Ruling Number: 62030549-125[30-2015/283]-72085 Introduction In a private ruling dated June 2, 2016, the Istanbul Tax Office (Taxpayer Services Income Taxes Group Directorate) addressed the taxation of interest arising from a loan provided by a French resident company to a Turkish resident company. The taxpayer, representing a French resident bank authorized to provide banking services (licensed by the French authority responsible for supervising the banking and insurance sector), stated that the bank provides loans to third parties. The bank operates in Türkiye through its Istanbul branch. A 2-year loan was provided to a Turkish institution under a loan agreement. The entire loan process was carried out by the head office in France, and the Istanbul branch was not a party to nor involved in any stage of the loan transaction. The taxpayer requested clarification on: Whether withholding tax applies to the interest payments to be made by the Turkish borrower; Whether the tax paid in Türkiye can be credited against French tax; Whether the Istanbul branch is considered a permanent establishment and therefore requires profit allocation; Whether the interest payments are subject to Banking and Insurance Transaction Tax (BSMV), Value Added Tax (VAT), Stamp Tax, and Resource Utilization Support Fund (KKDF). 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 30 – Withholding Tax for Limited Liability Taxpayers (Paragraph 1): A 15% withholding tax applies to income and proceeds paid or accrued to limited liability corporations. Paragraph 1(d): Withholding tax applies to movable capital income, except for certain specified exceptions. Council of Ministers Decree No. 2009/14593 – Withholding Tax Rates on Interest: Type of Lender Withholding Tax Rate Foreign states, international institutions, foreign banks, or institutions authorized to lend in their country of residence that lend to all real and legal persons (not just related parties) 0% All other lenders 10% Income Tax Law No. 193 – Article 75(6): Interest on all kinds of receivables (including interest on ordinary, preferred, secured, and promissory note receivables, current account receivables) constitutes movable capital income. Part II – Double Taxation Treaty Provisions Türkiye-France Double Taxation Treaty (Effective January 1, 1990) Article 5 – Permanent Establishment (Paragraph 5 – Dependent Agent): A person (other than an independent agent under paragraph 6) acting on behalf of an enterprise shall create a permanent establishment if: (a) They habitually exercise authority to conclude contracts on behalf of the enterprise; or (b) They regularly maintain a stock of goods or merchandise for delivery on behalf of the enterprise. Article 11 – Interest (Paragraphs 1, 2, 4, and 5): 1. Interest arising in one Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2. However, such interest may also be taxed in the State in which it arises. But if the beneficial owner is a resident of the other State, the tax charged shall not exceed 15% of the gross amount of the interest. 4. The term “interest” includes income from government securities, bonds, debentures, and all kinds of receivables. 5. If the beneficial owner carries on business through a permanent establishment in the other State and the receivable giving rise to the interest is effectively connected with that PE, then Article 7 (Business Profits) shall apply instead of Article 11. Article 23 – Elimination of Double Taxation (Paragraph 2 – France): 2. In France: (a) Where a resident of France derives income that may be taxed in Türkiye under this Treaty, France shall allow a credit against its tax equal to the tax paid in Türkiye. (b) “Income tax paid in Türkiye” includes any tax that would have been payable but is subject to exemption or reduction under Turkish incentive legislation. Notwithstanding the above, the tax paid in Türkiye on interest shall be calculated at 15% (as per Article 11(2)) for the purpose of the foreign tax credit. Part III – Ruling Conclusion – Corporate Tax Scenario 1 – Loan Processed Entirely by French Head Office (Istanbul Branch Not Involved) Factor Determination Loan processing location France (head office) Istanbul branch involvement None (not a party, not involved in any stage) Applicable DTT article Article 11 (Interest) Turkish withholding tax rate (domestic) 0% or 10% (under Council of Ministers Decree) Treaty maximum rate (Article 11(2)) 15% (but lower domestic rate applies if more favorable) Does the Istanbul branch constitute a PE for this transaction? No (branch not involved) No profit allocation required for this loan Yes Scenario 2 – Loan Processed Through Istanbul Branch (PE Involved) Factor Determination Loan processing location Türkiye (through Istanbul branch) Applicable DTT article Article 7 (Business Profits) – not Article 11 Tax treatment Income attributable to PE taxable in Türkiye under domestic law Profit allocation required Yes (attributable to the branch) Part IV – Deemed Tax Credit Mechanism (Favorable to French Bank) Actual Turkish Withholding Tax Paid (Domestic Rate) Deemed Tax for French Credit Purposes (Article 23) 0% (if qualified as authorized lender) 15% (deemed) 10% (if not qualified) 15% (deemed) Key Result: Regardless of whether the actual Turkish withholding tax is 0% or 10%, for French foreign tax credit purposes, the bank is deemed to have paid 15% tax in Türkiye. This deemed 15% can be credited against French tax on the same interest income. Part V – Stamp Tax Analysis Stamp Tax Law No. 488 – Article 9 and Table 2, Paragraph 23 (as amended by Law No. 6322): Documents related to loans provided by banks, foreign credit institutions, and international institutions, as well as their collateral and repayment (except for loan utilization), are exempt from stamp tax. Conditions for Stamp Tax Exemption: Condition Requirement 1. Lender qualifies as a “foreign credit institution” Must be authorized to lend under its home country laws (documented proof) 2. Or lender qualifies as an “international institution” Must be on the Berne Union list (e.g., World Bank, IMF, EBRD) 3. Document must be exclusively for loan, collateral, or repayment No general indebtedness provisions 4. Loan must be channeled through a Turkish bank or special finance institution Under Article 17/a of Decree No. 32 How to prove foreign credit institution status: Obtain a document from the home country’s official authorities confirming authorization to lend. Have the document certified by Turkish embassies, consulates, or economic advisors. Present the certified document to the bank intermediating the loan. Part VI – Value Added Tax (VAT) Analysis VAT Law No. 3065 Article 1(1): Supplies and services in Türkiye are subject to VAT. Article 17(4)(e): Transactions within the scope of Banking and Insurance Transaction Tax (BSMV) are exempt from VAT. VAT General Application Communiqué (Section II/F-4.5.1): BSMV applies to banks and insurance companies for all transactions conducted. Since BSMV-exempt foreign loan transactions are no different in nature from domestic banking services subject to BSMV, no VAT is calculated on foreign loan transactions. Conclusion: The loan transaction is not subject to VAT (exempt under Article 17/4-e). Part VII – Banking and Insurance Transaction Tax (BSMV) Analysis Expenditure Tax Law No. 6802 Article 28 – BSMV Scope: Banks and insurance companies (except financial leasing under Law No. 3226) are subject to BSMV on all monies received from any transactions conducted. Article 30 – Taxpayer: Banks, bankers, and insurance companies. Article 31 – Base: The amount of monies received as specified in Article 28. BSMV Treatment Based on Transaction Location: Scenario BSMV Applicable? Loan provided by a foreign bank’s head office abroad (no Turkish involvement) No (taxable event occurs outside Türkiye) Loan provided by a foreign bank’s Turkish branch Yes (branch in Türkiye) Turkish bank intermediates a foreign loan Yes (Turkish bank’s services) Conclusion for this case: Since the loan was processed entirely by the French head office and the Istanbul branch was not involved, the interest payments are not subject to BSMV in Türkiye. Part VIII – Resource Utilization Support Fund (KKDF) Analysis Communiqué No. 6 on KKDF (Decree No. 88/12944), Article 2: Type of Loan KKDF Rate Loans obtained from abroad by banks and financing companies 0% Conclusion: KKDF is calculated at 0% for loans obtained from abroad by Turkish resident banks. Summary Table Tax Type Treatment Rate / Notes Corporate Withholding Tax (if head office processes loan, branch not involved) Subject to withholding 0% or 10% (domestic) / 15% deemed for French credit Corporate Withholding Tax (if branch involved) Subject to business profits (Art. 7) Attributable to PE Foreign Tax Credit (France) Deemed 15% credit Favorable mechanism Stamp Tax Exempt If conditions met (foreign credit institution status, documentation) VAT Exempt Under Article 17/4-e (BSMV exemption) BSMV Not applicable Loan processed by head office abroad (no Turkish branch involvement) KKDF 0% For bank-intermediated foreign loans Required Documentation for Treaty Benefits (Corporate Tax) To benefit from the treaty provisions (including the deemed 15% credit in France) and the 0% domestic withholding tax rate, the French bank must: Obtain a Certificate of Residency from the competent French authorities. Provide documentation proving it is authorized to lend under French law and lends to all real and legal persons (not just related parties). Provide the original certificate along with a notarized or Turkish Consulate-certified Turkish translation to the withholding agent or relevant tax office. Important Notes The key distinction for corporate tax is whether the loan is processed through the Turkish branch (PE) or by the head office abroad (no PE). The deemed 15% tax credit in France applies even if the actual Turkish withholding tax is 0% or 10% – a highly favorable mechanism. For stamp tax exemption, the lender must prove its status as a “foreign credit institution” with appropriate documentation. The transaction is not subject to VAT (exempt under BSMV exemption). Since the loan was processed by the head office abroad (not the Turkish branch), no BSMV applies. 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.