Ruling Number: 62030549-125[30-2014/179]-97176 Introduction In a private ruling dated November 24, 2015, the Istanbul Tax Office (Taxpayer Services Income Taxes Group Directorate) addressed whether withholding tax applies to payments made for internet services obtained from a company resident in the Turkish Republic of Northern Cyprus (TRNC). The taxpayer requested clarification on: Whether the internet service received from a TRNC resident company is subject to VAT withholding, Whether the VAT paid can be deducted as input VAT, and Whether corporate tax withholding applies to the payments. Corporate Tax Withholding Analysis 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)(a) – Income Subject to Limited Liability: Commercial income derived by foreign corporations having a place of business or permanent representative in Türkiye (in accordance with Tax Procedure Law No. 213). Article 30 – Withholding Tax: Withholding tax applies to certain types of income listed in the article. Commercial income is NOT listed among income subject to withholding tax. Double Taxation Treaty Provisions Türkiye-TRNC Double Taxation Treaty Article 5 – Permanent Establishment: Defines when a permanent establishment exists in the other State. Article 7 – Business Profits: 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 the enterprise carries on business as aforesaid, the profits may be taxed in the other State but only so much of them as is attributable to that permanent establishment. 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. But if the payee is the beneficial owner, 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. 4. If the beneficial owner carries on business through a permanent establishment 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. Ruling Conclusion – Corporate Tax Withholding The ruling distinguishes between two scenarios: Scenario 1 – Standard Internet Service (Commercial Income) Factor Determination Nature of service Standard internet service (connection, data transmission) Characterization Commercial income Does the TRNC company have a PE in Türkiye? Not stated (presumably no) Taxing right under Article 7 Only TRNC (if no PE in Türkiye) Corporate tax withholding required? No (commercial income not subject to withholding under Article 30) Conclusion: Payments for standard internet services are not subject to corporate tax withholding in Türkiye. Scenario 2 – Services Involving Intangible Rights (e.g., Web Hosting) Factor Determination Nature of service Web hosting, domain hosting, or similar services involving the use of servers/intangible rights Characterization Royalties (Article 12) Withholding tax required? Yes Treaty maximum rate 10% Conclusion: If the service involves web hosting (website hosted on the TRNC company’s servers) or similar intangible rights, the payments are characterized as royalties and are subject to withholding tax at 10%. VAT Analysis Value Added Tax Law (Law No. 3065) Article 1(1): Supplies and services performed in Türkiye within the scope of commercial, industrial, agricultural, or professional activities are subject to VAT. Article 1(2): All imports of goods and services are subject to VAT. Article 4(1): Services are defined as transactions other than supplies and deemed supplies, including performing, processing, producing, repairing, cleaning, storing, preparing, valuing, leasing, or undertaking not to do something. Article 6(b): A transaction is deemed performed in Türkiye if the service is performed in Türkiye or benefited from in Türkiye. Article 9(1): If the taxpayer has no residence, workplace, legal center, or business center in Türkiye, the Ministry of Finance may hold the counterparty liable for the payment of VAT. VAT General Application Communiqué (Section I/C-2.1.2.1) For services performed in Türkiye by persons whose residence, workplace, legal center, and business center are not located in Türkiye, as well as services performed abroad but benefited from in Türkiye, VAT shall apply. Since the service provider has no residence, workplace, legal center, or business center in Türkiye, the full amount of VAT shall be declared and paid by the domestic recipient as a withholding agent using the 2 No. VAT Return. If the service is performed and benefited from abroad, no VAT is required. The recipient is not required to be a VAT taxpayer to be subject to withholding. Even non-VAT taxpayers must withhold VAT and declare it using the 2 No. VAT Return. Examples provided in the Communiqué: Architectural project service drawn abroad but sent to Türkiye, Consulting service provided from abroad for the operation of a power plant in Türkiye, Computer software service provided from abroad to a general budget institution. Ruling Conclusion – VAT Factor Determination Internet service obtained from TRNC resident company Service is used/benefited from in Türkiye Is the service subject to VAT? Yes (import of service – Article 1/2 and Article 6(b)) Who is liable for VAT payment? The taxpayer (recipient) as a withholding agent Which VAT return to file? 2 No. VAT Return (sorumlu sıfatıyla) Can the VAT be deducted as input VAT? Yes (deductible in the same period using the 1 No. VAT Return) Summary Table Tax Type Scenario Withholding Required? Rate/Notes Corporate Tax Standard internet service (commercial income) No Taxable only in TRNC (no PE in Türkiye) Corporate Tax Web hosting / intangible rights services Yes 10% (royalties under Article 12) VAT All internet services benefited from in Türkiye Yes (by recipient) Standard VAT rate (declare on 2 No. VAT Return; deduct on 1 No. VAT Return) Required Documentation for Treaty Benefits To benefit from the treaty provisions (including the 10% reduced rate for royalties), 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 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 will apply instead of the treaty provisions. Important Notes The classification of the service (standard internet vs. web hosting/intangible rights) is critical for determining whether corporate tax withholding applies. VAT withholding is required for all services benefited from in Türkiye, regardless of the service provider’s residency. The taxpayer must file both a 2 No. VAT Return (to declare and pay the withheld VAT) and a 1 No. VAT Return (to deduct the same VAT as input VAT). 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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