Ruling Number: 62030549-125[30-2015/422]-235988 Introduction In a private ruling dated August 4, 2017, the Istanbul Tax Office (Taxpayer Services Income Taxes Group Directorate) addressed whether corporate withholding tax applies to payments made for services received from a Dutch resident group company. The taxpayer stated that they receive various services from a Dutch resident group company under a service agreement. The services are provided without the Dutch company coming to Türkiye, and include general services, human resources consultancy, finance, planning, control, strategy, corporate communications, general marketing, quality, environment, health and safety, production coordination and logistics, procurement coordination, technology and engineering, geographic business development, information management, and legal and tax services. The taxpayer requested clarification on whether withholding tax applies to payments made to the limited liability foreign company. Part I – Corporate Tax Withholding Analysis 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 Türkiya . Article 3(3)(c): Professional service income derived in Türkiye constitutes corporate income subject to limited liability taxation . Article 3(3)(e): Other income and proceeds derived in Türkiye also constitute corporate income subject to limited liability taxation . Article 30 – Withholding Tax for Limited Liability Taxpayers: Type of Income Withholding Tax Rate Professional service income (petroleum exploration) 5%  Other professional service income 20%  Intangible rights (royalties) 20%  Note: Under Article 30, payments falling within the scope of commercial income are not subject to withholding tax . Double Taxation Treaty Provisions Türkiye-Netherlands Double Taxation Treaty (Effective January 1, 1989) Article 14 – Professional Services (Paragraph 2): Income derived by an enterprise of one Contracting State from professional services or other independent activities shall be taxable only in that State unless the services are exercised in the other Contracting State. If exercised in the other State, the income may also be taxed in that other State if: (a) The enterprise has a permanent establishment in the other State for performing the services; or (b) The services are performed for a period or periods exceeding 183 days in any continuous 12-month period . Note on Withholding: In both cases (PE or 183-day rule), Türkiye may tax the income by withholding. However, the recipient may elect to be taxed on a net basis under Article 7 as if the income were attributable to a 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. 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 23 – Elimination of Double Taxation: For residents of the Netherlands, taxes paid in Türkiye on royalties are credited against Dutch tax on the same income . Part II – Transfer Pricing Analysis Corporate Tax Law (Law No. 5520) – Article 13 – Transfer Pricing: Concept Explanation Related parties Corporations and their shareholders, or persons with direct/indirect control or influence  Arm’s length principle Prices must be set as if the parties were unrelated Consequence If not at arm’s length, profits may be recharacterized as disguised profit distribution Group Services Analysis: For a service to be recognized as a “group service,” the following must be met: The service must be actually provided , The recipient must have a need for the service , The price must be at arm’s length , An appropriate allocation key must be used . Conclusion: The taxpayer must ensure that: There is a real need for the services, The services are actually provided, The service fee is at arm’s length, The allocation keys used are appropriate . If these conditions are not met, transfer pricing adjustments may apply . Part III – Ruling Conclusion – Withholding Tax The ruling draws a distinction between professional services and royalty payments: Scenario 1 – Professional Services (No PE in Türkiye, Services Performed Abroad) Factor Determination Nature of services Professional services (consultancy, management, coordination, etc.)  Where are the services performed? Netherlands (without entering Türkiye)  Does the Dutch company have a PE in Türkiye? No  Are services performed in Türkiye for ≥183 days? No  Taxing right under Article 14 Only the Netherlands  Corporate withholding tax required in Türkiye? No Scenario 2 – Royalty Payments Factor Determination Nature of services Involves license, intellectual property, know-how, or industrial/commercial equipment use  Characterization Royalties (Article 12)  Treaty rate 10% (Article 12(2))  Corporate withholding tax required in Türkiye? Yes – 10%  Part IV – Summary Table Scenario Service Type PE in Türkiye? 183-Day Rule? Withholding Tax in Türkiye? Rate 1 Professional services (abroad) No No No 0% 2 Professional services (Türkiye) Yes Yes Yes 20% 3 Royalties (intangible rights, know-how, etc.) N/A N/A Yes 10% (treaty) / 20% (domestic without certificate) Required Documentation for Treaty Benefits To benefit from the treaty provisions (exemption from Turkish withholding tax for professional services or the 10% reduced rate for royalties), the Dutch resident company must: Obtain a Certificate of Residency from the competent Dutch authorities proving that it is fully liable to tax in the Netherlands 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 will apply instead of the treaty provisions . Important Notes The key question for corporate withholding tax is whether the Dutch company has a permanent establishment in Türkiye or whether the services are performed in Türkiye for 183 days or more . If the services involve intellectual property, know-how, or industrial equipment, the payments may be characterized as royalties and subject to 10% withholding tax under the DTT . Transfer pricing rules apply because the companies are related parties (group companies). The taxpayer must ensure the service fees are at arm’s length . 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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