Ruling Number: 39044742-130-188318 Introduction In a private ruling dated October 31, 2016, the Istanbul Tax Office (Taxpayer Services VAT Group Directorate) addressed whether withholding tax and VAT apply to payments made for services received from a Bulgarian resident company. The taxpayer stated that personnel from Bulgaria (subject to social security under Bulgarian law) were sent to work on energy project services in Nevşehir and Şanlıurfa. The taxpayer requested clarification on whether VAT and withholding tax should be applied as a withholding agent on the invoices issued for the services provided. 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 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% Double Taxation Treaty Provisions Türkiye-Bulgaria Double Taxation Treaty (Effective January 1, 1998) Article 14 – Professional Services: 1. Income derived by a resident of one Contracting State from professional services or other independent activities shall be taxable only in that State unless the individual has a fixed base regularly available in the other State for performing the activities. If the individual has such a fixed base, the income may be taxed in the other State but only so much as is attributable to that fixed base. 2. The term “professional services” includes independent scientific, literary, artistic, educational, and teaching activities, as well as the independent activities of physicians, lawyers, engineers, architects, dentists, and accountants. Article 15 – Dependent Personal Services: 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 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 permanent establishment or fixed base that the employer has in the other State. Article 22 – Elimination of Double Taxation: Taxes paid in Türkiye may be credited against Bulgarian tax on the same income. Part II – Ruling Conclusion – Consultancy Services (Professional Services) Factor Determination Nature of service Consultancy services for energy projects (professional services) Applicable DTT article Article 14 (Professional Services) Does the Bulgarian company have a fixed base in Türkiye? To be determined based on facts (presence of personnel, office, etc.) Taxing right (if no fixed base) Only Bulgaria Withholding tax required in Türkiye? No (if no fixed base) Taxing right (if fixed base exists) Türkiye may tax (limited to fixed base-attributable income) Withholding tax required (if fixed base exists) Yes (20% domestic rate) Part III – Ruling Conclusion – Wages of Bulgarian Personnel Factor Determination Nature of income Wages (dependent personal services) Applicable DTT article Article 15 Stay in Türkiye To be determined based on actual stay days Conditions of Article 15(2) If all three conditions are met (≤183 days, employer not Turkish resident, payment not borne by a PE in Türkiye), taxable only in Bulgaria If any condition is not met Türkiye may tax the wages Conclusion: The wages of Bulgarian personnel are taxable only in Bulgaria if all three conditions of Article 15(2) are met. If any condition is breached, Türkiye may tax the wages. Part IV – VAT Analysis VAT Law No. 3065 Article 1(1): Supplies and services performed in Türkiye are subject to VAT. Article 6(b): A transaction is deemed performed in Türkiye if the service is performed in Türkiye or benefited from in Türkiye. Article 8: The person performing the service is the taxpayer. Article 9(1): If the taxpayer has no residence, workplace, legal center, or business center in Türkiye, the Ministry may hold the counterparty (recipient) liable for VAT payment. VAT General Application Communiqué (Section I/C-2.1.2.1): For services performed in Türkiye by persons whose residence, workplace, legal center, and business center are not located in Türkiye, as well as services performed abroad but benefited from in Türkiye, VAT shall apply. Since the service provider has no residence, workplace, legal center, or business center in Türkiye, the full amount of VAT shall be declared and paid by the domestic recipient as a withholding agent using the 2 No. VAT Return. VAT Ruling Conclusion: Factor Determination Are the services benefited from in Türkiye? Yes (energy project services in Nevşehir and Şanlıurfa) Is the service subject to VAT? Yes (import of service) Who is liable for VAT payment? The taxpayer as a withholding agent Which VAT return to file? 2 No. VAT Return Can the VAT be deducted as input VAT? Yes (deductible on 1 No. VAT Return) Summary Table Tax Type Service Type / Income Fixed Base / 183-Day Rule Withholding Tax / VAT in Türkiye? Rate Corporate Tax Consultancy services (professional services) If no fixed base No 0% Corporate Tax Consultancy services (professional services) If fixed base exists Yes 20% Income Tax Wages of Bulgarian personnel If all conditions of Art. 15(2) met No (taxable only in Bulgaria) 0% Income Tax Wages of Bulgarian personnel If any condition breached Yes (Turkish tax) Progressive VAT All services N/A Yes (by recipient) Standard rate (18%) – 2 No. VAT Return Required Documentation for Treaty Benefits To benefit from the treaty provisions (exemption from Turkish withholding tax), the Bulgarian resident company and its personnel must: Obtain a Certificate of Residency from the competent Bulgarian authorities proving that they are fully liable to tax in Bulgaria on their 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 (20% withholding tax) will apply instead of the treaty provisions. Important Notes The key question for corporate withholding tax is whether the Bulgarian company has a fixed base in Türkiye (interpreted similarly to permanent establishment). For personnel wages, the 183-day rule is critical. The stay days of all personnel should be monitored. VAT applies because the services are benefited from in Türkiye (import of service). The taxpayer must withhold VAT and file a 2 No. VAT Return. 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. 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