Ankara Tax Office

Income Tax Laws VAT-Special Consumption Tax Group Directorate

Date: 25.12.2023

Number: -84974990-130[VAT.2/I/Transitional-20-2022/1]-614610

Subject: VAT on Software and Reporting Deliveries and Services by a Company Operating in a Technopark

In your request for a private letter ruling; it is stated that under the contract made between your company operating in the … Technology Development Zone … and the Republic of Turkey Ministry of Health Turkey Health Institutes Presidency (TÜSEB), the “… Clinical Trial” project with the STB code 84221, assessed as research and development (R&D) activities, involves the preparation of web-based application software for data entry, data collection, data management/query creation, volunteer tracking, randomization, clinical trial management system (CTMS), interactive web response system (IWRS), interactive voice response system (IVRS), e-consent, VOIP automated survey calls, vaccine/product tracking, vaccine/product temperature monitoring, material management, laboratory management, and reporting on efficacy and safety analyses, delivered to the research centers specified by TÜSEB. It is requested to know whether these software, data analysis, and reporting deliveries and services are exempt from VAT under Article 20 of the VAT Law No. 3065.

According to the VAT Law No. 3065;

• In Article 1/1, it states that deliveries and services performed in Turkey within the framework of commercial, industrial, agricultural activities, and free professions are subject to VAT.
• In Transitional Article 20/1, it is stated that the earnings of entrepreneurs operating in technology development zones and specialized technology development zones under Law No. 4691 are exempt from income or corporate tax during the specified period, and that the deliveries and services produced exclusively in these areas in the form of system management, data management, business applications, sectoral, internet, gaming, mobile, and military command control application software are exempt from VAT. It is also specified that for these exempt transactions, the provision in Article 30/1(a) of this Law shall not apply, and the Ministry of Treasury and Finance is authorized to set minimum thresholds for the amounts subject to exemption based on program and license types, as well as to define and implement the principles and procedures related to the software programs that will benefit from the exemption.

In the VAT General Implementation Communiqué (II-G/2), it is stated;

“…

According to this provision, the deliveries and services of system management, data management, business applications, sectoral, internet, gaming, mobile, and military command control application software produced by taxpayers in technology development zones or specialized technology development zones until 31/12/2023 are exempt from VAT. The sale of software produced in these areas to different individuals or the sale in CD or electronic format does not prevent the application of the exemption.

Technoparks affiliated with universities are also considered as Technology Development Zones. If the intellectual property rights of the software produced under the provisions of Transitional Article 20/1 remain with the taxpayer operating in these areas, the sale to different individuals at regular intervals or the sharing of the software in virtual environments will also be subject to VAT exemption.

…

However, any purchases of goods and services by entrepreneurs operating in technology development zones or specialized technology development zones for software produced exclusively in these areas are subject to VAT, regardless of whether the software is exempt from tax or not.

Maintenance and support (automation) services provided for software other than updates, network applications, and products, devices, items, etc. that use software to function, as well as services related to this hardware, advertising services provided via a website, and deliveries and services included in R&D activities are not assessed under the exemption.

…”

Based on the provisions and explanations above, it is possible for the web-based application software deliveries and services within the scope of the contract made with TÜSEB regarding the “… Clinical Trial” project coded 84221 to be exempt from VAT, provided they are produced within the Technology Development Zone established under Law No. 4691 and during the period when your corporate income is exempt from corporate tax. However, it is not possible for the analysis and reporting services of the data collected through the use of the mentioned software to be exempt from VAT under Transitional Article 20 of Law No. 3065.

In this context, if the amount related to the software deliveries and services provided by your company is separated from the total amount and shown separately on the invoice, it is possible to benefit from the exemption provision of Transitional Article 20 of Law No. 3065. If the amounts cannot be separated, VAT must be calculated based on the total amount shown on the invoice.

Source: Revenue Administration
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.

Date: July 12, 2024
Reference Number: E-17192610-125[KV-22-957]-
Subject: Tax Exemption for Profits from Software Sold to Foreign Entities

In your request:

• Your company signed a contract with a company in [Country] for the development of computer software.
• The software was developed by another firm in Turkey and then exported to the foreign company.

You are seeking clarification on whether the profit from this transaction qualifies for tax exemption under Article 10(1)(ğ) of the Corporate Tax Law.

Corporate Tax Law Perspective:

According to Article 6 of the Corporate Tax Law No. 5520, corporate tax is calculated based on net corporate profit earned within an accounting period. Net corporate profit is determined using the principles outlined in the Income Tax Law related to commercial earnings. Expenses listed in Article 8 of the Corporate Tax Law and Article 40 of the Income Tax Law can be deducted from the determined corporate profit.

Article 10(1)(ğ) of the Corporate Tax Law provides a tax deduction for profits earned from services such as architecture, engineering, design, software, medical reporting, accounting, call centers, product testing, certification, data storage, data processing, data analysis, and professional training, provided these services are rendered exclusively to non-resident individuals or entities, and the income is transferred to Turkey by the deadline for filing the corporate tax return. The invoice or equivalent document must be issued in the name of the foreign client.

General Tax Communiqué Perspective:

According to Section 10.5 of the General Communiqué, services must be actually provided, and services such as assistance, consultancy, and brokerage are not considered eligible for this tax exemption.

Since the software was developed by another company and merely exported, this does not meet the condition of providing the service directly, and thus, the profit cannot be exempted under Article 10(1)(ğ).

Value Added Tax (VAT) Law Perspective:

• Article 1/1 of VAT Law No. 3065 states that VAT applies to deliveries and services within Turkey.
• Article 6/b specifies that operations performed in Turkey are considered as services rendered or used in Turkey.
• Article 11/1-a provides VAT exemption for services rendered to foreign customers.
• Article 12/2 requires that for VAT exemption, the service must be provided for a foreign customer and utilized abroad.

The VAT General Application Communiqué explains that to benefit from VAT exemption for exported services, the service must be for a foreign customer, and the service must be used abroad. Documentation of the service provided to a foreign customer is necessary.

Therefore, if the software service provided to foreign customers meets these conditions and is used abroad, it can be exempt from VAT. However, VAT refunds for services exported with invoices showing amounts in Turkish Lira are subject to certain conditions, including evidence that the payment has been received in Turkey.

If the foreign customers utilize the software service in Turkey, VAT will apply according to general provisions.

Source: Revenue Administration
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.

The inquiry concerns whether design, software, and consulting services provided to foreign companies, through commissions received for architectural projects, qualify for VAT exemption and corporate tax deductions.

Corporate Tax Perspective:

• Corporate Tax Law: Corporate income is taxed on all earnings, both domestic and international. Article 10(1)(ğ) allows a 80% deduction from corporate income for services provided to non-resident persons or entities, if the income is fully transferred to Turkey by the declaration deadline.
• Conditions for Deduction: Services must be listed in the company’s main activity and invoices must be issued to foreign clients. The deduction applies if the services are used exclusively outside Turkey and the income is transferred to Turkey.
• Application: If the design and software services provided align with these criteria, an 80% deduction is applicable. However, independent consulting services not related to the design services are not eligible for this deduction.

VAT Perspective:

• VAT Law: Services rendered to foreign clients and utilized abroad are exempt from VAT under Article 11/1-a. To qualify, services must be provided for foreign clients and used outside Turkey.
• Conditions for Exemption: The service must be specifically related to the client’s activities abroad and not to their domestic operations. Services such as consulting for goods and services shipped to Turkey do not qualify for VAT exemption.
• Application: Design, software, and consulting services for foreign clients that meet these conditions can be exempt from VAT under Article 11/1-a, provided the services are utilized abroad.

In summary, both corporate tax deductions and VAT exemptions are possible for services provided to foreign companies, provided that the services meet specific criteria regarding their use and the handling of income.

Source: Revenue Administration
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.

Definition of Free Zone
Free Zones are defined as fenced-in areas in which special regulatory treatment exists for the operating users in order to promote exports of goods and services. Free zones offer more convenient and flexible business climate in order to increase trade volume and export for some industrial and commercial activities as compared to the other parts of country.

Definition of Free Zone

• Promoting export oriented investment and production.
• Accelerating foreign direct investment and technology access.
• Directing enterprises towards export.
• Developing international trade.

Activities
In general, all kind of activities can be performed in Turkish Free Zones such as:

• Research and Development (R&D),
• Manufacturing,
• Software,
• General trading,
• Storing,
• Packing,
• Banking and insurance.

Investors are free to construct their own premises, while zones have also available office spaces or warehouses on rental basis with attractive terms. All field of activities open to Turkish companies are also open to joint-venture of foreign companies.

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.

Source: Revenue Administration

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.

Name                           Source                       Country

1.Bill Gates                   Microsoft                      USA

2.Warren Buffet             Berkshire Hathaway      USA

3.Jeff Bezos                   Amazon.com                 USA

4.Amancio Ortega          Zara                            Spain

5.Mark Zuckerberg         Facebook                      USA

6.Carlos Slim Helu          Telecom                       Mexico

7.Larry Ellison                Software                       USA

8.Charles Koch               Diversified                     USA

9.David Koch                  Diversified                    USA

10.Michael Bloomberg     Bloomberg LP                USA

Source: Forbes

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.