Taxation Issues under the Agreement between Turkish Government and the Federal Republic of Germany for the Avoidance Double Taxation
Aralık 20th, 2016 Burcu DUMAN

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Pursuant to the article 5 of  the Double Taxation Agreement between Turkish Government and the Federal Republic of Germany for the Avoidance Double Taxation and pursuant to the article 11 of Corporate Tax Law which provides that the corporates whose legal and business centers are not located in Turkey shall be only taxed over  income they make in Turkey, if a foreign company has a branch office or liaison office in the territory of Turkey, the income will be taxed in Turkey.


How is the transfer of funds between Branch office and Enterprise to be considered under accounting and taxation aspects?

Transfer of profits and dividends:

As set forth in Article 7 paragraph 3 of the Double Taxation Agreement , in determining the profits of a permanent establishment, there shall be allowed as deductions expenses which are incurred for the purposes of the permanent establishment, including exeutive and general administrative expenses so incurred shether in the state in which the permanent establishment is situated or elsewhere. Therefore the transfer of funds from Enterprise to Branch office  in this context shall be considered as deductions expenses.

Article 7 of the Dobule Taxation of the Agreement provides that the profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in toher Contracting State through a permanent establishment situated therein. If the enterprise carries on business aforesaid, the profits of the enterprise may be taxed in other state but only so much of them as is attributable to that permanent establishment. In addition, paragraph 4 of article 10 provides tht the provisions of 1 and 2 shall not apply if the beneficial owner of the dividends (Enterprise), being a resident of a contracting state, carries business in the other contracting state of which the company paying the dividends is a resident,  through a permanent establishment situated therein  and the holding in respect of which the dividends are paid is effectively connected with such permanent establishment. In such case, article 7 shall apply. This article means that the transfer of dividends to Enterprise shall be taxed within the context of article 7 which settles profits and pay 20% corporate tax.

Therefore, Branch Office, pursuant to the article 7 of the Double Taxation Agreement and  paragraph 4 of article 75 of Turkish Income Tax Law , shall transfer the funds to Enterprise after payment of the corporate tax over %20 of income.

On the other hand, in the context of  paragraph 4 of article 75 of Turkish Income Tax Law,  dividend is only taxed if it is paid to the shareholders. In case dividend is added to the capital, Enterprise will not have to pay 15%  dividend under Double Taxation Agreement because in this case payment of dividends is put behind (as stated in paragraph 5 of article 10)

There is an important point that Value of equal services  will be considered in the transfer and taxation process of Enterprise and Branch office Office. In case the Tax Offices determines a marked difference between the value of equal and invoice cost of  Branch  Office, then the representative of Enterprise and Branch Office will have criminal liability under  article 359 of Turkish Tax Procedural Law no 213 and Tax Office will issue tax penalty due to the tax fraud.

The non-deductible expenses in the calculation of corporate profits

Regulations concerning the expenses that are non-deductible in the determination of the corporate earnings, are provided in Article 11 of the Corporation Tax Code. Accordingly, the following expenses are treated as non-deductible expenses in the determination of the corporate earnings:  

a) Interest paid or calculated over equity capital;


b)Interest, foreign exchange differences and other similar expenses  paid or calculated over disguised capital;

c)      Profits that are distributed in a disguised manner through transfer pricing;

d) Reserve funds set aside, irrespective of manner or appellation (including all reserves set aside from net earnings, in accordance with Turkish Commercial Law, with special corporation laws, or with Articles of Incorporation and Regulations, as well as provisions for contingencies set aside by banks based on the Banking Law);


e) Corporation Tax as calculated in accordance with this Law, as well as all monetary fines, tax penalties, and fines paid in accordance with the provisions of the Law Concerning the Procedures for the Collection of Public Receivables, dated 21/7/1953 and numbered 6183, and delay interests paid in accordance with the relevant provisions of the Tax Procedures Code,

f) Provided that the limits, determined by Law or based on authority granted by Law, are reserved, losses arising from the sale of securities below their nominal value, as well as commissions paid, and all similar expenses;


g) The expenses and the depreciation allowances set aside for sea vessels such as yachts, cutters, sailing boats, vessels, and speed boats, and aircraft such as airplanes and helicopters, which are acquired through leasing, or which are capitalized by the enterprise,  but that are not relevant to the main field of activity of the enterprise.

h) With the exception of the indemnifications that are incorporated in the agreements as penal conditions, tangible and intangible damage indemnity expenses, that were imposed as the result of the faulty actions of the corporation itself, its partners, managers and employees.

i) The indemnification expenses arising from the tangible and intangible damages that have incurred due to illegitimate actions committed through the press, or through the radio and television broadcasts.

j) Fifty percent (50%) of announcement and advertising expenditures for all kinds of alcohol and alcoholic beverages, as well as tobacco and tobacco products. (The Council of Ministers shall be entitled to increase the rate up to 100% or to reduce the same to  0%).

Transfer of Interest:

Paragraphes 1-3 of article 11 of the Double Taxation Agreement, the interest arising in  a Contracting State and paid to a resident of the other Contracting State may be taxed in other State. According to the article, the tax so charged shall not exceed 10 percent of the gross amount of the interest. However, paragraph 5 of the article 11 states that the provisions of paragraphs 1 to 3 shall not apply if the beneficial owner of the interest (Enterprise), being a resident of a contracting state, carries business in the other contracting state in which the interest arises, through a permanent establishment situated therein  and the debt claim in respect of which the interest is paid is effectively connected with such permanent establishment. In such case, article 7 shall apply. This article means that the transfer of interest to Enterprise shall be taxed within the context of article 7 which settles profits and pay 20% corporate tax.

Paragraph 4 of the article 11 states that penalty charges or late payment shall not be regarded as interest for the purpose of this article. Thus, Branch Office and Enterprise shall not be taxed over penalty charges or late payments during the transfer.

Transfer of Royalties:

In case the  beneficial owner of the royalties,  being a resident of a contracting state, carries business in the other contracting state in which roylties  arise, through a permanent establishment situated therein  and the right or property in respect of which royalties are paid is effectively connected with such permanent establishment, corporate tax rate 20% as stated article 7 shall apply while  transferring to Enterprise.

Transfer of Income from Immovable Property :

Article 6, paragraph 1 states that Income derived by a resident of a contracting state from immovable property situated in the other contracting state may be taxed in that other state.

The term “immovable property” shall have the meaning which it has under the law of the contracting state  in which property is situated. The provision of paragraph 1 shall apply to income derived from the direct use, renting or use or in any other form of immovable property.

Real estate tax and rental income tax over the value of which  ratio change year by year shall apply in this case.

Transfer of Directors' Fee: Directors' fee

Article 16 sets forth the taxation of directors' fee and other similar payments derived by a resident of a contracting state in his capacity as a member of the board of directors of a company which is a resident of other contracting state may be taxed in that other state. Directors' fee is taxed according to Turkish Social and Security Law.

According to the paragraph 1 of  article 15 titled Dependent Personal Services,

Subject to the provisions of articles 16,18,19 and 20, salaries, wages and other similar renumeration derived by a resident of a contracting state in respect of an employment shall be taxable only in that state unless the employment is exercised in the other contracting state. If the employment is so exercised, such renumeration as is derived therefrom may be taxed in that other state.

According to the paragraph 2 of  article 15 titled Dependent Personal Services,

Notwithstanding the provisions of paragraph 1, renumeration  derived by a resident of a contracting state in respect of an employment exercised in the other contracting state shall be taxable only in the first mentioned state if:

a) the recipient is present in the other state for a period or periods not exceeding in the aggregate183 days (temporary departure does not toll residence time) in any twelve month period commencing or ending in the fiscal year concerned,and

b) the remuneration is paid by, or on behalf of, an employer who is not a resident of the other state, and

c) the remuneration is not borne by a permanent establishment or a fixed base which the employer has in the other state.

These 3 conditions regarding renumeration settled in paragraph 2 are cumulative and have to co-occur in order to be taxed by Germany. In case lack of one condition, the renumeration will be taxed by means of income tax witholding in Turkey, within the context of articles 61,63,94 and 104 of Turkish Income Tax Law.

Since the branch offices are considered as permanent establishment in Double Taxation Agreements and Branch office office provides services on behalf of Enterprise legally,  there is no necessary to enter into a contractual agreement to cover the works. Even if there is a contractual agreement, the the legal character and taxation situation of Enterprise and Branch office  will not change.


If an enterprise has branch office in the territory of Turkey,  the branch office has to issue invoice on behalf of the corporation. Otherwise Turkish Tax Authorities will issue tax penalty due to the tax fraud and then the representative of Enterprise and Branch office Office will have criminal liability under  article 359 of Turkish Tax Procedural Law no 213.

Works performed and cost incurred in Germany shall be taxed by Germany pursuant to the article 11 of Corporate Tax Law which provides that the corporates whose legal and business centers are not located in Turkey shall be only taxed over  income they make in Turkey.

Works performed and cost incurred in Turkey shall be taxed by Turkey pursuant to the article 11 of Corporate Tax Law which provides that the corporates whose legal and business centers are not located in Turkey shall be only taxed over income they make in Turkey.

Benefits and/or losses made by the branch office shall be taxed by Turkey in accordance with article 11  Corporate Tax Law.

As set forth in Article 7 paragraph 3 of the Double Taxation Agreement , in determining the profits of a permanent establishment, there shall be allowed as deductions expenses which are incurred for the purposes of the permanent establishment, including exeutive and general administrative expenses so incurred shether in the state in which the permanent establishment is situated or elsewhere. Therefore the transfer of funds from Enterprise to Branch office  in this context shall be considered as deductions expenses.

What documentation level is required to cover such transfers between branch and mother.

In accordance with article 8, paragraph 1 of the Foreign Capital Framework Decree, Following the deduction of the taxes in accordance with the current tax laws and Double Taxation Agreement, from the profits and dividends corresponding to the shares of foreign shareholders of foreign capital entities, the net amount can be transferred abroad via banks freely. Branch Office, after previous accounting period, should submit the approved tax declaration, balance sheet, profit and loss account to the Bank. Tax accural vouchers and tax receipt vouchers could be submitted to the Bank later.

What documentation will be required under the double taxation agreement to be prepared by ENTERPRISE and/or exchanged between the tax offices in Turkey and Germany to finally clear the accounts ?

The original copy taken from relevant Tax Office shows the taxpayer information and proves that Branch office is active taxpayer with a petition, should be submitted to Büyük Mükellefler Vergi Dairesi. Büyük Mükellefler Vergi Dairesi will prepare 3 copies of residency document and give 2 of the copies to Branch Office. Branch Office shall keep one of the copies, give the another copy to Revenue Administration (General Directorate of EU and Foreign Affairs Unit) with the attached petition.


In addition, Enterprise should apply to relevant authorities to take residency document and translate  it officially before the notaries and have it approved by Turkish Embassy in Germany. They will need to deliver it to Tax  Offices or Relevant Tax Officer in case Tax officers issue witholding tax over the payments.


Please remember that in case Branch office can not obtain residency document, the domestic legislation on taxation shall apply by the Revenue Administration.


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