Ruling Number: 39044742-KDV.21-134109 Introduction In a private ruling dated September 6, 2016, the Istanbul Tax Office (Taxpayer Services Value Added Tax Group Directorate) addressed the taxation of electronic systems design services provided to a German resident company. The taxpayer stated that their company operates in the field of microchip and integrated circuit electronic systems design engineering, design, and manufacturing. They provide electronic systems design services to a German resident company in their field of activity. Part of the service is performed by an engineer employed by the taxpayer who works in Germany. The taxpayer requested clarification on: Whether they can benefit from the 50% corporate income tax deduction under Article 10(1)(ğ) of the Corporate Tax Law, and How the payments to be made to an engineer resident in the United Kingdom (for services received in connection with the German project) should be treated for VAT purposes. Part I – Corporate Tax Analysis Corporate Tax Law (Law No. 5520) Article 6 – Corporate Income Base: Corporate tax is levied on net corporate income. The determination of net corporate income follows the commercial income provisions of the Income Tax Law No. 193. Article 10(1)(ğ) – Deduction for Export of Services (Added by Law No. 6322, effective June 15, 2012): ğ) 50% of the income derived by service enterprises operating in the fields of architecture, engineering, design, software, medical reporting, accounting, call centers, and data storage, from services provided exclusively for the benefit of non-resident persons and entities whose workplace, legal center, and business center are located abroad, provided that the services are benefited from exclusively outside Türkiye. To benefit from this deduction, the invoice or similar document must be issued in the name of the foreign customer. Part II – Conditions for the 50% Deduction Corporate Tax General Communiqué No. 1 (Section 10.5.2) – Conditions for Benefiting from the Deduction: No. Condition 1 The company’s main activity (as stated in its articles of association) includes one or more of the following: architecture, engineering, design, software, medical reporting, accounting, call centers, data storage, education, or health. 2 The company must actually engage in these activities. 3 The service must be provided to non-resident persons or entities (workplace, legal center, and business center abroad). 4 The invoice must be issued in the name of the foreign person/entity. 5 The service provided must have no connection to the recipient’s activities in Türkiye, and the service must be benefited from exclusively abroad. Section 10.5.3.2 – Separate Tracking of Income, Costs, and Expenses: Requirement Explanation Separate tracking Revenue, cost, and expense items related to the qualifying activities must be tracked separately and not combined with other activities. Allocation of joint expenses If separate tracking is not possible, joint general expenses shall be allocated based on the ratio of qualifying revenue to total revenue. Depreciation allocation Depreciation of assets used jointly shall be allocated based on days of use. Amortization of non-traceable fixed assets Depreciation of fixed assets whose usage cannot be traced shall be allocated together with joint general expenses. Part III – Corporate Tax Ruling Conclusion Step 1 – Determine Eligibility for the 50% Deduction Factor Determination Main activity includes design/engineering? Yes (electronic systems design) Service provided to non-resident? Yes (German resident company) Service benefited abroad? Yes (part of the service performed in Germany) Invoice issued in foreign customer’s name? Yes (assumed) Step 2 – Treatment of Services Performed in Türkiye vs. Germany Service Portion Location Eligible for 50% Deduction? Services performed in Türkiye (by the taxpayer’s employees in Türkiye) Türkiye Yes (if all other conditions met) Services performed in Germany (by the taxpayer’s engineer working in Germany) Germany No (the service is not provided from Türkiye; it is provided abroad) Step 3 – Conclusion The portion of the electronic systems design services performed in Türkiye and benefited from abroad qualifies for the 50% deduction under Article 10(1)(ğ). The portion of the services performed in Germany (by the engineer working abroad) does not qualify for the deduction, as it is not provided from Türkiye. The qualifying and non-qualifying portions must be tracked separately in the company’s accounting records. Part IV – VAT Analysis Value Added Tax Law (Law No. 3065) Article 1(1): Supplies and services performed in Türkiye are subject to VAT. Article 1(2): All imports of goods and services 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. VAT Treatment – Services Provided to the German Company: Factor Determination Where is the service performed? Germany (the service is provided abroad) Is the service benefited from in Türkiye? No (benefited from abroad) Is the service subject to VAT? No (service performed and benefited from abroad) VAT Treatment – Services Received from the UK Resident Engineer: Factor Determination Where is the service performed? Germany (the engineer works in Germany for the German project) Is the service benefited from in Türkiye? No (benefited from abroad) Is the service subject to VAT? No (service performed and benefited from abroad) Conclusion: Neither the services provided to the German company nor the services received from the UK engineer are subject to VAT, as both the performance and benefit of the services occur outside Türkiye. Summary Table Tax Type Service / Transaction Location VAT/Corporate Tax Treatment Corporate Tax Design services performed in Türkiye (for German client) Türkiye (benefited abroad) 50% deduction eligible (Art. 10(1)(ğ)) Corporate Tax Design services performed in Germany (engineer abroad) Germany Not eligible for deduction (not provided from Türkiye) VAT Services provided to German company Germany (performed and benefited abroad) No VAT VAT Services received from UK engineer Germany (performed and benefited abroad) No VAT Required Documentation and Accounting Requirements To benefit from the 50% deduction, the taxpayer must: Issue invoices in the name of the foreign (German) customer. Track qualifying revenues, costs, and expenses separately in the accounting records. Allocate joint expenses (if any) based on the ratio of qualifying revenue to total revenue. Allocate depreciation of jointly used assets based on days of use. Show the deduction separately on the corporate income tax return. Important Notes The 50% deduction under Article 10(1)(ğ) applies only to services provided from Türkiye and benefited exclusively abroad. The portion of services performed abroad does not qualify. The UK engineer’s services are not subject to VAT because they are performed and benefited from abroad (outside Türkiye). The taxpayer’s services to the German company are not subject to VAT because the service is both performed and benefited from abroad (the engineer works in Germany for the project). 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.