Recent rulings by the Ministry of Finance and the judiciary regarding the taxation of payments made for computer software purchased from overseas companies have been inconsistent and, in some cases, incorrect. The relevant legal framework includes the Corporate Tax Law, the OECD Model Tax Convention, and its Commentary, which serve as the basis for interpreting Double Taxation Agreements signed between countries. This article provides a detailed evaluation of corporate tax withholding obligations for payments made to foreign software providers in Turkey.
Types of Payments and Tax Treatment
According to the Corporate Tax Code, the OECD Model Convention, and its Commentary, payments for software purchased from overseas companies may fall into four distinct categories, each with separate tax implications. Transfers of full or partial intellectual property (IP) rights are treated differently.
Commercial Use Without Modifications
When software is purchased from an overseas company and used in the business as-is or sold to final consumers without modifications or reproductions, the income received by the overseas company is considered commercial income. In such cases, no tax withholding is required.
Partial Intellectual Property Rights
If the transaction involves partial intellectual property rights, such as reproduction, modification, distribution, or public display under copyright law, the income earned by the overseas company is treated as royalties. Tax withholding must be applied according to the relevant Double Tax Treaty, such as a 10% rate for Germany.
Full Intellectual Property Rights
When all intellectual property rights of a software program are purchased from an overseas company, the income is classified as capital gain. Since only the country of residence of the overseas company has the right to tax this gain, no tax withholding should be applied in Turkey.
Customized Software for Domestic Use
If the software was specially prepared for a domestic company and was not previously available in the market, the income earned by the overseas company is considered self-employment income. Tax withholding rules depend on the presence of the overseas company in Turkey. If the company has a fixed place of business or performs activities exceeding 183 days in any 12-month period, a 15% tax withholding applies. Otherwise, no tax withholding is required.
Payments for Updates and Maintenance
The taxation principles applicable to the purchase of software also extend to related services, such as software updates and annual maintenance or guarantee services. These payments should be evaluated under the same corporate tax withholding rules as the original software purchase.
Conclusion
Payments made for software purchased from overseas companies require careful consideration of the type of income and applicable corporate tax rules in Turkey. Proper classification—whether commercial income, royalties, capital gains, or self-employment income—ensures compliance with corporate tax withholding obligations and prevents inconsistencies in tax reporting.
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