Ruling Number: B.07.1.GİB.4.34.16.01-125[30-2015/413]-71612 Introduction In a private ruling dated March 13, 2017, the Istanbul Tax Office (Taxpayer Services Income Taxes Group Directorate) addressed the taxation of payments made for engineering services received from companies resident in the United Kingdom, Germany, and Hong Kong. The taxpayer stated that they will provide engineering services to a Ukrainian resident company. The services will be performed through UK, German, and Hong Kong resident companies without entering Türkiye. The taxpayer requested clarification on whether VAT applies and whether corporate withholding tax is required on the payments made to these foreign companies. 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: Type of Payment Withholding Tax Rate Professional service income (petroleum exploration) 5% Other professional service income 20% Intangible rights (royalties) 20% Double Taxation Treaty Provisions Türkiye-UK Double Taxation Treaty (Effective January 1, 1989) Article 14 – Professional Services: Income derived by an enterprise of one Contracting State from professional services shall be taxable only in that State unless the services are exercised in the other Contracting State. If exercised in the other State, the income may also be taxed in that other State if: The enterprise has a fixed base regularly available in the other State; or The services are performed for 183 days or more in any continuous 12-month period. Türkiye-Germany Double Taxation Treaty (Effective January 1, 2011) Note: The Germany DTT’s Article 14 (Professional Services) applies only to individuals (real persons). For companies (legal entities), the applicable provisions are: Article 5 (Permanent Establishment) Article 7 (Business Profits) 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. Hong Kong: No double taxation treaty exists between Türkiye and Hong Kong. Part II – Ruling Conclusion – Corporate Tax UK Resident Companies: Factor Determination Nature of service Engineering services (professional services) Applicable treaty article Article 14 (Professional Services) Where are the services performed? UK (without entering Türkiye) Does the UK company have a fixed base in Türkiye? No (based on facts) Are the services performed in Türkiye for ≥183 days? No (services performed abroad) Taxing right under Article 14 Only the UK Withholding tax required in Türkiye? No German Resident Companies: Factor Determination Nature of service Engineering services (professional services) Applicable treaty articles Article 5 (PE) and Article 7 (Business Profits) Where are the services performed? Germany (without entering Türkiye) Does the German company have a PE in Türkiye? No (based on facts) Taxing right under Article 7 Only Germany Withholding tax required in Türkiye? No Hong Kong Resident Companies: Factor Determination Nature of service Engineering services (professional services) Is there a DTT with Hong Kong? No Applicable law Domestic law (Corporate Tax Law No. 5520) Characterization Professional service income Withholding tax required in Türkiye? Yes Applicable rate 20% (domestic rate under BKK No. 2009/14593) Part III – VAT Analysis VAT Law No. 3065 Article 1(1): Supplies and services performed in Türkiye 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 Circular No. 60 (Section 1.1.1 – Transactions Abroad): Services performed and benefited from abroad are not subject to VAT. VAT Ruling Conclusion: Factor Determination Where are the services performed? Abroad (UK, Germany, Hong Kong – without entering Türkiye) Where is the service benefited? Abroad (the ultimate beneficiary is the Ukrainian company) Is the service subject to VAT? No (performed and benefited from abroad) Conclusion: No VAT is required on the payments made to the UK, German, and Hong Kong companies. Summary Table Country Treaty with Türkiye? Applicable Treaty Article Taxing Right Corporate Withholding Tax in Türkiye? VAT in Türkiye? United Kingdom Yes (effective 1989) Art. 14 (Professional Services) Only UK No No Germany Yes (effective 2011) Art. 5 (PE) + Art. 7 (Business Profits) Only Germany (if no PE) No No Hong Kong No N/A (domestic law applies) Türkiye Yes – 20% No Required Documentation for Treaty Benefits (UK and Germany) To benefit from the treaty provisions (exemption from Turkish withholding tax), the UK and German resident companies must: Obtain a Certificate of Residency from the competent authorities of the UK or Germany proving that they are fully liable to tax in their country of residence on their worldwide income. Provide the original certificate along with a notarized or Turkish Consulate-certified Turkish translation to the withholding agent (the taxpayer) or the relevant tax office. If the Certificate of Residency cannot be provided: Domestic law provisions (20% withholding tax) may apply. Important Notes UK companies: Since the services are performed in the UK without entering Türkiye, Türkiye has no taxing right under Article 14 of the UK DTT. No withholding tax is required. German companies: Since the services are performed in Germany without entering Türkiye, and the German company has no PE in Türkiye, Türkiye has no taxing right under Article 7 of the Germany DTT. No withholding tax is required. Hong Kong companies: No DTT exists. Therefore, domestic law applies, and payments are subject to 20% withholding tax on professional service income. VAT: Since the services are performed and benefited from outside Türkiye, no VAT 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.