Ruling Number: 62030549-120[65-2015/363]-79460 Introduction In a private ruling dated June 14, 2016, the Istanbul Tax Office (Taxpayer Services Income Taxes Group Directorate) addressed whether withholding tax applies to legal services provided to foreign resident persons or legal entities. The taxpayer, a lawyer, stated that they provide consultancy services and litigation follow-up in Türkiye to companies established in Greece and Romania. The taxpayer requested clarification on: Whether withholding tax should be applied on professional service receipts (serbest meslek makbuzları) issued to foreign clients; Whether withholding taxes made on behalf of foreign resident companies should be paid; What actions are required under the Double Taxation Treaties. Legal Framework – Domestic Law Income Tax Law (Law No. 193) Article 65 – Definition of Professional Service Income: Income arising from any kind of professional service activity constitutes professional service income. Professional service activities are those that rely on personal effort, scientific or professional knowledge, or expertise rather than capital, are non-commercial in nature, and are performed independently without being subordinate to an employer, under personal responsibility, on one’s own behalf and account. Article 67 – Determination of Professional Service Income: Professional service income is the difference between the cash, benefits in kind, and other advantages collected during an accounting period in return for professional services and the expenses incurred for such activities. Expense reimbursements received from clients in cash or in kind are added to income. Article 94 – Withholding Tax Obligation (Paragraph 1, subparagraph 2/b): The following persons are required to withhold income tax at the time of payment (including advances): Public administrations, economic public enterprises, other institutions, trading companies, business partnerships, associations, foundations, cooperatives, investment fund managers, traders and professionals required to declare their income, and farmers determining agricultural income on a balance sheet basis. Rate: Payments made to persons performing professional services are subject to withholding tax at 20%. Important: This withholding obligation applies to payments made by Turkish resident payers (e.g., Turkish companies, institutions, professionals). It does not apply to payments made by foreign resident clients. Double Taxation Treaty Provisions Türkiye-Romania Double Taxation Treaty (Effective January 1, 1989) Article 14 – Professional Services (Paragraph 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 services are exercised in the other Contracting State. If exercised in the other State, the income may also be taxed in that other State if: (a) The individual has a fixed base regularly available in the other State for performing the activities; or (b) The individual stays in the other State for 183 days or more in a year. Türkiye-Greece Double Taxation Treaty (Effective January 1, 2005) Article 14 – Professional Services (Paragraph 1): Income derived by a resident of one Contracting State from professional services shall be taxable only in that State unless the services are exercised in the other Contracting State. If exercised in the other State, the income may also be taxed in that other State if: (a) The individual has a fixed base regularly available in the other State; or (b) The individual stays in the other State for 183 days or more in any 12-month period beginning or ending in the relevant fiscal year. Ruling Conclusion Scenario 1 – Services Performed in Türkiye (Without Going to Greece/Romania) Factor Determination Location of services Türkiye (consultancy and litigation follow-up) Taxpayer’s residency Türkiye (full liability taxpayer) Do Greece or Romania have a taxing right? No (services not performed in Greece/Romania; no fixed base, no 183+ days stay) Exclusive taxing right Only Türkiye Should the foreign client withhold tax? No (foreign payer is not subject to Turkish withholding tax obligations) Taxpayer’s Obligation: The taxpayer must declare the income in Türkiye through an annual income tax return (within the period specified in Article 92 of the Income Tax Law) and pay income tax on the professional service income. Scenario 2 – Services Performed in Greece or Romania (with Fixed Base or 183+ Days) Factor Determination Location of services Greece or Romania Taxpayer’s residency Türkiye Does Greece/Romania have a taxing right? Yes if the taxpayer has a fixed base OR stays ≥183 days Turkish taxing right Still exists (full liability taxpayer) Double taxation Relieved by foreign tax credit mechanism under the relevant DTT Summary Table Scenario Service Location Taxing Right Withholding by Foreign Client? Turkish Tax Obligation 1 Türkiye (no travel abroad) Only Türkiye No File annual income tax return in Türkiye 2 Greece/Romania (no fixed base, <183 days) Only Türkiye No (treaty exemption) File annual income tax return in Türkiye 3 Greece/Romania (with fixed base or ≥183 days) Both Türkiye and Greece/Romania Yes (if required by local law) File annual return in Türkiye; claim foreign tax credit Required Documentation for Treaty Benefits To benefit from the treaty provisions (exemption from foreign withholding tax or to claim foreign tax credit), the taxpayer must: Obtain a Certificate of Residency from the Turkish competent authorities proving that they are fully liable to tax in Türkiye on their worldwide income. Provide the certificate to the foreign clients or relevant tax authorities in Greece/Romania. Important Notes Withholding tax in Türkiye: The taxpayer is the service provider, not the payer. Therefore, the taxpayer does not withhold tax on payments received from foreign clients. Withholding tax obligations under Article 94 apply to Turkish resident payers paying Turkish resident service providers, not to foreign payers. Taxpayer’s obligation: The taxpayer must declare the professional service income in Türkiye through an annual income tax return. Since the income is from foreign clients and no Turkish withholding tax is applied, the taxpayer must self-assess and pay tax on this income. If services are performed in Greece or Romania: Under the DTTs, Greece or Romania may have the right to tax if the taxpayer has a fixed base or stays for 183 days or more. In such a case, the taxpayer may claim a foreign tax credit in Türkiye for taxes paid abroad. 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.