Ruling Number: B.07.1.GİB.4.34.16.01-125-169705 Introduction In a private ruling dated June 14, 2017, the Istanbul Tax Office (Taxpayer Services Income Taxes Group Directorate) addressed whether taxes paid in Egypt on know-how service income can be set off against corporate tax and corporate provisional tax in Türkiye. The taxpayer stated that their company will provide know-how services to an Egyptian resident company regarding their own production methods and technology for ring manufacturing. Payment will be made per gram of product produced. Taxes will be withheld in Egypt on these payments. The taxpayer has no partnership or shareholding in the Egyptian company. The taxpayer requested clarification on: Whether the amount withheld in Egypt can be set off against corporate provisional tax and corporate income tax in Türkiye, and What documents are required from the relevant country to claim the setoff. Domestic Law – Corporate Tax Law (Law No. 5520) Article 3 – Full Liability: Corporations whose legal or business center is located in Türkiye are taxed on their worldwide income . Article 33 – Setoff of Taxes Paid Abroad: (1) Corporate income taxes and similar taxes paid abroad on profits derived in foreign countries and transferred to the general results accounts in Türkiye may be deducted from the corporate income tax levied on such profits in Türkiye . (4) The amount that may be set off against corporate tax levied in Türkiye on foreign income shall not exceed the amount calculated by applying the corporate tax rate specified in Article 32 to the foreign income earned. Within this limit, taxes that cannot be fully or partially deducted in the accounting period in which the related income is transferred to the general results accounts in Türkiye may be deducted until the end of the third accounting period following that period. (5) If foreign income is earned during a provisional tax period, taxes paid in the country where the income is earned (by withholding or otherwise) may also be set off against the provisional tax calculated for that period. The deductible amount shall not exceed the amount calculated by applying the provisional tax rate specified in Article 32 to the foreign income earned. (6) Taxes paid abroad shall not be deducted from taxes levied in Türkiye unless proven with documents certified by the competent authorities of the foreign country and authenticated by Turkish embassies or consulates (or by similar representatives of the country protecting Turkish interests). (7) If the documents proving the payment of taxes abroad cannot be submitted at the time of assessment, the tax paid or to be paid abroad shall be calculated at the rate applicable in that country (not exceeding the corporate tax rate in Article 32), and the portion of the assessment corresponding to this amount shall be deferred. If the required documents are submitted to the relevant tax office within one year from the assessment date, the assessment shall be adjusted according to the definitive amount stated in the documents. (8) If documents are not submitted within this period without justifiable cause, or if it is determined that the right to setoff is lower than the deferred tax amount, default interest shall be calculated on the deferred taxes. Double Taxation Treaty Provisions Türkiye-Egypt Double Taxation Treaty (Published in Official Gazette No. 22863 on December 30, 1996, effective January 1, 1997) 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. 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 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 22 – Methods for Elimination of Double Taxation (Paragraph 1): Where a resident of one Contracting State derives income which, in accordance with this Treaty, may be taxed in the other Contracting State, the first-mentioned State shall allow as a credit against its tax on the income of that resident an amount equal to the tax on income paid in that other State. However, such credit shall not exceed the amount of tax calculated before the credit on the income that may be taxed in that other State. Ruling Conclusion Step 1 – Characterization of the Payment The taxpayer will provide know-how services regarding their production methods and technology for ring manufacturing. Such payments are characterized as royalties under Article 12(3) of the Türkiye-Egypt DTT (payments for know-how / industrial, commercial, or scientific experience). Step 2 – Taxing Rights Under the DTT State Taxing Right Türkiye (residence State) Yes – Türkiye has the right to tax the income Egypt (source State) Yes – Egypt may tax up to 10% under Article 12(2) Step 3 – Setoff of Egyptian Taxes in Türkiye Factor Determination Can Egyptian taxes be set off? Yes – under Article 33 of Corporate Tax Law and Article 22 of the DTT Against which taxes? Corporate income tax and corporate provisional tax Limitation on setoff Cannot exceed the Turkish tax on the same income (corporate tax rate – 20%) Documentation required Certified documents proving tax payment in Egypt, authenticated by Turkish embassies/consulates Required Documentation for Setoff Under Article 33(6) of the Corporate Tax Law, the following documents are required to claim the setoff: Tax payment certificate from the competent Egyptian authorities. Authentication by Turkish embassies or consulates (or by similar representatives of the country protecting Turkish interests). If documents cannot be submitted at the time of assessment: The foreign tax amount shall be calculated at the rate applicable in that country (not exceeding 20%). The assessment corresponding to this amount shall be deferred. Documents must be submitted within one year from the assessment date. If documents are not submitted within the deadline: Default interest shall be calculated on the deferred taxes. Summary Table Question Answer What is the nature of the service? Know-how (royalty) Does Egypt have the right to tax? Yes – up to 10% (Article 12(2)) Does Türkiye have the right to tax? Yes (full liability taxpayer) Can Egyptian taxes be set off in Türkiye? Yes Against which Turkish taxes? Corporate income tax and corporate provisional tax Limitation on setoff Cannot exceed Turkish tax on the same income Required documents Certified tax payment certificate from Egypt, authenticated by Turkish consulate Deadline for document submission Within one year from assessment date (if deferred) Required Documentation for Treaty Benefits To benefit from the treaty provisions (including the 10% reduced rate in Egypt), the taxpayer must obtain a Certificate of Residency from the Turkish tax authorities and submit it to the Egyptian tax authorities. Important Notes The know-how service income is characterized as royalties under the DTT. Egypt may withhold tax up to 10% of the gross amount. The taxpayer may claim a foreign tax credit in Türkiye for the Egyptian taxes paid. The setoff cannot exceed the Turkish tax attributable to the same income (20% corporate tax rate). Proper documentation is critical – without certified and authenticated documents, the setoff is not allowed. 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. 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