Ruling Number: 17192610-120[ÖZG-14/67]-14507 Introduction In a private ruling dated April 26, 2017, the Istanbul Tax Office (Taxpayer Services Income Taxes Group Directorate) addressed the taxation of a mosque reconstruction project carried out in Bosnia and Herzegovina. The taxpayer stated that a contract was signed for the reconstruction project. The work will be carried out by Bosnian resident companies providing labor, materials, and services, and they will invoice the taxpayer. The taxpayer will invoice the project owner. The taxpayer requested clarification on: How the project income should be taxed in Türkiye under the Türkiye-Bosnia and Herzegovina Double Taxation Treaty, Whether the project should be treated as a long-term construction project (yıllara sari inşaat), Whether VAT paid to local Bosnian companies can be refunded or offset. Part I – Income and Corporate Tax Analysis Income Tax Law (Law No. 193) Article 3(1)(1) – Full Liability: Real persons resident in Türkiye are taxed on their worldwide income. Article 85 – Declaration of Income: Taxpayers must file an annual return for income derived during a calendar year, unless otherwise provided. Article 42 – Long-Term Construction and Repair Works: For construction and repair works extending over more than one calendar year, the profit or loss is determined definitively in the year the work is completed and is treated as income of that year, to be shown in the return for that year. Article 94(1)(3) – Withholding Tax on Long-Term Construction Payments: Withholding tax applies to progress payments made to contractors for works falling under Article 42. 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: Withholding tax applies to certain payments made to limited liability corporations. Ruling Conclusion – Long-Term Construction Treatment: Factor Determination Is the project a long-term construction project (yıllara sari inşaat)? Yes (spans multiple years) Is the project located in Türkiye? No (located in Bosnia and Herzegovina) Does Article 42 apply to projects abroad? No – Article 42 applies only to projects in Türkiye Withholding tax on progress payments? No (Article 94/3 does not apply to foreign projects) How should income be taxed? Income must be recognized on an accrual basis in the relevant periods and declared in the annual return for each year Part II – Double Taxation Treaty Analysis Türkiye-Bosnia and Herzegovina Double Taxation Treaty (Signed February 16, 2005, effective January 1, 2009) Article 5 – Permanent Establishment (Paragraph 3): A construction site, assembly, installation, or erection project, or supervisory activities in connection therewith, lasting more than 12 months constitutes a permanent establishment. 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. Ruling Conclusion – Treaty Analysis: Duration of Project in Bosnia PE in Bosnia? Taxing Right ≤12 months No Only Türkiye >12 months Yes Both Türkiye and Bosnia (Bosnia may tax PE-attributable profits) Calculation of 12-Month Period: Start Date End Date Notes Date the site is established (including preparatory work) Date the work is completed or permanently abandoned Both dates included Foreign Tax Credit: If the taxpayer pays tax in Bosnia on the project income, under Article 24 of the DTT (Elimination of Double Taxation), the Bosnian tax may be credited against the Turkish tax on the same income. Required Documentation for Treaty Benefits: To benefit from the treaty provisions (e.g., to claim the foreign tax credit), the taxpayer must obtain a Certificate of Residency from the Turkish tax authorities and submit it to the Bosnian tax authorities. Part III – VAT Analysis VAT Law No. 3065 Article 1(1): Supplies and services performed in Türkiye are subject to VAT. Article 4(1): Services are transactions other than supplies (performing, processing, producing, repairing, etc.). Article 6(b): A service is deemed performed in Türkiye if it is performed in Türkiye or benefited from in Türkiye. VAT Circular No. 60 (Section 1.1.1 and 8.1.1.1): Type of Transaction VAT Treatment Services performed and benefited from abroad Not subject to VAT VAT incurred on non-taxable transactions Not deductible and not refundable Examples of Non-Taxable Transactions: Construction work abroad by a Turkish construction company Services performed abroad and benefited abroad Transit exports (goods sold abroad without entering Türkiye) Ruling Conclusion – VAT: Factor Determination Where is the reconstruction project performed? Bosnia and Herzegovina Where is the service benefited? Bosnia and Herzegovina Is the project subject to VAT in Türkiye? No (performed and benefited abroad) Can VAT paid to Bosnian companies be deducted in Türkiye? No (not subject to VAT in Türkiye; VAT incurred on non-taxable transactions is not deductible) Can VAT paid to Bosnian companies be refunded? No (not within the scope of Turkish VAT) Summary Table Tax Type Treatment Notes Income/Corporate Tax Income taxable in Türkiye (accrual basis) Declared in annual returns Article 42 (Long-term construction) Not applicable (project abroad) No withholding tax on progress payments DTT – PE Analysis PE in Bosnia if >12 months Bosnia may tax PE-attributable profits Foreign Tax Credit Available Under Article 24 of DTT VAT – Services performed and benefited abroad Not subject to VAT No VAT in Türkiye VAT – Incurred in Bosnia Not deductible/refundable Not within Turkish VAT scope Required Documentation Certificate of Residency from Turkish tax authorities (to claim treaty benefits in Bosnia). Invoices and supporting documents from Bosnian subcontractors (for cost substantiation). Tax payment certificates from Bosnia (to claim foreign tax credit in Türkiye). Important Notes The project is not subject to Turkish VAT because it is performed and benefited from abroad. VAT paid to Bosnian companies is not deductible or refundable in Türkiye. The income from the project must be declared in Türkiye on an accrual basis (not deferred until project completion). If the project exceeds 12 months, Bosnia may tax the income attributable to the PE. The taxpayer may claim a foreign tax credit in Türkiye for taxes paid in Bosnia. 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.