Number: E-17192610-125[KV-23-427]
Date: May 17, 2024
Subject: Whether Withholding Tax Should be Applied on Payments for Sales Consulting Services Obtained from the UK
Upon reviewing your inquiry forms, it is understood that your company purchases services from a firm based in the UK for activities such as identifying trade fairs to attend, determining product colors and quality, customer referrals, and sales consulting. These services are invoiced by the foreign company, and you are seeking guidance on whether corporate tax and value-added tax (VAT) withholding should be applied to these payments.
CORPORATE TAX LAW
According to Article 3, Paragraph 2 of the Corporate Tax Law No. 5520, institutions without legal and business centers in Turkey are taxed only on the income obtained within Turkey. Paragraph 3 of this article lists the types of income and earnings that constitute corporate income for limited taxpayers.
Article 30 of the same Law provides that institutions subject to limited taxation must withhold corporate tax on the income and earnings listed in the article, including advances, paid or accrued by those who pay or accrue these amounts. Article 30, Paragraph (b) stipulates that withholding tax is applicable to professional income. The withholding tax rates are set by the Council of Ministers Decision No. 2009/14593, which specifies 5% for income from petroleum exploration and 20% for other professional income.
DOUBLE TAXATION AVOIDANCE AGREEMENTS
Article 14 of the Double Taxation Avoidance Agreement between Turkey and the United Kingdom, effective from January 1, 1989, states:
- Income from professional or similar activities by an enterprise of one Contracting State is only taxable in that State. However, if these activities are performed in the other Contracting State and:
- The enterprise has a place of business in that other State, or
- The activities exceed 183 days in any continuous 12-month period, then the income may also be taxed in the other State.
- “Professional activities” include independent scientific, literary, artistic, educational, and teaching activities, as well as independent activities of doctors, lawyers, engineers, architects, dentists, accountants, and other professions requiring specialized knowledge and skill.
Since the sales consulting service provided by the UK-based company constitutes professional income, it should be assessed under Article 14. Accordingly, the UK has the sole right to tax income from professional activities performed outside Turkey. If the activities occur in Turkey for more than 183 days or if the UK enterprise has a place of business in Turkey, then Turkey also has the right to tax under its domestic laws.
Thus, Turkey does not have the right to tax the income earned by the foreign company from services performed abroad, and no withholding will be applied to the service fees.
VALUE-ADDED TAX LAW
According to Law No. 3065 on VAT:
- Article 1/1 stipulates that deliveries and services within the scope of commercial, industrial, agricultural, and professional activities in Turkey are subject to VAT.
- Article 4 specifies that services include operations such as making, processing, creating, manufacturing, repairing, cleaning, maintaining, preparing, evaluating, renting, or undertaking not to do something, excluding deliveries and imports of goods.
- Article 6/b states that performing services in Turkey or benefiting from the services in Turkey indicates that the operations are considered to be conducted in Turkey.
- Article 9/1 allows the Ministry of Treasury and Finance to hold those involved in taxable transactions responsible for VAT payment if they do not have a residence, workplace, legal center, or business center in Turkey.
The VAT General Application Communiqué and Circular No. 60 provide regulations on VAT withholding for transactions performed by those without a residence, workplace, legal center, or business center in Turkey.
Accordingly, since the consulting services for the overseas trade fairs are obtained and utilized abroad, they are not subject to VAT in Turkey, and there is no need for VAT reporting by your company for these service fees.
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.
