Specifics of application of Double Taxation Treaties in Turkmenistan

1) Which principal Double Tax Treaties (DTTs) are currently in force in Turkmenistan?

Turkmenistan has ratified 39 DTTs, 4 of which were inherited from USSR agreements that the country continues to honor. While Turkmenistan uses the UN Model Convention as its foundation, it allows for interpretation guidelines from the OECD model. Here is the full list of countries that have signed DTTs with Turkmenistan: Armenia, Austria, Azerbaijan, Bahrain, Belarus, Belgium, China, Croatia, Czech Republic, Estonia, Finland, France, Georgia, Germany, Hungary, India, Iran, Japan, Kazakhstan, Kyrgyzstan, Latvia, Lithuania, Malaysia, Moldova, Pakistan, Romania, Russia, Saudi Arabia, Singapore, Slovakia, South Korea, Switzerland, Tajikistan, Türkiye, Ukraine, United Arab Emirates, United Kingdom, United States, Uzbekistan.

2) What types of income are covered by Double Taxation Treaties? 

The types of income covered by DTTs to which Turkmenistan is a contracting state include personal income, business profits , royalties, dividends, interests, capital gains, income from immovable property, and other incomes (e.g., shipping and air transport).

3) How is tax residency determined for DTT purposes in Turkmenistan?

According to Turkmenistan's tax legislation, an individual is considered a tax resident if they are physically present in Turkmenistan for a total of or more than 183 days within a calendar year. A legal entity is deemed a tax resident if it's incorporated in Turkmenistan or if its main governing body is in the country. Additionally, a non-resident entity may create a permanent establishment in Turkmenistan if its business activities fall under the definition of works and services creating a permanent establishment as per Turkmenistan's tax legislation, unless a DTT provides otherwise.

To apply DTT provisions, the non-resident taxpayer of Turkmenistan must submit to the tax service of Turkmenistan an application as well as a formal tax residency certificate issued by the respective authority of the relevant foreign state.

4) How to properly prove tax residency status to apply treaty benefits?

The tax residency is confirmed by obtaining the tax residency certificate issued for the purposes of the DTT.  The certificate shall be issued by the respective tax authorities of the contracting state.

5) How to determine which Double Taxation Treaty applies to a specific transaction?

To determine applicability of the provisions of the relevant DTT to a specific transaction involving Turkmenistan individuals or entities should do the following: 

• identify the tax residency of all parties involved (using the 183-day rule for individuals or place of permanent establishment rules for entities) and determine the source country of the income;
• verify whether Turkmenistan has a ratified DTT with your respective country;
• once the applicable DTT is identified, its provisions will govern the tax treatment of a specific type of transaction or income (such as dividends, royalties, or business profits);
• and, as a final step, non-residents must provide official tax residency certificates from their home country’s tax authorities to claim DTT benefits in Turkmenistan.

6) Do the provisions of the DTT take precedence over domestic tax law?

According to Article 6 of the Tax Code of Turkmenistan, the provisions of the international treaties to which Turkmenistan is a signatory shall prevail over the domestic legislation.

7) What tax obligations does a resident have when receiving income from abroad under a DTT?

To use DTT benefits against domestic taxes in Turkmenistan, entities must provide tax payment confirmations or receipts issued by the tax authorities of the other contracting state. Unfortunately, tax treaty benefits are not applied automatically but require completing the formalities established by the Turkmenistan tax authorities to receive an exemption, tax credit, or the offset of paid taxes.

8) How are tax rates on dividends, interest, and royalties applied under a DTT?

Tax rates are applied in accordance with the relevant DTT, and the rates specified in the treaty are applied to the corresponding transaction.

The key conditions that need to be checked when determining the applicability of reduced or zero tax rates are: 

• whether their beneficial owner is a qualifying entity (e.g., company holding ≥ 25%);
• whether the interest/dividend is paid by or to a government body or institution;
• whether the loan or deposit is non-bearer and with a bank;
• whether the interest is tied to commercial credit for goods/services.

9) What are the mechanisms for eliminating double taxation?

DTT benefits are not obtained in Turkmenistan automatically by providing a tax residency certificate, as it is common in many other countries. Entities should submit a formal DTT exemption application package (i.e. Form 23) along with a tax residency certificate issued for DTT purposes by the other contracting state. Normally tax authorities of Turkmenistan review the application and confirm the DTT exemption by approving Form 23. The whole process could take from 10 to 30 calendar days from submission.

For the taxes paid in Turkmenistan, tax authorities issue Form 22, which confirms the taxes paid in Turkmenistan for DTT purposes. Foreign entities can use this certificate of taxes paid in Turkmenistan to offset or credit in the other contracting state (in their own countries).

10) What is the dispute resolution process and Mutual Agreement Procedure (MAP) under a DTT?

Under DTT, the model dispute resolution process typically involves a mutual agreement procedure which allows the contracting states to the DTT to present their case to the competent authorities of the contracting state’s jurisdiction to resolve disputes arising from taxation not in accordance with the DTT. The competent authorities then negotiate to reach an agreement without resorting to litigation, and in the event such an agreement is reached, the competent authorities shall, as necessary, refund the excess amounts paid, allow tax exemptions, or levy taxes.

Authors: Mekan Bashimov, Counsel; Annamenli Rozymyradova, Associate