Ruling Number: 62030549-125[30-2015/399]-235875 Introduction In a private ruling dated August 4, 2017, the Istanbul Tax Office (Taxpayer Services Income Taxes Group Directorate) addressed the taxation of payments made for market research services received from a related company resident in Azerbaijan. The taxpayer stated that the owner of their Turkish resident company also has a company in Azerbaijan. The Azerbaijani resident company conducts market research to increase the Turkish company’s sales. The taxpayer requested clarification on the tax treatment of payments made for these market research services. 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 Professional Service Income Withholding Tax Rate Petroleum exploration 5% Other professional service income 20% Double Taxation Treaty Provisions Türkiye-Azerbaijan Double Taxation Treaty (Effective January 1, 1998) Article 14 – Professional Services: 1. Income derived by a resident of one Contracting State from professional services or other independent activities shall be taxable only in that State unless the person has a fixed base regularly available in the other State for performing the activities. If the person has such a fixed base, the income may be taxed in the other State but only so much as is attributable to that fixed base. 2. The term “professional services” includes independent scientific, literary, artistic, educational, and teaching activities, as well as the independent activities of physicians, lawyers, engineers, architects, dentists, and accountants. Article 22 – Elimination of Double Taxation: Taxes paid in Türkiye may be credited against Azerbaijani tax on the same income. Part II – Transfer Pricing Analysis Corporate Tax Law (Law No. 5520) – Article 13 – Transfer Pricing: If a transaction is conducted with a related party at a price that deviates from the arm’s length principle, the Turkish tax authorities may make adjustments to the taxable income (disguised profit distribution). Related Party: Since the owner of both companies is the same person, the companies are related parties under Article 13. Factor Determination Are the companies related? Yes (common owner) Must the price be at arm’s length? Yes Consequence of non-compliance Transfer pricing adjustment possible Part III – VAT Analysis VAT Law No. 3065 Article 1(1): Supplies and services performed in Türkiye are subject to VAT. Article 4: 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. Article 9(1): If the taxpayer has no residence, workplace, legal center, or business center in Türkiye, the Ministry may hold the counterparty (recipient) liable for VAT payment. VAT General Application Communiqué (Section I/C-2.1.2.1): For services performed in Türkiye by persons whose residence, workplace, legal center, and business center are not located in Türkiye, as well as services performed abroad but benefited from in Türkiye, VAT shall apply. Since the service provider has no presence in Türkiye, the full amount of VAT shall be declared and paid by the domestic recipient as a withholding agent using the 2 No. VAT Return. However: If the service is performed and benefited from abroad, it is not subject to VAT. Ruling Conclusion – Corporate Tax Step 1 – Characterization of the Service Factor Determination Nature of service Market research (professional service) Characterization under domestic law Professional service income Applicable DTT article Article 14 (Professional Services) Step 2 – Application of Article 14 Factor Determination Does the Azerbaijani company have a fixed base in Türkiye? No (based on the facts) Taxing right under Article 14 Only Azerbaijan Withholding tax required in Türkiye? No Conclusion: Since the Azerbaijani company has no fixed base in Türkiye, the income from market research services is taxable only in Azerbaijan. No withholding tax is required in Türkiye. Step 3 – Transfer Pricing Consideration Factor Determination Are the companies related? Yes Must the payment be at arm’s length? Yes Consequence of non-compliance Transfer pricing adjustment (Article 13) Conclusion: The taxpayer must ensure that the payment to the Azerbaijani related company is at arm’s length. If not, the Turkish tax authorities may make a transfer pricing adjustment. Ruling Conclusion – VAT Factor Determination Where is the service performed? Azerbaijan (market research conducted abroad) Where is the service benefited? Azerbaijan (for export transactions – no connection to Türkiye) Is the service subject to VAT? No (performed and benefited from abroad) VAT withholding required? No Summary Table Tax Type Service Type Fixed Base in Türkiye? Withholding Tax / VAT in Türkiye? Rate / Notes Corporate Tax Market research (professional services) No No Taxable only in Azerbaijan Corporate Tax (Exception) Market research (professional services) Yes Yes 20% Transfer Pricing Related party transaction N/A Potential adjustment Arm’s length required VAT Market research (performed and benefited abroad) N/A No Not subject to VAT Required Documentation for Treaty Benefits To benefit from the treaty provisions (exemption from Turkish withholding tax), the Azerbaijani resident company must: Obtain a Certificate of Residency from the competent Azerbaijani authorities proving that it is fully liable to tax in Azerbaijan on its 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 The key question for corporate withholding tax is whether the Azerbaijani company has a fixed base in Türkiye. Based on the facts, it does not, so no withholding tax is required. Transfer pricing rules apply because the companies are related parties (common owner). The market research service is not subject to VAT because it is performed and benefited from abroad. 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. 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