Ruling Number: 62030549-125[30-2015/373]-189429 Introduction In a private ruling dated November 1, 2016, the Istanbul Tax Office (Taxpayer Services Income Taxes Group Directorate) addressed the withholding tax treatment of interest payments on government bonds, treasury bills, and Eurobonds issued domestically by the Turkish Treasury to a French resident company. The taxpayer, acting as a representative for a French resident company authorized to provide banking and financial services under French law, stated that the company invests in government bonds and treasury bills issued domestically by the Turkish Treasury, as well as bonds issued abroad (Eurobonds), and derives interest income from these investments. The taxpayer requested clarification on: The withholding tax rate applicable to such interest income, and Whether the company can benefit from the “protected credit” system in France under Article 23 of the Türkiye-France Double Taxation Treaty. Part I – Domestic Law Analysis Corporate Tax Law (Law No. 5520) Article 1 – Scope of Corporate Tax: Defines the scope of corporate tax. Article 2 – Taxpayers: Capital companies, cooperatives, economic public enterprises, economic enterprises of associations and foundations, and business partnerships are corporate taxpayers. 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 (Paragraph 1): A 15% withholding tax applies to income and proceeds paid or accrued to limited liability corporations. Paragraph 1(d): Withholding tax applies to movable capital income, except for certain specified exceptions. Council of Ministers Decree No. 2009/14593 – Withholding Tax Rates on Interest: Type of Interest Withholding Tax Rate Interest on government bonds, treasury bills, and similar securities issued by the Turkish Treasury (including Eurobonds issued abroad) 0% All other interest income 10% or 15% Income Tax Law No. 193 – Article 75(5): Interest on all kinds of bonds and treasury bills constitutes movable capital income. Part II – Temporary Article 67 (Geçici 67) – Final Withholding Tax on Capital Market Income Paragraph 1: Banks and intermediary institutions shall withhold tax at 15% on: (a) Differences between purchase and sale prices of securities, (b) Differences between purchase price and redemption price, (c) Periodic returns collected on behalf of clients, (d) Income from securities lending transactions. Exception – 0% Rate for Certain Taxpayers: The rate is 0% for: Corporate taxpayers under Article 2(1) of Corporate Tax Law No. 5520, and Investment funds and investment trusts (and similar foreign institutional investors) that are exclusively engaged in earning securities income and capital gains. Paragraph 5: The status of the income recipient (real/legal, full/limited liability, tax-exempt or not) does not affect the withholding obligation. Paragraph 9: For securities issued before the effective date of Geçici 67, the tax rules applicable as of December 31, 2005, shall apply. Income Tax General Communiqué No. 277 (Section 2.1): For corporate taxpayers under Article 2(1) of Corporate Tax Law No. 5520, and foreign institutional investors (limited partnerships, country funds, institutional funds, investment institutions) that are similar to investment funds and trusts, the withholding tax rate is 0% from October 1, 2010. Part III – Ruling Conclusion – Withholding Tax Rates Eurobonds (Government Bonds Issued Abroad): Factor Determination Type of security Eurobonds (government bonds issued abroad by the Turkish Treasury) Domestic withholding tax rate (BKK No. 2009/14593) 0% Tax treatment Not subject to withholding under Geçici 67 Government Bonds and Treasury Bills Issued Domestically (from January 1, 2006): Factor Determination Type of security Government bonds and treasury bills issued domestically Applicable regime Geçici 67 (Paragraph 1) Withholding tax rate 0% (for foreign institutional investors similar to investment funds and trusts) Government Bonds and Treasury Bills Issued Domestically (before January 1, 2006): Factor Determination Type of security Government bonds and treasury bills issued domestically before January 1, 2006 Applicable regime Rules as of December 31, 2005 (Geçici 67/9) Withholding tax rate To be determined based on rules applicable before 2006 Part IV – Double Taxation Treaty Analysis Türkiye-France Double Taxation Treaty (Effective January 1, 1990) Article 11 – Interest (Paragraphs 1, 2, 4, and 5): 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. 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. 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 that PE, then Article 7 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 a credit against its tax equal to the tax paid in Türkiye. (b) “Income tax paid in Türkiye” includes any tax that would have been payable but is subject to exemption or reduction under Turkish incentive legislation. Notwithstanding the above, the tax paid in Türkiye on interest shall be calculated at 15% (as per Article 11(2)) for the purpose of the foreign tax credit. Part V – Deemed Tax Credit Mechanism Actual Withholding Tax Rate in Türkiye Deemed Tax for French Credit Purposes (Article 23) 0% (actual rate under domestic law) 15% (deemed) Key Result: Although the actual Turkish withholding tax on government bond/t-bill/Eurobond interest is 0%, 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. Summary Table Type of Security Issuer Domestic Withholding Tax Rate Treaty Maximum Rate Actual Rate Deemed Rate for French Credit Eurobonds (issued abroad) Turkish Treasury 0% 15% 0% 15% Gov’t bonds/t-bills (domestic, from 1/1/2006) Turkish Treasury 0% (for foreign institutional investors) 15% 0% 15% Gov’t bonds/t-bills (domestic, before 1/1/2006) Turkish Treasury To be determined under pre-2006 rules 15% To be determined 15% Foreign Tax Credit in France Actual Turkish tax paid: 0% (on the interest income). Deemed tax for French credit: 15% of the gross interest amount. Effect: The French bank can claim a foreign tax credit in France equal to 15% of the interest income, even though no tax was actually paid in Türkiye. Required Documentation for Treaty Benefits To benefit from the treaty provisions (including the deemed 15% credit in France), the French resident company 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. Important Notes The 0% withholding tax rate on government bonds, treasury bills, and Eurobonds applies under domestic law (Council of Ministers Decree No. 2009/14593). For French foreign tax credit purposes, the interest income is deemed to have been taxed at 15% under Article 23 of the Türkiye-France DTT. This is a highly favorable mechanism: the French bank pays 0% tax in Türkiye but can claim a 15% foreign tax credit in France. The ruling applies to both domestically issued government bonds/t-bills and Eurobonds. 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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