Ruling Number: 62030549-125[30-2014/168]-106046 Introduction In a private ruling dated August 2, 2016, the Istanbul Tax Office (Taxpayer Services Income Taxes Group Directorate) addressed whether withholding tax applies to payments made for computer software obtained from an Irish resident company. The taxpayer stated that their company is engaged in the import, stocking, and distribution of electronic security products and software (security cameras, card-based audio and visual access control systems, alarm systems, and related equipment). The company’s main activity is distributing imported products to end users through a dealer network. The company does not engage in software development or physical product manufacturing. The taxpayer purchases computer software from an Irish software development company and sells it as commercial goods to dealers without modification or reproduction. The taxpayer requested clarification on whether withholding tax applies to: Payments made for the software (as commercial goods), and Payments made for activation codes for such software. Part I – Domestic Law Analysis 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: Type of Payment Withholding Tax Rate Professional service income (petroleum exploration) 5% Other professional service income 20% Intangible rights (royalties – copyrights, patents, trademarks, etc.) 20% Important: Commercial income (business profits) is not subject to withholding tax. Part II – 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 taxpayer (or modifications made to existing software) Professional service income Yes 20% 3 Acquisition of copyright rights (reproduction, modification, distribution, display) Royalties (intangible rights) Yes 20% Note: Payments for activation codes are treated the same as the underlying software purchase (based on the nature of the transaction). Part III – Double Taxation Treaty Analysis 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. Part IV – Ruling Conclusion Step 1 – Characterization of the Income (No Modification, No Reproduction Rights) The taxpayer purchases standard software from the Irish company and sells it to dealers without modification or reproduction. No copyright rights (reproduction, modification, adaptation) are granted. Factor Determination Nature of the transaction Sale of standard software products (off-the-shelf) Rights granted Distribution only (no copyright rights) Characterization under domestic law Commercial income (business profits) Characterization under DTT Article 7 (Business Profits) Step 2 – Application of DTT Article 7 (Business Profits) Factor Determination Does the Irish company have a PE in Türkiye? No (sells through independent dealers) Are the dealers “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 dealers, the payments would be characterized as royalties under Article 12, subject to 10% withholding tax (treaty rate). Step 5 – Activation Codes Factor Determination Nature of activation codes Activation codes are ancillary to the software purchase Tax treatment Treated the same as the underlying software payments (based on the nature of the transaction) 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 dealers 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 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 5 Activation codes Treated as software payments Same as underlying transaction Same as underlying transaction Same as underlying transaction 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 (the taxpayer) or the relevant tax office. If the Certificate of Residency cannot be provided: Domestic law provisions (20% withholding tax) may apply if the income is characterized as royalties or professional services. However, if the income is characterized as commercial income, no tax would be due regardless. Important Notes The key distinction is whether the taxpayer acquires only distribution rights or also copyright rights (reproduction, modification, adaptation). The fact that the dealers are independent and unrelated parties is critical – they do not create a permanent establishment for the Irish company. Activation codes are treated the same as the underlying software payments (the tax treatment depends on the nature of the transaction). 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. 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