Ruling Number: 62030549-125[30-2015/9]-92805 Introduction In a private ruling dated November 9, 2015, the Istanbul Tax Office (Taxpayer Services Income Taxes Group Directorate) addressed whether withholding tax applies to payments to be made for computer software purchased from a German resident company. The taxpayer stated that they intend to purchase computer software from a German resident company and resell it domestically without making any modifications. The software will be delivered on physical media (DVD/USB), and the activation passwords will be sent via email. The taxpayer requested clarification on whether withholding tax is required on the payments to be made to the German resident company. 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 such payments is 20%. Double Taxation Treaty Provisions Türkiye-Germany Double Taxation Treaty (Effective January 1, 2011) 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. If the enterprise carries on business as aforesaid, the profits may be taxed in the other State but only so much of them as is attributable to that permanent establishment. 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 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 of literary, artistic, or scientific work (including software). Ruling Conclusion The ruling distinguishes between two scenarios based on the nature of the rights acquired: Scenario 1 – Distribution Rights Only (No Modification or Reproduction Rights) Factor Determination Nature of the contract The Turkish company obtains only the right to distribute the software in Türkiye (no right to modify or reproduce) Characterization Commercial income (sale of goods) Applicable treaty articles Article 7 (Business Profits) and Article 5 (Permanent Establishment) Withholding tax required in Türkiye? No (commercial income is not subject to withholding tax under Article 30) Taxing right Only Germany (unless the German company has a permanent establishment in Türkiye) Condition: If the German company does have a permanent establishment (place of business or permanent representative) in Türkiye, then Türkiye may tax the profits attributable to that PE. Scenario 2 – Right to Modify or Reproduce the Software Factor Determination Nature of the contract The Turkish company obtains the right to modify or reproduce the software Characterization Royalties (Article 12 – use of copyright) Domestic withholding tax rate 20% Treaty reduced rate (Article 12(2)) 10% (maximum) Withholding tax required in Türkiye? Yes Applicable rate (with Certificate of Residency) 10% Summary Table Scenario Nature of Rights Characterization Withholding Tax in Türkiye? Rate 1 Distribution only (no modification/reproduction) Commercial income (sale of goods) No 0% 2 Right to modify or reproduce software Royalties (Art. 12) Yes 10% (with certificate) / 20% (without) Required Documentation for Treaty Benefits To benefit from the treaty provisions (including the 10% reduced rate for royalties or the commercial income exemption), the German resident 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). 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 the right to modify or reproduce the software. The method of delivery (physical media vs. password via email) does not change the tax treatment; the characterization depends on the nature of the rights acquired under the contract. 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. 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