Permanent Establishment Risk in Turkey for Foreign Companies

Introduction

Permanent establishment risk in Turkey is one of the most important tax issues for foreign companies doing business with Turkish customers, appointing local agents, sending employees to Turkey, performing services in Turkey, managing projects remotely, using warehouses or operating through Turkish representatives. A foreign company may believe that it has no Turkish tax exposure because it has not incorporated a company or opened a registered branch in Turkey. However, under Turkish domestic tax principles and applicable double taxation treaties, a taxable presence may arise from the actual conduct of business in Turkey.

Permanent establishment, often abbreviated as PE, generally refers to a fixed place of business or similar taxable presence through which a foreign enterprise carries on business in another country. In Turkish tax practice, PE risk is closely connected with the concepts of işyeri and daimi temsilci, meaning workplace and permanent representative. If a foreign company is considered to have a permanent establishment or permanent representative in Turkey, Turkey may tax the profits attributable to that Turkish presence.

The issue is particularly important because Turkey taxes resident companies on worldwide income, while non-resident companies are generally taxed only on Turkish-source income. PwC’s 2026 Turkey corporate tax summary confirms that the standard corporate income tax rate is 25% for ordinary companies and 30% for financial sector companies. It also explains that taxable income is computed based on net accounting profits after adjustments for exemptions, deductions and limited prior-year loss carry-forwards.

For foreign companies, the key question is not only whether Turkish tax applies, but whether Turkey can treat part of the foreign company’s business profits as attributable to a Turkish PE. If that happens, the foreign company may face corporate tax, VAT, withholding tax, stamp duty, bookkeeping, registration, invoicing and tax audit obligations in Turkey. PwC also notes that corporations or permanent establishments are liable for all taxes, including corporate tax, VAT, withholding tax and stamp tax, once they are registered for tax purposes in Turkey.

1. What Is a Permanent Establishment?

A permanent establishment is generally a taxable business presence of a foreign enterprise in another country. In treaty practice, it is usually regulated under Article 5 of double taxation treaties, while the taxation of business profits attributable to that PE is regulated under Article 7. Turkish Revenue Administration guidance on double taxation treaties states that commercial profits derived through a workplace or permanent representative in the other contracting state may be taxed in that state only to the extent attributable to that workplace or permanent representative, and that the situations creating a workplace or permanent representative are explained in the PE article of the relevant treaty.

This means that a foreign company’s Turkish tax exposure depends on both domestic Turkish tax law and the relevant double taxation treaty. If there is no treaty, domestic law becomes decisive. If there is a treaty, the treaty may limit Turkey’s taxing rights unless the foreign company has a PE in Turkey.

In practical terms, PE risk may arise even without formal registration. A fixed office, project site, construction site, workshop, sales office, warehouse, local representative, dependent agent, employee presence, service team or contract-concluding authority in Turkey may trigger analysis. The legal issue is not the label used by the company; it is the real business activity performed in Turkey.

2. Why PE Risk Matters for Foreign Companies

PE risk matters because it can transform a foreign company’s Turkish position from a simple cross-border transaction into a taxable Turkish business presence. If a foreign company merely sells goods to Turkey from abroad, and no PE exists, Turkey may generally have limited ability to tax the company’s business profits under many treaties. However, if the company operates through a Turkish PE, Turkey may tax the profits attributable to that PE.

This distinction can produce significant financial consequences. A foreign company with a PE may need to register with Turkish tax authorities, maintain accounting records, file corporate tax returns, calculate Turkish-source profits, issue invoices, declare VAT, manage withholding taxes, retain documents and respond to tax audits. If the PE is discovered after years of activity, the company may face retroactive tax assessments, penalties and late-payment interest.

PE risk is also important in commercial negotiations. Turkish customers may request tax residency certificates, treaty documentation, withholding tax analysis or local invoicing support. If a foreign supplier performs services physically in Turkey, the Turkish customer may also worry about withholding tax, VAT reverse-charge and documentation risks. Therefore, PE analysis affects not only the foreign company but also its Turkish business partners.

3. Fixed Place of Business PE

The classic form of PE is a fixed place of business. This may include an office, branch, factory, workshop, management place, warehouse, construction site or other physical location through which the foreign company conducts business in Turkey. The location does not necessarily need to be owned by the foreign company. Long-term use, control or availability of a place may be relevant.

A fixed place PE analysis usually asks whether there is a place of business, whether it is fixed, whether it is at the disposal of the foreign enterprise and whether business activities are carried on through that place. A temporary meeting room or occasional customer visit may not create the same risk as a permanent office used by employees or representatives to manage Turkish sales.

Foreign companies often create risk unintentionally. For example, a foreign manufacturer may keep personnel at a Turkish customer’s facility for months. A foreign software company may maintain a local technical team working from a co-working space. A foreign trading company may use a warehouse in Turkey to hold inventory and fulfill local orders. A foreign contractor may operate from a project office at a construction site. Each scenario should be reviewed under the applicable treaty and domestic rules.

4. Dependent Agent PE

A foreign company may also create a PE through a dependent agent or permanent representative. This is one of the most common risks for companies that do not want to establish a Turkish subsidiary but still want local market access.

Turkish Revenue Administration rulings provide useful guidance. In a ruling concerning online services from a German company, the Administration stated that, under the relevant treaty, if a person acts in one contracting state on behalf of an enterprise of the other state and performs activities specified in the dependent agent provision, those activities may create a PE for that foreign enterprise. The same ruling also distinguishes independent agents, explaining that an enterprise is generally not deemed to have a PE merely because it conducts business through a broker, general commission agent or other independent agent acting in the ordinary course of its own business.

The difference between dependent and independent agents is critical. A genuinely independent distributor, broker or commission agent may reduce PE risk if it acts legally and economically independently, bears entrepreneurial risk and conducts business in its ordinary course. However, if the Turkish representative works almost exclusively for the foreign company, follows detailed instructions, has authority to negotiate or conclude contracts, or plays the principal role leading to contract conclusion, PE risk increases.

Another Turkish Revenue Administration ruling concerning Irish software sales explains that an independent agent must be both legally and economically independent, must not be subject to the effective control of the foreign enterprise, and must not carry out activities only for a single employer. It also notes that if a person acts in Turkey on behalf of the foreign enterprise and performs activities covered by the dependent agent provision, those activities may create a PE.

5. Service PE and Employee Presence in Turkey

Foreign companies providing services in Turkey face a separate category of PE risk. Some Turkish tax treaties contain service PE provisions. Under these provisions, services performed in Turkey by employees or other personnel may create a PE if the duration threshold is exceeded.

A Turkish Revenue Administration ruling concerning services provided by a Chinese resident company is especially instructive. The ruling states that the PE criterion is not limited to a physical place and that services provided in Turkey through personnel may also create a PE depending on the treaty duration threshold. It further explains that, where services under the same or connected projects are performed in Turkey, the total duration should be considered as a whole; if multiple personnel are sent for the same project, their time in Turkey may be aggregated.

In that ruling, the relevant treaty threshold was 12 months, and the Administration stated that if services performed in Turkey through personnel exceeded 12 months, the income would be taxable in Turkey under the business profits article. However, thresholds differ by treaty. Some treaties may use six months, nine months, twelve months or other formulations, and some may not contain a service PE clause at all. Therefore, the specific treaty must always be checked.

Service PE risk is relevant for engineering companies, technical consultants, software implementation teams, installation personnel, project managers, training providers, maintenance teams, architects, design firms, testing companies and management consultants. A foreign company should track days spent in Turkey by each employee, consultant and subcontractor.

6. Construction, Installation and Assembly Projects

Construction, installation and assembly projects are classic PE risk areas. Many treaties contain specific provisions under which a building site, construction project, installation project or assembly project constitutes a PE only if it lasts longer than a specified period. However, the period varies by treaty and the project facts must be analyzed carefully.

Foreign contractors should monitor the start date, end date, interruptions, related projects, subcontractor activities, personnel presence and site office use. Splitting a project into several short contracts may not eliminate PE risk if the contracts are commercially connected or form a coherent whole. Tax authorities may examine the real economic substance rather than the formal contract structure.

Construction PE risk is particularly important in infrastructure, energy, industrial installation, machinery assembly, hospital projects, hotel construction, factory setup, telecom infrastructure and large engineering projects. A foreign contractor should determine before bidding whether the project may create a Turkish PE and should include Turkish tax cost in pricing.

7. Warehouse, Inventory and Logistics Structures

Foreign companies selling goods into Turkey may use warehouses, fulfillment centers, bonded areas, logistics providers or consignment stock. These structures can create PE questions depending on control, inventory ownership, local sales activity and the role of the Turkish facility.

If the warehouse is used only for storage, display or delivery and falls within an exception under the relevant treaty, PE risk may be lower. However, if the warehouse is used for core sales activity, order fulfillment, customer service, local delivery management, after-sales operations or inventory-based Turkish sales, the risk increases.

E-commerce and marketplace businesses should be particularly careful. A foreign company may believe it sells from abroad, but if it stores goods in Turkey and uses a local fulfillment structure to serve Turkish customers, the tax analysis becomes more complex. VAT, customs, consumer law and PE issues may arise together.

8. Remote Work and Employees Working from Turkey

Remote work creates new PE risks. A foreign company may have an employee, manager, developer, sales representative or consultant working from Turkey while formally employed abroad. If the employee performs core business functions from Turkey, negotiates contracts, manages Turkish customers, supports sales or has authority to represent the company, Turkish PE risk may arise.

The risk is higher where the remote worker’s presence in Turkey is not temporary or incidental. A senior employee working from Turkey as a regional manager may create more risk than an employee temporarily visiting family while performing back-office tasks. Companies should adopt remote work policies, track work locations and limit authority where necessary.

Remote work can also create payroll tax, social security and individual tax residency issues. A PE analysis should therefore be part of a broader employment and tax review.

9. Subsidiary Does Not Automatically Eliminate Parent PE Risk

Many foreign investors establish a Turkish subsidiary and assume that this fully eliminates PE risk for the foreign parent. This is not always correct. A subsidiary is generally a separate legal entity, but the foreign parent may still create its own Turkish PE if it conducts business directly in Turkey through personnel, offices, dependent agents or contract negotiation activity.

For example, if the Turkish subsidiary acts only as a support office while the foreign parent’s employees negotiate and conclude Turkish customer contracts, the parent may face PE risk. Similarly, if the subsidiary habitually acts on behalf of the parent and lacks commercial independence, dependent agent PE issues may arise.

The safest structure is one where the Turkish subsidiary has clearly defined functions, employees, contracts, risks and remuneration. Intercompany agreements should reflect actual conduct. Parent company visits should be controlled and documented. Sales authority, pricing authority, contract signature authority and customer relationship management should be allocated consistently.

10. PE and Business Profits Under Tax Treaties

Double taxation treaties generally protect foreign enterprises from Turkish taxation of business profits unless a PE exists in Turkey. Turkish Revenue Administration rulings repeatedly apply this principle. In a ruling concerning a Moroccan resident company, the Administration stated that business profits of an enterprise resident in the other contracting state are taxable only in that state unless the enterprise carries on business in Turkey through a Turkish PE; if a PE exists, Turkey may tax only the profits attributable to that PE.

Similarly, the ruling concerning Irish software payments states that income from software sales would be taxable in Turkey only if the Irish company carried on business in Turkey through a workplace under Article 5 of the treaty. If such a PE or permanent representative exists, Turkey may tax the amount attributable to that Turkish presence under domestic law.

This attribution principle is crucial. PE existence does not automatically mean that all global income of the foreign company becomes taxable in Turkey. Turkey generally taxes only the profits attributable to the Turkish PE. However, determining attributable profit can be complex and may require functional analysis, accounting allocation, transfer pricing principles and documentation.

11. Profit Attribution to a Turkish PE

Once a PE exists, the next issue is how much profit should be attributed to it. Under treaty principles, the PE should generally be treated as if it were a separate and independent enterprise performing similar functions under similar conditions. Turkish Revenue Administration guidance in an Irish software ruling quotes treaty language stating that profits attributable to a PE should be the profits that the PE would have earned if it were a separate and independent enterprise engaged in the same or similar activities under the same or similar conditions.

Profit attribution may require identifying functions performed in Turkey, assets used, risks assumed, personnel roles, local costs, customer relationships and revenue generation. If a Turkish PE performs only limited support functions, the attributable profit may be limited. If it performs sales, contract negotiation, project delivery or key value-creating functions, the attributable profit may be substantial.

OECD’s Turkey transfer pricing profile notes that Turkey’s tax treaties generally contain the pre-2010 version of Article 7 and that Turkey reserves the right to use the pre-2010 version of the OECD Model Convention’s Article 7. It also notes that Turkey does not apply the authorized OECD approach for treaties containing the pre-2010 Article 7 and that there is no specific domestic transfer pricing guidance for attribution of profits to PEs of non-resident entities. This means that PE profit attribution in Turkey can be fact-sensitive and may require careful legal and economic analysis.

12. PE, Withholding Tax and VAT

PE risk should not be reviewed in isolation. Cross-border payments may also trigger withholding tax, VAT reverse-charge or other obligations. If no PE exists, a Turkish payer may still have to withhold tax on certain payments depending on domestic law and treaty classification. If a PE exists, the tax treatment may change because the income may be taxed as business profit attributable to the PE rather than as passive income subject only to withholding.

VAT is also critical. A Turkish Revenue Administration ruling on services performed by a Chinese resident company states that services performed in Turkey or services benefited from in Turkey fall within the scope of Turkish VAT rules. Therefore, even where PE analysis under a treaty limits corporate tax, VAT consequences may still need to be reviewed.

Foreign service providers and Turkish customers should coordinate PE, withholding tax and VAT analysis before payment. A contract should specify gross or net payment terms, tax documentation responsibilities, residence certificate obligations, VAT treatment and invoice requirements.

13. Tax Residency Certificates and Treaty Relief

A foreign company relying on treaty protection should provide a tax residency certificate from the competent authority of its country of residence. The Turkish Revenue Administration ruling concerning Chinese services states that, for treaty provisions to apply, the foreign company must obtain a residence certificate from the competent authority of its country and submit the original or a notarized/consular-certified copy to the withholding tax responsible party or relevant tax office.

This requirement is highly practical. Without a residence certificate, Turkish domestic law may be applied without treaty relief. Foreign companies should obtain residence certificates before receiving payments from Turkish customers. Turkish payers should keep certificates and treaty analysis in their payment files.

Treaty relief also requires correct income classification. A payment may be business profit, royalty, interest, service income or another category. If the payment is royalty income effectively connected with a Turkish PE, the treaty article on royalties may not apply in the ordinary way; instead, taxation may occur under business profits rules. The Irish software ruling states that if a royalty is effectively connected with a Turkish workplace or fixed base, taxation is not made by applying the royalty withholding rate but under the business profits or independent personal services article, depending on the circumstances.

14. Common PE Risk Scenarios in Turkey

Foreign companies should pay special attention to the following scenarios:

A foreign sales company appoints a Turkish representative who negotiates prices and contracts with customers. A foreign technology company sends implementation personnel to Turkey for an extended project. A foreign engineering company provides on-site technical services in Turkey for connected projects. A foreign manufacturer maintains inventory in Turkey for local fulfillment. A foreign parent company uses its Turkish subsidiary as a contract negotiation hub. A foreign contractor runs an installation site in Turkey for several months. A foreign company’s regional manager works remotely from Turkey. A foreign SaaS company employs Turkish customer success personnel who manage Turkish clients. A foreign distributor uses a Turkish agent who works almost exclusively for it.

Each scenario requires a treaty-by-treaty and fact-specific analysis. Small differences in authority, duration, location, contract structure and personnel function may change the result.

15. Compliance Steps to Reduce PE Risk

Foreign companies can reduce PE risk through preventive structuring. First, they should map all Turkey-related activities, including employees, agents, warehouses, customers, contracts, service days, projects and local assets. Second, they should review the applicable double taxation treaty. Third, they should define whether activities are preparatory or auxiliary, core revenue-generating, sales-related or service-related. Fourth, they should limit Turkish representatives’ authority where appropriate. Fifth, they should track personnel days in Turkey. Sixth, they should maintain contracts showing the true commercial relationship. Seventh, they should obtain and preserve tax residency certificates. Eighth, they should review withholding tax and VAT before payment. Ninth, they should document transfer pricing and intercompany arrangements. Tenth, they should seek advice before exceeding treaty thresholds or establishing a regular Turkish presence.

The company should not rely on contract wording alone. If the agreement says the Turkish agent has no authority, but in practice the agent negotiates and finalizes all key contract terms, tax authorities may look at the actual conduct. Substance is more important than labels.

16. PE Risk in Tax Audits

PE issues may arise during Turkish tax audits, withholding tax reviews, VAT refund examinations, transfer pricing audits or customer-level inspections. Tax authorities may review contracts, emails, travel records, invoices, bank payments, service reports, timesheets, warehouse records, customer communications and local representative activities.

If a Turkish customer is audited, the tax inspector may also examine payments to foreign service providers. This can indirectly expose the foreign company’s PE risk. If the foreign company has no Turkish registration but appears to have personnel, project operations or dependent representatives in Turkey, the issue may escalate.

A foreign company should therefore maintain a Turkey activity file. This file should include contracts, residence certificates, service day calculations, travel records, employee roles, agent agreements, invoices, correspondence, project descriptions and tax analysis. Good documentation is often the difference between a manageable inquiry and a serious PE assessment.

17. Consequences of Undisclosed PE

If a foreign company is found to have an undisclosed PE in Turkey, possible consequences include corporate tax assessments on attributable profits, VAT liabilities, withholding tax issues, tax penalties, late-payment interest, bookkeeping obligations, invoicing deficiencies, stamp duty exposure, payroll or social security questions and potential disputes with Turkish customers.

The foreign company may also face double taxation if its residence country has already taxed the same income. Treaty mechanisms may reduce double taxation, but administrative procedures may be time-consuming. The Turkish Revenue Administration’s MAP guidance explains that mutual agreement procedures under tax treaties allow taxpayers to request competent authority assistance where actions by one or both states result in taxation not in accordance with the treaty.

However, MAP is not a substitute for preventive compliance. It is better to structure correctly before the risk arises than to seek relief after assessments are issued.

18. Practical Checklist for Foreign Companies

Before doing business in Turkey, a foreign company should ask the following questions:

Will the company have personnel physically present in Turkey? Will employees or consultants provide services in Turkey? How many days will personnel spend in Turkey? Are the projects connected? Will the company use a Turkish office, warehouse, customer site or project site? Will a Turkish agent negotiate or conclude contracts? Is the agent legally and economically independent? Does the company have inventory in Turkey? Will a Turkish subsidiary act on behalf of the foreign parent? Does the applicable treaty contain a service PE or construction PE threshold? Are payments classified as business profits, royalties, services or interest? Has the company obtained a tax residency certificate? Do contracts match actual conduct? Have VAT and withholding tax been reviewed? Has the company prepared documentation for a possible audit?

This checklist should be reviewed before signing contracts with Turkish customers, before sending personnel to Turkey and before appointing local representatives.

Conclusion

Permanent establishment risk in Turkey is a central tax issue for foreign companies. A company does not need to incorporate a Turkish subsidiary or open a formal branch to face Turkish PE analysis. A taxable presence may arise through a fixed place of business, dependent agent, permanent representative, service activities, construction projects, warehouses, local personnel or contract negotiation functions.

Under double taxation treaty principles, Turkey generally taxes the business profits of a foreign enterprise only if the enterprise carries on business in Turkey through a PE, and only to the extent profits are attributable to that PE. Turkish Revenue Administration guidance consistently emphasizes that the relevant treaty’s PE article determines whether a workplace or permanent representative exists, while the business profits article governs taxation of profits attributable to that presence.

For foreign companies, the safest approach is preventive legal and tax planning. Activities in Turkey should be mapped, treaty thresholds should be monitored, Turkish representatives should be structured carefully, employee presence should be tracked, contracts should reflect actual conduct, tax residency certificates should be obtained, and withholding tax and VAT treatment should be reviewed before payment.

A well-managed Turkish market entry structure can reduce PE risk, protect treaty benefits, prevent retroactive tax assessments and support commercial growth. A poorly managed structure may expose the foreign company to Turkish corporate tax, VAT, withholding tax, penalties, audits and double taxation. Therefore, permanent establishment risk in Turkey should be treated as a core part of international tax planning and legal risk management for every foreign company doing business with or in Turkey.