Branch remittance tax refers to a withholding tax imposed on profits transferred by a permanent establishment (PE) to its head office.
Although the profits of a PE are already taxed as business profits in the source country, Turkey and some other jurisdictions impose an additional tax at the time of remittance.
From a legal perspective, branch remittance tax is not a separate income category. Rather, it represents an additional layer of taxation on business profits earned through a PE.
Domestic Law Perspective: Withholding at 15% Before Treaty Review
Under Turkish domestic tax law, profit transfers from a PE to its head office are subject to a withholding tax of 15%, before considering any double tax treaty (DTT).
Importantly, this tax is not triggered by dividend distribution, since a PE has no legal personality separate from its head office. Instead, it is treated as an additional tax on commercial (business) income.
Interaction With Double Tax Treaties: Business Profits vs Dividend Logic
Most double tax treaties do not contain an explicit branch remittance article. As a result, tax authorities often justify the tax by arguing that:
- Branch remittance tax is not prohibited under Article 7 (Business Profits), and
- The treaty does not explicitly restrict such an additional tax.
However, in practice, tax administrations frequently limit the withholding rate by reference to the dividend article.
In Turkey, this approach is also reflected in tax rulings. Although branch remittance tax does not legally fall under dividends, the Turkish Revenue Administration effectively applies the treaty dividend rate as a ceiling, in order to avoid excessive taxation.
Therefore, branch remittance tax is business-profit based in nature, but dividend provisions often operate as a limitation mechanism.
Notably, where a treaty contains explicit branch remittance provisions, these are typically located within the dividend article itself.
Treaty-Specific Examples: South Korea and Ukraine
Some tax treaties include explicit rules on branch remittances. These provisions usually appear within the dividend article.
Key examples include:
- South Korea: The Turkey–South Korea tax treaty provides a maximum branch remittance tax rate that is lower than the maximum dividend withholding rate. This rule directly restricts Turkey’s taxing right.
- Ukraine: The treaty wording implies that Turkey cannot levy withholding tax on branch remittances. This effectively eliminates source taxation.
These examples demonstrate that treaty wording can materially change the outcome.
Timing of Taxation and Foreign Tax Credit Treatment
If a Turkish branch transfers profits from previous years that were not previously remitted, the tax arises in the month of transfer. The branch declares the tax in the relevant withholding return.
If the branch transfers funds before the annual profit is finalized, taxation occurs after profit determination. In this case, the branch declares the tax in April of the following year.
Turkey treats branch remittance tax as an additional tax on business profits. Therefore, the head office may credit this tax against its corporate or income tax. In the case of Germany, for example, the total creditable tax burden may effectively reach 30% (25% corporate tax + 5% branch remittance tax), provided treaty conditions are met.
Conclusion
In substance, branch remittance tax is an additional tax on business profits, not a dividend tax. Nevertheless, dividend provisions in tax treaties frequently act as a limiting reference point, and in some treaties, explicit branch remittance rules exist.
Therefore, before applying any withholding on PE profit transfers, it is essential to, examine the relevant double tax treaty in detail.
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