Ruling Number: 41931384-125[3-2013-12]-53 Introduction In a private ruling dated December 20, 2013, the Sakarya Tax Office (Taxpayer Services Group Directorate) addressed whether withholding tax applies to payments made for the repair of defective equipment sent to the manufacturer in Germany. The taxpayer stated that their company performs maintenance and repair of passenger wagons belonging to the Turkish State Railways (TCDD). In this context, two defective transmissions used in these wagons were sent to the manufacturer, a German company, for repair at its facilities in Germany. After repair, the products will be returned. The taxpayer requested clarification on their tax obligations regarding the repair service payments. Legal Framework – Domestic Law Corporate Tax Law (Law No. 5520) Article 3 – 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: Withholding tax applies to certain types of income paid or accrued to limited liability corporations. Under the Council of Ministers Decree No. 2009/14593 (dated January 12, 2009), the withholding tax rate for professional service income is: 5% for professional service income related to petroleum exploration activities, 20% for other professional service income. Double Taxation Treaty Provisions Türkiye-Germany Double Taxation Treaty (Effective as of January 1, 2011 – entered into force on August 1, 2012) Article 7 – Business Profits: 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. Article 5 – Permanent Establishment: Defines when a permanent establishment exists, including specific provisions under paragraph 3(b). Article 14 – Professional Services (if the income is derived by an individual rather than a company): Applies instead of Article 7 when the income is derived by a real person (individual) rather than a corporate entity. Ruling Conclusion Key Principle: Under Article 7 of the Türkiye-Germany DTT, the right to tax business profits belongs exclusively to the State of residence (Germany) unless the enterprise carries on business through a permanent establishment in the other State (Türkiye). Application to the Case: Factor Determination Service provided Repair of defective transmissions Location of repair Germany (at the manufacturer’s facilities) Service provider German resident company Does the German company have a permanent establishment in Türkiye? No (based on the facts) Where is the income derived? Germany (services performed outside Türkiye) Conclusion: The German company’s income from the repair services is not derived in Türkiye. Türkiye does not have the right to tax this income under the DTT. No withholding tax shall be applied to the payments made for the repair services. Note: If the income were derived by an individual (real person) rather than a company, the analysis would be under Article 14 (Professional Services), but the conclusion would be the same – no withholding tax if the services are performed outside Türkiye without a fixed base in Türkiye. Required Documentation for Treaty Benefits To benefit from the treaty provisions, the German company must: Obtain a Certificate of Residency from the competent German authorities proving that it is fully liable to tax in Germany 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 tax provisions (including potential 20% withholding tax) shall apply instead of the treaty provisions. Summary Table Question Answer Where are the repair services performed? Germany Does the German company have a PE in Türkiye? No Does Türkiye have the right to tax the repair income? No (under DTT Article 7) Withholding tax required on payments? No Condition for treaty benefit Certificate of Residency + certified Turkish translation Consequence if no certificate provided Domestic law applies (potential 20% withholding tax) 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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