Ruling Number: 62030549-125[30-2014/154]-92661 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 made for the acquisition of shares of a Turkish joint stock company subsidiary from a company resident in Malta. The taxpayer stated that they would acquire 100% of the shares of a joint stock company subsidiary that a Maltese resident company has held for more than one year in Türkiye. The payment would be made to the Maltese resident company (the parent company’s main center in Malta). The taxpayer requested clarification on whether withholding tax is required on such 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. Double Taxation Treaty Provisions Türkiye-Malta Double Taxation Treaty (Effective January 1, 2014) Article 13 – Capital Gains: 1. Gains derived by a resident of one Contracting State from the alienation of immovable property (as defined in Article 6) situated in the other Contracting State may be taxed in that other State. 2. Gains from the alienation of shares or similar interests in a company whose assets consist wholly or principally of immovable property may be taxed in the Contracting State where the company’s assets or principal assets are situated. 3. Gains from the alienation of movable property forming part of the business property of a permanent establishment or fixed base may be taxed in the other State. 4. Gains from the alienation of ships, aircraft, or road vehicles operated in international traffic shall be taxable only in the State where the alienator is resident. 5. Gains from the alienation of any property other than those referred to in paragraphs 1, 2, 3, and 4 shall be taxable only in the State where the alienator is resident. However, such capital gains derived in the other State may also be taxed in that other State if the period between acquisition and alienation does not exceed one year. Article 26 – Limitation of Benefits (Paragraph 3): Notwithstanding the other provisions of this Treaty, a resident of one Contracting State shall not be entitled to any tax reduction or exemption provided by this Treaty in the other Contracting State if the main purpose or one of the main purposes of the creation or existence of such resident or any person connected with such resident is to obtain benefits under this Treaty that would not otherwise be available. Ruling Conclusion The tax treatment depends on two main factors: Whether the subsidiary company’s assets consist wholly or principally of immovable property (real estate), and If not, the holding period of the shares (whether more than one year). Scenario 1 – Subsidiary’s Assets Consist Wholly or Principally of Immovable Property Factor Determination Applicable treaty article Article 13(2) Taxing right Türkiye (where the company’s assets/principal assets are situated) Does the holding period matter? No – regardless of whether shares were held for more than one year Withholding tax required in Türkiye? Yes (Türkiye has taxing right) Scenario 2 – Subsidiary’s Assets Do NOT Consist Wholly or Principally of Immovable Property Holding Period Applicable Treaty Article Taxing Right Withholding Tax in Türkiye? More than 1 year Article 13(5) – first sentence Only Malta (State of residence of the alienator) No 1 year or less Article 13(5) – second sentence (proviso) Türkiye (source State) may also tax Yes Important Note: The taxpayer stated that the Maltese company has held the shares for more than one year. Therefore, under Scenario 2, the exclusive taxing right belongs to Malta, and no withholding tax is required in Türkiye. Limitation of Benefits (Anti-Abuse Provision) Under Article 26(3) of the DTT, even if the treaty would otherwise provide an exemption or reduced rate, the Maltese company cannot benefit from the treaty if: The main purpose (or one of the main purposes) of the creation or existence of the Maltese company (or any person connected with it) is to obtain treaty benefits that would not otherwise be available. Practical implication: The taxpayer and the Maltese company should be prepared to demonstrate that the transaction has a legitimate commercial purpose and is not structured primarily for treaty shopping. Required Documentation for Treaty Benefits To benefit from the treaty provisions (e.g., exemption from Turkish tax if holding period >1 year), the Maltese resident company must: Obtain a Certificate of Residency from the competent Maltese authorities proving that it is fully liable to tax in Malta on its worldwide income. Provide the original certificate along with a notarized or Turkish Consulate-certified Turkish translation to the relevant tax authorities or withholding agent. Summary Table Subsidiary’s Asset Composition Holding Period Taxing Right Withholding Tax in Türkiye? Wholly/principally immovable property Any Türkiye Yes Not wholly/principally immovable property More than 1 year Only Malta No (exemption) Not wholly/principally immovable property 1 year or less Türkiye (may also tax) Yes Based on the taxpayer’s statement (holding period >1 year and no indication of immovable property-heavy assets): No withholding tax in Türkiye, subject to the limitation of benefits clause. Important Notes 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.