Ruling Number: 49327596-120[GVK.ÖZ.2014.72]-284 Introduction In a private ruling dated November 11, 2015, the Antalya Tax Office (Taxpayer Services Income Group Directorate) addressed the taxation of a company whose headquarters are located in Antalya, Türkiye, when it opens a branch in the Turkish Republic of Northern Cyprus (TRNC). The taxpayer stated that they are engaged in a course activity providing training in computer software, databases, and similar subjects. Due to student demand, they are considering opening a branch in the TRNC. The taxpayer requested clarification on how their income would be taxed if they open such a branch. Double Taxation Treaty Provisions Türkiye-TRNC Double Taxation Treaty (Effective January 1, 1989) Article 5 – Permanent Establishment: 1. The term “permanent establishment” has a general definition, and 2. Specific examples of what constitutes a permanent establishment are listed (the list is not exhaustive). Conclusion: A branch opened by the taxpayer in the TRNC constitutes a permanent establishment in the TRNC. Article 7 – Business Profits (Paragraph 1): Where an enterprise of one Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, the profits of the enterprise may be taxed in that other State but only so much of them as is attributable to that permanent establishment. Article 7(3) – Deductible Expenses: Expenses incurred for the purposes of the permanent establishment (including executive and general administrative expenses) may be deducted in calculating the profits attributable to the permanent establishment, subject to certain limitations specified in the paragraph. Article 22 – Elimination of Double Taxation: Business profits taxed in the TRNC in accordance with the provisions of this Treaty shall be exempt from all taxes on income in Türkiye. Domestic Law – Reporting Obligation Tax Procedure Law (Law No. 213) Article 159 – Notification Obligation: Taxpayers are required to notify the tax office of any increase or decrease in the number of workplaces belonging to the same enterprise or business. Article 352(2)(4) – Penalty for Non-Compliance: Taxpayers who fail to comply with the notification obligation under Article 159 shall be subject to a procedural irregularity penalty. Ruling Conclusion Step 1 – Permanent Establishment in the TRNC By opening a branch in the TRNC, the taxpayer creates a permanent establishment in the TRNC under Article 5 of the Türkiye-TRNC DTT. Step 2 – Taxation in the TRNC Under Article 7(1) of the DTT, the TRNC has the right to tax the profits attributable to the branch (permanent establishment) in accordance with its domestic tax laws. Step 3 – Deduction of Expenses Under Article 7(3), expenses incurred for the purposes of the branch (including executive and general administrative expenses) may be deducted in calculating the branch’s taxable profits, subject to the limitations specified in the treaty. Step 4 – Taxation in Türkiye (Exemption) Under Article 22 of the DTT, business profits that are taxed in the TRNC in accordance with the treaty shall be exempt from all taxes on income in Türkiye. Step 5 – Reporting Obligation in Türkiye Under Article 159 of the Tax Procedure Law No. 213, the taxpayer must notify the Turkish tax office of the opening of the new branch (increase in the number of workplaces). Failure to do so may result in a procedural irregularity penalty under Article 352(2)(4). Summary Table Question Answer Does opening a branch in the TRNC create a permanent establishment? Yes (Article 5 of DTT) Does the TRNC have the right to tax the branch’s profits? Yes (Article 7(1) – limited to profits attributable to the PE) Can expenses be deducted? Yes (Article 7(3) – subject to limitations) Will the same profits be taxed in Türkiye? No (Article 22 – exemption for profits taxed in TRNC) Must the taxpayer notify the Turkish tax office? Yes (Article 159 of Tax Procedure Law No. 213) Penalty for non-notification? Procedural irregularity penalty (Article 352(2)(4)) Practical Steps for the Taxpayer Notify the Turkish tax office: Report the opening of the TRNC branch under Article 159 of the Tax Procedure Law No. 213. Comply with TRNC tax laws: File tax returns and pay tax on branch profits in the TRNC. Claim exemption in Türkiye: Under Article 22 of the DTT, the TRNC-taxed profits will be exempt from Turkish income tax. Maintain documentation: Keep records of expenses allocated to the branch and taxes paid in the TRNC. Important Notes The exemption under Article 22 applies only to profits that are actually taxed in the TRNC in accordance with the treaty. The taxpayer must still comply with all Turkish tax filing requirements, including reporting the existence of the branch. 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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