Turkish Corporate Tax Code ("CTC") provides that entities not seated in Turkey (i.e. entities having both their headquarters and principal places of business outside Turkey) shall pay taxes only for their income gained in Turkey. CTC further provides that a foreign entity that has an establishment1 (including branch offices) OR a "permanent representative" in Turkey is, inter alia, liable for taxes arising from that foreign entity's commercial income gained via such representatives or within such establishments.
As recently brought to public attention by a 45-million $ tax fine imposed by Turkish tax authorities on a U.S. based Internet-search and web advertising giant (now rumored to be decreased to 22-million $ in line with the new tax amnesty legislation2), the question of what constitutes a permanent establishment/representative under Turkish tax law has garnered interest.
With regard to the definition of permanent representatives, CTC refers to the Turkish Income Tax Code ("ITC") which provides under Article 8 that "permanent representatives are those bound by a service agreement or a representation agreement vis-a-vis the represented party, and authorized to carry out, for a definite or indefinite period, or numerous commercial transactions on behalf and in account of such party". Same article also provides that the following entities are automatically deemed as permanent representatives without having to meet the conditions required above: (i) agents as defined under the Turkish Commercial Code and commercial representatives3, (ii) entities or individuals whose expenses are continually paid by the represented party, partially or in whole (except for advertising expenses of the represented party), and (iii) those that continually keep the represented party's goods in their stores or warehouses for consignment sales in account of the represented party.
While the permanent-representative qualities of an individual or entity are determined according to the facts and merits of each case, the general understanding is that a permanent representative works on behalf and in account of the represented party – mostly on a continual basis. Even though, for instance, commission agents are not explicitly mentioned under Article 8 of ITC; to the extent that they meet the conditions above, they may also be deemed as permanent representatives. In one ruling dated 1999, the Ministry of Finance states that if liaison offices do not conduct any commercial activities (which, according to law, they cannot) they may not be deemed as permanent representatives. This does not, however, hold liaison offices exempt from an investigation by the tax authorities on whether or not their activities are commercial in reality. In one of its decisions dated 19864, the Council of State stated that a company authorized to carry out several official matters with a power of attorney given by the captain of a foreign entity's ship may not be considered as a permanent representative, implicating that following up basic paperwork does not indicate a permanent representation resulting in the foreign entity's tax liability. In another decision dated 2000, the Council of State stated that a Turkish bank conducting remittance activities and acting only as a correspondent to a foreign off shore bank was not considered as a permanent representative as per ITC and CTC5.
A crucial point regarding this matter is whether the existence of an establishment or permanent representative in Turkey should directly point to the assumption that any commercial income gained by the foreign entity in Turkey was gained through such representative or establishment. While the legislation does not provide for an exact answer, Council of State decisions and scholars' opinion in this regard indicate that having a permanent representative or an establishment in Turkey shows, by default, the foreign entity's intention to gain commercial income in Turkey and thus the foreign entity should bear the burden of proof that the income was gained without any involvement of the permanent representative or establishment in Turkey.
1. Tax Revenue Administration's explanations in English regarding the Turkish tax system describe these establishments as "permanent establishments". See http://www.gib.gov.tr/index.php?id=469. The direct translation of the term used in CTC is, however, "workplace/establishment".
2. Published on Vatan newspaper on 31 May 2011.
3. This sub-section of the article provides for three types of commercial representatives under Turkish commercial law with subtly varying degrees of representation powers –namely ticari mümessil, tüccar vekili and ticari memur- that are all directly supervised by the trader. As the nuances in-between may not be reflected well in translation, they are here collectively referred to as "commercial representatives".
4. Decision held by the 4th Chamber of the Council of State, dated 21 February 1986 no. 1982/9909 E. 1986/705 K.
5. Decision held by the 4th Chamber of the Council of State, dated 3 May 2000 no. 2000/559 E. 2000/1913 K.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.