Ruling Number: 62030549-125[30-2015/439]-100955 Introduction In a private ruling dated April 12, 2017, the Istanbul Tax Office (Taxpayer Services Income Taxes Group Directorate) addressed whether withholding tax applies to payments made to a US resident company for passwords used to conduct online examinations. The taxpayer stated that they purchase exam passwords electronically from a US resident company. Using these passwords, examinations are conducted in Türkiye under the supervision of the taxpayer’s personnel, using questions from the company’s question bank. Certificates are issued based on the exam results. The taxpayer pays the exam fees for its personnel and issues invoices to other individuals for exam fees. The taxpayer requested clarification on: Whether the payments to the US company should be characterized as commercial income or royalties, and Whether withholding tax applies to such payments. 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: Withholding tax applies to certain types of income. Commercial income is NOT listed among income subject to withholding tax. Double Taxation Treaty Provisions Türkiye-US Double Taxation Treaty (Effective January 1, 1998) 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. If it does, the profits may be taxed in the other State but only so much as is attributable to that PE. Article 5 – Permanent Establishment: Defines when a permanent establishment exists in the other State, including: Paragraph 4 – Dependent Agent: A person acting on behalf of an enterprise creates a PE if they habitually exercise authority to conclude contracts. Paragraph 5 – Independent Agent: An enterprise is not deemed to have a PE if it carries on business through a broker, general commission agent, or other independent agent acting in the ordinary course of their business (provided they are legally and economically independent). Independent Agent Criteria: Condition Description Legal independence Agent is legally separate from the enterprise Economic independence Agent is not subject to the enterprise’s effective control Conducts own business Agent carries on business in the ordinary course Not a single employer Agent does not work exclusively for the enterprise Ruling Conclusion Step 1 – Characterization of the Payments Factor Determination Nature of the transaction Purchase of exam passwords to access the US company’s question bank Characterization Commercial income (business profits) Is it a royalty (intangible right)? No – the payments are for the use of the system (passwords), not for the transfer of copyright or intangible rights Step 2 – Application of Article 7 (Business Profits) Factor Determination Does the US company have a PE in Türkiye? Based on the facts, the US company sells passwords and provides exam services without establishing a PE in Türkiye Does the taxpayer act as a dependent agent for the US company? No – the taxpayer conducts its own business (administering exams to personnel and others) Taxing right under Article 7 Only the US (since no PE in Türkiye) Withholding tax required in Türkiye? No (commercial income not subject to withholding) Conclusion: The payments made to the US resident company for the exam passwords are characterized as commercial income (business profits). Since the US company does not have a permanent establishment in Türkiye, the income is taxable only in the US. No withholding tax is required in Türkiye. Summary Table Question Answer What is the nature of the payments? Commercial income (business profits) Are the payments royalties? No Does the US company have a PE in Türkiye? No (based on the facts) Taxing right under DTT Article 7 Only the US Withholding tax required in Türkiye? No Domestic law treatment Commercial income not subject to withholding Required Documentation for Treaty Benefits To benefit from the treaty provisions (exemption from Turkish withholding tax), the US resident company must: Obtain a Certificate of Residency from the competent US authorities (IRS) proving that it is fully liable to tax in the USA on its 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 on intangible rights) could apply if the payments were characterized differently. However, since the payments are characterized as commercial income, no withholding tax is due regardless. Important Notes The key distinction is that the payments are for access to the examination system (passwords) rather than for the transfer of intellectual property rights (copyright) over the questions or software. The US company’s business model is providing examination services, not licensing intangible rights. The taxpayer administers the exams independently and does not act as a dependent agent for the US company. 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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