Ruling Number: 62030549-120[94-2014/831]-64672 Introduction In a private ruling dated May 24, 2016, the Istanbul Tax Office (Taxpayer Services Income Taxes Group Directorate) addressed the withholding tax treatment of payments made for standard software products obtained from Irish resident companies. The taxpayer is an Irish resident company that sells standard software products to customers in Türkiye. The software is distributed through independent distributors and resellers in Türkiye. The taxpayer requested clarification on how the income derived from these software sales should be taxed in Türkiye. 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 (Paragraphs 1(b) and 2): Type of Payment Withholding Tax Rate Professional service income 20% Intangible rights (royalties – copyrights, patents, trademarks, etc.) 20% Important: Commercial income (business profits) is not subject to withholding tax. Domestic Law – Three Scenarios for Software Payments Scenario Characterization Withholding Tax in Türkiye? Rate 1 Standard software imported and sold without modification or reproduction Commercial income No 2 Custom software developed specifically for the buyer (not previously available) Professional service income Yes 20% 3 Acquisition of copyright rights (reproduction, modification, distribution, display) Royalties (intangible rights) Yes 20% Note: The method of delivery (physical media vs. internet download vs. password activation) does not affect the tax treatment. Double Taxation Treaty Provisions Türkiye-Ireland Double Taxation Treaty (Effective January 1, 2011) Article 5 – Permanent Establishment: Defines when a permanent establishment exists in the other State, including: Paragraph 6 – Dependent Agent: A person acting on behalf of an enterprise creates a PE if they habitually exercise authority to conclude contracts. Paragraph 7 – 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). Article 7 – Business Profits (Paragraphs 1 and 2): 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. 2. Where an enterprise carries on business through a PE, there shall be attributed to that PE the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities. Article 12 – Royalties (Paragraphs 2, 3, and 4): 2. Royalties arising in one State and paid to a resident of the other State may be taxed in the other State. 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 shall apply instead of Article 12. Article 23 – Elimination of Double Taxation (Paragraph 1(a)): Taxes paid in Türkiye may be credited against Irish tax on the same income. Ruling Conclusion Step 1 – Characterization of the Income The taxpayer sells standard software products through independent distributors and resellers in Türkiye. No modification or reproduction rights are granted to the distributors. Only distribution rights are provided. Factor Determination Nature of the transaction Sale of standard software products (off-the-shelf) Rights granted Distribution only (no copyright rights – no reproduction, modification, adaptation) Characterization under domestic law Commercial income (business profits) Step 2 – Application of DTT Article 7 (Business Profits) Under Article 7(1) of the Türkiye-Ireland DTT: Factor Determination Does the Irish company have a PE in Türkiye? No (the company sells through independent distributors) Are the independent distributors “dependent agents” under Article 5(6)? No (they are independent agents under Article 5(7)) Taxing right Only Ireland Withholding tax required in Türkiye? No Step 3 – Exception (If a PE Exists in Türkiye) If the Irish company had a permanent establishment or dependent agent in Türkiye (e.g., a person habitually concluding contracts on its behalf), then Türkiye would have the right to tax the profits attributable to that PE. Step 4 – Exception (Copyright Rights / Royalties) If the Irish company granted copyright rights (reproduction, modification, adaptation) to the Turkish distributors, the payments would be characterized as royalties under Article 12, subject to 10% withholding tax (treaty rate). Independent Agent vs. Dependent Agent Analysis Type of Agent Condition PE in Türkiye? Independent Agent (Article 5(7)) Legally and economically independent, conducts own business, not subject to effective control, does not work for a single employer No Dependent Agent (Article 5(6)) Habitually exercises authority to conclude contracts on behalf of the Irish company, subject to control, works exclusively or primarily for the Irish company Yes The Turkish distributors in this case are independent agents (unrelated parties), so they do not create a PE for the Irish company. Summary Table Scenario Rights Granted Characterization DTT Article Withholding Tax in Türkiye? Rate 1 Distribution only (no reproduction/modification) Commercial income Art. 7 (Business Profits) No (if no PE in Türkiye) 0% 2 Distribution through independent agents (unrelated) Commercial income Art. 7 (no PE) No 0% 3 Copyright rights (reproduction, modification, adaptation) Royalties Art. 12 Yes 10% 4 Sales through a dependent agent (PE in Türkiye) Business profits Art. 7 (PE) Yes (on PE profits) Corporate tax rate Foreign Tax Credit Under Article 23(1)(a) of the DTT, if taxes are paid in Türkiye (e.g., in the royalty scenario), those taxes may be credited against Irish tax on the same income. Required Documentation for Treaty Benefits To benefit from the treaty provisions (exemption from Turkish withholding tax for commercial income or the 10% reduced rate for royalties), the Irish resident company must: Obtain a Certificate of Residency from the competent Irish authorities proving that it is fully liable to tax in Ireland on its worldwide income. Provide the original certificate along with a notarized or Turkish Consulate-certified Turkish translation to the withholding agent (Turkish customers) or the relevant tax office. If the Certificate of Residency cannot be provided: Domestic law provisions (20% withholding tax on intangible rights) would apply in theory, but since the income is characterized as commercial income (not subject to withholding), no tax would be due regardless. Important Notes The key distinction is whether the Turkish distributors receive only distribution rights or also copyright rights (reproduction, modification, adaptation). The fact that the distributors are independent and unrelated parties is critical – they do not create a permanent establishment for the Irish company. The method of software delivery (physical media, internet download, password activation) does not affect the tax treatment. 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.