The ratification process in Turkey was completed in early 2012, and on 1 August 2012, Turkey’s Ministry of Foreign Affairs announced that Germany had completed the formal procedures, thereby allowing the income tax treaty to enter into force.
The treaty’s provisions have a retroactive effective date of 1 January 2011.
Implications of retroactive effective date
The background for the retroactive effective date is:
- In August 2009, Germany indicated it would unilaterally terminate the then-existing income tax treaty between Turkey and Germany.
- The former treaty, however, continued to remain in effect during 2009 and 2010, pending treaty negotiations.
- The new treaty was signed in September 2011, with a retroactive effective date of 1 January 2011.
- Because formal treaty negotiations were not completed during 2010, there was effectively no income tax treaty between Turkey and Germany beginning in 2011.
Given the level of trade and volume of business between the two countries, the absence of an income tax treaty resulted in adverse tax consequences and caused concerns as to the effect of the tax implications of no treaty during the interim period.
Article 27 of the new treaty includes specific provisions for taxpayers to follow in filing refund claims for taxes paid or withheld beginning from the retroactive effective date of 1 January 2011. For instance, refund claims for dividends, interest payments, royalties, and other amounts withheld at source are to be filed by the end of the fourth year following the year in which the tax was withheld in the source country. The actual refund procedures are defined by the source country’s domestic tax laws.
Another issue related to the retroactive effective date is whether the tax authorities can make an assessment of tax for amounts that were not paid / withheld when the taxpayer believed that the treaty would enter into force and therefore negate the requirements to pay or withhold tax (in order words, the taxpayer did not pay or withhold the amounts of tax in order to avoid having to go through the refund process unnecessarily).
Read an August 2012 report [PDF 59 KB] prepared by the KPMG member firm in Turkey: Progress on German / Turkish Double Tax Treaty