What is the difference between a software licence and a software service, and why does it matter on the invoice?
A licence is the right to use software that already exists; a service is work done for you, such as building, installing, maintaining or hosting software. Which line item appears on the invoice can decide the answer to questions about software VAT withholding, so the contract and the invoice need to describe the purchase in the same words.
People who search for "software withholding rate" or "software VAT withholding" in Türkiye are mostly asking one thing: do I have to withhold part of the VAT on the software invoice I received? The answer is not always the same. Article 4 of the VAT Law No. 3065 treats every transaction that is not a supply of goods or an import as a "service", while partial withholding applies only to the transactions and buyers listed in the VAT General Implementation Communiqué. The Communiqué says so plainly: partial withholding applies only to the transactions it lists, and not to others.
So the word "software" is not a reason for withholding on its own. First look at the nature of the work (licence, development, subscription, maintenance), then at who the buyer is (a public body, a bank, a listed company, a small business). Rates and buyer lists change, so this article relies on the Communiqué text published by the Revenue Administration (GİB) as of 2026. Check the current text, and your accountant, before you act.
How do you tell a licence, custom development, a subscription and maintenance apart?
The table below is a starting point for deciding how to name what you buy in the contract and on the invoice. The tax result in each row depends on the buyer and the details of the contract.
| What you buy | What you actually get | Invoice and contract point |
|---|---|---|
| Off-the-shelf licence | Right to use, the copy is yours | State type, term and user count separately |
| Custom development | Work done for you | State scope, acceptance and source code rights |
| SaaS subscription | Access to software run in the cloud | State period, user count and support level |
| Maintenance and support | Fixes, updates, help | Show as a separate line from the licence fee |
| Foreign supplier | Service or licence provided abroad | Ask your accountant about reverse-charge VAT |
| Freelance developer | Service bought from an individual | Clarify invoice or freelance receipt first |
There is a practical reason to separate the lines. If a licence, development work and maintenance sit together in one contract, each may have a different tax result, and if the price is not split there is a risk that one rule is applied to everything. The Communiqué's consulting section sets a similar rule: where legal advice and consultancy are in one contract without separate pricing, withholding applies to the total. Rather than assume the same logic for software, separate the lines from the start.
When does VAT withholding apply to a software service?
Under the Communiqué it is the buyer, not the seller, who withholds. The buyer declares and pays a set share of the VAT as the responsible party, and the seller declares the remainder in its own return. Two conditions have to be met: the transaction must fall within the withholding scope, and the buyer must be obliged to withhold.
On the buyer side the Communiqué names two groups: VAT taxpayers and "designated buyers". Designated buyers include public bodies, revolving-fund institutions, banks, insurance and pension companies, state economic enterprises, mobile operators, organised industrial zones and companies whose shares trade on Borsa Istanbul. If your buyer is in neither group, and the software work is not named in another section, the withholding question usually does not arise.
On the transaction side, do not look for a general line called "software withholding". Two routes stand out in the Communiqué:
- The "other services" section: for services not specifically listed elsewhere, the buyers named in that section (public administrations, banks, insurers, development agencies and similar) withhold at (5/10).
- The maintenance and repair section: in the Communiqué's own example, for a public body's automation system, services on operating-system software such as changes, troubleshooting, maintenance and updates have 7/10 of the VAT withheld by the buyer.
Whether a licence sale counts as a supply of goods or a service depends on the structure of the deal, and the Communiqué has no general withholding line reserved for licences. Do not guess here; get a written view from your supplier and from your own accountant. The Communiqué also provides a separate VAT exemption for certain software produced in technology development zones, but the same section states that maintenance and support other than updates fall outside that exemption.
What should you check when buying from abroad or hiring a freelancer?
If you buy a software service from a company abroad, VAT may be calculated by you instead of the seller. The Communiqué states that for services supplied by persons with no workplace or business centre in Türkiye, the whole VAT is declared and paid by the local recipient as the responsible party. The recipient does not need to be a VAT taxpayer; non-taxpayers also declare and pay through VAT Return No. 2. The position is different if the service is used abroad, so it helps to write in the contract where the service will be used.
With a freelance developer the question is less VAT and more income tax withholding. Article 94 of the Income Tax Law No. 193 requires companies, and traders and professionals who must declare their actual income, to withhold income tax on payments for freelance professional work. The rate and exceptions can change, so get the current figure from your accountant. Whether the person runs a freelance practice or a commercial business decides whether they issue an invoice or a freelance receipt, so settle that before you pay.
How should lines be written in the contract and on the invoice?
The aim is that an auditor, or a new accountant, can read the contract and see which amount pays for what. These steps help:
- Write licence, development, subscription, maintenance and training as separate clauses with separate prices.
- If there is a licence, state its scope: term, number of users and where it may be installed. Law No. 5846 on Intellectual and Artistic Works deals separately with assigning economic rights and with granting only a licence to use, and it requires contracts on economic rights to be in writing, with each right listed separately.
- Make the invoice description match the contract heading: instead of just "Software", write "Custom software development service, phase 2" or "Annual maintenance and support".
- If your buyer is an organisation that must withhold, say so in the quotation from the start, or your cash flow will differ from what you expect.
- For an unclear line, the seller's and the buyer's accountants should agree on the same classification in writing.
What does a worked calculation look like?
For example, suppose a bank receives an invoice of TRY 100,000 for a custom software development service, with VAT assumed at 20%. Assume the service is not a specially listed item and falls under "other services". The VAT is TRY 20,000. With a (5/10) withholding rate, the bank declares TRY 10,000 as the responsible party, and the seller declares the remaining TRY 10,000. The seller collects TRY 100,000 + TRY 10,000 = TRY 110,000 from the bank.
Had you done the same job for a small business that is not obliged to withhold, no withholding would arise under this assumption and the full TRY 20,000 VAT would be added to the invoice, for a total of TRY 120,000. This is a hypothetical example; the rate, the buyer type and the classification of the service must be confirmed with an accountant in a real transaction. If maintenance and update lines sit in the same contract, each may carry its own rate, which is another reason to price them separately.
Which mistakes come up most often?
- Writing one total price in the contract and not separating licence, development and maintenance.
- Seeing the word "software" and applying withholding automatically, or never applying it.
- Not asking at quotation stage whether the buyer must withhold.
- Forgetting the reverse-charge VAT declaration on services bought from a foreign supplier.
- Not discussing the invoice or receipt choice and income tax withholding with a freelancer up front.
- Treating a rate from an earlier year as current; rates and buyer lists change.
How Hatson Tech helps
Before a software project starts, discussing development, maintenance and any licence as separate lines also makes your accountant's job easier. With Hatson Tech you can settle that scope in the discovery meeting. Hatson does not publish fixed prices; the first meeting and the discovery are free. To pin down scope, see our custom software development service. Before a purchase decision, our guides on choosing an AI supplier and on buying versus building may also help. Always make the tax classification decision together with your accountant.