Ruling Number: 62030549-125[30-2016/237]-179936 Introduction In a private ruling dated June 21, 2017, the Istanbul Tax Office (Taxpayer Services Income Taxes Group Directorate) addressed the taxation of payments made to auditors from the United States for accreditation audits. The taxpayer stated that their Secretariat General signed a project contract for the establishment of an international accreditation system. Under this contract, a service agreement was signed with a US-based company for accreditation audits to be conducted. An invoice was issued to the institution. The taxpayer requested clarification on the taxation of payments made to auditors coming from abroad for accreditation audits. 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-US Double Taxation Treaty (Effective January 1, 1998) Article 14 – Professional Services (Paragraph 2): Income derived by an enterprise of one Contracting State from professional services or other independent activities 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: (a) The enterprise has a permanent establishment in the other State for performing the services; or (b) The services are performed for a period or periods exceeding 183 days in any continuous 12-month period. Important Clarifications: Factor Explanation PE through personnel A PE may be created if the US company’s personnel perform services in Türkiye through a fixed place of business 183-day calculation The stay periods of all personnel sent to Türkiye for the same or connected projects are aggregated Multiple clients If the US company provides services to multiple clients in Türkiye, the stay periods for all activities are aggregated Withholding at payment Since the withholding agent cannot know the total stay duration at the time of payment, withholding tax should be applied (20%) Refund mechanism If it is later determined that the 183-day threshold was not met, the US company may apply for a refund of the withheld tax Part II – 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. 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. VAT Ruling Conclusion: Factor Determination Are the audit services benefited from in Türkiye? Yes (accreditation audits conducted in Türkiye) Is the service subject to VAT? Yes (import of service) Who is liable for VAT payment? The taxpayer as a withholding agent Which VAT return to file? 2 No. VAT Return (if the US company has no presence in Türkiye) Alternative (if US company has presence in Türkiye) 1 No. VAT Return (by the US company) Part III – Stamp Tax Analysis Stamp Tax Law No. 488 Article 1: Documents listed in the attached tables are subject to stamp tax. Article 3: The taxpayer is the person signing the documents. Table I, Section IV/1(a): Receipts and discharge documents issued by individuals to official institutions for payments made for goods and services (including advances) are subject to proportional stamp tax. Definition of “Official Institution” (Article 8): General and special budget administrations, provincial special administrations, municipalities, and villages. Economic enterprises attached to these institutions with separate legal personality are not considered official institutions. Ruling Conclusion – Stamp Tax: Factor Determination Is the taxpayer an “official institution”? Yes (Secretariat General) Is the payment for services? Yes (accreditation audit services) Is stamp tax applicable? Yes – payments made by official institutions for services are subject to stamp tax under Table I, Section IV/1-a Summary Table Tax Type Applicability Rate / Notes Corporate Tax (Withholding) Yes (if PE or ≥183 days in Türkiye) – applied at payment, refundable if conditions not met 20% VAT Yes – benefited from in Türkiye (import of service) Standard rate – 2 No. VAT Return (if no presence in Türkiye) Stamp Tax Yes – since the payer is an official institution Proportional stamp tax (Table I, IV/1-a) Required Documentation for Treaty Benefits To benefit from the treaty provisions (exemption from withholding tax or refund), the US resident company must: Obtain a Certificate of Residency from the competent US authorities (IRS) proving that it is fully liable to tax in the USA 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. Important Notes The key question for corporate withholding tax is whether the US company has a permanent establishment in Türkiye (through personnel performing services for ≥183 days). At the time of payment, the withholding agent must apply 20% withholding tax because the duration is unknown. If it is later determined that the 183-day threshold was not met, the US company may apply for a refund. VAT applies because the services are benefited from in Türkiye. The taxpayer must file a 2 No. VAT Return (unless the US company has a presence in Türkiye). Stamp tax applies because the payer is an official institution. 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.