Ruling Number: 62030549-125[30-2014/387]-14595 Introduction In a private ruling dated February 22, 2016, the Istanbul Tax Office (Taxpayer Services Income Taxes Group Directorate) addressed whether withholding tax applies to payments made for design, technical drawing, and security certification testing services for POS (point-of-sale) devices obtained from foreign resident companies. The taxpayer stated that their company is engaged in the manufacturing and sale of POS devices. The following services are obtained from abroad: Service Type Service Provider Location Design and technical drawings of molds for plastic and metal parts, and design and technical services for electronic circuits Israel (individuals and companies) Security certification testing (EMVL1 and EMVL2) France (individuals and companies) Mechanical parts security testing (certifying that mechanical parts are secure for payment systems) United Kingdom and Canada (companies) All services are performed entirely outside Türkiye (in Israel, France, the UK, and Canada). The taxpayer makes payments against invoices to these foreign providers. The taxpayer requested clarification on whether income tax withholding is required on these payments. Legal Framework – 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 30 – Withholding Tax for Limited Liability Taxpayers: Type of Payment Withholding Tax Rate Professional service income (petroleum exploration) 5% Other professional service income 20% Intangible rights (royalties – copyrights, patents, trademarks, etc.) 20% Important: Commercial income (business profits) is not subject to withholding tax under Article 30. Double Taxation Treaty Provisions – Effective Dates Country DTT Effective Date Israel January 1, 1999 France January 1, 1990 United Kingdom January 1, 1989 Canada January 1, 2012 Ruling Conclusion – Analysis by Service Type and Country The ruling concludes that design, technical drawing, and testing services are generally characterized as professional services (serbest meslek faaliyeti). However, the treatment varies by country and by whether the service provider is an individual or a company. 1. France and United Kingdom (Professional Services Article – Article 14) Factor Determination Type of services Design, technical drawings, security testing (professional services) Applicable DTT article Article 14 (Professional Services) Where are the services performed? France / UK (entirely outside Türkiye) Does the provider have a fixed base in Türkiye? No Does the provider stay in Türkiye for ≥183 days? No Taxing right Only France / UK Withholding tax required in Türkiye? No 2. Israel and Canada – Individuals (Article 14 – Professional Services) Factor Determination Service provider type Individuals (real persons) Applicable DTT article Article 14 (Professional Services) Where are the services performed? Israel / Canada (entirely outside Türkiye) Taxing right Only Israel / Canada Withholding tax required in Türkiye? No 3. Israel and Canada – Companies (Article 7 – Business Profits) Factor Determination Service provider type Companies (legal entities) Applicable DTT article Article 7 (Business Profits) (not Article 14) Where are the services performed? Israel / Canada (entirely outside Türkiye) Does the company have a PE in Türkiye? No Taxing right Only Israel / Canada Withholding tax required in Türkiye? No (commercial income not subject to withholding) 4. Israel – Special Case (If Design Rights Remain with the Provider as Intangible Property) Factor Determination Nature of the transaction The design/technical drawing rights remain with the Israeli provider (no transfer of ownership) Characterization Royalties (Article 12(3) – intangible rights) Applicable treaty article Article 12 (Royalties) Withholding tax required in Türkiye? Yes Treaty rate (Article 12(2)) 10% Note: This applies only if the design and technical drawings constitute intangible property (gayrimaddi hak) and the right of disposition (tasarruf hakkı) remains with the Israeli provider. Summary Table Country Provider Type Service Type DTT Article Withholding Tax in Türkiye? Rate France Individuals/Companies Testing, design Art. 14 (Professional Services) No 0% UK Individuals/Companies Testing, design Art. 14 (Professional Services) No 0% Israel Individuals Design, technical drawings Art. 14 (Professional Services) No 0% Israel Companies Design, technical drawings Art. 7 (Business Profits) No 0% Israel Any (if intangible rights retained) Design rights as intangible property Art. 12 (Royalties) Yes 10% Canada Individuals Testing Art. 14 (Professional Services) No 0% Canada Companies Testing Art. 7 (Business Profits) No 0% Required Documentation for Treaty Benefits To benefit from the treaty provisions (exemption from Turkish withholding tax or reduced royalty rate), the foreign resident companies/individuals must: Obtain a Certificate of Residency from the competent authorities of their country of residence (Israel, France, UK, or Canada). 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 on professional service income or royalties) will apply instead of the treaty provisions. Important Notes The key fact is that all services are performed entirely outside Türkiye (in Israel, France, the UK, and Canada). For France and the UK, the Professional Services article (Article 14) covers both individuals and companies. For Israel and Canada, Professional Services (Article 14) covers only individuals; companies are covered under Business Profits (Article 7). Exception for Israel: If the design/technical drawings constitute intangible property and the rights remain with the Israeli provider, the payments are characterized as royalties under Article 12, subject to 10% withholding 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. 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.