Ruling Number: B.07.1.GİB.4.34.16.01-120[23-2015/10]-123944 Introduction In a private ruling dated May 5, 2017, the Istanbul Tax Office (Taxpayer Services Income Taxes Group Directorate) addressed whether wages paid in foreign currency from a Chinese resident company are exempt from income tax under Article 23, paragraph 14 of the Income Tax Law No. 193. The taxpayer stated that they work as a Field Application Engineer responsible for Türkiye and the Middle East for a Chinese electronic communication module manufacturer. The Chinese company has no legal business center, office, or establishment in Türkiye. The company’s products are sold in Türkiye through distributors. The taxpayer provides engineering support to companies in Türkiye and the Middle East that have purchased the products and require technical assistance, traveling to these countries as needed. When not traveling, the taxpayer works from home. The taxpayer’s salary and expenses are paid in Euros to their bank account in Türkiye by the Chinese company. The taxpayer requested clarification on whether the wages (which are not taxed in China) are exempt under Article 23(14) of the Income Tax Law. Part I – Domestic Law Analysis Income Tax Law (Law No. 193) Article 1 – Scope: Real persons’ incomes are subject to income tax. Article 3(1)(1) – Full Liability: Real persons resident in Türkiye are taxed on their worldwide income (both within and outside Türkiye). 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. 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 61 – Definition of Wages: Wages are cash, benefits in kind, and other advantages provided to employees dependent on an employer and affiliated with a specific workplace in return for services. Article 86(1)(b) – No Annual Return Required (Full Liability Taxpayers): No annual return is required for wages from a single employer that have been subject to withholding tax (subject to certain thresholds). Article 94(1)(1) – Withholding Tax Obligation: Withholding tax applies to wages paid to employees. Article 95(1)(1) – Wages Not Subject to Withholding Tax: Employees who receive their wages directly from an employer in a foreign country are not subject to withholding tax. Such persons must declare their income through an annual income tax return. Part II – Conditions for Exemption Under Article 23(14) According to Income Tax General Communiqué No. 147 (Section 1-c) , the following conditions must be met simultaneously for the exemption to apply: No. Condition Met? 1 The employer is a limited liability corporation (legal and business centers not in Türkiye) and does not engage in any activities in Türkiye that would generate income No – The Chinese company sells products through distributors in Türkiye and benefits from the taxpayer’s after-sales technical support services, which are part of the company’s core activities 2 The individual working for the limited liability employer is an employee and the payment is wages Yes 3 The payment to the employee in Türkiye is made from the employer’s foreign earnings Yes (presumably) 4 The wages are paid in foreign currency Yes (Euros) 5 The wages are not recorded as an expense in the employer’s Turkish accounts Yes (presumably) Key Issue: Condition No. 1 is not met because the Chinese company’s products are sold in Türkiye through distributors, and the taxpayer provides after-sales technical support to customers in Türkiye and the Middle East. This technical support is an integral part of the company’s core business activity and cannot be separated from it. Therefore, the company is deemed to be engaged in income-generating activities in Türkiye (even if indirectly through the taxpayer’s services). Conclusion: The exemption under Article 23(14) does not apply. Part III – Double Taxation Treaty Analysis Türkiye-China Double Taxation Treaty (Entered into force January 20, 1997, effective January 1, 1998) Article 15 – Dependent Personal Services (Paragraph 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 Contracting State. If the employment is exercised in the other State, such income may be taxed in that other State. Ruling Conclusion – Treaty Analysis: Factor Determination Taxpayer’s residency Türkiye (under Article 4 – resident of Türkiye) Where is the employment exercised? Türkiye and Middle East (primarily from home in Türkiye) Taxing right under Article 15(1) Türkiye (unless employment is exercised in China) Does China have the right to tax? No (employment is not exercised in China) Note: If the taxpayer performs services in other Middle Eastern countries, the tax treatment would depend on whether Türkiye has a double taxation treaty with each such country. Part IV – Annual Return Requirement Since the wages are paid by a foreign employer (Chinese company) and are not subject to withholding tax in Türkiye: Factor Determination Is the salary subject to withholding tax in Türkiye? No (foreign employer – Article 95) Annual return required? Yes – the taxpayer must file an annual income tax return What must be declared? The full salary amount (converted to TL at the applicable exchange rate) Summary Table Question Answer Is the taxpayer a resident of Türkiye? Yes (domicile in Türkiye) Does the Article 23(14) exemption apply? No (the employer engages in income-generating activities in Türkiye via the taxpayer’s after-sales support) Does China have the right to tax the wages? No (employment not exercised in China) Does Türkiye have the right to tax the wages? Yes Is the salary subject to withholding tax in Türkiye? No (foreign employer) Is an annual income tax return required? Yes How should the return be filed? By the taxpayer, declaring the full salary amount (in TL) with the tax office where their domicile is located Important Notes The key reason the Article 23(14) exemption does not apply is that the Chinese company does engage in income-generating activities in Türkiye (selling products through distributors and providing after-sales technical support). The taxpayer’s technical support services are an integral part of the company’s business and cannot be separated from its core activities. The taxpayer is a full liability taxpayer (resident of Türkiye) and must declare the wages in Türkiye. Since the employer is foreign, no withholding tax is applied in Türkiye, and the taxpayer must self-assess and file an annual return. If the taxpayer performs services in other Middle Eastern countries, the tax treatment may vary depending on whether a double taxation treaty exists with each country. 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. 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