Since the recent addition of Article 4 to Law No. 5651 ("Law No. 5651" or "the Law") by the enactment of Law No. 7253 named "Law Amending the Law on the Regulation of Online Broadcasts and the Prevention of Crimes Committed through Such Broadcasts ("Law No. 7253" or "Social Media Law"), social network providers who are based abroad and have more than 1 million daily access to their services from Turkey are required to appoint local representatives in Turkey ("Local Representatives").
Although the reasons behind the introduction of this requirement are clearly not tax-related, we have encountered different opinions, particularly from certain tax courts, regarding the tax impact of the presence of these Local Representatives.
In this context, we will be discussing the underlying provisions of the requirement to appoint Local Representatives brought upon the non-resident social network providers and the current and potential interpretation of these provisions from a Turkish tax perspective.
- The Requirement to Appoint a Local Representative under the Social Media Law
Before diving into the concept of representation, we believe it would be useful to focus on the "social network provider" definition under the Law. Per the provision added to Article 2 of the Social Media Law, "social network provider" refers to natural or legal persons who provide platforms that enable users to create, view, or share content such as text, image, sound, location on the internet for social interaction.
Within this framework, the Local Representatives to be appointed by the non-resident social network providers who have more than 1 million daily access to their services from Turkey shall; (1) deal with the requests and notifications that are sent by the Information Technologies and Communications Authority ("ICTA") as well as the judicial and administrative authorities, (2) respond to the applications made by the persons within the scope of the Law and ensure that other obligations under the Social Media Law are fulfilled. Since there is no explicit regulation regarding the legal status of the representatives to be appointed in the Social Media Law, the appointees may be either natural or legal persons, considering the civil law provisions. However, under the explicit language of Additional Article 4, if a natural person is appointed as the Local Representative, the representative must be a Turkish citizen.
It is evident that the main issue that is aimed to be solved with this requirement is that the Turkish government, like many other countries in the world, wants to have a local respondent to communicate with regarding judicial and legal matters related to these non-resident social network providers. In other words, the sole purpose of the requirement for Local Representatives is to create a point of contact to whom the government (particularly ICTA) and other legal and natural persons can convey their requests regarding the services of the non-resident social media providers.
- The Concept of "Permanent Representative" Under the Turkish Tax Legislation
Under the Turkish tax legislation, entities with either legal or business headquarters in Turkey are subject to corporate income tax on their worldwide income. These entities are referred to as "fully tax liable" or Turkish resident entities.
Where neither the legal nor business headquarters of an entity is located in Turkey, the entity is subject to corporate income tax only on income derived in Turkey. Such entities are called "limited tax liable" or non-resident entities.
Article 7 of the Income Tax Law No.193 ("ITL") titled "Obtaining Earnings and Income in Turkey" is as follows:
"With regards to persons subject to limited taxation, the fact that the earnings and revenue have been derived in Turkey shall be determined according to the following conditions:
- Commercial earnings: Those who have obtained the income must have a permanent establishment or a permanent representative in Turkey, and the income must have been obtained at such places or through such representatives."
Within this scope, to determine whether a non-resident entity should be taxed in Turkey, it should first be determined (1) whether the entity has a permanent establishment or a permanent representative in Turkey and (2) if the income has been obtained at such places or through such representatives.
Per Article 8 of the ITL, a Permanent Representative is a person "who is associated with the person who is being represented by means of a service contract or a power of attorney and shall be authorized to carry out commercial transactions or several commercial transactions on behalf and for the account of his principal over a definite period or indefinite period.
The persons indicated below shall be considered as the permanent representative of the principal without stipulating other conditions:
- Commercial representatives, merchants' employees, and persons who are in the situation of an agent according to the provisions of the Turkish Commercial Code,
- Persons whose expenses are regularly paid by the principal partly or entirely excluding the costs of advertisement which are on the account of the principal,
- Persons who regularly keep in their shop or warehouse goods on consignment to be sold for the account of their principal represented by them.
Even if a person represents more than one person at the same time, this shall not change the characterization of permanent representative."
In light of the provisions mentioned above, in the event that a non-resident corporation has a "Permanent Representative" in Turkey within the meaning of Article 8 of the ITL, this may result in the income generated through this Permanent Representative to be subject to tax in Turkey.
Per the definition provided in Article 8 of the ITL, for a person to be considered a Permanent Representative, the person should:
- work on behalf and in the account of the represented party,
- be affiliated with the non-resident entity and must represent the non-resident entity through a service agreement or a power of attorney, and
- be engaged in commercial activity for a definite or indefinite period or indefinitely on the non-resident entity's behalf.
- The Concept of Agency Permanent Establishment ("Agency PE") Under the Double Tax Treaties
Turkey has a vast network of double tax treaties ("DTTs")1 with more than 80 countries. Article 90 of the Turkish Constitution provides that in the event of a conflict between international agreements concerning fundamental rights and freedoms and the domestic law on the same subject, provisions of the international agreements shall prevail. As taxation is a limitation on a fundamental right (i.e., right to property), the provisions of the relevant DTT must be analyzed if the non-resident entity is entitled to benefit from a DTT.
Per Article 7 of the DTTs, "the profits of an enterprise of a contracting state shall be taxable only in the first-mentioned State unless the said enterprise carries on business through a permanent establishment in the other contracting state."
Under Article 5 of the DTTs, it is provided that "where a person, other than an agent of an independent status, is acting in a Contracting State on behalf of an enterprise of the other Contracting State, that enterprise shall be deemed to have a permanent establishment in the first-mentioned Contracting State in respect of any activities that person undertakes for the enterprise, if such a person has and habitually exercises in that State an authority to conclude contracts in the name of the enterprise" (i.e., "agency PE").
Therefore, for a person's activities to be considered as a dependent agent PE of the non-resident entity, the person should be (1) a dependent agent, who (2) has and habitually exercises an authority to conclude contracts in the name of the enterprise.
If the person creates an agency PE, within the meaning of Article 5, of the non-resident principal, the profits attributable to their activities shall be subject to tax in Turkey.
- Clearing the "Haze" Around Two Concepts: Local Representatives and Permanent Representatives
Although the requirement to appoint a Local Representative has been imposed only for the fulfillment of the requirements listed in Law No. 5651, based on an argument in a court decision we encountered, it seems like there is still a need for clarification to eliminate a possible confusion between the Local Representative to be appointed by the social network providers per Law No. 5651 and the Permanent Representative concept described in Article 8 of the ITL.
It should be borne in mind that the concept of "Permanent Representative" described under the ITL is a tax concept that provides for a nexus for the non-resident entity in Turkey if their representative is a person authorized to carry out commercial transactions on behalf and for the account of his principal. However, as mentioned previously, the duties of the representative appointed under Law No. 5651 are limited to dealing with the requests and notifications sent by the ICTA and the judicial and administrative authorities and responding to the applications made by the persons within the scope of the Law. In other words, the Local Representative is designed as a mere point of contact instead of an agent vested with the authority to carry out commercial transactions on behalf and for the account of his principle.
While it is indeed possible that the Local Representative also carries out commercial transactions on behalf and for the account of his principal, it is unlikely that would be the case for most social network providers. In that event, whether the Local Representative would also be a Permanent Representative in terms of Article 8 of the ITL would be debatable.
However, it should be noted that, even if the Local Representative is also a Permanent Representative within the meaning of the ITL, if the social media network provider is entitled to DTT benefits, no nexus can be established if the Local Representative does not constitute an Agent PE per the relevant DTT. Therefore, most Local Representatives can create a taxable presence in Turkey only if they are dependent agents who bear and habitually exercise the authority to conclude contracts on behalf of the Social Network Providers.
Despite the clear distinction between the two concepts, we recently came across a tax court decision where the tax court referred to Law No. 5651, mentioning the requirement to appoint a Local Representative while determining the tax status of a non-resident social network provider. The court deduced that, in general, the Local Representatives constitute permanent representatives of the non-resident social network providers, without even examining the duties and authorities vested to the Local Representatives. In other words, the court considered Local Representatives as "per se Permanent Representatives." Although such criticism was not the basis of the abovementioned court decision and has not been put forth in tax inspections yet, this interpretation of the tax court may also spread to tax inspection reports and be used as a foundation for court decisions soon.
In line with our explanations above, we disagree with this line of thinking as we believe that appointing a Local Representative, merely to fulfill the requirement outlined in the Social Media Law, by itself does not constitute a Permanent Representative in terms of domestic tax legislation and a Dependent Agent PE under the DTTs.
In conclusion, the requirement to appoint Local Representatives imposed by Law No. 7253 upon non-resident social network providers with more than 1 million daily access to their services from Turkey has been introduced only to fulfill the purposes set forth in the Social Media Law. This specific concept of "Local Representative" should not be confused with the tax concept, "Permanent Representative", provided in Article 8 of the ITL. As long as the Local Representative's activities are limited to the duties listed in Law No. 5651 and do not include the exercise of the authority to carry out commercial transactions, we believe that these Local Representatives should not be considered as Permanent Representatives and should not establish nexus in Turkey for the non-resident social media network providers.
It is rather concerning that the tax courts already have started to consider the Social Media Law while deciding on the disputes where the permanent representative/permanent establishment status of the non-resident taxpayers is in question. Therefore, it is quite possible for the tax inspectors to start making tax assessments soon by claiming that the Local Representatives create nexus in Turkey for the non-resident social media network providers.
- Income Tax Law No.193
- Tax Procedure Law No. 213
- the Law No. 5651 on the Regulation of Internet Broadcasts and Prevention of Crimes Committed through Such Broadcasts
- the Law No. 7253 Amending the Law on the Regulation of Internet Broadcasts and Prevention of Crimes Committed through Such Broadcasts
- BASAK, Levent, 7253 Sayili Kanun Kapsaminda Sosyal Ag Saglayicisi Yabanci Tüzel Kisilerin Vergilendirilmesi Esaslari Ve Dikkat Edilmesi Gereken Bazi Hususlar, Lebib Yalkin Mevzuat Dergisi, Kasim 2020
- ERGIN, Numan Emre, Sosyal Medya Sirketlerine Kesilen Cezalar ve Vergi, Kasim 2020
- BASAK, Levent, 2015 Döneminde Dar Mükellef Kurumlarin Isyeri-Daimi Temsilci Vasitasi ile Elde Ettikleri Kazançlarin Vergilendirilmesinde Dikkat Edilmesi Gereken Bazi Hususlar, Vergi Sorunlari Dergisi, Nisan 2016
1. Please kindly note that, the numbers of the Articles may vary within the scope of DTTs that concluded between different countries. The provisions of the Article we have set forth as examples in this article are specified in accordance with the Convention between Ireland and the Republic of Turkey for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital Gains.
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.