Ruling Number: 62030549-125[30-2014/211]-13093 Introduction In a private ruling dated February 17, 2016, the Istanbul Tax Office (Taxpayer Services Income Taxes Group Directorate) addressed whether withholding tax applies to payments made for translation services received from a Spanish resident translation bureau. The taxpayer stated that they receive translation services from a Spanish resident translation bureau. The files to be translated are sent to the bureau via email, and the translated files are received back via email. The taxpayer requested clarification on whether corporate tax withholding and VAT withholding are required on the payments made to the Spanish translation bureau. 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)(c) – Income Subject to Limited Liability: Professional service income derived in Türkiye constitutes corporate income subject to limited liability taxation. Article 30(1) – Withholding Tax: Withholding tax applies to payments made for professional service income at a rate of 15% (with authority granted to the Council of Ministers to adjust rates). Council of Ministers Decree No. 2009/14593: Type of Professional Service Income Withholding Tax Rate Petroleum exploration 5% Other professional service income 20% Double Taxation Treaty Provisions Türkiye-Spain Double Taxation Treaty (Article 14 – Professional Services) Paragraph 1 – Real Persons (Individuals): Income derived by an individual resident of one Contracting State from professional services shall be taxable only in that State unless the services are exercised in the other State. If exercised in the other State, the income may also be taxed in that other State if: (a) The individual has a fixed base regularly available in the other State for performing the services; or (b) The individual stays in the other State for 183 days or more in any 12-month period. Paragraph 2 – Enterprises (Legal Entities): Income derived by an enterprise of one Contracting State from professional services shall be taxable only in that State unless the services are exercised in the other State. If exercised in the other State, the income may also be taxed in that other State if: (a) The enterprise has a permanent establishment in the other State for performing the services; or (b) The services are performed for a period or periods exceeding 183 days in any 12-month period. The enterprise may elect to be taxed under Article 7 (Business Profits) as if the income were attributable to a PE. This election does not affect the other State’s right to tax by withholding. Protocol – Article 7 (Additional to Article 14(2)): For the purposes of Article 14(2), services or activities performed by an enterprise of one Contracting State in the other State through personnel employed or assigned (for the same or connected projects) shall be deemed to be performed in that other State. Article 22 – Elimination of Double Taxation (Paragraph 1): Taxes paid in Türkiye may be credited against Spanish tax on the same income. Ruling Conclusion – Corporate Tax Withholding Key Principle: The Spanish translation bureau provides the translation services without coming to Türkiye (all communication and file transfer via email). Factor Determination Where are the services performed? Spain (via email – no entry to Türkiye) Does the Spanish bureau have a fixed base/PE in Türkiye? No Are the services performed in Türkiye for ≥183 days? No Taxing right under Article 14 Only Spain Corporate withholding tax required in Türkiye? No Conclusion: Since the translation services are performed entirely in Spain, the conditions under Article 14(1)(a)/(b) and (2)(a)/(b) are not met. Therefore, the income is taxable only in Spain. No corporate withholding tax is required in Türkiye. Exception: If the Spanish bureau were to: Establish a fixed base (for individuals) or permanent establishment (for enterprises) in Türkiye, OR Perform services in Türkiye for 183 days or more, then Türkiye would have the right to tax (by withholding at 20% or under Article 7/14 as applicable). VAT Withholding 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, including performing, processing, producing, manufacturing, 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 may hold the counterparty (recipient) liable for VAT payment. 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. Ruling Conclusion – VAT Factor Determination Where is the translation service performed? Spain (via email) Is the service benefited from in Türkiye? Yes (the Turkish company uses the translated documents 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 Service Location Benefit Location Withholding Required? Rate/Notes Corporate Tax Spain (performed abroad) Türkiye No (taxable only in Spain under DTT Article 14) 0% Corporate Tax (Exception) Türkiye (with PE or ≥183 days) Türkiye Yes 20% (or under Art. 7/14) VAT Spain (performed abroad) 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 (exemption from Turkish corporate withholding tax), the Spanish translation bureau must: Obtain a Certificate of Residency from the competent Spanish authorities proving that it is fully liable to tax in Spain 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 on professional service income) would apply in theory, but since the services are performed abroad, domestic law may not deem the income derived in Türkiye. Important Notes Corporate tax withholding: Not required because the services are performed entirely in Spain and the Spanish bureau has no fixed base/PE in Türkiye. VAT withholding: Required because the service is benefited from in Türkiye (import of service). The taxpayer must file both: 2 No. VAT Return to declare and pay the withheld VAT, and 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. Every institution has different requirements because of its own circumstances even though they bear a resemblance to each other. Consequently, it is your interest to consult on an expert before taking a decision based on information stated in this article and putting into practice. Neither MuhasebeNews nor related person or institutions are not responsible for any damages or losses that might occur in consequence of the use of the information in this article by private or formal, real or legal person and institutions.