Withholding Tax Dilemma: Project Days or Man Days ?
The Double Tax Treaty - General Communiqué Serial Nr.4
The Double Tax Treaty General Communiqué Serial Nr.4 was published in the Official Gazette on September 26, 2017 and became valid on the same date and cancelled the former Communiqué Serial Nr.3 dated July 15, 2015.
The aforementioned communiqué includes explanations regarding the taxation of income derived by non-resident real/juridical persons (“service provider”) from independent personal services and any related activities rendered in Turkey. Nevertheless this communiqué is released to explain the ongoing view of the Turkish Tax Authority and will not set new rules regarding the current tax applications.
The most crucial point is about the calculation of the duration of stay (length of presence) of the service provider in Turkey.
According to Double Taxation Treaties, the length of presence of the service provider is the most important element in determination of Turkey’s taxation right. The services performed by the service provider in Turkey last for a period of 6 months or 183 days or longer than 183 days within any continuous period of 12 months or a calendar/fiscal year shall be taken into consideration.
Before the commencement of the Communiqué Nr.4, the length of presence was calculated by considering both the factors of number of personnel and the number of days spent performing the service. For example, if a service provider renders a service with its 15 personnel for 25 days in Turkey, the total days of activity in Turkey is calculated as 375 (15 x 25).
However, starting from the date the said communiqué entered into force, the presence of the service provider in Turkey will be calculated based on their presence in Turkey regardless of the number of the personnel who are present in Turkey to perform such activity. For example, if 15 employees are in Turkey for a period of 25 days to perform the services, the presence of the service provider in Turkey will be counted as 25 days.
As per this Communiqué Nr.4, additional documentation requirements implied for professional services rendered in Turkey. Please refer below for details:
1 - If professional services are rendered in the country where the service provider is resident:
In this case a “Certificate of Residency” which is obtained from the tax authority of the related country is sufficient since it is not eligible to incur tax by Turkey to the service provider.
This document has to be delivered along with its certified translation to the service recipient (the payer of the invoice) in Turkey in order not to calculate any withholding tax. The certificate is retained by the Turkish service recipient and presented to the tax inspectors if requested.
2 - If professional services are rendered in Turkey but the length of presence stays within the 183 days criterium:
In this case the service provider must fill in the attached form (Annex I) and send it back to the service recipient in Turkey within 1 month after the start date of the project. Additionally the other attached form (Annex II) must be filled in by the service recipient and presented to the tax office before the realization of payment to the service provider together with Certificate of Residence and Service Agreement (if available).
It is vital to present the required documents (Annex I & Annex II) to benefit from the treaty provisions. If Annex I is not sent to the service recipient in Turkey by the service provider in the required time limit, the service recipient has to incur 20% withholding tax over the invoice amount. In this case if the service provider proves that related withholding tax should be refunded in accordance with the Double Taxation Treaty clauses, Annex III will be filled in by the service provider to be submitted to the tax office.