Evaluation of Payments Made for Computer Programs (Software) Purchased from Overseas Companies in terms of Corporate Tax Withholding in Turkey
Recently, incorrect and inconsistent decisions / verdicts have been made by the Ministry of Finance and the judiciary regarding the taxation of payments made for computer programs (software) purchased from overseas companies. Legal provisions related to the subject are included in the Corporate Tax Law, the OECD Model Agreement and its Commentary which are the source and interpretation of Double Taxation Agreements signed between the States.
As it can be clearly understood from the Corporate Tax Code, the OECD Model Agreement and Commentary; in case of purchasing computer software from overseas companies, there may be four different type of income, each of which is taxed separately. Even the transfer of full ownership of intellectual property rights and the transfer of partial ownership of intellectual property rights are considered separately. Accordingly, in summary;
• In case the software programs purchased from an overseas company are sold to final consumers without making any changes and/or reproductions or used in the business in the same way, the revenue obtained by the overseas company is in the nature of commercial (business) income, and no tax withholding should be made on such payments.
• In case of purchasing of partial intellectual property rights like reproduction, modification, distribution to the public, display, etc. of a software within the scope of copyright from an overseas company, the income obtained by the company is in the form of royalties, and tax withholding must be made from these payments (for example, 10% for Germany).
• In case of purchasing of all intellectual property rights of a computer program from an overseas company, the income is in the nature of capital gain, and since this gain can only be taxed by the State of residence of the overseas company, no tax should be withheld on such payments.
• In case of purchasing of a computer software that was not previously available in the market and specially prepared by an overseas company for a domestic company to use in the business and/or to sell to customers, the income earned by the the overseas company is considered self-employment income. If the company performs these activities in Turkey and has a fixed place that it can use continuously to perform these activities, or if the period in which the activities are carried out exceed a total of 183 days in any uninterrupted 12-month period, a 15% tax withholding should be made on these payments, otherwise, no tax withholding should be made.
Besides, the taxation principles related to the payments made for the purchase of the software programs should also be applicable on the payments made for services such as updates and annual maintenance (guarantee) regarding computer programs.