Corporate Income Tax Reduction for Services Provided Abroad

In a recent private ruling issued to a company operating in the mobile application and gaming sector, the Tax Administration provides a noteworthy assessment regarding the taxation of income earned from abroad.

As a rule, the legal effect of a private ruling is limited to the taxpayer to whom it is issued. In practice, however, it carries broader significance because it indicates how the Tax Administration approaches similar activities. We will assess this recent private ruling within that framework.

The company requesting the private ruling develops its artificial intelligence and mobile gaming applications entirely in-house and offers them to users in Türkiye and abroad through Google Play and the App Store, generating revenue from subscriptions and in-app sales of virtual products.

The company stated that it was able to document the distinction between domestic and foreign customers and asked whether the income generated from foreign users could benefit from the income deduction under Article 10/1-ğ of the Corporate Income Tax Law, the reduced corporate income tax rate under Article 32/7, and the VAT exemption for exported services.

The Tax Administration gave a negative response based on two separate grounds.

First, the Administration considers that the activity does not constitute “software” in terms of the type of service provided.

Second, since the applications are also used in Türkiye, it takes the view that the activity cannot be regarded as a service provided exclusively to customers abroad.

Although the company, which generates revenue through in-app product sales and subscription models, stated that the software was developed entirely in-house, it may still be debated whether this activity should be regarded as software development or rather as “mass production” through software.

I hope that the Administration reached this conclusion only after obtaining sufficient additional information and documentation from the taxpayer. Frankly, it is difficult to see how in-app product sales or subscription sales could exist without software.

Perhaps this is precisely why a second ground for rejection was included in the private ruling. If the service provided is not considered software, there would otherwise be little need for an additional justification, since the relevant provision specifically grants the deduction for software activities.

Unfortunately, it is also difficult to agree with the second justification. The company’s service appears to have been treated as though it were a one-off application sale, and the fact that the application was not offered exclusively to customers abroad was interpreted negatively.

Regarding Article 32, the Tax Administration states that artificial intelligence and mobile gaming applications may be considered exported services if they are developed for use by customers abroad. However, if the applications are used both abroad and in Türkiye, the activity cannot be regarded as service export.

A similarly uncertain response was provided in terms of VAT.

Private rulings sometimes contain answers that remain highly open to interpretation. In my view, this part of the ruling is one of those examples.

In other words, the response may be read as saying that the company can benefit from Article 32 and the VAT exemption for services provided to foreign customers. On the other hand, because it also states that the exemption cannot apply where the applications are used both abroad and in Türkiye, the response may also be interpreted as negative.

A digital product developed in Türkiye is sold to the global market and generates income from abroad. Despite this, the current business model based on direct sales to end users does not appear to benefit from the tax advantages provided for software services supplied abroad in the manner that might be expected.

Yet for a mobile gaming or application company, the ordinary way to reach large numbers of users in different countries is precisely through global platforms such as Google Play and the App Store.

In my opinion, the issue is not limited to whether a particular condition for a tax deduction has technically been met.

Looking at the Tax Administration’s approach, selling a digital product developed in Türkiye to the world through a Turkish company may create greater tax uncertainty, while selling the same product through a company established abroad may fit into a clearer tax framework.

It hardly needs to be said, but the real objective should be to keep the value created in Türkiye within Türkiye in every sense.

For this reason, I believe that tax rules relating to the digital economy, as well as the interpretation of those rules, should take into account the actual commercial functioning of the sector.

Corporate Income Tax Law, Article 10.

Corporate Income Tax Law, Article 32.

Value Added Tax Law, provisions concerning exported services.

Revenue Administration, recent private ruling concerning mobile application and gaming activities.

If the date and reference number of the private ruling are available, they should be included in full in the references.