Ruling Number: B.07.1.GİB.4.34.16.01-KVK 30-2221 Introduction In a private ruling dated December 15, 2011, the Istanbul Tax Office (Taxpayer Services Income Taxes Group Directorate) addressed whether withholding tax applies to payments made to foreign resident companies for computer software. The taxpayer stated that they are engaged in marketing, sales, installation, maintenance, consulting, and version updates for software purchased from abroad. They acquired software licenses from a Polish resident company (24.98% subsidiary) by purchasing passwords via email, without receiving physical media such as CDs. The software was then sold to customers in Türkiye without being used by the taxpayer themselves. The taxpayer requested clarification on whether withholding tax is required on payments made abroad for such software, including for software to be purchased from the United Kingdom under similar arrangements. Legal Framework Corporate Tax Law (Law No. 5520) Article 3 (Limited Liability): Corporations whose legal and business centers are not both located in Türkiye are subject to taxation only on their income derived from Türkiye. Article 30 (Withholding Tax for Limited Liability Taxpayers): Paragraph 1(b): Payments made for professional service income are subject to withholding tax. Paragraph 2: Payments made for the sale, transfer, or assignment of copyrights, patents, trademarks, trade names, and other intangible rights – regardless of whether they are included in commercial or agricultural income – are subject to withholding tax at a rate of 20% (as determined by Council of Ministers Decree No. 2009/14593). Three Scenarios for Software Payments Scenario Nature of Income Withholding Tax Required 1. Imported software sold to end users or used in the business without modification or reproduction Commercial income No withholding tax 2. Custom development of a new software program (not previously available in the market) for use or resale Professional service income 20% withholding tax 3. Purchase of copyright rights (reproduction, modification, distribution, display, etc.) Intangible right (royalty) 20% withholding tax Important Note: The method of delivery (physical media imported through customs vs. password download via the internet) does not change the tax treatment. Double Taxation Treaty Provisions Türkiye-Poland Double Taxation Treaty (Effective January 1, 1989) 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. Such 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 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, know-how, or industrial, commercial, or scientific equipment. Article 23 – Elimination of Double Taxation (Poland): Poland shall provide a foreign tax credit for taxes paid in Türkiye, limited to the amount of Polish tax attributable to such income. Application to the Case (Poland) The payments made to the Polish resident company are for passwords that allow downloading and using software. These payments constitute royalties under Article 12 of the treaty because they provide the right to use the software. Standard withholding tax rate: 20% (under domestic law) Treaty reduced rate: 10% (if the beneficial owner is a resident of Poland) To apply the 10% treaty rate, the Polish company must provide: A Certificate of Residency issued by the competent Polish authorities, and A notarized or Turkish Consulate-certified Turkish translation of the certificate, to the relevant tax office or to the taxpayer (as withholding agent). Application to the United Kingdom The Türkiye-UK Double Taxation Treaty contains identical provisions in Article 12 (Royalties), also providing a 10% reduced withholding tax rate for royalty payments. Therefore: Payments to UK resident persons (real or legal) for similar software password arrangements are subject to 20% withholding tax under domestic law. If the UK resident provides a valid Certificate of Residency (with notarized Turkish translation), the withholding tax rate shall be reduced to 10%. Summary Table Counterparty Domestic Withholding Rate Treaty Reduced Rate Condition for Reduced Rate Poland 20% 10% Certificate of Residency + certified Turkish translation United Kingdom 20% 10% Certificate of Residency + certified Turkish translation 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. 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