Ruling Number: 62030549-125[30-2015/224]-97212 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 to an Indian resident company under a license agreement. The taxpayer stated that they have a license agreement as a Turkish distributor with a company headquartered in India. Under this agreement, the taxpayer sells computer software to public schools, private schools, and various educational institutions in Türkiye without making any modifications to the software. The taxpayer makes monthly payments in foreign currency to the Indian resident company for these licenses. The taxpayer requested clarification on whether withholding tax is required on these payments. Legal Framework – 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 30(2) – Withholding Tax for Limited Liability Taxpayers: Withholding tax applies to payments made for the sale, transfer, or assignment of intangible rights such as: Copyrights, Patents, Trademarks, Trade names, And similar intangible rights, regardless of whether they are included in commercial or agricultural income. Council of Ministers Decree No. 2009/14593 (effective February 3, 2009): Type of Payment Withholding Tax Rate Professional service income 20% Intangible rights (royalties) 20% Double Taxation Treaty Provisions Türkiye-India Double Taxation Treaty (Effective January 1, 1994) Article 5 – Permanent Establishment: Defines when a permanent establishment exists in the other State. 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 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, according to its domestic laws. But if the beneficial owner is a resident of the other State, the tax charged shall not exceed: (i) 15% of the gross amount of royalties for the use of or the right to use any copyright of literary, artistic, or scientific work (including cinematograph films), or (ii) 10% of the gross amount of royalties for the use of or the right to use any patent, trademark, design, plan, secret formula, or manufacturing process, or for the use of or the right to use industrial, commercial, or scientific equipment, or for information concerning industrial, commercial, or scientific experience (know-how). Ruling Conclusion The ruling distinguishes between two scenarios based on the nature of the rights acquired: Scenario 1 – Distribution Only (No Modification or Reproduction Rights) Factor Determination Nature of the contract The Turkish company acts as a distributor, selling software without modification and without acquiring any additional rights (reproduction, modification, display, etc.) Characterization Commercial income (sale of goods) Applicable treaty article Article 7 (Business Profits) Does the Indian company have a permanent establishment in Türkiye? Not stated (presumably no) Taxing right Only India (if no PE in Türkiye) Corporate tax withholding required in Türkiye? No (commercial income not subject to withholding under Article 30) Conclusion: Payments for software distribution rights only (without modification or reproduction rights) are not subject to withholding tax in Türkiye. Scenario 2 – Acquisition of Copyright Rights (Reproduction, Modification, Distribution, Display, etc.) Factor Determination Nature of the contract The Turkish company acquires the right to reproduce, modify, distribute, display, or other copyright-related rights Characterization Royalties (Article 12) Applicable treaty article Article 12 Domestic withholding tax rate 20% Treaty reduced rates Up to 15% (literary/artistic/scientific works) or up to 10% (patents, trademarks, know-how, equipment) Withholding tax required in Türkiye? Yes Conclusion: Payments for copyright rights (beyond mere distribution) are characterized as royalties and may be subject to withholding tax at rates not exceeding the treaty limits. Summary Table Scenario Characterization Treaty Article Withholding Tax in Türkiye? Rate 1 Distribution only (no modification/reproduction rights) Commercial income (Art. 7) No 0% 2 Copyright rights (reproduction, modification, display, etc.) Royalties (Art. 12) Yes Up to 10%-15% (treaty) / 20% (domestic) Required Documentation for Treaty Benefits To benefit from the treaty provisions (including the exemption for commercial income or the reduced rates for royalties), the Indian resident company must: Obtain a Certificate of Residency from the competent Indian authorities proving that it is fully liable to tax in India 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 intangible rights) will apply instead of the treaty provisions. Important Notes The key distinction is whether the Turkish company acquires only distribution rights or also acquires copyright rights (reproduction, modification, display, etc.). In Scenario 1 (distribution only), the payments are treated as commercial income and are not subject to withholding tax in Türkiye, provided the Indian company has no permanent establishment in Türkiye. In Scenario 2 (copyright rights), the payments are treated as royalties and are subject to withholding tax. 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. 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