Ruling Number: 62030549-125[30-2013/95]-1084 Introduction In a private ruling dated July 24, 2013, the Istanbul Tax Office (Taxpayer Services Income Taxes Group Directorate) addressed the withholding tax treatment of interest payments made to a French resident company in connection with loans provided in Turkish Lira to Turkish resident banks, financial institutions, and companies. The taxpayer, acting as a representative for a French resident company, requested clarification on: The withholding tax rate applicable to interest income derived from loans extended in Türkiye, and Whether the French resident company can benefit from the “protected credit” system in France under Article 23 of the Türkiye-France Double Taxation Treaty. Legal Framework Corporate Tax Law (Law No. 5520) Article 3 – 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): Withholding tax at a rate of 15% shall be applied 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, paragraph 2, subparagraphs (1), (2), (3), and (4) of the Income Tax Law No. 193. Council of Ministers Decree No. 2009/14593 (pursuant to Article 30, paragraph 8): Type of Lender Withholding Tax Rate on Interest Foreign states, international institutions, 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 (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 by public legal entities)” constitutes movable capital income, regardless of its source. Double Taxation Treaty Provisions Türkiye-France Double Taxation Treaty 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 of the interest 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 (Independent Personal 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 the provisions of this Treaty, France shall allow as a credit against the tax on that person’s income an amount equal to the income tax 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 the provisions of Turkish incentive legislation aimed at accelerating Türkiye’s economic development. Notwithstanding the preceding sentence, the income tax paid in Türkiye shall be calculated at the following rates: (i) 15% for dividends mentioned in Article 10(2)(a); (ii) 20% for dividends mentioned in Article 10(2)(b); (iii) 15% for interest mentioned in Article 11(2); (iv) 10% for royalties mentioned in Article 12(2). However, if the tax rates applied under Turkish law to dividends, interest, and royalties derived by non-residents in Türkiye are reduced below these rates, such lower rates shall apply for the purposes of this paragraph. Ruling Conclusion Step 1 – Determine the Domestic Withholding Tax Rate: Under Council of Ministers Decree No. 2009/14593: Condition Withholding Tax Rate The French company is authorized to lend to all real and legal persons (not just related parties) in its country of residence, 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 – Apply the Treaty for Foreign Tax Credit in France: Under Article 23(2)(b)(iii) of the Türkiye-France 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). This means: The French resident company will actually pay tax in Türkiye at 0% or 10% (depending on its status). However, for calculating the foreign tax credit in France, it will be deemed to have paid 15% tax in Türkiye. This deemed 15% tax can be credited against the French tax liability on the same interest income. Practical Example Scenario Actual Withholding Tax Paid in Türkiye Deemed Tax Paid for French Credit Purposes Credit Available in France Company qualifies for 0% rate 0% 15% (deemed) 15% credit against French tax Company does not qualify for 0% rate (10% applied) 10% 15% (deemed) 15% credit against French tax Summary Table Question Answer Domestic withholding tax rate (if company qualifies as authorized lender) 0% Domestic withholding tax rate (if company does not qualify) 10% Treaty maximum rate under Article 11(2) 15% (not applicable if domestic rate is lower) Rate deemed paid for French foreign tax credit purposes under Article 23(2)(b)(iii) 15% Can the French company claim a credit in France? Yes – on the deemed 15% Required documentation Proof of authorization to lend to all persons in country of residence (for 0% rate) Required Documentation To benefit from the 0% domestic withholding tax rate, the French company must 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 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. 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