How to Tax the Payments Made for the Works Performed to Companies Residing Abroad?

Taxation Process for Payments Made to Foreign Companies

In the context of international commercial activities, many companies operating in Türkiye procure services such as maintenance, repair, assembly, labor, and transportation from foreign firms. However, whether the payments made in return for these services are subject to tax withholding (withholding tax) in Türkiye and which documents should be submitted to financial institutions are important tax responsibilities for businesses.

This article will outline the taxation principles of payments made to foreign firms and the impact of double taxation avoidance agreements (DTAAs).

1. Are Payments Made to Foreign Companies Subject to Taxation?

Corporate Tax Assessment

According to the Corporate Tax Law No. 5520, companies that do not have their legal or business headquarters in Türkiye are only taxed on their income earned within Türkiye.

As per Article 7 of the Income Tax Law No. 193, commercial income is considered earned in Türkiye if:

• The income owner has a permanent establishment or representative in Türkiye, and
• The income is generated through these establishments or representatives.

For professional services, income is considered earned in Türkiye if:

• The service is performed in Türkiye, or
• The service is utilized or evaluated in Türkiye.

“Evaluation in Türkiye” means that the payment is made in Türkiye, or if the payment is made abroad, it is recorded in the accounts of the payer in Türkiye or deducted from their profits.

Income Tax Assessment

According to the Income Tax Law No. 193, professional service income is considered earned in Türkiye if:

• The service is performed or evaluated in Türkiye.
• The payment is made in Türkiye, or the earnings from the payment are recorded in Turkish accounting records.

Thus, payments made to a foreign company for services such as maintenance, assembly, labor, and transportation, provided without a permanent establishment in Türkiye, may be considered professional service income and subject to a 20% withholding tax.

2. Double Taxation Avoidance Agreements (DTAAs) and Tax Liabilities

Türkiye has signed Double Taxation Avoidance Agreements (DTAAs) with countries such as Azerbaijan, Georgia, and Kazakhstan to prevent the same income from being taxed both in Türkiye and in the service provider’s country.

Impact of These Agreements on Taxation

• For commercial income: If the service is provided abroad by a foreign company, only the country where the service provider is located has the right to tax it. No withholding tax is applied in Türkiye.
• For professional service income: If a foreign company provides services without coming to Türkiye, taxation rights remain with the country where the service is performed.
• If the service is provided through a permanent establishment in Türkiye, the income attributable to that establishment can be taxed in Türkiye.

Examples:

• Maintenance and repair services from Azerbaijan and Kazakhstan: If the company provides the service without coming to Türkiye, taxation rights belong to Azerbaijan or Kazakhstan, and no withholding tax is applied in Türkiye.
• Services from Georgia: The DTAA between Türkiye and Georgia grants professional service tax exemption only to individuals. Services provided by a Georgian company should be considered commercial income.
• International transportation services are also covered under DTAAs. If a company conducts road transportation services without a permanent establishment in Türkiye, taxation is applied only in the country where the transportation company is located.

3. Required Documents for Tax Exemption: Certificate of Tax Residency

To benefit from Double Taxation Avoidance Agreements (DTAAs), the foreign company must provide a Certificate of Tax Residency, proving that it is a full taxpayer and is subject to taxation on its worldwide income.

• The Certificate of Tax Residency must be obtained from the relevant tax authority in the foreign country and certified by a notary or the Turkish consulate.
• If no Certificate of Tax Residency is submitted, Türkiye’s domestic tax laws apply instead of the DTAA provisions, and withholding tax may be deducted.

4. Key Considerations When Making Payments to Foreign Companies

• If the service is provided entirely abroad and the foreign company does not have a permanent establishment in Türkiye, no withholding tax is applied.
• If the service is provided in Türkiye or through a permanent establishment in Türkiye, withholding tax may be applicable.
• If Türkiye has a DTAA with the service provider’s country, the provisions of the agreement should be reviewed first.
• To benefit from withholding tax exemption under a DTAA, a Certificate of Tax Residency must be obtained from the foreign company.
• International transportation services are taxed only in the country where the transportation company is located.

Companies operating in Türkiye must comply with DTAA provisions and local tax regulations when engaging in business with foreign firms to ensure full compliance with tax obligations.