Republic of Türkiye
Ministry of Finance
Istanbul Provincial Directorate of Revenue Administration
Directorate of Income Tax and Corporate Tax Group
Date: 24.09.2024
No: E-62030549-125[10-2024]-
Subject: Taxation of income obtained from engineering services provided to foreign-resident institutions
Upon reviewing your private letter ruling request form, it has been understood that, as stated in your articles of association published in the Trade Registry Gazette, your Company provides all kinds of engineering and technological services, including thermodynamic, thermal, and fluid mechanics analysis, both domestically and internationally. It has been noted that you provided engineering services to … GmbH Co. KG located in Stuttgart, Germany, and that you issued invoices exempt from VAT for the services provided to projects abroad. You have requested a ruling on whether 80% of the income derived from this service provided abroad can be considered as a deduction in determining your corporate tax base under the provisions of Article 10, paragraph 1, subparagraph (ğ) of the Corporate Tax Law.
In the first paragraph of Article 3 of the Corporate Tax Law No. 5520, it is stated that institutions listed in Article 1 of the Law, whose legal or business center is located in Türkiye, will be taxed on all the income they obtain both within and outside Türkiye. Furthermore, it is stipulated in Article 6 of the same Law that corporate tax will be calculated based on the net corporate income obtained by the taxpayers during an accounting period, and the provisions of the Income Tax Law regarding commercial income will apply in determining net corporate income.
In the first paragraph of Article 10 titled “Other deductions” of the same Law, deductions that can be made from corporate income, provided that they are additionally indicated on the corporate tax return, are included. In subparagraph (ğ) of the first paragraph of the mentioned article, it states: “Income obtained by service businesses that provide architecture, engineering, design, software, medical reporting, bookkeeping, call center, product testing, certification, data storage, data processing, data analysis, and services provided under the permission and supervision of the relevant ministry in the fields determined by the Ministry of Finance, exclusively benefiting persons not resident in Türkiye and entities whose workplaces, legal and business centers are located abroad, provided that 80% of this income is transferred to Türkiye by the deadline for submitting the corporate tax return related to the period in which the income was earned (with the amendment made by Article 59 of Law No. 7491; effective for income and gains obtained from 1/1/2023 onwards on 28/12/2023).
To benefit from this deduction, it is essential that the invoice or similar document is issued in the name of the customer abroad.
The article contains the provision regarding this matter.
Regarding the subject, explanations are provided in the section titled “10.5. Services provided to foreign resident individuals and institutions from Türkiye” of the Corporate Tax General Communiqué Serial No. 1, including:
- In the section titled “10.5.2.1. The main activity subjects written in the articles of association of companies that can benefit from the deduction,” it states: “The main activities written in the articles of association of the relevant companies must include services such as architecture, engineering, design, software, medical reporting, bookkeeping, call center, product testing, certification, data storage, data processing, data analysis, vocational training, education, and health services. These services may be provided either as a single service or multiple services as long as they are included in the articles of association.”
- In the section titled “10.5.2.2. The service must be exclusively rendered for a foreign resident individual and/or institution from Türkiye,” it states: “Architecture, engineering, design, software, medical reporting, bookkeeping, call center, product testing, certification, data storage, data processing, data analysis, and vocational training services determined by the Ministry of Finance with the opinion of relevant ministries must be provided to individuals not residing in Türkiye and entities with legal and business centers abroad; education or health services must also be provided to individuals not residing in Türkiye.
The above-mentioned services must be actually rendered, and services such as assistance, consultancy, and mediation provided in these fields cannot be considered within this scope.”
- In the section titled “10.5.2.3. The invoice must be issued in the name of a foreign resident individual and/or institution,” it states: “The invoice to be issued regarding the services must be issued in the name of a foreign resident individual and/or institution.”
- In the section titled “10.5.2.4. Services rendered from Türkiye, benefiting from architecture, engineering, design, software, medical reporting, bookkeeping, call center, product testing, certification, data storage, data processing, and data analysis,” it states: “It is required that the service rendered is benefited abroad, and the service provided for foreign resident individuals and/or institutions must not be related to their activities in Türkiye.”
On the other hand, upon examining our system records, it has been understood that your area of activity has been “721901-Other Research and Experimental Development Activities Related to Natural Sciences (Including Agricultural Research)” since 23/05/2023.
Moreover, in the section titled “1. Subject of the Agreement” of the “Cooperation Agreement” dated 14/06/2023 included in the private letter ruling request form, it is stated that “… Türkiye operates in the energy market and follows energy projects.” In the section titled “2. Scope of Services,” it is noted that “… All intermediate and final results must be completed in a manner that fully complies with … Türkiye principles.” Furthermore, it is stated that “The Cooperation Partner will have the right to include the CV in proposals prepared for projects outside Türkiye; that is, this CV will be shared with … GmbH & Co KG, Stuttgart. For projects in Türkiye, an evaluation will be made based on the situation.” In the section titled “5. Warranty,” it is stated that “… The warranty period will start upon the commencement of services provided under the agreement by … Türkiye and will end 12 months after the acceptance of services.” In the section titled “8. Payment Terms,” it is stated that the invoice will be issued in the name of … Türkiye, and in the section titled “9. Project Results, Inventions,” it is stated that “All results and documents arising during the performance of this agreement will belong to … Türkiye, and … Türkiye will have exclusive rights over them. Project results will be submitted to … Türkiye in the current valid … Türkiye standard software formats (typically MS Office 365 and Adobe Acrobat) and in printed form, depending on the relevant task.” It is also stated that “… Türkiye will be informed about inventions made during the performance of services under the agreement by the Cooperation Partner and/or staff. … Türkiye will benefit from these if desired, and the Cooperation Partner will transfer all rights to … Türkiye. The expenses for benefiting from these inventions will be covered by … Türkiye.”
It has been stated in the “Supplementary Agreement” dated 09/07/2024 in the section titled “1. Scope of Services” that “This supplementary agreement is intended to clarify the scope specified in the main agreement. The scope items specified below are valid from 15.06.2023. Engineering, analysis, calculations; Thermodynamics (thermal-mass energy balance, etc.), Thermal and heat transfer (heat transfer surfaces, heat exchangers, etc.), Combustion (boiler, waste heat boiler, etc.), Fluid mechanics analysis (turbomachinery fans, pumps, turbines, etc.), all kinds of engineering technology analysis, preparation of flow diagrams, preparation of layout and assembly plans, preparation of specifications and data sheets, concept and configuration studies, as well as field studies and supervision services will be provided.”
It has been observed that the mentioned agreement was signed by the Turkish branch of the foreign company and that invoices were issued in the name of the foreign-based company.
Based on the provisions and explanations above, provided that the engineering services rendered to individuals not residing in Türkiye and to entities whose workplaces, legal, and business centers are located abroad are actually provided, and all other conditions mentioned above are met, it is possible for 80% of the income obtained from these services to be considered as a deduction in determining your corporate tax base.
However, if the engineering services provided to foreign resident individuals or institutions are not benefited abroad and the service is related to the activities of these individuals and/or institutions in Türkiye, it is understood that the income obtained from these services will not be evaluated within the scope of subparagraph (ğ) of the first paragraph of Article 10 of the Corporate Tax Law.
Source: Revenue Administration
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