Toolkit for Non-Resident Taxpayers: Service Provisions in Türkiye

This toolkit serves as a strategic roadmap for non-resident entities (in Türkiye). It addresses the implementation and “tricky points” of Turkish tax law by framing scenarios, strategy and their respective tax treatments.

1. Domestic WHT Landscape

The Scenario: A non-resident company provides engineering, consultancy, software, or personnel leasing services to a Turkish client. What is the tax implication under Turkish domestic law?

  • Professional Services: Services such as personnel recruitment, consultancy, and engineering are subject to a 20%
  • Construction & Technical Works: Projects on a commitment basis are subject to 5%, while urban rail systems (subways, trams, etc.) are subject to 1%.
  • Software (Royalty): These are subject to 20% WHT, categorized either as royalties or business profits or professional services income depending on the license. If royalty does mean development or production of software, it falls under professional services provisions domestically. However the classification does not change the WHT rate.
  • Final Tax: WHT is a final tax for non-residents. No tax return is required unless a Permanent Establishment (PE) is registered.
  • VAT (KDV): A 20% VAT applies via the “reverse charge” mechanism, where the Turkish client pays and deducts it.

2. DTA Specifics: The “Person vs. Enterprise” Distinction

The Scenario: A company from Germany, Poland, or Austria provides services. How do treaty definitions change the tax taxing right?

  • Germany DTA: The treaty specifically uses the term “individual” (real person) for certain professional service protections. This often leads to stricter interpretations for corporate entities.
  • Poland & Austria DTAs: These treaties provide separate and distinct definitions for “individuals” and “enterprises.”
  • This distinction is crucial for determining whether the income falls under Article 14 (Professional Services) or Article 7 (Business Profits).
  • Strategic Impact: The classification determines if the “183-day rule” applies to the individual employees or the enterprise as a whole.

3. The 183-Day Rule & Deemed PE

The Scenario: The employees of a non-resident stay in Türkiye for more than 183 days. Does this automatically change the taxation to “Business Profits”?

  • Administrative Interpretation: The Turkish tax administration distinguishes between a “registered PE” and a “deemed PE” implicitly
  • The Trap: Even if a DTA states that staying over 183 days forms a PE, tax rulings often argue that since the taxing right has been surrendered to Türkiye, the tax should still be collected as WHT (Professional Service) under domestic law classification, rather than taxing it as commercial business profit because it consists a deemed PE.
  • On the other hand, non-resident can opt for registering a PE or can choose to fall under Article 7 (Business profits) according to some DTAs.

VAT Perspective: Where local suppliers are utilized during the assembly or commissioning phases, establishing a Permanent Establishment (PE) in Türkiye should be considered. This would enable the effective management of VAT-related complexities and allow the entity to benefit from input VAT recovery. On the other hand, the Investment Incentive Certificate should be considered in the analysis as it will affect the results.

4. Procedural Roadmap for Treaty Benefits

The Scenario: How can a non-resident actually benefit from the reduced rates (e.g., %0, 10%) provided by a DTA?

  • Apostille Requirement: A “Certificate of Residence” must be obtained from the home country. It must be apostilled; without an apostille, the document has no legal standing before Turkish authorities.
  • Mandatory Documentation:
    • Form No. 1: Must be filled out by the non-resident and sent to the Turkish client.
    • Form No. 2: The Turkish client uses this to justify the application of the reduced DTA rate.

5. Contractual Safeguards & Strategy

The Scenario: How should the WHT burden be managed to avoid commercial disputes between the parties?

  • Net vs. Gross Clauses: It is vital to clarify in the contract whether the price is “net of taxes” or “gross.” While this does not bind the tax administration, it prevents payment conflicts between the service provider and the client.
  • Tax Strategy: Non-residents should view this as a strategy. In some cases, it may be more beneficial to opt for Article 7 (Business Profits) by registering a PE and filing a tax return, rather than being subject to a high WHT rate on gross revenue.
  • Royalty vs Software Development: Although royalties are subject to a 20% withholding tax under domestic legislation, Turkish tax authority rulings tend to classify software development and bespoke (customized) software as professional service income and include them under this specific article in double taxation treaties.
  • VAT scope: While establishing a PE can offer advantages in terms of VAT, it requires a combined assessment of both VAT and CIT burdens.

 

Summary Toolkit Checklist:

  • [ ] Identify if the service is Professional (20%) or Construction (5%/1%).
  • [ ] Review the DTA specific to your country (Note the “Individual vs. Enterprise” distinction in Poland/Austria vs. Germany).
  • [ ] Secure an Apostilled Certificate of Residence.
  • [ ] Execute Form No. 1 for the Turkish client.
  • [ ] Define Net/Gross terms in the commercial agreement to mitigate the WHT burden.

 

Emre Akın, PhD, LLM
Partner – (Sworn-in CPA, Certified Tax Advisor)