Ruling Number: 62030549-125[30-2014/208]-12900 Introduction In a private ruling dated February 16, 2016, the Istanbul Tax Office (Taxpayer Services Income Taxes Group Directorate) addressed whether withholding tax applies to payments made to an Irish resident company for the purchase of security software licenses. The taxpayer stated that they purchase security software (providing virus protection, location tracking via internet, backup services, etc.) from an Irish resident company to be used in technological products (telephones, laptops, etc.) manufactured by domestic companies. The taxpayer requested clarification on whether withholding tax is required on the payments made for these software licenses. 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 – Withholding Tax for Limited Liability Taxpayers: Paragraph 1(b): Withholding tax applies to professional service income. Paragraph 2: Withholding tax applies to payments made for the sale, transfer, or assignment of intangible rights (copyrights, patents, trademarks, trade names, etc.), regardless of whether they are included in commercial or agricultural income. Council of Ministers Decree No. 2009/14593 – Withholding Tax Rates: Type of Payment Rate Professional service income (petroleum exploration) 5% Other professional service income 20% Intangible rights (royalties) 20% Double Taxation Treaty Provisions 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. 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 transaction Purchase of security software, resold to manufacturers without modification or reproduction, and without acquiring copyright rights Characterization Commercial income (sale of goods) Applicable treaty article Article 7 (Business Profits) Does the Irish company have a PE in Türkiye? Not stated (presumably no) Taxing right Only Ireland (if no PE in Türkiye) Withholding tax required in Türkiye? No Scenario 2 – Acquisition of Copyright Rights (Reproduction, Modification, Distribution, Display, etc.) Factor Determination Nature of the transaction The Turkish company acquires the right to reproduce, modify, distribute, display, or other copyright-related rights Characterization Royalties (Article 12) – intangible right Domestic withholding tax rate 20% Treaty reduced rate (Article 12(2)) 10% (provided the Irish company is the beneficial owner) Withholding tax required in Türkiye? Yes (at 10%) Exception (Article 12(4)): If the Irish company carries on business through a permanent establishment in Türkiye and the right/asset giving rise to the royalty is effectively connected with that PE, then Article 12 does not apply. Instead, the royalties are taxed under Article 7 (Business Profits) together with the PE profits. Independent Agent vs. Dependent Agent (PE Analysis) If the Turkish company acts as a distributor for the Irish company, the analysis of whether a PE exists depends on the nature of the relationship: 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 Yes Method of Delivery – No Effect on Tax Treatment The ruling explicitly states that the method of delivery does not change the tax treatment: Software imported on physical media (CD, disk) then activated with a password downloaded via internet, OR Software downloaded directly via internet (with license numbers separately obtained) Result: Same tax treatment as described above. Summary Table Scenario Characterization DTT Article Withholding Tax in Türkiye? Rate 1 Distribution only (no modification/reproduction rights) Commercial income (Art. 7) No (if no PE in Türkiye) 0% 2 Copyright rights (reproduction, modification, display, etc.) Royalties (Art. 12) Yes 10% (treaty rate) / 20% (domestic – without certificate) 2 (Exception) Royalties with effective connection to a PE in Türkiye Business profits (Art. 7) Yes (as part of PE profits) Corporate tax rate Foreign Tax Credit Under Article 23(1)(a) of the DTT, taxes paid in Türkiye on royalty payments may be credited against Irish tax on the same income. Required Documentation for Treaty Benefits To benefit from the treaty provisions (including 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) 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.). The method of software delivery (physical media vs. internet download) does not affect the tax treatment. If the Turkish company acts as a dependent agent (habitually concluding contracts on behalf of the Irish company), the Irish company may be deemed to have a PE in Türkiye, changing the tax outcome. 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.