Ruling Number: 62030549-125[30-2014/230]-92665 Introduction In a private ruling dated November 9, 2015, the Istanbul Tax Office (Taxpayer Services Income Taxes Group Directorate) addressed whether withholding tax applies to lease payments made for an aircraft rented from a foreign resident company. The taxpayer stated that their company is authorized by the Ministry of Transport, Maritime Affairs and Communications (Directorate General of Civil Aviation) to operate regional airline services. The company intends to lease an aircraft for 5 years through an ordinary (operating) lease from an Irish resident company authorized to lease aircraft. The taxpayer requested clarification on whether withholding tax is required on the lease 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 3(3)(d) – Income Subject to Limited Liability: Income derived from leasing movable and immovable property and rights 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(c)): Withholding tax applies to real estate capital income (rental income) paid or accrued to limited liability corporations. Council of Ministers Decree No. 2009/14593 – Withholding Tax Rates on Real Estate Capital Income: Type of Lease Withholding Tax Rate Leasing activities under Financial Leasing Law No. 3226 (now superseded by Law No. 6361) 1% All other rental income 20% Income Tax Law No. 193 – Article 7 (Income Deemed Derived in Türkiye): For rental income from movable/immovable property and rights to be deemed derived in Türkiye: The movable or immovable property must be located in Türkiye, and The property or rights must be used or utilized in Türkiye. “Utilization” means: The payment is made in Türkiye, or if the payment is made abroad, it is credited to the accounts of the payer or the person on whose behalf the payment is made in Türkiye, or separated from profits. Financial Leasing Law Framework Law No. 6361 (Financial Leasing, Factoring, and Financing Companies Law) Article 2(5): For airline companies engaged in passenger and cargo transportation, the leasing of air transport vehicles, engines, and their components and parts from abroad for a period of at least two years, by companies, organizations, or financial leasing companies authorized to lease them under the laws of the country where they are established, based on a financial leasing contract, shall be considered financial leasing under this Law without being subject to the limitations in Article 3(1)(d). Article 52 – Repealed Provisions: (1) Financial Leasing Law No. 3226 is repealed. (2) References in other laws to Law No. 3226 are deemed references to the relevant articles of this Law. Important: The 1% withholding tax rate for financial leasing (previously under Law No. 3226) continues to apply under Law No. 6361. Double Taxation Treaty Provisions Türkiye-Ireland Double Taxation Treaty (Effective January 1, 2011 – entered into force August 18, 2010) Article 12 – Royalties: 1. Royalties 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 may also be taxed in the State in which they arise, according to its domestic laws. 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 of any kind for the use of, or the right to use: Any copyright of literary, artistic, or scientific work (including cinema films and radio/television recordings), Any patent, trademark, design, plan, secret formula, or manufacturing process, Industrial, commercial, or scientific know-how, Industrial, commercial, or scientific equipment. The term “royalties” also includes income from the alienation of any similar right or asset related to productivity, use, or disposal. Article 23 – Elimination of Double Taxation (Paragraph 1(a)): Taxes paid in Türkiye on royalties may be credited against Irish tax on the same income. Ruling Conclusion The ruling addresses two separate determinations: Step 1 – Characterization under Domestic Law (Financial Leasing vs. Ordinary Rental) Condition Characterization Domestic Withholding Tax Rate Lease qualifies as financial leasing under Law No. 6361, Article 2(5) (airline company, air transport vehicle, at least 2 years, from authorized lessor) Financial leasing 1% Lease does NOT meet the above conditions Ordinary rental (real estate capital income) 20% Step 2 – Treaty Characterization (Royalties) Under Article 12(3) of the Türkiye-Ireland DTT, aircraft lease payments are considered royalties (use of industrial, commercial, or scientific equipment). Factor Determination Characterization under DTT Royalties (Article 12) Treaty maximum rate (Article 12(2)) 10% Domestic rate (financial leasing) 1% Domestic rate (ordinary rental) 20% Key Principle: If domestic law provides a lower rate than the treaty rate, the taxpayer may benefit from the lower domestic rate (as it is more favorable to the taxpayer). Final Conclusion: Scenario Applicable Withholding Tax Rate Lease qualifies as financial leasing under Law No. 6361, Article 2(5) 1% (domestic rate – more favorable than 10% treaty rate) Lease does NOT qualify as financial leasing 10% (treaty rate – lower than 20% domestic rate) Foreign Tax Credit Taxes paid in Türkiye on these royalty payments may be credited against Irish tax on the same income under Article 23(1)(a) of the DTT. Required Documentation for Treaty Benefits To benefit from the treaty provisions (including the 10% rate), 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 (the taxpayer) or the relevant tax office. If the Certificate of Residency cannot be provided: Domestic law provisions (1% or 20%, depending on the nature of the lease) will apply instead of the treaty provisions (but the domestic rate may already be more favorable). Summary Table Lease Qualification Domestic Characterization Domestic Rate Treaty Characterization Treaty Rate Final Applicable Rate Qualifies as financial leasing (Law No. 6361, Art. 2(5)) Financial leasing 1% Royalty (Art. 12) 10% 1% (lower domestic rate) Does NOT qualify as financial leasing Ordinary rental 20% Royalty (Art. 12) 10% 10% (lower treaty rate) Important Notes 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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