Ruling Number: 62030549-125[30-2015/325]-14528 Introduction In a private ruling dated February 22, 2016, the Istanbul Tax Office (Taxpayer Services Income Taxes Group Directorate) addressed whether withholding tax applies to payments made under a franchising agreement. The taxpayer stated that: Under a Franchising Agreement signed between the taxpayer (Turkish company) and a UK resident franchisor and US resident licensors, products bearing certain trademarks are imported and sold directly to end consumers in the taxpayer’s stores across Türkiye. Withholding tax at 10% is already being applied to franchising payments made to the licensors under Article 12 (Royalties) of the Türkiye-US DTT. Additionally, under the “Global Marketing Fund” provision of the agreement, contributions are made to a fund established by the franchisor to finance advertising, marketing, and promotional activities worldwide. The taxpayer does not conduct any activities itself nor hires advertising agencies. The taxpayer only prints ready-made advertising/promotional materials obtained from abroad and forwards them to agencies for advertisements in print and visual media. The taxpayer requested clarification on whether withholding tax applies to the Global Marketing Fund contributions (calculated as a percentage of retail sales). 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: The withholding tax rate for intangible rights (royalties) is 20%. Double Taxation Treaty Provisions Türkiye-US Double Taxation Treaty (Effective January 1, 1998) 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 beneficial owner is a resident of the other State, the tax charged shall not exceed: (a)10% of the gross amount of royalties defined in paragraph 3(a) (copyrights, patents, trademarks, know-how, etc.); (b)5% of the gross amount of royalties defined in paragraph 3(b) (use of industrial, commercial, or scientific equipment). 3. The term “royalties” includes payments for the use of, or the right to use: (a) Any copyright, patent, trademark, design, plan, secret formula, manufacturing process, or know-how; (b) 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 (Business Profits) shall apply instead of Article 12. Article 13 – Transfer Pricing (Örtülü Kazanç Dağıtımı – Article 13 of Corporate Tax Law No. 5520): If the Global Marketing Fund is a related party of the taxpayer, transfer pricing rules must be considered. Ruling Conclusion Key Principle – Franchising Agreement as a Whole The taxpayer argued that the Global Marketing Fund contributions are merely cost-sharing payments for advertising/promotional materials and should not be treated as royalties. However, the ruling concludes otherwise. Factor Determination Nature of the overall agreement Franchising agreement (use of trademarks and intangible rights) Size of Global Marketing Fund contributions relative to total payments Minor (cüzi) Does the minor nature of the fund contributions change the fundamental character of the agreement? No – the agreement remains primarily a royalty/licensing agreement Treatment of payments under different names All payments under the franchising agreement (regardless of naming) must be treated as royalties for tax purposes Conclusion: The Global Marketing Fund contributions, although named differently, are part of the overall franchising agreement and constitute royalties (gayrimaddi hak bedeli). Withholding Tax Rate Payment Type Characterization Domestic Rate Treaty Rate (US Licensors) Applicable Rate Franchising payments (including Global Marketing Fund contributions) to US licensors Royalties (Art. 12) 20% 10% 10% Franchising payments to UK resident franchisor Royalties 20% Subject to Türkiye-UK DTT (Art. 12) To be determined under that treaty Transfer Pricing Consideration Under Article 13 of the Corporate Tax Law No. 5520 (Transfer Pricing – Disguised Profit Distribution): If the Global Marketing Fund is a related party of the taxpayer, the contributions must be made at arm’s length. If the contributions are not at arm’s length, they may be recharacterized as disguised profit distribution. Summary Table Question Answer What is the nature of the Global Marketing Fund contributions? Royalties (part of the franchising agreement) Does the minor nature of the contributions change the characterization? No Withholding tax required in Türkiye? Yes Applicable rate (US licensors) 10% (under Article 12 of Türkiye-US DTT) Applicable rate (UK franchisor) Subject to Türkiye-UK DTT Is the agreement treated as a whole or as separate components? As a whole Transfer pricing rules applicable? Yes, if the Fund is a related party Required Documentation for Treaty Benefits To benefit from the treaty provisions (including the 10% reduced rate), the US resident licensors must: Obtain a Certificate of Residency from the competent US authorities (IRS) proving that they are fully liable to tax in the USA on their 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 ruling emphasizes that a franchising agreement must be evaluated as a whole. Payments made under different names (e.g., “Global Marketing Fund contributions”) cannot be separated from the overall royalty character of the agreement, especially when they constitute a minor portion of total payments. The fact that the taxpayer does not directly benefit from the global marketing activities or does not conduct its own advertising does not change the characterization. Transfer pricing rules apply if the Global Marketing Fund is a related party. 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.