Ruling Number: 38418978-125[30-15/9]-113996 Introduction In a private ruling dated June 3, 2016, the Ankara Tax Office (Taxpayer Services Income Taxes Group Directorate) addressed the taxation of technical support services provided by a Czech resident company to a Turkish client under a contract for the evaluation of construction license application documents. The taxpayer (a Czech resident company) stated that their Turkish client intended to withhold 20% from all invoices regardless of whether the services were provided in Türkiye or the Czech Republic. The taxpayer argued that this treatment violates Articles 5 and 7 of the Türkiye-Czech Republic Double Taxation Treaty. The taxpayer provided documentation of its Czech tax residency and provided information about its Turkish establishment that performs the portion of services to be delivered in Türkiye. The taxpayer requested clarification on the correct tax treatment. Part I – Domestic Law (Corporate Tax 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)(a): Commercial income derived by foreign corporations having a place of business or permanent representative in Türkiye. Article 3(3)(c): Professional service income derived in 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% Part II – Double Taxation Treaty Provisions Türkiye-Czech Republic Double Taxation Treaty (Effective January 1, 2004) Article 5 – Permanent Establishment (Paragraph 3(b)): The term “permanent establishment” also includes: (b) The provision of services (including consultancy or management services) by an enterprise of one Contracting State through its employees or other personnel, where such activities continue for a period or periods aggregating more than six months (183 days) in any 12-month period. 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. Article 12 – Royalties (Paragraphs 2 and 4): 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. 4. If the beneficial owner carries on business through a PE in the other State and the right or asset giving rise to the royalty is effectively connected with that PE, then Article 7 shall apply instead of Article 12. Article 15 – Dependent Personal Services (Paragraphs 1 and 2): 1. Salaries, wages, and other similar income derived by a resident of one Contracting State in respect of employment shall be taxable only in that State unless the employment is exercised in the other State. If exercised in the other State, such income may be taxed in that other State. 2. Notwithstanding paragraph 1, income derived from employment exercised in the other State shall be taxable only in the first-mentioned State if: (a) The recipient stays in the other State for a period or periods not exceeding 183 days in any 12-month period; (b) The payment is made by or on behalf of an employer who is not a resident of the other State; and (c) The payment is not borne by a PE or fixed base that the employer has in the other State. Protocol Article 2 – Calculation of 183 Days for Article 15: The following days shall be included in calculating the 183-day period: (a) All days physically present, including arrival and departure days; (b) Saturdays, Sundays, national holidays, and vacation days spent outside the State where the activity is performed but in connection with continued activity in that State, as well as days spent on business trips directly related to employment in that State. Article 22 – Elimination of Double Taxation: Taxes paid in Türkiye may be credited against Czech tax on the same income. Part III – Ruling Conclusion – Services Provided in Türkiye Factual Determination: The contract had a planned duration of 24 months, and the taxpayer would maintain an administrative contact person and two continuous experts in Ankara (under Work Package 1). This exceeds the 6-month (183-day) threshold under Article 5(3)(b). Factor Determination Duration of services in Türkiye 24 months (exceeds 6 months / 183 days) Does this create a PE in Türkiye under Article 5(3)(b)? Yes Taxing right under Article 7 Türkiye may tax profits attributable to the PE Withholding tax treatment Services are professional services in nature → 20% withholding tax on payments attributable to Türkiye-performed services Part IV – Services Provided in Czech Republic (No Personnel in Türkiye) Factor Determination Location of service performance Czech Republic (entirely) Does this create a PE in Türkiye? No Taxing right Only Czech Republic Withholding tax in Türkiye? No Important: If a work package (İş Paketi) can be separated into distinct Czech-performed and Türkiye-performed portions, and the Czech portion can be performed independently, then: Czech-performed portion: No Turkish tax Türkiye-performed portion: Subject to 20% withholding tax If the Czech-performed portion cannot be separated from the Türkiye-performed portion (i.e., it is complementary and not independent), then the entire work package may be subject to Turkish taxation. Part V – Know-How / Royalty Characterization Certain services under the contract may constitute transfer of know-how (industrial, commercial, or scientific experience): Service Type Potential Characterization IP1: Continuous senior and senior technical experts in Ankara Professional services (PE) IP3: Technical training to Turkish personnel Know-how transfer IP8: Review of differences between reference plant and ANS and safety impact assessment Know-how transfer If characterized as know-how (royalties): Factor Determination Treaty article Article 12 (Royalties) Withholding tax rate 10% Exception (Article 12(4)) If the know-how is effectively connected with a PE in Türkiye → taxed under Article 7 (Business Profits) instead Part VI – Taxation of Employee Wages (Czech Personnel Assigned to Türkiye) Scenario A – Same Personnel Throughout the Project (e.g., 2 continuous experts for 24 months) Factor Determination Stay in Türkiye 24 months (exceeds 183 days) Condition (a) of Article 15(2) Not met (stay >183 days) Taxing right under Article 15(1) Türkiye may tax the wages Turkish tax treatment Wages subject to Turkish income tax (withholding by employer or annual return by employee) Scenario B – Different Personnel Rotated (e.g., multiple experts, each staying less than 183 days) Factor Determination Stay in Türkiye for each person Calculated individually (arrival/departure days, weekends, holidays, business trip days all included – Protocol Article 2) Condition (a) of Article 15(2) Met if each person ≤183 days Conditions (b) and (c) Presumably met (Czech employer, no PE in Türkiye for employment purposes) Taxing right Only Czech Republic (no Turkish tax on wages) Scenario C – Administrative Personnel Based in Ankara (e.g., administrative contact for invoicing and communication) Factor Determination Nature of position Based in Ankara, performing ongoing administrative functions Taxing right Only Türkiye (under Article 15(1) – employment exercised in Türkiye) Turkish tax treatment Subject to Turkish income tax Summary Table Type of Income / Service Location / Condition Characterization Treaty Article Withholding Tax in Türkiye? Rate Technical support services performed in Türkiya (≥6 months) Türkiye (PE created) Business profits / Professional services Art. 7 Yes 20% Technical support services performed in Czech Republic (no personnel in Türkiye) Czech Republic Business profits Art. 7 No 0% Know-how transfer (e.g., training, expertise) Any (if no PE connection) Royalties Art. 12 Yes 10% Know-how transfer (if connected to PE in Türkiye) Türkiye (PE) Business profits Art. 12(4) → Art. 7 Yes 20% (or PE attribution) Wages – same personnel ≥183 days in Türkiye Türkiye Dependent personal services Art. 15(1) Yes Turkish income tax Wages – different personnel each <183 days Türkiye (rotated) Dependent personal services Art. 15(2) No (taxable only in Czech Republic) 0% Wages – administrative personnel based in Ankara Türkiye Dependent personal services Art. 15(1) Yes Turkish income tax Required Documentation for Treaty Benefits To benefit from the treaty provisions, the Czech resident company and its personnel must: Obtain a Certificate of Residency from the competent Czech authorities proving that they are fully liable to tax in the Czech Republic on their worldwide income. Provide the original certificate along with a notarized or Turkish Consulate-certified Turkish translation to the withholding agent (Turkish client) or the relevant tax office. Important Notes The 24-month project duration automatically creates a PE in Türkiye under Article 5(3)(b) for the portion of services performed in Türkiye. The Turkish client’s proposed flat 20% withholding on all invoices without distinguishing between Türkiye-performed and Czech-performed services is not correct under the DTT. For services performed entirely in the Czech Republic, Türkiye has no taxing right. For wages, the 183-day calculation for each employee must include arrival/departure days, weekends, holidays, and business trip days (Protocol Article 2). 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.