Ruling Number: 62030549-120[23-2015/41]-92664 Introduction In a private ruling dated November 9, 2015, the Istanbul Tax Office (Taxpayer Services Income Taxes Group Directorate) addressed the taxation of wages earned in foreign currency from a foreign employer. The taxpayer stated that they are a Turkish citizen residing in Türkiye. They entered into an employment contract with a US resident company to expand its customer network in the Middle East and Africa and to coordinate relationships with existing and potential customers in those countries. The US resident company has no production, sales, or marketing activities in Türkiye. The wages will be paid in foreign currency from the United States. The taxpayer requested clarification on whether: The wages are exempt under Article 23, paragraph 14 of the Income Tax Law No. 193, The wages are subject to income tax under Article 15 (Dependent Personal Services) of the Türkiye-US Double Taxation Treaty, and An annual income tax return is required. Legal Framework – Domestic Law Income Tax Law (Law No. 193) Article 1 – Scope: Real persons’ incomes are subject to income tax. Income is the net amount of earnings and proceeds obtained by a real person during a calendar year. Article 3 – Full Liability: The following real persons are taxed on their worldwide income (both within and outside Türkiye): 1. Those resident in Türkiye; 2. Turkish citizens residing abroad who are affiliated with official institutions or organizations whose headquarters are in Türkiye (provided that if they are subject to income tax or a similar tax abroad, they are not taxed again in Türkiye on those earnings). Article 4 – Residence in Türkiye: The following persons are considered resident in Türkiye: Those whose domicile is in Türkiye; Those who stay continuously in Türkiye for more than six months in a calendar year (temporary absences do not interrupt the period). Article 23(14) – Exemption for Wages Paid in Foreign Currency: Wages paid in foreign currency to employees working for employers subject to limited liability (whose legal and business centers are not located in Türkiye) from the employer’s profits earned outside Türkiye are exempt from income tax. Article 95 – Wages Not Subject to Withholding Tax: Employees who receive their wages directly from an employer in a foreign country must declare such wage income through an annual income tax return. Conditions for Exemption Under Article 23(14) According to the Income Tax Law and Serial No. 147 of the Income Tax General Communiqué, the following conditions must be met simultaneously for the exemption to apply: No. Condition 1 The employer is a limited liability corporation (legal and business centers not in Türkiye) 2 The limited liability employer does not engage in any activities in Türkiye that would generate income 3 The individual working for the limited liability employer is an employee and the payment is wages 4 The payment to the employee in Türkiye is made from the employer’s foreign earnings 5 The wages are paid in foreign currency 6 The wages are not recorded as an expense in the employer’s Turkish accounts Double Taxation Treaty Provisions Türkiye-US Double Taxation Treaty (Effective January 1, 1998 – entered into force December 19, 1997) Article 15 – Dependent Personal Services: 1. Subject to Articles 16, 18, 19, and 20, 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 Contracting State. If the employment is exercised in the other State, such income may be taxed in that other State. 2. Notwithstanding paragraph 1, income derived by a resident of one Contracting State from employment exercised in the other Contracting 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 continuous 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 permanent establishment or fixed base that the employer has in the other State. Ruling Conclusion Step 1 – Residency Status The taxpayer is a Turkish citizen residing in Türkiye. Under Article 4 of the Income Tax Law, they are considered a resident of Türkiye (full liability taxpayer). Step 2 – Application of Article 23(14) Exemption The taxpayer requested exemption under Article 23(14). However, the ruling concludes that the exemption does not apply. Reason: The wages are paid for services rendered outside Türkiye (in the Middle East and Africa). The exemption under Article 23(14) is generally intended for wages paid to employees working within Türkiye for foreign employers whose income is derived from foreign sources. The taxpayer’s services are performed abroad, so the exemption is not available. Condition for Exemption Met? Employer is limited liability (legal/business centers not in Türkiye) Yes (US resident company) Employer has no income-generating activities in Türkiye Yes Payment is wages Yes Payment made from foreign earnings Yes Payment in foreign currency Yes Wages not recorded as expense in Turkish accounts Yes (presumably) Services performed in Türkiye? No (services performed in Middle East/Africa) Conclusion: The exemption under Article 23(14) does not apply because the services are not performed within Türkiye. Step 3 – Treaty Application (Article 15) Under Article 15(1) of the Türkiye-US DTT, since the taxpayer is a resident of Türkiye and the employment is not exercised in the US (it is exercised in the Middle East and Africa), the taxing right belongs only to Türkiye. The exception under Article 15(2) (taxable only in the first-mentioned State) does not apply because the employment is not exercised in the other State (the US). Step 4 – Domestic Tax Treatment Since: The taxpayer is a full liability resident of Türkiye, The wages are from a foreign employer (no withholding tax applied in Türkiye), and The wages are subject to tax in Türkiye, the taxpayer must: File an annual income tax return within the period specified in Article 92 of the Income Tax Law, Declare the wages (converted to Turkish Lira at the applicable exchange rate), and Pay income tax according to the progressive tax brackets (Articles 103 and 104). Summary Table Question Answer Is the taxpayer a resident of Türkiye? Yes (domicile in Türkiye) Does the Article 23(14) exemption apply? No (services performed outside Türkiye) Does the US have the right to tax the wages? No (employment not exercised in the US) Does Türkiye have the right to tax the wages? Yes Will withholding tax be applied in Türkiye? No (employer is not a Turkish resident) Is an annual income tax return required? Yes When must the return be filed? Within the period specified in Article 92 (typically March of the following year) 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. Legal Notice: The information in this article is intended for information purposes only. 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