Ruling Number: 62030549-125[30-2013/302]-2358 Introduction In a private ruling dated October 10, 2014, 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 US resident company. The taxpayer stated that they would lease an aircraft through an ordinary (operating) lease from the same US resident company to which they would sell the 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 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 immovable property must be located in Türkiye, or 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. Double Taxation Treaty Provisions Türkiye-US Double Taxation Treaty (Effective January 1, 1998) Article 8 – Shipping and Air Transport: 1. Profits derived by an enterprise of one Contracting State from the operation of ships or aircraft in international traffic shall be taxable only in that State. 2. For the purposes of this Article, profits from the operation of ships or aircraft in international traffic include profits from the rental of ships or aircraft, provided such rental profits are incidental to other profits described in paragraph 1. Article 12 – Royalties: 2. Royalties may also be taxed in the State in which they arise, according to its domestic laws. However, if the beneficial owner is a resident of the other State, the tax charged shall not exceed: (a) 10% of the gross amount of royalties defined in paragraph 3(a); (b) 5% of the gross amount of royalties defined in paragraph 3(b). 3. The term “royalties” includes: (a) … (copyrights, patents, trademarks, etc.) (b) Payments for the use of, or the right to use, industrial, commercial, or scientific equipment. Article 13 – Capital Gains (Paragraph 4): Gains derived from the alienation of aircraft operated in international traffic shall be taxable only in the State where the alienator is resident. Ruling Conclusion The ruling identifies three scenarios depending on the nature and frequency of the leasing activity: Scenario Characterization Withholding Tax Rate Scenario 1: Aircraft rental is incidental to international air transport operations (occasional, few times) International traffic profits (Article 8) – exclusive taxing right of the US 0% (no Turkish tax) Scenario 2: Aircraft rental is continuous (not incidental) OR the US company’s main activity is not international air transport Royalty (Article 12(3)(b) – industrial/commercial equipment) 5% (treaty rate) Scenario 3: Domestic law applies (no treaty benefit or no certificate) Real estate capital income (domestic law) 20% Detailed Analysis Scenario 1 – Incidental Rental (International Traffic) Under Article 8(2) of the DTT: Rental of aircraft is included in “profits from international traffic” only if the rental income is incidental to the main international air transport profits. Condition: The leasing activity must be occasional (e.g., a few times). Result: Exclusive taxing right belongs to the US. No withholding tax in Türkiye. Scenario 2 – Continuous Rental or Non-Air Transport Company If the leasing activity is continuous (beyond incidental), OR The US company’s principal business is not international air transport, Then Article 8 does not apply. The rental payments are characterized as royalties under Article 12(3)(b) (use of industrial, commercial, or scientific equipment). Result: Withholding tax at 5% (treaty rate). Scenario 3 – Domestic Law Only If the US company cannot provide a Certificate of Residency, or if the treaty does not apply for other reasons: Domestic law characterizes the payments as real estate capital income (movable property rental). Result: Withholding tax at 20% (domestic rate). Capital Gains on Sale of Aircraft Under Article 13(4) of the DTT, gains from the alienation (sale) of aircraft operated in international traffic are taxable only in the State where the alienator is resident (the US). However, this ruling notes that such gains must still be considered under domestic law for Turkish tax purposes (though the treaty may exempt them). Required Documentation for Treaty Benefits To benefit from the treaty provisions, the US resident company must: Obtain a Certificate of Residency from the competent US authorities (IRS). Provide the original certificate along with a notarized or Turkish Consulate-certified Turkish translation to the withholding agent (the taxpayer). Withholding agents must retain these certificates and present them to the authorities when required. If the certificate is not provided, domestic tax provisions (20% withholding) will apply instead of the treaty. Summary Table Factor Incidental Rental (Article 8) Continuous Rental / Non-Air Transport Co. (Article 12) No Certificate (Domestic Law) Characterization International traffic profits Royalty (industrial/commercial equipment) Real estate capital income Taxing right Only the US Both US and Türkiye (with rate limit) Türkiye Withholding tax rate in Türkiye 0% 5% 20% Treaty article Article 8 Article 12(3)(b) N/A 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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