Ruling Number: 64597866-125[3-2016]-205 Introduction In a private ruling dated January 7, 2016, the Large Taxpayers Tax Office (Taxpayer Services Group Directorate) addressed the withholding tax treatment of payments to be received by a Turkish resident company for leasing, maintenance, and repair services provided to an Indian resident company. The taxpayer stated that their company provides modification, maintenance, and repair services for air transport vehicles (aircraft) and their components. The company will enter into an agreement with an Indian resident company covering the leasing of landing gear and its maintenance and repair. The landing gear requiring repair will be removed from the aircraft and replaced by the taxpayer’s landing gear. The removed landing gear will be repaired at the taxpayer’s workshops in Istanbul. The repair fee will consist of approximately 65% materials and parts and 35% labor. The Indian resident company, under its domestic tax laws, intends to withhold 15% tax on the payments to be made to the taxpayer for the leasing and maintenance/repair services. The taxpayer requested clarification on: Whether the Indian company can withhold tax on the payments under the Türkiye-India Double Taxation Treaty, and If withholding tax is applied, whether the tax paid can be set off against corporate income tax in Türkiye. Legal Framework – Domestic Law Corporate Tax Law (Law No. 5520) Article 3(1) – Full Liability: Corporations whose legal or business center is located in Türkiye are taxed on their worldwide income (both within and outside Türkiye). Article 6 – Corporate Income Base: Corporate tax is levied on net corporate income. The determination of net corporate income follows the commercial income provisions of the Income Tax Law No. 193. Article 33 – Setoff of Taxes Paid Abroad (Paragraph 1): Corporate income taxes and similar taxes paid abroad on profits derived in foreign countries and transferred to the general results accounts in Türkiye may be deducted from the corporate income tax levied on such profits in Türkiye. Double Taxation Treaty Provisions Türkiye-India Double Taxation Treaty (Effective January 1, 1994) Article 12 – Royalties and Fees for Technical Services: 1. Royalties and fees for technical services 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 royalties or fees for technical services 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 15% of the gross amount of the royalties or fees for technical services. 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, or industrial, commercial, or scientific equipment, or for know-how. 4. The term “fees for technical services” means payments of any kind (other than payments to employees of the payer) for managerial, technical, or consultancy services, including the provision of other personnel or technical services. 5. If the beneficial owner carries on business through a permanent establishment in the other State and the right or asset giving rise to the payment is effectively connected with that PE, then Article 7 (Business Profits) shall apply instead of Article 12. 6. For the purposes of this Article, royalties or fees for technical services shall be deemed to arise in the State where the payer is a resident (or has a PE bearing the liability). Article 7 – Business Profits (Paragraph 1): Profits of an enterprise of one Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. Article 5 – Permanent Establishment: Defines when a permanent establishment exists in the other State. Article 22 – Elimination of Double Taxation (Paragraph 3): 3. For residents of Türkiye: (a) Where a resident of Türkiye derives income that may be taxed in India under this Treaty (other than income covered in subparagraph b), Türkiye shall exempt such income from tax. (b) Where a resident of Türkiye derives income that, under Articles 10, 11, 12, and 13(4), may be taxed in India, Türkiye shall allow as a credit against its tax on that income an amount equal to the tax paid in India. However, such credit shall not exceed the amount of tax calculated before the credit on the income that may be taxed in India. Ruling Conclusion The ruling addresses three categories of services separately: Category 1 – Leasing of Landing Gear Factor Determination Nature of service Leasing of landing gear (industrial/commercial equipment) Characterization under DTT Royalties (Article 12(3) – use of industrial/commercial equipment) Taxing right Türkiye (Article 12(1) – residence State) India’s taxing right (source State) Yes – but limited to 15% (Article 12(2)) Applicable Indian withholding tax rate Up to 15% (if lower under Indian domestic law, the lower rate applies) Conclusion: The Indian company may withhold tax on the leasing payments at a rate not exceeding 15% of the gross amount. Category 2 – Maintenance and Repair Services (Materials and Parts Separately Invoiced) Factor Determination Nature of payment Sale of materials and parts (not services) Characterization under DTT Commercial income (Article 7 – Business Profits) Taxing right Türkiye (residence State) India’s taxing right Yes only if the taxpayer has a permanent establishment in India to which the income is attributable Indian withholding tax on this portion? No (commercial income not covered by Article 12) Conclusion: If the taxpayer has no permanent establishment in India, India has no taxing right over the materials/parts portion, and no withholding tax should be applied. Category 3 – Maintenance and Repair Services (Labor Only) Factor Determination Nature of service Technical/managerial services (labor for repair work) Characterization under DTT Fees for technical services (Article 12(4)) Taxing right Türkiye (residence State) India’s taxing right (source State) Yes – but limited to 15% (Article 12(2)) Applicable Indian withholding tax rate Up to 15% Conclusion: The Indian company may withhold tax on the labor portion of the repair services at a rate not exceeding 15% of the gross amount. Category 4 – Maintenance and Repair Services (Materials/Labor Not Separated) Factor Determination Nature of service Combined maintenance/repair service (materials + labor) Characterization under DTT Business profits (Article 7) – not separated Taxing right Türkiye (residence State) India’s taxing right Yes only if the taxpayer has a permanent establishment in India Indian withholding tax on combined payment? No (not covered by Article 12 if not separated) Conclusion: If the materials and labor costs are not separately invoiced, the entire payment is treated as business profits under Article 7, and India has no taxing right unless the taxpayer has a PE in India. Summary Table Type of Payment Characterization DTT Article India’s Taxing Right Maximum Indian Withholding Rate Leasing of landing gear Royalties Art. 12(3) Yes 15% Materials/parts (separately invoiced) Commercial income Art. 7 No (unless PE in India) 0% Labor (separately invoiced) Fees for technical services Art. 12(4) Yes 15% Combined (not separated) Business profits Art. 7 No (unless PE in India) 0% Foreign Tax Credit in Türkiye Under Article 22(3)(b) of the DTT and Article 33 of the Corporate Tax Law No. 5520: Taxes paid in India on income covered by Articles 10, 11, 12, and 13(4) may be credited against Turkish corporate income tax on the same income. The credit shall not exceed the amount of Turkish tax attributable to that income. Therefore: If the Indian company withholds tax on the leasing fees and/or labor fees (up to 15%), the taxpayer may claim a foreign tax credit in Türkiye. Required Documentation for Treaty Benefits To benefit from the treaty provisions (including the foreign tax credit in Türkiye and to confirm the taxability in India), the taxpayer must: Obtain a Certificate of Residency from the competent Turkish authorities (to prove Turkish residency for treaty purposes). Provide this certificate to the Indian resident company (or to Indian tax authorities) as required. The procedure is set forth in Circular No. 3 on Double Taxation Treaties dated December 20, 2013, available on the Revenue Administration’s website (www.gib.gov.tr). Important Notes The separation of materials/parts costs from labor costs is critical for determining the correct tax treatment. If separated, the labor portion is subject to up to 15% withholding tax in India. If not separated, the entire payment is treated as business profits under Article 7, and India has no taxing right unless the taxpayer has a PE in India. The taxpayer may claim a foreign tax credit in Türkiye for any Indian taxes actually paid. 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. 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