Turkey-Malta Double Tax Treaty

Justine Bielik | 26 Jun 2013

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On 14th April 2011 Malta and the Republic of Turkey signed the Malta-Turkey Agreement for the Avoidance of Double Taxation and the Prevention of Tax Evasion with respect to Taxes on Income. This is the first legal toll regulating taxation matters between the two countries; however, our countries have long history of bilateral agreements which regulates i.a. promotion and protection of investments, scientific and cultural relations and visa regulations.

1. Turkey-Malta Tax Treaty Definitions

Generally speaking, the Convention follows the OECD’s Model Tax Treaty, however with some alterations.  It extends the definition of a permanent establishment, which now includes also so-called “service PE”, which arises when furnishing of services in the other state continues for a period or periods aggregating more than 6 months within any 12-month period. The treaty keeps, abandoned by the OECD Model, provision on independent personal services, which completes the system of taxation of individuals.

2. Taxation of Particular Types of Income

Majority of provisions allocate taxing rights to both countries. In case of dividends Turkish withholding tax rate is 10% or 15%, and in case of interest and royalties – 10%. The treaty covers with the “royalties” definition payments for the use of, or the right to use, industrial, commercial, or scientific equipment. The OECD removed the leasing of industrial, commercial, or scientific equipment from that provision, suggesting that income generated on such transactions is not of “royalty” nature and therefore should fall under business income. Nevertheless, many Maltese double tax treaties still apply the old approach (e.g. with Syria, Poland, Singapore, Belgium). It should be noted that the treaty introduces quite unique rules for taxation of capital gains, e.g. in case of shares in a property company where it departs from shareholding percentage threshold, leaving some room for interpretation. Potential double taxation shall be avoided with the credit method.

3. Exchange of Tax Information between Malta & Turkey & Anti-avoidance Measures

The Malta-Turkey Double Tax Treaty regulates an exchange of information, which importance is strengthen by the fact that Turkey has not concluded with Malta any bilateral Agreement on Tax Information Exchange, based on the OECD model (TIEA). However, on 3rd November 2011 Turkey signed amended Convention on Mutual Administrative Assistance in Tax Matters, highlighting this way its commitment to international co-operation in this matter.  

It is important to notice that the treaty contain limitation of benefits clause, which limits treaty benefits not only in case of artificial arrangements, but also in case of persons enjoying a special fiscal treatment.

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