Ruling Number: 62030549-120[86-2015/568]-9272 Introduction In a private ruling dated February 4, 2016, the Istanbul Tax Office (Taxpayer Services Income Taxes Group Directorate) addressed the taxation of dividends derived from becoming a partner in a company established in Bosnia and Herzegovina. The taxpayer stated that they reside in Türkiye and receive dividend income from a company in Bosnia and Herzegovina due to their partnership in that company. They do not stay in Bosnia and Herzegovina for more than 180 days. The taxpayer requested clarification on whether such dividend income is subject to tax in Türkiye. Legal Framework – Domestic Law Income Tax Law (Law No. 193) Article 3(1)(1) – Full Liability: Real persons resident in Türkiye are taxed on their worldwide income (both within and outside Türkiye). Article 4 – Residence in Türkiye: The following persons are considered resident in Türkiye: Those whose domicile is in Türkiye; Those who stay continuously in Türkiye for more than six months in a calendar year (temporary absences do not interrupt the period). Article 86 – Declaration Threshold for Movable Capital Income: For movable capital income not subject to withholding tax or exemption, an annual return is required if the amount exceeds the prescribed threshold (for 2015: TL 1,500). If the threshold is exceeded, the entire foreign dividend income must be declared. Double Taxation Treaty Provisions Türkiye-Bosnia and Herzegovina Double Taxation Treaty (Signed February 16, 2005, effective January 1, 2009) Article 4 – Resident: 1. “Resident of a Contracting State” means any person who, under the laws of that State, is liable to tax therein by reason of their home, domicile, place of management, or any other criterion of a similar nature. 2. Where an individual is a resident of both Contracting States, their status shall be determined as follows: (a) They shall be deemed a resident only of the State where they have a permanent home available to them; if they have a permanent home in both States, they shall be deemed a resident only of the State with which their personal and economic relations are closer (center of vital interests); (b) If the center of vital interests cannot be determined, or if they have no permanent home in either State, they shall be deemed a resident only of the State where they habitually stay; (c) If they habitually stay in both States or in neither, they shall be deemed a resident only of the State of which they are a citizen; (d) If they are a citizen of both States or of neither, the competent authorities shall resolve the issue by mutual agreement. 3. For a person other than an individual, the person shall be deemed a resident only of the State where its place of effective management is situated. Article 10 – Dividends: 1. Dividends paid by a company resident in one Contracting State to a resident of the other Contracting State may be taxed in that other State. 2. However, such dividends may also be taxed in the State where the paying company is resident. But if the beneficial owner is a resident of the other State, the tax charged shall not exceed: (a) 5% of the gross amount of the dividends if the beneficial owner is a company (other than a partnership) holding directly at least 25% of the capital of the paying company; (b) 15% of the gross amount of the dividends in all other cases. 5. If the beneficial owner of the dividends carries on business through a permanent establishment in the other State, and the holding giving rise to the dividends is effectively connected with such permanent establishment, then paragraphs 1 and 2 shall not apply. In such case, Article 7 (Business Profits) or Article 14 (Professional Services) shall apply. Article 24 – Elimination of Double Taxation: Provides for a foreign tax credit mechanism. Ruling Conclusion Step 1 – Residency Status of the Taxpayer The taxpayer resides in Türkiye. Under Article 4 of the Income Tax Law, they are considered a resident of Türkiye (full liability taxpayer). Step 2 – Treaty Residency Confirmation Even under the tie-breaker rules of Article 4(2) of the DTT, the taxpayer is a resident of Türkiye (domicile in Türkiye, habitual stay in Türkiye). Step 3 – Taxing Rights Under Article 10 (Dividends) State Taxing Right Limitation Bosnia and Herzegovina (source State) Yes Tax shall not exceed 15% of gross dividends (Article 10(2)(b) – applies to individuals) Türkiye (residence State) Yes Full liability taxpayer – worldwide income Note: The reduced 5% rate under Article 10(2)(a) applies only to corporate shareholders, not to individuals. Therefore, the taxpayer (as an individual) is subject to the 15% rate in Bosnia and Herzegovina. Step 4 – Exception Under Article 10(5) If the dividend income is derived through a permanent establishment or fixed base in Bosnia and Herzegovina to which the shareholding is effectively connected, then: Article 10(2) (15% limit) does not apply. The dividends are taxed as business profits (Article 7) or professional service income (Article 14), together with the PE/fixed base profits. Step 5 – Taxation in Türkiye (Domestic Law) As a resident of Türkiye, the taxpayer must declare the dividend income in Türkiye. Condition Tax Treatment in Türkiye Gross dividend income ≤ TL 1,500 (2015 threshold) No return required (under Article 86) Gross dividend income > TL 1,500 (2015 threshold) Annual return required – declare the entire foreign dividend income Step 6 – Foreign Tax Credit Under Article 24 of the DTT, taxes paid in Bosnia and Herzegovina on the dividend income may be credited against the Turkish tax on the same income. Summary Table Question Answer Is the taxpayer a resident of Türkiye? Yes (domicile in Türkiye) Does Bosnia and Herzegovina have the right to tax the dividends? Yes (as source State – Article 10(2)) Maximum withholding tax rate in Bosnia and Herzegovina 15% (individual shareholder – Article 10(2)(b)) Does the 5% rate apply? No (5% applies only to corporate shareholders with ≥25% holding) Exception (PE/fixed base in Bosnia)? If effectively connected → taxed under Article 7 or 14 Does Türkiye have the right to tax the dividends? Yes (full liability taxpayer – worldwide income) Is an annual return required in Türkiye? Yes, if gross dividend > TL 1,500 (2015 threshold) Foreign tax credit available in Türkiye? Yes (Article 24 of DTT) Practical Steps for the Taxpayer Determine the gross dividend amount received from the Bosnian company for the calendar year. Compare with the declaration threshold (TL 1,500 for 2015 – verify current threshold for relevant year). If threshold is exceeded: File an annual income tax return in Türkiye declaring the full dividend income. Claim foreign tax credit: Deduct the tax paid in Bosnia and Herzegovina (up to 15%) from the Turkish tax calculated on the same income. Obtain Certificate of Residency from the Turkish tax authorities (Istanbul Tax Office) to prove Turkish residency for treaty purposes in Bosnia and Herzegovina. Important Notes The 5% reduced withholding tax rate under Article 10(2)(a) applies only to corporate shareholders (companies) holding at least 25% of the capital of the paying company. It does not apply to individual shareholders. The taxpayer must keep documentation of the Bosnian tax withheld (e.g., dividend payment slip, tax certificate) to claim the foreign tax credit in Türkiye. 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.