days). Servers located in Türkiye may constitute a permanent establishment for the US company. VAT applies to both types of services because the services are benefited from in Türkiye (import of service). The taxpayer must withhold VAT and file a 2 No. VAT Return. If services are not benefited from in Türkiye, no VAT applies. Pass-through payments (no markup) to foreign providers are not subject to VAT. Markup amounts charged by the taxpayer are subject to VAT at 18%. 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. 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