Ruling Number: 62030549-125[30-2015/435]-9232 Introduction In a private ruling dated February 4, 2016, the Istanbul Tax Office (Taxpayer Services Income Taxes Group Directorate) addressed whether withholding tax applies to payments made for training and consultancy services received from a company resident in the Turkish Republic of Northern Cyprus (TRNC). The taxpayer stated that their company receives training and consultancy services from a company located in the TRNC Free Zone. The services are provided via the internet without the service provider coming to Türkiye. The taxpayer requested clarification on whether the payments made to the limited liability foreign company are subject to corporate withholding tax. 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 3(3)(c) – Income Subject to Limited Liability: Professional service income derived in Türkiye constitutes corporate income subject to limited liability taxation. Article 3(4): The determination of whether income is derived in Türkiye and whether a permanent representative exists follows the relevant provisions of the Income Tax Law No. 193. Article 30 – Withholding Tax for Limited Liability Taxpayers (Paragraph 1(b)): Withholding tax applies to payments made for professional service income. Council of Ministers Decree No. 2009/14593: The withholding tax rate for professional service income is 20%. Double Taxation Treaty Provisions Türkiye-TRNC Double Taxation Treaty (Effective January 1, 1989) Article 14 – Professional Services: 1. (a) Income derived by a resident of one Contracting State from professional services or other independent activities shall be taxable only in that State unless the services are exercised in the other Contracting State. If the services are exercised in the other State, the income may also be taxed in that other State if: (i) The resident has a fixed base regularly available to them in the other State for the purpose of performing their activities; or (ii) The services are performed in the other State for a period or periods aggregating 183 days or more in any continuous 12-month period. In such a case, only so much of the income as is attributable to that fixed base or performed during the stay may be taxed in the other State. 3. For the purposes of this Article, “professional services” means independent activities based on personal effort, professional knowledge, skill, and service, rather than capital, performed without being subordinate to an employer. 4. For the purposes of this Article, “fixed base” means a fixed place for the professional activity, whether partially or fully conducted, indicating a certain location and continuity. Article 22 – Elimination of Double Taxation: Provides for a foreign tax credit mechanism. Ruling Conclusion Key Principle under Article 14: The TRNC resident company’s income from training and consultancy services is taxable only in the TRNC unless: Condition If Met If Not Met (i) The TRNC company has a fixed base in Türkiye for performing the services Türkiye may tax (attributable to fixed base) No Turkish tax (ii) The services are performed in Türkiye for 183 days or more in any 12-month period Türkiye may tax (for the duration of stay) No Turkish tax Application to the Case: The taxpayer stated that the services are provided via the internet from the TRNC Free Zone, and the service provider does not come to Türkiye. Factor Determination Where are the services performed? TRNC (via internet) Does the TRNC company have a fixed base in Türkiye? No (stated) Are the services performed in Türkiye for 183+ days? No (services performed abroad) Conclusion: Since the services are performed entirely in the TRNC, the conditions under Article 14(1)(a)(i) and (ii) are not met. Therefore, the income is taxable only in the TRNC. No withholding tax is required in Türkiye. Summary Table Factor Determination Nature of service Training and consultancy (professional services) Location of service performance TRNC (via internet – no entry to Türkiye) Fixed base in Türkiye? No Services performed in Türkiye for ≥183 days? No Taxing right under Article 14 Only TRNC Withholding tax required in Türkiye? No Domestic withholding tax rate (if taxable) 20% (not applicable here) Foreign Tax Credit If, contrary to the facts stated, the services were performed in Türkiye and Turkish tax was paid, the tax paid in Türkiye could be credited against the TRNC tax on the same income under Article 22 of the DTT. Required Documentation for Treaty Benefits To benefit from the treaty provisions (exemption from Turkish withholding tax), the TRNC resident company must: Obtain a Certificate of Residency from the competent TRNC authorities proving that it is fully liable to tax in the TRNC on its worldwide income. Provide the original certificate 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) will apply instead of the treaty provisions. Important Notes The key factor is that the services are performed entirely outside Türkiye (via internet) and the service provider does not enter Türkiye. If the TRNC company were to send personnel to Türkiye for extended periods (≥183 days) or establish a fixed base in Türkiye, the result would differ. 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.