Ruling Number: 17192610-125[ÖZG-15-32]-26 Introduction In a private ruling dated February 8, 2016, the Bursa Tax Office (Taxpayer Services Income Group Directorate) addressed whether withholding tax applies to rental payments made for real estate belonging to a company resident in the People’s Republic of China. The taxpayer stated that their company rents an office from a Chinese resident company to monitor and control the Chinese export market and to use as a liaison office. The taxpayer requested clarification on whether withholding tax is required on the rental payments made to the Chinese 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 3(3)(d) – Income Subject to Limited Liability: Income derived from leasing movable and immovable property and rights in Türkiye constitutes corporate income subject to limited liability taxation. Article 30 – Withholding Tax for Limited Liability Taxpayers (Paragraph 1(c)): Withholding tax applies to real estate capital income (rental income) paid or accrued to limited liability corporations. Council of Ministers Decree No. 2009/14593 – Withholding Tax Rates on Real Estate Capital Income: Type of Lease Withholding Tax Rate Financial leasing activities under Law No. 3226 1% All other rental income (including ordinary real estate rental) 20% Income Tax Law (Law No. 193) Article 7 – Income Deemed Derived in Türkiye (for limited liability persons): Paragraph 5: For real estate capital income, the income is deemed derived in Türkiye if: The immovable property is located in Türkiye, or The property or rights of such nature are used or utilized in Türkiye. “Utilization” means: The payment is made in Türkiye, or if the payment is made abroad, it is credited to the accounts of the payer or the person on whose behalf the payment is made in Türkiye, or separated from profits. Corporate Tax General Communiqué No. 1 (Section 22.2.4): Income derived from leasing movable and immovable property and rights in Türkiye constitutes real estate capital income of limited liability corporations. For such income to be deemed derived in Türkiye, the movable/immovable property must be located in Türkiye and the property/rights must be used or utilized in Türkiye. Double Taxation Treaty Provisions Türkiye-People’s Republic of China Double Taxation Treaty (Effective January 1, 1998) Article 22 – Other Income: 1. Items of income of a resident of one Contracting State, wherever arising, not dealt with in the foregoing Articles of this Treaty, shall be taxable only in that State. Ruling Conclusion Step 1 – Characterization Under Domestic Law Under Article 3(3)(d) of the Corporate Tax Law, rental income derived by a non-resident company from property located in Türkiye would generally constitute real estate capital income subject to 20% withholding tax. However, in this case, the rented real estate is located in China, not in Türkiye. Step 2 – Application of Article 22 (Other Income) The rental income paid by the Turkish taxpayer to the Chinese resident company is not covered by any specific article of the DTT (it is not business profits, dividends, interest, royalties, capital gains, etc. – and importantly, the real estate is not situated in Türkiye, so Article 6 does not apply). Therefore, under Article 22(1) of the Türkiye-China DTT: Items of income of a resident of one Contracting State, wherever arising, not dealt with in the foregoing Articles, shall be taxable only in that State. Step 3 – Conclusion Factor Determination Location of the rented real estate China Is the real estate located in Türkiye? No Under Article 6 (Income from Immovable Property) The property is not situated in Türkiye, so Türkiye has no taxing right under Article 6 Under Article 22 (Other Income) Income not covered by other articles is taxable only in the State of residence (China) Turkish withholding tax on rental payments? No (provided the Chinese company provides a Certificate of Residency) Conclusion: The rental income is taxable only in China. Türkiye has no taxing right. Therefore, no withholding tax is required on the rental payments made to the Chinese resident company. Required Documentation for Treaty Benefits To benefit from the treaty exemption (no Turkish withholding tax), the Chinese resident company must: Obtain a Certificate of Residency from the competent Chinese authorities proving that it is fully liable to tax in China on its worldwide income. Provide the certificate to the taxpayer (withholding agent). If the Certificate of Residency cannot be provided: Domestic law provisions (20% withholding tax on real estate capital income – if the income were deemed derived in Türkiye) would need to be considered. However, since the property is located in China, even under domestic law, it is unlikely that Türkiye would have taxing rights. Summary Table Question Answer Where is the rented real estate located? China Is the real estate situated in Türkiye? No Under domestic law, would Türkiye tax this income? Generally, no (property not in Türkiye) Under DTT Article 6 (Immovable Property) Taxable only in China (property situated in China) Under DTT Article 22 (Other Income) Taxable only in China (residence State) Withholding tax required in Türkiye? No Required document Certificate of Residency from Chinese authorities Important Notes The key fact is that the rented real estate is located in China, not in Türkiye. If the real estate were located in Türkiye, the result would be different (Türkiye would have taxing rights under Article 6, and withholding tax would apply at 20% or the treaty rate, if any). 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.