Problematic Interpretation of the Provision of Tax Treaties Regarding Dividend Taxation in Turkey
Turkish tax authority has started not to apply provision of tax treaties to dividend derived by non-resident from shares of Turkish resident listed companies.
According to domestic legislation dividend paid to non-resident is subject to 15% withholding. But most of tax treaties concluded by Turkey reduced withholding rate to 5% and 10% based on certain conditions. Same time most of the treaties include beneficial ownership test.
Provision of tax treaties regarding withholding on dividend is applied automatically by payer of dividend. In case if payer fail to apply provision of tax treaty due to different reason, then non-resident may go tax authority to get refund in accordance with tax treaty.
One of non-resident company who applied to tax authority to get refund for tax withheld against to tax treaty has been rejected by tax authority based on report prepared by tax inspector.
In another case tax authority has made an assessment to a dividend distributing company due to application of treaty rate automatically. That assessment is again based on the report prepared by tax inspector.
In both case the main reason for refund rejection or additional assessment is the explanation that has been made in very old communique published in 1996 by tax authority. That communique is about application of tax treaty between Turkey and Netherlands. It is indicated in the communique that explanation of the communique is applicable to all tax treaties whose provision is same or substantially similar with the provision of Netherlands treaty.
According to that communique in order to apply provision of Netherlands tax treaty, shares of dividend distributing company must be registered shares not bearer share.
Tax inspectors using this explanation in communique rejected to apply tax treaties to dividend distributed to the owner of the shares that are not registered. Tax inspectors did not feel to be obliged to make any research to determine whether non-resident dividend receiver is beneficial owner of the dividend or not. For them it is enough to assume that if the shares are bearer shares than owner of the shares are not the beneficial owner.
In fact, Turkish capital market law clearly allows bearer shares to be listed in capital market. And also, law indicate that in principle, capital market instruments shall be issued in the dematerialized form in the electronic environment, without certificates. Dematerialized capital market instruments shall be kept in accounts created according to name without considering whether they are registered or payable to the bearer. Regarding registration share transfer share register by corporations, pursuant to the related provisions of the Law numbered 6102, the records at the depository (CRA) shall be taken as basis, without the need for further application of the interested parties.
Based on the provision of capital market law listed shares should be issued in the dematerialized form and should be kept in accounts created according to the name of owner. This provision has over-ride the explanation in the communique.
Dividend distributer based on the records of the depository (CRA) determines who is the owner of the dividend and applies related tax treaties if the other conditions are met. If tax authority has doubt about ownership of the shares than need to investigate to determine who is the beneficial owner. Without conducting any investigation to find out the beneficial owner, rejecting to apply tax treaty is not in line with the provision of any treaty and also domestic legislation. This kind of interpretation of tax treaty is not always in favor of taxation in Turkey either. In some case even shares might be registered shares but beneficial owner might be different. Without making any investigation to determine beneficial ownership based on whether shares are registered or not is very problematic.
In order to solve the problem tax authority should abolish such explanation from that communique as soon as possible. And also, an explanation regarding determination of the beneficial ownership which is in line with the OECD commentaries should be mentioned in the communique.