Permanent Establishment in Turkey: When a Foreign Company Accidentally Becomes Taxable

A permanent establishment in Turkey is a taxable presence — a fixed place of business or a dependent representative — that pulls a foreign company into Turkish corporate tax even though it never registered anything here. A foreign company becomes taxable in Türkiye in one of two ways. Either it is a Turkish tax resident — its registered head office or its effective place of management sits in Türkiye — in which case its worldwide profit is taxed here. Or it is non-resident, and Türkiye taxes only its Turkish-source income, typically where the company has a place of business ("işyeri") or a permanent representative ("daimî temsilci") in the country. That second route is the one that surprises people. No company is registered, no branch is opened — and yet a salesperson who closes deals in Istanbul, a rented warehouse used as a distribution point, or a site team that stays a year on a project can be enough to put the foreign company inside the Turkish tax net. Where a double tax treaty applies, its own permanent establishment article usually narrows the domestic test and governs. This guide explains what creates the risk and how to structure around it.

Tax residency or limited liability: which Turkish tax net are you in?

Turkish corporate tax draws one line before all others. Tax residency for a Turkish company — or for a foreign one — turns on where it sits: a company is a Turkish tax resident when its registered head office (the office named in its constitutional documents) or its business head office (the place where the business is actually gathered and directed) is in Türkiye. Residents carry full liability: worldwide income.

A company whose registered office and effective management are both abroad carries limited liability: only its Turkish-source income is taxed. That sounds comfortable — until you notice what counts as Turkish-source. Commercial profit is treated as Turkish-source when it is earned through a place of business or a permanent representative in Türkiye, using the definitions borrowed from the Tax Procedure Law (No. 213) and the Income Tax Law (No. 193). One important qualification: this place-or-person test governs commercial profit. Other Turkish-source payments to a non-resident — service fees, royalties, interest and similar — can be taxed by withholding at source even where there is no permanent establishment at all, subject to any treaty reduction.

Two practical consequences follow. First, moving the real decision-making of a group company to Istanbul can make that company Turkish-resident even if it is incorporated in Delaware or Dubai. Where that produces residence in two countries at once, an applicable treaty's tie-breaker rule decides which one prevails. Second, you can be non-resident and still owe Turkish corporate tax on a slice of your profit. Our Turkish tax law team sees both, and the second far more often.

What creates a permanent establishment in Türkiye?

PE risk for a foreign company in Turkey comes from two domestic triggers, and they are independent of each other.

A place of business (işyeri). A physical location placed at the company's disposal and used for the business: an office, a branch, a shop, a factory, a workshop, a mine, a warehouse used as more than a passive store, a construction or installation site. Ownership is not required. A desk in a group company's Istanbul office, used continuously by your own people, is capable of being your place of business.

A permanent representative (daimî temsilci). A person in Türkiye who is authorised, under a continuing relationship, to carry out transactions binding the foreign company. The classic case is an agent who negotiates and concludes contracts in the company's name. It can also arise where someone holds stock and fills orders from it, or where a person is economically dependent on the single foreign principal.

Notice the asymmetry: the first trigger needs a place, the second needs only a person. Many foreign companies avoid the office and then create the exposure through the human being.

How does a double tax treaty change the answer?

Türkiye has an extensive treaty network — the Revenue Administration publishes the current list of agreements in force — and most follow the OECD model's permanent establishment article. Where a treaty applies to your company, it does two useful things.

It narrows the domestic concept. The treaty lists what counts as a PE (place of management, branch, office, factory, workshop) and then carves out preparatory or auxiliary activities: storage or display of goods, purchasing, collecting information, and similar. It also gives construction and installation sites a time threshold — a site only becomes a PE once it has run beyond the period the particular treaty specifies. That period is commonly six or twelve months, but it genuinely varies from treaty to treaty, so read yours rather than assuming.

It also protects the independent agent. A broker or agent acting in the ordinary course of its own business, for several principals, at arm's length, generally does not create a PE for those principals. Dependence is what kills the protection.

Two cautions. Treaty relief is not automatic — you normally need a certificate of residence from your home tax authority, translated and legalised, plus the procedural steps the Turkish payer must take. And on the multilateral instrument: Türkiye signed the OECD MLI on 7 June 2017 but has not yet deposited an instrument of ratification, so Turkish treaties are currently read as concluded rather than as modified by it. That position can change, and it should be checked as at the date of the transaction. We cover the mechanics in our guide to double tax treaties and treaty relief in Türkiye.

The traps that catch real businesses

These are the fact patterns that turn up again and again.

• The sales rep who says yes. Hired locally, paid a commission, gives customers a firm price and a delivery date. On paper the contract is concluded at head office. In practice, the deal was closed in Istanbul.
• The warehouse that grew up. It started as storage — arguably auxiliary. Then it began fulfilling orders, handling returns and holding a service team. The character of the place changed and nobody re-examined it.
• The project that ran long. A four-month installation is extended twice. Separate but connected contracts on the same site are often aggregated, so slicing a project into phases rarely helps.
• The remote employee. A senior person relocates to Türkiye and keeps working for the foreign employer. Beyond the PE question, employing someone here brings payroll, social security and permit duties — see employer obligations for foreign companies.
• The group service company. An affiliate in Türkiye performs work that is really the parent's business, at a thin margin. The transfer pricing challenge and the PE challenge arrive together.
• The liaison office that traded. A representative office that quotes, invoices or negotiates has stepped outside its permit.

Branch, subsidiary or liaison office: which structure fits?

If you do need presence, choose it deliberately rather than drifting into it.

Note the asymmetry: the two activities foreign companies most often ask for — market research and promotion — are precisely the ones for which the permit is not extended, so check the current position before you build a long-term plan around a liaison office.

The liaison office is the only genuinely non-taxable option, and only while it stays strictly non-commercial. The subsidiary is the cleanest for anything that looks like a business, because it puts a Turkish taxpayer between your group and the Turkish market. Our company formation practice and the guide to establishing a business in Türkiye set out the steps; where a structure is being built as part of a transaction, our corporate and M&A team handles it alongside the deal.

What happens once a permanent establishment exists?

A PE is not a fine. It is an obligation set, and it is retrospective — it begins when the facts began, not when someone notices.

• Registration. The PE must be registered with the competent tax office and obtain a tax identification number.
• Books and filings. Turkish-standard bookkeeping, periodic advance corporate tax returns and an annual corporate tax return covering the profit attributable to the PE, plus VAT compliance under Law No. 3065 where relevant.
• Attribution. Only the profit properly attributable to the Turkish activity is taxed — but you must be able to evidence that split with intercompany agreements and transfer pricing support.
• Withholding. Payments out of Türkiye to non-residents can attract withholding, and remitting branch profit to head office has its own treatment. Rates and reductions depend on the payment type and the treaty; see withholding tax on payments to non-residents and repatriating profits to a foreign parent.
• Interest and penalties can be assessed for periods already closed, which is why late self-correction is usually better than waiting.

The general corporate tax rate is 25%, with a higher rate for banks and other financial institutions and a domestic minimum corporate tax regime in effect; further rate changes for certain activities have been legislated for future tax periods. These are policy-sensitive figures and must be confirmed for the tax year in question. The wider picture is in our guide to corporate tax in Türkiye for foreign companies.

How do you structure to avoid an unintended PE?

Nothing here is exotic. It is mostly discipline about who does what, and paper that matches reality.

1. Keep contracting authority abroad — really. If local people negotiate commercial terms, the limitation in their job description will not save you.
2. Use buy-sell distributors rather than agents where the commercial model allows. A distributor trading on its own account for its own margin is not concluding contracts in your name.
3. Keep fixed places genuinely auxiliary, and re-test them when their function changes.
4. Watch the clock on projects, including connected phases, against your specific treaty threshold.
5. Decide consciously about people in Türkiye — employer of record, subsidiary employment, or not at all.
6. Align the documents with the facts: agency and services agreements, delegations of authority, board minutes showing where decisions are taken.
7. Consider an advance ruling from the Revenue Administration where a structure is significant and the answer is genuinely uncertain.

For US groups, the analysis usually runs alongside home-country reporting, and we coordinate through our US Desk. Because we act by power of attorney, most of this can be handled without travelling to Türkiye, on written terms agreed in advance. If you would like a structure reviewed before it hardens, tell us about your situation or contact the firm.

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