Ruling Number: 62030549-125[30-2015/210]-13094 Introduction In a private ruling dated February 17, 2016, the Istanbul Tax Office (Taxpayer Services Income Taxes Group Directorate) addressed the withholding tax treatment of interest payments made on loans obtained from a French resident institution where the borrowers are private legal entities (as opposed to public legal entities). The taxpayer, acting as a representative for a French resident bank (fully licensed to conduct banking activities under French law), stated that the bank provides various loans in foreign currency or Turkish Lira to private legal entities in Türkiye. The interest arising from these loan transactions is paid by Turkish private legal entities to the bank. The bank’s Istanbul branch is not a party to these loan contracts and is not involved in any stage of the loan transactions. The taxpayer requested clarification on whether withholding tax applies to the interest income derived by the bank and how to benefit from the Türkiye-France Double Taxation Treaty. 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 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): A 15% withholding tax applies to income and proceeds paid or accrued (including advances) to limited liability corporations. Paragraph 1(d): Withholding tax applies to movable capital income, except for those specified in Article 75(2)(1), (2), (3), and (4) of the Income Tax Law No. 193. Council of Ministers Decree No. 2009/14593 (pursuant to Article 30(8)): Type of Lender Withholding Tax Rate Foreign states, international institutions, or foreign banks, or institutions authorized to lend in their country of residence that lend to all real and legal persons (not just related parties) 0% All other lenders 10% Income Tax Law No. 193 – Article 75(6): Interest on all kinds of receivables (including interest on ordinary, preferred, secured, and promissory note receivables, current account receivables, and interest paid on amounts borrowed and secured by promissory notes) constitutes movable capital income, regardless of its source. Double Taxation Treaty Provisions Türkiye-France Double Taxation Treaty (Effective January 1, 1990) Article 11 – Interest: 1. Interest 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 interest may also be taxed in the State in which it arises, according to its domestic laws. But if the beneficial owner is a resident of the other State, the tax charged shall not exceed 15% of the gross amount of the interest. 4. The term “interest” includes income from government securities, bonds, debentures, and all kinds of receivables, as well as all other income treated as lending income under the tax laws of the State in which it arises. 5. If the beneficial owner carries on business through a permanent establishment in the other State and the receivable giving rise to the interest is effectively connected with such permanent establishment, then Article 7 (Business Profits) or Article 14 (Professional Services) shall apply instead of Article 11. Article 23 – Elimination of Double Taxation (Paragraph 2 – France): 2. In France: (a) Where a resident of France derives income that may be taxed in Türkiye under this Treaty, France shall allow as a credit against the tax on that person’s income an amount equal to the tax on income paid in Türkiye. However, such credit shall not exceed the amount of tax calculated before the credit on the income that may be taxed in Türkiye. (b) For the purposes of subparagraph (a), “income tax paid in Türkiye” includes any amount of tax that would have been payable under Turkish tax law but is subject to exemption, exclusion, or reduction under Turkish incentive legislation aimed at accelerating Türkiye’s economic development. Notwithstanding the preceding sentence, the income tax paid in Türkiye on interest shall be calculated at 15% (as per Article 11(2)) for the purpose of the foreign tax credit. Ruling Conclusion Step 1 – Determine the Domestic Withholding Tax Rate Under Council of Ministers Decree No. 2009/14593: Condition Domestic Withholding Tax Rate The French bank lends to all real and legal persons (not just related parties) and is authorized to lend under French law, AND this status is documented 0% Otherwise (if the above condition is not met) 10% Important: The reduced rates under the Council of Ministers Decree are considered tax incentives aimed at accelerating Türkiye’s economic development. Step 2 – Treaty Maximum Rate Under Article 11(2) of the Türkiye-France DTT, the maximum withholding tax rate on interest is 15%. However, if domestic law provides a lower rate (0% or 10%), the lower rate applies (more favorable to the taxpayer). Step 3 – Apply the Treaty for Foreign Tax Credit in France Under Article 23(2)(b)(iii) of the DTT, for the purpose of claiming a foreign tax credit in France, the interest income is deemed to have been taxed in Türkiye at a rate of 15% (regardless of the actual rate applied under domestic law). Summary Table – Actual vs. Deemed Tax Scenario Actual Domestic Withholding Tax Rate in Türkiye Treaty Maximum Rate Deemed Tax Rate for French Credit Purposes Bank qualifies as authorized lender (lends to all persons) 0% 15% 15% (deemed) Bank does NOT qualify (or status not documented) 10% 15% 15% (deemed) Key Result: Regardless of whether the actual Turkish withholding tax is 0% or 10%, for French foreign tax credit purposes, the bank is deemed to have paid 15% tax in Türkiye. This deemed 15% can be credited against French tax on the same interest income. Practical Example Scenario Actual Turkish Withholding Tax Paid Deemed Tax for French Credit Net Effect French bank lends €1,000,000 at 5% interest (€50,000 interest) – qualifies for 0% rate €0 (0% of €50,000) €7,500 (15% deemed of €50,000) French bank claims €7,500 credit against French tax French bank lends €1,000,000 at 5% interest (€50,000 interest) – does not qualify for 0% rate €5,000 (10% of €50,000) €7,500 (15% deemed of €50,000) French bank claims €7,500 credit against French tax (including actual €5,000 paid + deemed additional credit) Comparison with Previous Ruling (Public Legal Entities) This ruling (private legal entities) is identical to the previous ruling on interest payments from public legal entities. The analysis and conclusion are the same. The only difference in the facts is the type of borrower (private legal entities vs. public legal entities), but this does not affect the tax treatment under either domestic law or the DTT. Required Documentation for Treaty Benefits To benefit from the treaty provisions (including the deemed 15% credit in France), the French bank must: Obtain a Certificate of Residency from the competent French authorities proving that it is fully liable to tax in France on its worldwide income. Provide the original certificate along with a notarized or Turkish Consulate-certified Turkish translation to the withholding agent or the relevant tax office. To benefit from the 0% domestic withholding tax rate, the French bank must also prove that it is: Authorized to lend money under French law, and Lends to all real and legal persons (not just related parties), by providing appropriate documentation from the competent French authorities. Important Notes The actual Turkish withholding tax rate is 0% or 10% depending on the bank’s status. The treaty provides a deemed 15% tax paid for French foreign tax credit purposes – a highly favorable mechanism. The French bank’s Istanbul branch is not involved in these loan transactions, so there is no permanent establishment issue (Article 11(5) does not apply). This ruling applies to loans made to private legal entities (the previous ruling applied to public legal entities). 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.