Ruling Number: 62030549-125[30-2016/53]-81767 Introduction In a private ruling dated June 17, 2016, the Istanbul Tax Office (Taxpayer Services Income Taxes Group Directorate) addressed the withholding tax rate applicable to dividend payments to be made to a Danish resident company. The taxpayer stated that their company (a Turkish resident company) will distribute dividends to a Danish resident company that holds 90% of the taxpayer’s shares. The taxpayer requested clarification on the withholding tax rate to be applied under the Türkiye-Denmark Double Taxation Treaty. 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: A 15% withholding tax applies to income and proceeds paid or accrued to limited liability corporations (including advances). Paragraph 3: Full liability corporations distributing dividends to limited liability corporations (except those receiving dividends through a permanent establishment in Türkiye) or to limited liability taxpayers exempt from corporate tax must also withhold tax at 15% on the dividends (except for certain types of profit distributions specified in Article 75(2)(1), (2), and (3) of the Income Tax Law). Double Taxation Treaty Provisions Türkiye-Denmark Double Taxation Treaty (Effective January 1, 1991) Article 10 – Dividends: 1. Dividends paid by a company resident in one Contracting State to a resident of the other Contracting State may be taxed in that other State. 2. However, such dividends may also be taxed in the State where the paying company is resident, according to its domestic laws. But if the beneficial owner is a resident of the other State, the tax charged shall not exceed: (a)15% of the gross amount of the dividends if the beneficial owner is a company (other than a partnership) holding directly at least 25% of the capital of the paying company; (b)20% of the gross amount of the dividends in all other cases. 3. The term “dividends” includes income from shares, founders’ shares, or other rights (not being debt-claims) participating in profits. 4. If a company of one Contracting State derives profits from the other State through a permanent establishment, those profits (after taxation under Article 7) may be taxed on the remaining amount in the other State, and the tax so charged shall not exceed 50% of the rate provided in paragraph 2(a) (i.e., 7.5%). 5. If the beneficial owner of the dividends carries on business through a permanent establishment in the other State, and the holding giving rise to the dividends is effectively connected with such permanent establishment, then paragraphs 1 and 2 shall not apply. In such case, Article 7 (Business Profits) or Article 14 (Professional Services) shall apply. 6. A company resident in one State deriving profits from the other State shall not be taxed in that other State on dividends paid by it (except to residents of that State or effectively connected with a PE), nor on undistributed profits. Ruling Conclusion Step 1 – Determine the Applicable Treaty Rate Factor Determination Beneficial owner Danish resident company Shareholding percentage 90% (direct holding) Article 10(2)(a) condition (≥25% holding) Met Applicable treaty rate 15% Step 2 – Domestic Rate vs. Treaty Rate Rate Type Percentage Domestic withholding tax rate (Article 30) 15% Treaty rate (Article 10(2)(a)) 15% Applicable withholding tax rate in Türkiye 15% (same as domestic rate) Step 3 – Denmark’s Taxing Right Under Article 10(1), Denmark also has the right to tax the dividends. If double taxation occurs, under Article 22 of the DTT, taxes paid in Türkiye may be credited against Danish tax on the same income. Step 4 – Article 10(4) – Branch Profits (Not Applicable) The ruling notes that Article 10(4) (which provides a reduced 7.5% rate for branch profits) applies to branch profits, not to dividend distributions. Since the Danish company does not have a branch/PE in Türkiye, this provision does not apply to this case. Summary Table Question Answer What is the shareholder’s holding percentage? 90% Condition for 15% rate under Article 10(2)(a) ≥25% holding – Met Applicable treaty withholding tax rate 15% Domestic withholding tax rate 15% Final withholding tax rate in Türkiye 15% Does Article 10(4) (7.5% rate) apply? No (applies to branch profits, not dividends) Foreign tax credit available? Yes (in Denmark, under Article 22) Required Documentation for Treaty Benefits To benefit from the treaty provisions (including the 15% rate), the Danish resident company must: Obtain a Certificate of Residency from the competent Danish authorities proving that it is fully liable to tax in Denmark 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 (15% withholding tax – which is the same rate) will apply. The rate is the same, but without the certificate, the Danish company may not be able to claim the foreign tax credit in Denmark. Important Notes The 15% rate applies to corporate shareholders holding at least 25% of the paying company’s capital. The domestic withholding tax rate is also 15%, so the result is the same regardless of whether the treaty is applied (for withholding tax purposes). However, the treaty is still important for the foreign tax credit in Denmark. If the shareholding were less than 25%, the treaty rate would be 20% (which is higher than the domestic 15%). In such a case, the domestic 15% rate would apply (more favorable to the taxpayer). The 7.5% rate under Article 10(4) applies to branch profits (profits taxed after PE taxation), not to dividends. 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. 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