Ruling Number: 38418978-125[30-16/11]-271752 Introduction In a private ruling dated July 26, 2017, the Ankara Tax Office (Taxpayer Services Income Taxes Group Directorate) addressed the taxation of services received from a Moldovan resident company for the development of visual designs, bug detection, and testing of an online game. The taxpayer stated that their company operates in the field of game program development in Türkiye. They receive remote services from a Moldovan resident company without any physical contact and without the company’s employees coming to Türkiye. The services involve the development of visual designs for an online game, detection of bugs, and testing required to resolve them. The taxpayer’s company also contributes by developing ideas on how the game should function and ensuring it operates smoothly. The taxpayer requested clarification on: Whether this service should be characterized as commercial income or professional service income, and If characterized as professional service income, whether corporate withholding tax is required under the Türkiye-Moldova Double Taxation Treaty. 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 3(3)(c): Professional service income derived in Türkiya constitutes corporate income subject to limited liability taxation. 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-Moldova Double Taxation Treaty (Effective January 1, 2001) 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 individual has a fixed base regularly available in the other State for performing the activities. If the individual 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. Note on “Fixed Base”: The term “fixed base” is not explicitly defined in the treaty but is interpreted similarly to “permanent establishment” under Article 5 (Permanent Establishment). The difference is that: “Permanent establishment” is used for commercial and industrial activities (Article 7), “Fixed base” is used for professional services (Article 14). Article 5 – Permanent Establishment: Defines when a permanent establishment exists in the other State. Article 12 – Royalties (Paragraphs 2 and 3): 2. Royalties arising in one State and paid to a resident of the other State may be taxed in that other State. However, such royalties may also be taxed in the State in which they arise. But if the beneficial owner is a resident of the other State, the tax charged shall not exceed 10% of the gross amount of the royalties. 3. The term “royalties” includes payments for the use of, or the right to use, any copyright, patent, trademark, design, plan, secret formula, manufacturing process, know-how, or industrial, commercial, or scientific equipment. Article 22 – Elimination of Double Taxation (Paragraph 2): Taxes paid in Türkiye may be credited against Moldovan tax on the same income. Ruling Conclusion Step 1 – Characterization of the Services Factor Determination Nature of services Development of visual designs, bug detection, testing for an online game Does the service involve the transfer of intangible rights? Potentially – if the Moldovan company transfers design rights or know-how Characterization Professional service income (if no intangible rights transfer) Alternative characterization Royalties (if intangible rights are transferred – Article 12) Step 2 – Application of Article 14 (Professional Services) Factor Determination Does the Moldovan company have a fixed base in Türkiye? No (services performed remotely, no employees in Türkiye) Taxing right under Article 14 Only Moldova Withholding tax required in Türkiye? No Conclusion: If the services are general professional services (no transfer of intangible rights), and the Moldovan company has no fixed base in Türkiye, the income is taxable only in Moldova. No withholding tax is required in Türkiye. Step 3 – Alternative: Royalties (If Intangible Rights are Transferred) If the Moldovan company transfers design rights, copyrights, or know-how related to the game, the payments may be characterized as royalties under Article 12. Factor Determination Characterization Royalties (Article 12) Türkiye’s taxing right Yes (source State – up to 10%) Withholding tax required in Türkiye? Yes – 10% Summary Table Scenario Characterization Fixed Base in Türkiye? Taxing Right Withholding Tax in Türkiye? Rate 1 General professional services No Only Moldova No 0% 2 General professional services Yes Both Türkiye and Moldova Yes 20% 3 Royalties (intangible rights transfer) N/A Both Türkiye and Moldova Yes 10% Required Documentation for Treaty Benefits To benefit from the treaty provisions (exemption from Turkish withholding tax or reduced royalty rate), the Moldovan resident company must: Obtain a Certificate of Residency from the competent Moldovan authorities proving that it is fully liable to tax in Moldova 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) will apply. Important Notes The key distinction is whether the services involve general professional services (Article 14) or royalties (Article 12 – transfer of intangible rights such as copyright, design, or know-how). Since the Moldovan company performs the services remotely without employees in Türkiye, it does not have a fixed base in Türkiye. Therefore, under Article 14, the income is taxable only in Moldova. If the services involve the transfer of intangible rights (e.g., copyrights, designs, know-how), the payments may be characterized as royalties and subject to 10% withholding tax in Türkiye. 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.