Ruling Number: 62030549-125[30-2015/216]-134881 Introduction In a private ruling dated September 7, 2016, the Istanbul Tax Office (Taxpayer Services Income Taxes Group Directorate) addressed whether withholding tax applies to lease payments made for construction machinery rented from a Georgian resident company. The taxpayer stated that they will bring construction machinery from a Georgian resident company through a lease agreement for use in construction works. Under the contract, the Georgian resident company will issue monthly lease invoices. The taxpayer requested clarification on the withholding tax rate to be applied on the payments made against these invoices. Part I – Domestic Law Analysis 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 3(3)(d) – Income Subject to Limited Liability: Income derived from leasing movable and immovable property and rights in Türkiye constitutes corporate income subject to limited liability taxation. Article 3(4): The determination of whether income is derived in Türkiye and whether a permanent representative exists follows the relevant provisions of the Income Tax Law No. 193. Article 30 – Withholding Tax for Limited Liability Taxpayers (Paragraph 1(c)): Withholding tax applies to real estate capital income (rental income) paid or accrued to limited liability corporations. Council of Ministers Decree No. 2009/14593 – Withholding Tax Rates on Real Estate Capital Income: Type of Lease Withholding Tax Rate Financial leasing activities under Law No. 3226 (now Law No. 6361) 1% All other rental income (including ordinary equipment rental) 20% Transfer Pricing (Article 13 – Corporate Tax Law No. 5520): If the Georgian company is a related party of the taxpayer, the lease payments must be made at arm’s length. If not, they may be recharacterized as disguised profit distribution. Part II – Double Taxation Treaty Analysis Türkiye-Georgia Double Taxation Treaty (Effective January 1, 2011) Article 5 – Permanent Establishment: Defines when a permanent establishment exists in the other State. Article 7 – Business Profits (Paragraph 1): Profits of an enterprise of one Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If it does, the profits may be taxed in the other State but only so much as is attributable to that PE. Part III – Ruling Conclusion Step 1 – Characterization of the Income Factor Determination Nature of the transaction Rental of construction machinery (movable property) Location of use Türkiye (construction works in Türkiye) Characterization under domestic law Real estate capital income (rental income) Step 2 – Domestic Withholding Tax Type of Lease Domestic Withholding Tax Rate Ordinary rental (operating lease) 20% Financial leasing (qualifying under Law No. 6361) 1% Step 3 – Treaty Application (Article 7 – Business Profits) Under Article 7(1) of the Türkiye-Georgia DTT: Factor Determination Does the Georgian company have a PE in Türkiye? To be determined based on facts (if the machinery and personnel create a PE) Taxing right (if no PE) Only Georgia Withholding tax required in Türkiye? No (if no PE) Taxing right (if PE exists) Türkiye may tax PE-attributable profits (at 20% domestic rate) Step 4 – Practical Guidance If the Georgian company simply leases the machinery and has no personnel, office, or fixed base in Türkiye, it is likely that no PE is created. In such a case, Türkiye has no taxing right, and no withholding tax is required. If the Georgian company has personnel in Türkiye operating the machinery, maintains an office, or has a fixed base in Türkiye, a PE may be created. In such a case, Türkiye may tax the profits attributable to the PE (domestic rate: 20%). Summary Table Scenario PE in Türkiye? Taxing Right Withholding Tax in Türkiye? Rate 1 Leasing only (no personnel, no office) No Only Georgia No 0% 2 Leasing with personnel/office/fixed base in Türkiye Yes Türkiye (PE-attributable profits) Yes 20% 3 Financial leasing (qualifying) N/A Depends on PE analysis Yes (if PE) 1% (domestic) Transfer Pricing Consideration Under Article 13 of the Corporate Tax Law No. 5520: If the Georgian company is a related party of the taxpayer, the lease payments must be at arm’s length. If the payments are not at arm’s length, they may be recharacterized as disguised profit distribution, and the Turkish tax authorities may make adjustments. Required Documentation for Treaty Benefits To benefit from the treaty provisions (exemption from Turkish withholding tax), the Georgian resident company must: Obtain a Certificate of Residency from the competent Georgian authorities proving that it is fully liable to tax in Georgia 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 (20% withholding tax) will apply instead of the treaty provisions. Important Notes The key question is whether the Georgian company has a permanent establishment in Türkiye. The ruling does not definitively determine this but provides the framework for analysis. The domestic withholding tax rate for ordinary rental income is 20%. However, if the Georgian company qualifies for the treaty exemption (no PE), no withholding tax is required. If a PE exists, the income is taxed as business profits under Article 7, not as rental income under domestic law (though the effective rate may be 20%). Transfer pricing rules apply if the Georgian company is a related party. 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. Neither MuhasebeNews nor related person or institutions are not responsible for any damages or losses that might occur in consequence of the use of the information in this article by private or formal, real or legal person and institutions.