Ruling Number: 62030549-125[30-2015/17]-135672 Introduction In a private ruling dated September 8, 2016, the Istanbul Tax Office (Taxpayer Services Income Taxes Group Directorate) addressed whether withholding tax applies to payments made for operator services and the rental of vehicles obtained from Italian and Austrian resident companies. The taxpayer stated that their company operates in the railway track services sector. Vehicles used in rail services are leased through temporary import from Italy and Austria, and operator services are also obtained. The taxpayer requested clarification on whether VAT and income tax withholding apply to these payments. Part I – Domestic Law Analysis – Corporate Tax 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)(c) – Professional Service Income: Professional service income derived in Türkiye. Article 3(3)(d) – Rental Income: Income derived from leasing movable and immovable property and rights in Türkiye. Article 22 – Determination of Limited Liability Corporate Income: Paragraph 1: If a limited liability corporation has a place of business (PE) in Türkiye, the provisions applicable to full liability corporations apply. Paragraph 2: For income other than commercial or agricultural income, the provisions of the Income Tax Law apply. However, if such income is derived within the scope of a commercial activity in Türkiye, corporate income is determined under paragraph 1. Corporate Tax General Communiqué No. 1 (Section 30.3): If a limited liability corporation has a PE in Türkiye and derives professional service income or rental income through that PE, no withholding tax is applied (the income is taxed as part of the PE’s profits). However, if a limited liability corporation does not have a PE in Türkiye, or has a PE but derives income not connected to its commercial activity, withholding tax applies at the domestic rate. Article 30 – Withholding Tax for Limited Liability Taxpayers: Type of Income Withholding Tax Rate Professional service income (other than petroleum exploration) 20% Real estate capital income (rental income) 20% Part II – Double Taxation Treaty Analysis – Italy Türkiye-Italy Double Taxation Treaty (Effective January 1, 1994) Article 12 – Royalties (Paragraphs 1, 2, 3, and 4): 1. Royalties arising in one State and paid to a resident of the other State may be taxed in that other State. 2. However, such royalties may also be taxed in the State in which they arise. But if the beneficial owner is a resident of the other State, the tax charged shall not exceed 10% of the gross amount of the royalties. 3. The term “royalties” includes payments for the use of, or the right to use, any copyright, patent, trademark, design, plan, secret formula, manufacturing process, know-how, or industrial, commercial, or scientific equipment. 4. If the beneficial owner carries on business through a PE in the other State and the right or asset giving rise to the royalty is effectively connected with that PE, then Article 12 does not apply, and the income is taxed under domestic law. Article 14 – Professional Services: 2. Income derived by an enterprise of one Contracting State from professional services shall be taxable only in that State unless the services are exercised in the other State. If exercised in the other State, the income may also be taxed in that other State if: (a) The enterprise has a permanent establishment in the other State; or (b) The services are performed for a period or periods exceeding 183 days in any continuous 12-month period. The enterprise may elect to be taxed under Article 7 (Business Profits) on a net basis. Article 23 – Elimination of Double Taxation: Taxes paid in Türkiye may be credited against Italian tax. Part III – Double Taxation Treaty Analysis – Austria Türkiye-Austria Double Taxation Treaty (Effective January 1, 2010) Article 12 – Royalties (Paragraphs 1, 2, 3, and 4): 1. Royalties arising in one State and paid to a resident of the other State may be taxed in that other State. 2. However, such royalties may also be taxed in the State in which they arise. But if the beneficial owner is a resident of the other State, the tax charged shall not exceed 10% of the gross amount of the royalties. 3. The term “royalties” includes payments for the use of, or the right to use, any copyright, patent, trademark, design, plan, secret formula, manufacturing process, know-how, or industrial, commercial, or scientific equipment. 4. If the beneficial owner carries on business through a PE in the other State and the right or asset giving rise to the royalty is effectively connected with that PE, then Article 7 (Business Profits) or Article 14 (Professional Services) shall apply instead. Article 14 – Professional Services: Same structure as the Italy treaty (PE or 183-day rule). Article 22 – Elimination of Double Taxation: Paragraph 1(a): For professional services, taxes paid in Türkiye are exempted in Austria. Paragraph 1(b): For royalties, taxes paid in Türkiye are credited against Austrian tax. Part IV – Ruling Conclusion – Vehicle Rentals Factor Determination Nature of payment Rental of railway vehicles (movable property – equipment) Characterization under DTT Royalties (use of industrial/commercial equipment – Article 12(3)) Domestic withholding tax rate 20% Treaty rate (Article 12(2)) 10% Applicable withholding tax (if no PE in Türkiye) 10% Applicable tax (if PE exists and equipment connected to PE) Taxed under domestic law (no withholding) Part V – Ruling Conclusion – Operator Services Factor Determination Nature of payment Operator services (professional services) Characterization under DTT Professional services (Article 14) Domestic withholding tax rate 20% Taxing right (if no PE and <183 days) Only Italy/Austria Withholding tax required? No (but withholding agent may not know duration at payment) Taxing right (if PE exists or ≥183 days) Türkiye may tax (20% withholding) Practical Note for Withholding Agents: At the time of payment, the withholding agent may not know whether the Italian/Austrian company will stay in Türkiye for 183 days or more. Therefore, withholding tax should be applied (20%) and may be refunded later if it is determined that no PE was created and the 183-day threshold was not met. Part VI – Wages of Assigned Personnel The wages of personnel assigned for operator services must be evaluated under Article 15 (Dependent Personal Services) of the respective treaties. Factor Determination Where is the employment exercised? Türkiye (if personnel work in Türkiye) Taxing right Türkiye may tax if the personnel stay ≥183 days (or if conditions are not met for exemption) Part VII – VAT Analysis VAT Law No. 3065 Article 1(1): Services performed in Türkiye are subject to VAT. Article 1(2): Imports of services are subject to VAT. Article 6(b): A service is deemed performed in Türkiye if it is performed in Türkiye or benefited from in Türkiye. Article 9(1): If the taxpayer has no residence, workplace, legal center, or business center in Türkiye, the Ministry may hold the counterparty (recipient) liable for VAT payment. VAT General Application Communiqué (Section I/C-2.1.2.1): For services performed in Türkiye by persons whose residence, workplace, legal center, and business center are not located in Türkiye, as well as services performed abroad but benefited from in Türkiye, VAT shall apply. Since the service provider has no presence in Türkiye, the full amount of VAT shall be declared and paid by the domestic recipient as a withholding agent using the 2 No. VAT Return. VAT Ruling Conclusion: Factor Determination Are the rental and operator services benefited from in Türkiye? Yes (used for railway track services in Türkiye) Is the service subject to VAT? Yes (import of service) Who is liable for VAT payment? The taxpayer as a withholding agent Which VAT return to file? 2 No. VAT Return Can the VAT be deducted as input VAT? Yes (deductible on 1 No. VAT Return) Summary Table Tax Type Service Type Characterization PE/183-Day Rule Withholding Tax in Türkiye? Rate Corporate Tax Vehicle rental (Italy) Royalties (Art. 12) If no PE connected Yes 10% Corporate Tax Vehicle rental (Austria) Royalties (Art. 12) If no PE connected Yes 10% Corporate Tax Vehicle rental (either) Royalties (Art. 12) If PE connected Taxed under domestic law No withholding Corporate Tax Operator services Professional services (Art. 14) If no PE and <183 days No 0% Corporate Tax Operator services Professional services (Art. 14) If PE or ≥183 days Yes 20% Personal Income Tax Wages of personnel Dependent personal services (Art. 15) If ≥183 days Yes Progressive VAT All services (rental + operator) Import of service N/A Yes (by recipient) Standard rate (18%) – 2 No. VAT Return Required Documentation for Treaty Benefits To benefit from the treaty provisions (reduced rates or exemption), the Italian and Austrian resident companies must: Obtain a Certificate of Residency from the competent authorities of Italy or Austria proving that they are fully liable to tax in their country of residence on their 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 Vehicle rentals are characterized as royalties (use of industrial/commercial equipment) under both the Italy and Austria DTTs, subject to 10% withholding tax (if no PE connection). Operator services are characterized as professional services – taxable in Türkiye only if the provider has a PE in Türkiye or stays for ≥183 days. VAT applies to both types of services because they are benefited from in Türkiye (import of service). Wages of assigned personnel must be separately evaluated under the dependent personal services article (Article 15). For Austria: Royalties are credited (foreign tax credit), while professional service income is exempted from Austrian tax. For Italy: Both royalties and professional service income are credited against Italian tax. 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. 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