Ruling Number: 38418978-125[30-14/17]-1246 Introduction In a private ruling dated November 9, 2015, the Ankara Tax Office (Taxpayer Services Income Taxes Group Directorate) addressed the taxation of services related to the physical infrastructure required for the operation of servers obtained from a Canadian resident company. The taxpayer stated that they are engaged in mining activities and intend to purchase certain services from a Canadian resident hosting company (operating in the cloud computing sector) to provide the physical infrastructure necessary for the operation of servers. The taxpayer requested clarification on whether withholding tax is required on the payments to be made to the Canadian resident company for these services. Legal Framework – 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) – Income Subject to Limited Liability: (a) Commercial income derived by foreign corporations having a place of business or permanent representative in Türkiye; (c) Professional service income derived in Türkiye; (e) Other income and proceeds derived in Türkiye. Article 22 – Determination of Limited Liability Corporate Income: Paragraph 1: For income derived by limited liability corporations through a place of business or permanent representative, the provisions applicable to full liability corporations apply unless otherwise specified. Paragraph 2: For income other than commercial or agricultural income, the provisions of the Income Tax Law apply. However, if such income is derived within the scope of a commercial or agricultural activity carried on in Türkiye, corporate income shall be determined under paragraph 1. Article 30 – Withholding Tax for Limited Liability Taxpayers: Type of Income Withholding Tax Rate Professional service income (petroleum exploration) 5% Professional service income (other) 20% Intangible rights (copyrights, patents, trademarks, know-how, etc.) 20% Important: Commercial income is not listed among income subject to withholding tax. Double Taxation Treaty Provisions Türkiye-Canada Double Taxation Treaty (Effective January 1, 2012 – published in Official Gazette No. 27919 on April 29, 2011) Article 12 – Royalties: 1. Royalties 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 royalties may also be taxed in the State in which they arise, according to its domestic laws. 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 of any kind for the use of, or the right to use: Any copyright of literary, artistic, or scientific work (including cinema films and radio or television recordings), Any patent, trademark, design, plan, secret formula, or manufacturing process, Industrial, commercial, or scientific know-how, Industrial, commercial, or scientific equipment. 4. If the beneficial owner of the royalties carries on business in the other State through a permanent establishment and the right or asset giving rise to the royalties is effectively connected with such permanent establishment, then Article 7 (Business Profits) shall apply instead of Article 12. 5. Royalties shall be deemed to arise in the State where the payer is a resident (or has a permanent establishment bearing the liability). Article 5 – Permanent Establishment (Paragraph 3(b)): A permanent establishment shall also include the provision of services (including consultancy services) by an enterprise of one Contracting State through employees or other personnel engaged for such purpose, where such activities continue for a period or periods aggregating more than 183 days in any 12-month period with respect to the same or connected project. Article 7 – Business Profits: Profits of an enterprise of one Contracting State shall be taxable only in that State unless the enterprise carries on business in the other State through a permanent establishment situated therein. Article 23 – Elimination of Double Taxation (Paragraph 1(a)): Taxes paid in Türkiye on income may be credited against Canadian tax on the same income. Ruling Conclusion The ruling distinguishes between two categories of services: Category 1 – Server Provision Services Factor Determination Nature of service Provision of servers (industrial, commercial, or scientific equipment) Characterization under DTT Royalties (Article 12(3) – use of equipment) Domestic withholding tax rate 20% (intangible rights) Treaty reduced rate (Article 12(2)) 10% (maximum) Withholding tax required in Türkiye? Yes (if the Canadian company is the beneficial owner) Applicable rate (with Certificate of Residency) 10% Conclusion: Payments for server provision are characterized as royalties and are subject to withholding tax at 10% under the DTT. Category 2 – Ancillary Services (Technical Support, Updates, Maintenance, Repair, etc.) Scenario Characterization Tax Treatment Ancillary services are included in the server contract and not separately priced Royalties (part of the same transaction) 10% withholding tax (same as Category 1) Ancillary services are separately priced Professional services (Article 5 and 7) Depends on whether a permanent establishment is created in Türkiye For separately priced ancillary services (professional services): Condition Taxing Right Withholding Tax in Türkiye? Services performed in Canada (no PE in Türkiye) Only Canada (Article 7) No Services performed in Türkiye for ≤183 days (no PE) Only Canada No (but withholding agent may not know duration at time of payment) Services performed in Türkiye for >183 days (PE created) Türkiye (Article 5(3)(b)) Yes (20% domestic rate, unless treaty provides otherwise) Determination of 183-Day Period for PE Assessment Under Article 5(3)(b) of the DTT, the 183-day period is determined as follows: If services are provided under the same or connected projects in Türkiye, the stay periods are aggregated (counted as one total period). If services are provided under separate projects, each project’s duration is considered separately. If multiple personnel are sent to Türkiye for the same project, the total stay days of all personnel are aggregated. Practical Implementation for Withholding Agents At the time of payment, the withholding agent cannot know whether the Canadian company will stay in Türkiye for more than 183 days. Therefore, withholding tax must be applied at the time of payment (if the payment is characterized as royalties or professional services subject to withholding). If it is later determined that: The Canadian company had no permanent establishment in Türkiye (stay ≤183 days), and The income should not have been taxed in Türkiye, the Canadian company may apply for a refund of the withheld tax from the relevant tax office. Required Documentation for Treaty Benefits To benefit from the treaty provisions (including the 10% reduced rate), the Canadian resident company must: Obtain a Certificate of Residency from the competent Canadian authorities proving that it is fully liable to tax in Canada on its worldwide income. Provide the original certificate along with a notarized or Turkish Consulate-certified Turkish translation to: The withholding agent (if withholding tax is applied), or The relevant tax office (in other cases). If the Certificate of Residency cannot be provided: Domestic law provisions (20% withholding tax) will apply instead of the treaty provisions. Foreign Tax Credit Under Article 23 of the DTT, taxes paid in Türkiye on these payments may be credited against Canadian tax on the same income. Summary Table Type of Service Characterization Withholding Tax in Türkiye? Rate Server provision (equipment use) Royalties (Art. 12) Yes 10% (with certificate) / 20% (without) Ancillary services (included in contract, not separately priced) Royalties (ancillary) Yes 10% (with certificate) / 20% (without) Ancillary services (separately priced, performed in Canada) Professional services (no PE) No 0% Ancillary services (separately priced, performed in Türkiye, ≤183 days) Professional services (no PE) No (but refund procedure applies) 0% Ancillary services (separately priced, performed in Türkiye, >183 days) Professional services (PE created) Yes 20% (domestic rate) Important Notes 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. 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