Technical Explanation PDF

TREASURY DEPARTMENT
TECHNICAL
EXPLANATION
OF
THE
AGREEMENT
BETWEEN
THE
GOVERNMENT
OF
TEE
UNITED
STATES
OF
AMERICA
AND THE
GOVERNMENT
OF TEE REPUBLIC
OF TURKEY
FOR THE
AVOIDANCE
OF DOUBLE
TAXATION
AND TEE
PREVENTION
OF
FISCAL EVASION
WITH
RESPECT TO
TAXES ON
INCOME
SIGNED
AT WASHINGTON
ON
MARCH
28, 1996
INTRODUCTION

This document
is a technical
explanation
of
the Agreement

between
the United States
and Turkey
and the accompanying
Proto­
col, which were signed
on March 28, 1996 (the
"Convention" or the

"Agreement"). Although,
at the request of Turkey,
the term

"agreement"
is used throughout
the Agreement and Protocol,
it is

not intended
to have a
meaning different
from
the
term "Conven­
tion"
that is used in most
U.S. income tax treaties.
In this

Technical Explanation,
the term "Convention"
will
generally be

used.
References
in this Explanation
to the
"OECD Model"
are to

the Model Tax
Convention on Income and on
Capital, published by

the OECD in 1992, as subsequently amended. References to the

"U.N. Model"
are to the United Nations
Model Double Taxation

Convention between
Developed
and Developing
Countries, published

in 1980.

The Technical
Explanation is an official
guide
to the

Convention. It reflects the policies behind particular Conven­
tion provisions, as well as understandings reached with respect

to the application and interpretation of the Convention.

The Convention is accompanied
by
a Protocol pertaining
to

particular Articles of the
Convention. These Protocol
provisions
are discussed in
the explanations of the relevant
articles.

Article 1.
PERSONAL
SCOPE

Paragraph
1
TURKEY 189
Supp. No. 6(1998)

Paragraph
1 provides
that
the
Convention
is applicable
to

residents
of the
United
States
or Turkey,
except
where
the
terms

of
the
Convention
provide
otherwise.
Under
Article
4
(Resident)

a person
generally
is treated
as
a resident
of a Contracting

State
if that
person
is,
under the
laws
of that
State,
liable
to

tax therein
by
reason
of
his domicile,
residence
or other similar

criteria.
If a person
is,
under these
criteria,
a
resident
of

both
Contracting
States,
a single
State
of
residence
is
assigned

under
Article
4. The
Article 4
definition
of residence
applies

for all
provisions
of
the Convention.

Certain
provisions of
the Convention
are applicable
to
persons who
may not be residents
of either
Contracting
State.
For example, paragraph
1 of Article 24 (Non-Discrimination)
applies to nationals
of the
Contracting
States, even
if they are
residents
of a third state.
Under Article 26 (Exchange
of
Information) information
may be exchanged with respect
to resi­
dents of
third states.

Paragraph 2
Paragraph 2 of
Article 1 describes the
relationship between
the rules of the Convention,
on the one hand,
and the laws of.the
Contracting States and other
agreements
between the
Contracting
States,
on the other. Subparagraph
2 a) makes explicit
the
generally
accepted principle that no
provision in the Convention
may
restrict any exclusion, exemption, deduction, credit or other
allowance accorded by the laws of the Contracting States. For
example,
if a deduction would be
allowed under the Internal
Revenue Code (the "Code") in computing the taxable income of a
resident of Turkey, the deduction will be available to that
person in computing income under the Convention. In no event may
the application of the Convention increase the tax burden on a
resident of a Contracting
State beyond that permitted
under the
State's internal
law. Thus, a right to
tax given by the Conven­
tion
cannot
be exercised by the United
States unless that right
also exists under the
Code. For example, the taxation
of certain
interest allowable under Article 11 (Interest)) cannot be exer­
cised because of the Code exemption in sections 871(h) and

881(c).

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TURKEY 190
Supp. No. 6(1998)

While a
taxpayer
may generally
rely on
more
favorable

treatment
afforded
under
the
Code,
a taxpayer
may not
pick
and

choose
among
Code
and
Convention
provisions
in an
inconsistent

manner
in order
to minimize
tax.
For example,
assume
a resident
of Turkey
has three
separate
businesses
in the United
States.
One is a profitable
permanent
establishment.
The other
two are
trades
or
businesses
that would
earn
income taxable
in
the United
States
under
the Code
but
that
do not
meet the
permanent
estab­
lishment
threshold
tests
of
the
Convention;
one
is profitable
and
the
other
incurs a
loss. Under
the Convention,
the income
of the
permanent
establishment
is taxable,
and
both the
profit
and the

loss
of the other
two
businesses
are ignored.
Under
the
Code,
all three would be taxable.
The loss would be offset
against the
profits
of the two
profitable
ventures.
The
taxpayer
may not
invoke
the
Convention
to exclude
the
profits
of the profitable

trade
or business
and invoke the
Code to off
set the loss
of the
loss
trade or
business
against
the profit
of
the permanent

establishment.
(See Rev. Rul. 84-17,
1984-1 C.B. 308.) The

taxpayer
may invoke
the Code
to subject
all
three
ventures
to

U.S. tax.
A taxpayer
that does so
would not be
precluded from
invoking the Convention
with respect to, for example,
any divi­
dend income
received
from the United
States that
is not effec­
tively connected
with
any of its business
activities
in the

United
States.

Under
subparagraph
2 b), the
Convention
may not be used
to
deny
or
restrict
any
benefit
granted
by any other
agreement
between the United States and Turkey. For example, if a consular
convention affords certain
protections not found in
the Conven­
tion,
those protections will
be available to residents
of the
Contracting States
regardless of any provisions
to the contrary
(or silence)
in the
Convention.

Paragraph
3
Paragraph 3 contains the traditional "saving clause," and
paragraph
4 contains exceptions to that
clause. Under the saving
clause,
the Contracting States reciprocally
reserve their
right
to
tax their residents, and the
United States reserves its
right
to tax its citizens and
certain former citizens, notwithstanding
any Convention provision to the contrary. The concept of "resi­
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TURKEY
191

Supp. No.
6(1998)

dence"
for purposes
of the
saving clause
is determined
under

Article
4 (Resident).
Thus, for
example, if
an individual
who is
not a U.S. citizen
is a resident of the United
States
under the

Code
(e.g., a "green card"
holder), and is also a
resident of

Turkey under Turkish
law, and if that individual
has a permanent
home available
to him in Turkey
and
not
in the United
States, he
would
be treated as a resident
of Turkey under the tie-breaker

rules of
paragraph
2 of Article
4.
This result
would
apply for
purposes
of the saving
clause, and
the United States
therefore
would not be
permitted to apply its statutory
rules
to that
person if
those rules are inconsistent
with the Convention.
The following
example
illustrates
the operation
of the

saving
clause.
If a
Turkish
resident
(as defined
in Article
4)

performs
independent personal
services in the
United States, the
individual
is present
in the United
States
for a period
of no

more
than 183 days in a continuous
12 month period,
and the

income from
the services
is not
attributable
to a fixed
base in

the United States,
Article 14 (Independent Personal
Services)

would
normally
prevent
the United
States
from taxing
the income.

If,
however,
the Turkish
resident
is also
a citizen
of the
United
States,
the saving
clause permits
the United States
to include

the remuneration
in the
worldwide
income
of the citizen
and

subject
it to tax under
the normal
Code
rules.

Under
paragraph 3,
the United
States also
reserves its
right
to
tax former
U.S.
citizens
whose loss
of citizenship
had
as one

of its principal
purposes
the avoidance
of
U.S. tax.
Such
a

former
citizen
is taxable
in accordance
with
the provisions
of

section
877 of the
Code for 10
years following
the loss
of

citizenship.

Paragraph
4

Paragraph
4
sets forth
exceptions
to
the saving
clause
in

cases
where its
application
would
undermine
Convention
benefits

that
are intended
to be available
to residents
of a
Contracting

State
and to
citizens
of
the United
States.
Under
subparagraph

a), for
example,
U.S. residents
and
citizens
are entitled
to

certain
U.S.
benefits
provided
under
the Convention.
Those

benefits
are:
(1) Paragraph
2
of Article
9 (Associated
Enterpris­
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TURKEY
192
Supp. No. 6(1998)

es), which
grants
the right
to a correlative
adjustment
and,
in

particular,
consistent
with the
provisions of
Article 25
(Mutual

Agreement Procedure),
permits the override
of the statute of

limitations for
the purpose of refunding
tax under such a corre­
lative adjustment;
(2) Paragraph 2 of Article
18 (Pensions and

Annuities),
which calls
for
exclusive
source State taxation
of

social
security benefits; (3)
Article 23 (Relief from
Double
Taxation),
which
confers the
benefit-of double
taxation
relief
by
a Contracting State on its
citizens and residents
(to apply the
saving clause
to this Article
would
render the Article
meaning­
less);
(4) Article
24 (Non-Discrimination),
which
prevents
a
Contracting
State from denying certain
deductions to its resi­
dents
or from applying
other
or more burdensome
tax treatment
to
its enterprises
that are
owned by residents
of the
other State
than
it applies to
other similar
enterprises;
and (5) Article
25
(Mutual
Agreement
Procedure),
which
may confer
benefits,
such
as

a waiver
of the statute
of limitations
on
refunds, by a
State

with
respect to its
citizens and residents.

Subparagraph
4 b) provides
a different
set of
exceptions
to

the
saving
clause
for
certain
benefits
available
to persons
who

are neither citizens nor
lawful permanent residents
(e g., U.S.

"green card" holders)
of a Contracting
State
but who remain
in
that State long enough
to become residents under
its law. The
benefits preserved
by
this
subparagraph
are the host
country
exemptions
for the
following
items
of income:
government
service
salaries
and pensions
under
Article
19 (Government
Service);

certain
income of
students,
apprentices
and teachers
under

Article
21
(Students,
Apprentices,
and
Teachers);
and
the income

of diplomatic
and consular
officers
under
Article
27 (Members
of

Diplomatic Missions
and Consular
Posts).

Paragraph 5
Paragraph
5 of
Article
1
specifically
relates
to
nondiscrim­
ination
obligations
of the
Contracting
States
under
other
agree­
ments.
The provisions
of
paragraph
5 are
an exception
to the
rule
provided
in paragraph
2
b) of this
Article
under which
the

Convention
shall
not restrict
in
any manner
any
exclusion,

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TURKEY
193
Supp. No. 6(1998)

exemption, deduction, credit, or other allowance now or hereafter

accorded by any other
agreement
between the Contracting
States.

Subparagraph
a) of paragraph 5 provides
that, notwithstand­
ing any other agreement
to which the Contracting
States may be

parties, a
dispute
concerning whether
a measure is within the

scope
of this Convention
shall be considered
only by the compe­
tent authorities of the
Contracting
States, and the
procedures
under
this Convention exclusively
shall apply to the dispute.

Thus, procedures for dealing with disputes that may be incorpo­
rated into
trade, investment,
or other
agreements
between the

Contracting
States shall
not apply
for the purpose
of determining

the
scope
of the
Convention.

Subparagraph b)
of paragraph 5 provides that, unless
the

competent
authorities
determine
that
a taxation
measure
is not

within the scope
of this Convention,
the
nondiscrimination

obligations
of this Convention exclusively shall
apply with

respect to that
measure,
except for such
national treatment
or

most-favored-nation
("MFN") obligations
as may
apply to trade
in
goods
under
the General
Agreement
on
Tariffs and
Trade
("GATT").
No national
treatment
or MFN
obligation
under
any other
agreement
shall apply with
respect to that measure. Thus, unless
the
competent
authorities
agree
otherwise,
any national
treatment
and
MFN obligations
undertaken
by the Contracting
States
under

agreements
other
than the Convention
shall not
apply to a
taxa­
tion measure,
with
the exception
of
GATT as
applicable
to trade
in goods.

Subparagraph c)
of paragraph 5
defines a "measure"
broadly.
It would
include,
for example,
a
law, regulation,
rule, proce­
dure,
decision,
administrative
action,
or any
other similar
provision
or
action.

Article
2.
TAXES
COVERED

This
Article
identifies
the
U.S.
and Turkish
taxes
to which

the
Convention
applies.

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TURKEY
194
Supp. No. 6 (1998)

Paragraphs I and 2
Paragraph
1, based
on the
comparable
paragraph
in
the OECD
Model,
states
that the
Convention
applies
to income
taxes
imposed
on behalf
of the
Contracting
States
(i.e.,
not including
state
and
local taxes).
Paragraph
2
lists the
specific
taxes
that are
covered.
The
statement
in
paragraph
1
of the
general
rule
that
the Convention
applies
to income
taxes
does
not
expand
the
coverage
beyond
those
taxes
specified
in
paragraph
2
or
referred
to
in paragraph
3.
Subparagraph
2 a) specifies
the existing
Turkish
taxes
to

which the
Convention applies.
These
are: (i) the
income tax

(Gelir
Vergisi),
(ii)
the corporation
tax (Kurumlar
Vergisi),
and

(iii)
the levy imposed
on
the income
tax and
the corporation
tax.

The latter tax
is a surtax based on the income
taxes specified in

clauses (i)
and (ii) of
subparagraph
2 a). The Turkish
covered

taxes are referred to
in the Convention as "Turkish
Tax."

The covered taxes
of
the United States
are specified in
subparagraph
2 b). They are
the Federal
income taxes
imposed by
the
Code
(excluding
the accumulated
earnings
tax and the
personal
holding company
tax, which are considered
penalty taxes), and the
excise taxes imposed with respect to private foundations (z=
Chapter
42 of subtitle D of the
Code). The Convention
does
not
apply (except in the case of Articles 24 (Non-Discrimination) and
26 (Exchange of Information)) with respect to the excise taxes
imposed on insurance
premiums paid on policies
issued by foreign
insurers under Code section
4371. In general, the
Convention
also does not
apply to social security taxes
(Code sections 1401,
3101, 3111 and 3301).
There is no Social Security
Totalization
Agreement
between the
United States and Turkey.
The United
States covered taxes are referred to in the Convention as "United
States
Tax."
Except with respect to Article 24 (Non-Discrimination),

state and
local taxes are not covered by the Convention. Article

24 prohibits discriminatory taxation with respect to all taxes,

whether or not they are covered taxes under Article 2, and

whether they are imposed
by the Contracting States,
their politi­
cal
subdivisions or local authorities.
The
information
exchange

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TURKEY
195
Supp.
No.
6 (1998)

provisions
of
Article
26 (Exchange
of Information)
apply
to
all

national
level taxes,
including
excise
taxes
and other
taxes

imposed
by either
Contracting
State,
whether
or
not specified
in

paragraph
2,
to the
extent
that
the
information
exchanged
is

relevant
to enforcement
of the
Convention
or of
any such

national-level
tax that
is
applied
in a
manner
consistent
with

the Convention.

Paragraph 3

Under
paragraph
3, the Convention
will apply
to any
taxes

enacted
after March
28, 1996 (the
date of signature
of
the

Convention)
that
are identical
or
substantially
similar
to
the

existing
taxes enumerated
in paragraph
2 and
that are
imposed
in

addition to,
or in place
of, the existing
taxes.
The paragraph

further provides
that the
U.S. and Turkish
competent
authorities

will
notify each other of significant
changes in their taxation

laws.
This requirement
refers
to changes that
are of signifi­
cance to
the operation of
the Convention.

Article 3.
GENERAL DEFINITIONS

Paragraph 1

Paragraph 1
of Article
3 defines a
number of basic
terms

used
in the Convention. Certain
other terms are defined
in other

articles of the Convention. For example, the term "resident of a

Contracting State" is defined
in Article 4 (Resident).
The
term

"permanent
establishment" is
defined in Article 5 (Permanent

Establishment).
The terms "dividends,"
"interest" and "royal­
ties" are defined in Articles 10, 11 and 12, respectively, which

deal with the taxation of those classes of income. Terms that

are not defined
in the Convention are dealt
with in paragraph 2.

The
terms "Turkey" and "United
States" are defined
in

subparagraphs 1 a) (i) and
(ii), respectively. The
term
"Turkey"

means the territory of the Republic of Turkey and includes the

continental shelf
over
which Turkey has sovereign
rights, consis­
tent with international law, with respect to the exploration or

exploitation
of natural resources.
The term "United States"
is

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TURKEY
196
Supp.
No.
6 (1998)

defined
to mean the United States
of America, not including

Puerto Rico,
the Virgin Islands, Guam
or any other U.S. posses­
sion or territory.
When used in a geographic
sense, the term

includes the states
and District of Columbia and,
consistent with

international
law,
the U.S. continental
shelf
(with respect
to

the exploration
or exploitation of natural
resources).
The

continental shelves
of the Contracting States are
included within

their definitions only to the extent that the application of the

Convention to the continental shelf is consistent with interna­
tional law and is connected with the exploration or exploitation

of the natural resources of the shelf.

The terms "a Contracting State" and "the other Contracting
State" are defined in subparagraph 1 b) to mean Turkey or the
United States, according to the context in which the term is
used.
Subparagraph
1 c) defines the term "person"
to include an

individual, a company and any other body of persons. Although

not specifically
listed
in the definition,
by
virtue of the
use

of the phrase "any
other body of persons,"
the term is also

understood
to include a partnership, estate
or trust. The term

"person" is significant
because, as specified
in Article 1

(Personal
Scope), the Convention applies to persons who are

residents of a Contracting State.

The term "company"
is defined in subparagraph
1 d) as a body

corporate or
any entity treated as a
body corporate for tax
purposes. In the United
States, the rules of
Treas. Reg.
§ 301.7701-2 generally apply to determine whether an entity is
taxed as a body corporate.

Paragraph
1, in subparagraph
e),
clarifies
for each Con­
tracting
State
how
a "place of incorporation"
is determined.
Under the Turkish Code of
Commerce, a company's place
of incorpo­
ration is
where its legal head office
is registered. Under U.S.
law,
a company's
place
of incorporation
is
where it is organized,
created
or incorporated.
The term
"place of
incorporation"
is
used
in Article
4 (Resident)
both
as a
criterion
for residence
in
a Contracting
State and
as the tie-breaker
rule for
the residence
of an otherwise dual-resident corporation.
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TURKEY 197
Supp. No. 6 (1998)

The term
"national,"
as applied
to Turkey and
the United

States,
is defined in
subparagraphs
f)(i) and (ii),
respectively.

A national
of Turkey
is either
an individual
who has Turkish

nationality
in accordance with
the Turkish Nationality Code,
or a

legal person, partnership
or association deriving
its legal

status as such
an organization
from Turkish
law. A
national of

the
United States
is either
a citizen of
the United States
or a

company,
association
or other entity
that derives
its status
as

such from
United
States
law or from
the laws of
any United States

political
subdivision.
This
term is
relevant, in
particular, to

paragraph 2 of Article
4 (Resident), Articles 19
(Government

Service,) 24 (Non-Discrimination), and 25 (Mutual Agreement

Procedure).

The terms "enterprise of a Contracting State" and "enter­
prise of the other Contracting
State" are defined in
subparagraph

1
g) as an enterprise
carried
on by a resident
of a Contracting

State and
an enterprise carried on
by a resident of the other

Contracting
State, respectively. The term "enterprise" is not

defined in the Convention.

Subparagraphs 1 h) (i) and (ii) define the term "competent

authority" for
Turkey and the United States,
respectively. The

competent authority
of Turkey is the Minister
of Finance or his

authorized representative.
The U.S. competent authority
is the

Secretary of the Treasury or his delegate. The Secretary of the

Treasury has delegated
the competent authority
function
to the

Commissioner of Internal Revenue, who has, in turn, redelegated

,the
authority
to
the Assistant
Commissioner
(International).

With respect to interpretative issues, the Assistant Commissioner

acts with the concurrence of the Associate Chief Counsel (Inter­
national) of the Internal Revenue Service.

Subparagraph 1 i) defines the term "international traffic."

This definition is significant principally in relation to Article

8 (Shipping
and Air Transport),
but
also is relevant to
Article

15 (Dependent
Personal Services).
The
term means any transport

by a ship
or aircraft operated
by an
enterprise
of
a Contracting

State except
when the
vessel is operating
solely
between places

within
the other Contracting
State. The exclusion
from interna­
tional traffic
of transport
solely
between
places
within
a

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198
Supp. No. 6 (1998)

Contracting State means, for example, that carriage of goods or

passengers between New York and Chicago by a Turkish carrier (if

that were permitted) would not
be treated as international

traffic. The resulting
income, therefore,
would not
be exempt

from U.S. tax
under Article 8. Instead,
it would be treated as

business profits and,
under Article 7 (Business
Profits) would
be

taxable
in the
United States
on a net basis
if attributable
to a

U.S. permanent
establishment.
If, however,
goods or
passengers

are carried by a Turkish
carrier
from Istanbul to New
York, and

some of the goods
or passengers are
carried only
to New York,

while the rest
are taken to Philadelphia,
the entire transport,

including the New York-to-Philadelphia
portion,
would be interna­
tional traffic.

Paragraph 2
Paragraph 2 establishes a procedure for determining a

definition
of a
term, for purposes
of the
Convention, that
is not

otherwise
defined
in
the Convention.
The
paragraph
provides
the

general
rule that any such term will
have the meaning that it has

under
the taxation law of the
Contracting State whose
tax is

being applied.
If a term is defined
under
that Contracting

State's
tax law and under a non-tax
law (e.1., a property
law),

the tax law
definition would be
used in applying the
Convention.

A
meaning
other
than
this
statutory
meaning
may be
used,
however,

if
the context so requires,
or if the competent authorities,

pursuant to
the authority
granted to
them in paragraph
3 of

Article
25 (Mutual
Agreement
Procedure),
so agree.
If,
for

example,
the meaning
of a term
cannot
be readily
determined
under

the law of a
Contracting
State, or if
there
is a
conflict in

meaning
under the
laws of the
two States that
creates problems
in

the
application
of the
Convention,
the competent
authorities
may

establish
a common
meaning
in
order
to prevent
double
taxation
or

to
further any
other purpose
of the Convention.
This
common

meaning
need
not conform
to the
meaning
of the
term
under
the

laws
of either
Contracting
State.

Article
4 -RESIDENT
-11­
TURKEY 199
Supp. No. 6(1998)

Article
4 sets forth
rules
for
determining whether
a person

is a resident
of the United States
or Turkey for purposes of the

Convention.
As a general
matter only
residents
of the Contract­
ing States
may claim the benefits of
the Convention. The defini­
tion of resident in the Convention is to be used only for purpos­
es of the Convention.

Paragraph 1
Paragraph 1 defines
the term "resident
of a Contracting

State" for all purposes of the Convention. In general, this

definition incorporates the definitions of residence in U.S. and

Turkish law. A resident of a Contracting State is a person who,

under the laws of that State, is liable to tax therein by reason

of his domicile, residence, place of management, place of incor­
poration or any other criterion of a similar nature. For this

purpose,
"liable to tax in" is interpreted as "subject to the

taxation
laws of." Thus, a non-profit,
tax-exempt entity
may be

a
resident of its state
of organization because it
is subject to

the taxation laws of that state, even though it may be exempt

from
taxation in that state. A person
who, under the general

rule of paragraph 1, is
a resident of one State and
not of the

other will be treated for purposes of the Convention as a resi­
dent of the first-mentioned
State (subject
to an exception de­
scribed below).

In the
case of the United States,
residents include U.S.

citizens
as well as aliens who
are considered U.S. residents

under Code section 7701(b). Although "citizenship" is not

included
among the explicit criteria
of residence in the Conven­
tion,
it is understood to be
a "criterion of a similar
nature"

under
paragraph 1. Thus, a U.S. citizen who resides outside the

United
States may
be a resident
of the United
States within
the

meaning of Article
4 and therefore entitled
to treaty benefits

from Turkey
because, as
a U.S. citizen,
he is liable
to U.S. tax

on
his worldwide
income. Under
Point I of
the Protocol,
however,

U.S. citizenship
may
not automatically
render
a person
a resident

of the United
States for
purposes of
the Convention.
Under this

Protocol
provision,
a citizen
of the United States who
has a

closer economic
nexus
to
another country
than
to
the United

States
will
be treated
for purposes
of the
Convention
as a

-12­
TURKEY
200
Supp. No.
6 (1998)

resident
of that other country, and
not
of the United States.

The relative economic
nexus is determined by applying
the princi­
ples of the tie-breaker
rules of paragraph
2 of the Article to
the U.S. citizen.

Paragraph
1 also makes clear that
a partnership or similar
pass-through
entity, an estate or a trust
may be treated as a
resident
of a Contracting
State
for purposes
of the Convention,
but
only
to the
extent that
the income derived
by such
entity is
subject to tax
in that State
as the income
of a resident,
either
in the
hands
of
the entity or
in the hands
of its partners,

members,
grantors
or beneficiaries.
The
phrase "similar
pass-
through
entity"
may
include,
in general,
any
entity
that is
classified
as a
partnership
for tax purposes
under the
rules of
Code section.
7701 (as from
time to time
amended).
Thus, for
example, Turkish
source
income received
by a U.S.
limited liabil­
ity
company
("LLC")
classified as
a partnership
for U.S.
tax
purposes will
generally be
treated
as
income of a U.S.
resident

to the
extent
the
income is
included
in the distributive
share of

the
LLC's members
that are
themselves U.S.
residents
(looking
through
any partnerships
or other
pass-through
entities
that
are

themselves
partners
or members).
Certain
publicly-traded
part­
nerships
are
classified
for U.S.
tax purposes
as
corporations

taxable
at the entity
level and
thus would
not be considered
"partnerships"
for purposes
of applying the
rules of paragraph
1
to
determine
whether
income
they receive
is income
of a U.S.

resident.

The
treatment
under
the Convention
of income
received
by a

trust
or
estate
will
be determined
by the
residence
for
taxation

purposes
of the person
subject
to
tax on such income,
which
may

be the
grantor,
the beneficiaries,
or the estate
or
trust itself,
depending on the circumstances.

Paragraph
1 also
specifies
that
a person
liable
to tax in
a
State
only in
respect
of income
from
sources
within
that State
will not
be
treated
as a resident
of
that State
for
purposes
of

the
Convention.
For
example,
a Turkish
consular
official
sta­
tioned
in
the United
States,
who
may be subject
to
U.S. tax
on

his
U.S.
source
investment
income
but
not on
his
non-U.S.
source

income
would
not be
considered
a
resident
of
the United
States
-13­
TURKEY
201
Supp. No. 6 (1998)

for purposes
of the
Convention
(see
Code
section
7701(b)
(5)
(B)).
Similarly,
a Turkish
enterprise
with a
permanent
establishment
in

the
United States
is
not, by virtue
of
that permanent
establish­
ment,
a resident
of the United
States. The
enterprise is
subject
to U.S.
tax only
with respect
to its income
attributable
to the
U.S. permanent
establishment, not with respect
to its worldwide

income, as
is a U.S.
resident.

It is understood that the two Contracting States and their

political subdivisions are to be treated as residents of those

States for purposes
of Convention
benefits.

Paragraph
2

If an individual is considered a resident of each State
under its laws, a single State of residence is determined by
application of
the tie-breaker rules of
paragraph 2. Paragraph
2 a) provides
that such an individual
will be resident in the
State in which the individual has a permanent home. If the
individual has a permanent
home available to him in
both States,
he will be considered to be a resident of the Contracting State
to which his personal and economic relations are closest, i.e.,
the location of his "centre of vital interests." Under paragraph
2 b), if he has no
"centre of vital interests"
or if he does not
have a permanent home available to him in either State, he will
be treated as a resident of the Contracting State in which he

maintains an habitual abode. Under paragraph 2 c), if he has an
habitual abode
in both States or in neither
of them, he will be
treated as a resident of the State of which he is a citizen. If
he is a citizen of both States or of neither, paragraph 2 d)
provides that the competent authorities will, by mutual agree­
ment, assign
a single State
of residence.
As noted
above, these

tests may also
be applied to determine whether
a U.S. Citizen or

green card
holder is to be
treated as a resident
of the United

States or of
a third state for purposes
of the Convention.

Paragraph 3
The
tie-breaker
rules of paragraph
2 apply
only to individu­
als. Paragraph 3
addresses companies that
are
treated as a

resident
of each State
under its
internal laws.
A corporation
-14­
TURKEY 202
Supp. No. 6 (1998)

that is incorporated under
the laws of the United States
or
one
of its states or the District of Columbia and that is managed and

controlled
in Turkey might be
such a dual resident. Paragraph
3
provides that such a company will be considered to be a resident

of the State in which it has its place of incorporation. Under
subparagraph 1 e) of Article 3 (General Definitions), a company
has its "place of incorporation" in Turkey if its legal head
office is in Turkey
and in the United States if
it is organized,
created, or incorporated in the United States or in any political

subdivision. It is understood that the place an entity is

created,
organized, or incorporated
is sufficiently analogous
to

the location of the legal
head office that, in virtually
all
cases, the tie-breaker
rule of paragraph 3
will
result in a

single
State of
residence.

Paragraph 4
Paragraph
4 addresses
dual-residence
issues
for
persons

other than individuals or
companies. Under this paragraph,
the
competent
authorities are
instructed
to determine
a single State

of residence
by mutual
agreement,
and to determine
how
the

Convention will apply to such a person.

Article
5 -PERMANENT
ESTABLISEMENT
This
Article
defines
the term
"permanent
establishment."
This definition
is relevant
under
several
articles
of the Conven­
tion.
The existence of a permanent
establishment in a Contract­
ing State is necessary under Article 7 (Business Profits) for
that State
to tax the business
profits
of a resident
of the other
Contracting
State. Because the
term "fixed base" in Article
14
(Independent
Personal Services)
is understood
by reference
to the
definition of "permanent establishment," Article 5 is also
relevant for
purposes of Article 14.
Articles 10, .11 and 12
(dealing
with
dividends,
interest,
and royalties,
respectively)

provide
rules
limiting
the source
State's
taxation
of these
items
of
income when
they are
received
by a resident
of
the other
State

but only
when
such
income
is not
attributable
to
a permanent

establishment
or
fixed
base that
the
resident
has
or had
in the

source
State. Article
13 (Gains)
permits the
non-resident
-15­
TURKEY 203
Supp. No. 6 (1998)

Contracting
State
to tax gains on
the disposition of movable

property forming
part of
the business
property
of
a
permanent

establishment
located
in that
State. Article
21 (Other
Income)

permits the
non-resident State
to tax any
item of income
(except

income
from
immovable property)
not dealt with elsewhere
in the

Convention
(including income from a
third country), to the extent

it is attributable to a
permanent establishment located
in that

State.

This Article is similar in many respects to the correspond­
ing articles in the OECD Model and in recent U.S. treaties. In

some important
respects, however, it is
patterned more closely

after
the permanent
establishment article in
the U.N. Model.

Paragraph
1

Paragraph 1 provides the basic definition of the term

"permanent
establishment."
As used
in the Convention, the term

means a
fixed place of business through
which
the business of
an

enterprise
is wholly or partly carried on.

Paragraph 2
Paragraph 2 contains a list of fixed places of business that

will constitute
a permanent establishment. The list is illustra­
tive and non-exhaustive. According to paragraph 2, the term

permanent establishment includes a place of management, a branch,

an
office, a factory, a workshop,
and a mine, oil or gas
well,

quarry or other place of
extraction of natural resources.
The

use
of singular nouns in
this illustrative list is not meant
to

imply that each
such place necessarily
represents a separate

permanent
establishment.
In
the case of mines
or
wells,
for

example, several such places of business could constitute a

single
permanent establishment
if the project is a whole
commer­
cially
or geographically.

A permanent
establishment
also includes
a
building
site or a

construction,
assembly
or installation
project, but
only if the

site, project
or activities
continue
for a period
of more than

six months. The six-month
test applies separately
to each

individual
site or project.
The six-month period begins
when

-16­
TURKEY 204
Supp. No. 6 (1998)

work
(including
preparatory
work
carried
on
by the
enterprise)

physically
begins
in a Contracting
State.
A
site should
not
be

regarded
as having
ceased
to
exist
when
work
is temporarily

discontinued.
A
series
of contracts
or projects
that
are
inter­
dependent
both
commercially
and
geographically
are to
be treated

as a single
project
for
purposes
of
applying
the
six-month

threshold
test. For
example,
the
construction
of a
housing

development
would be
considered
a single
project
even
if each

house
in the
development
is constructed
for
a different
purchas­
er. If the
six-month threshold
is exceeded,
the
site
or project

constitutes
a permanent
establishment
as of the
first day that

the work in
that State
began. This interpretation
of the Article

is based on
the Commentaries
to the corresponding
provisions
of

Article
5 of the
OECD Model
and therefore
is the generally

accepted
international interpretation
of the language in para­
graph
2 of Article 5 of the Convention.
Paragraph 3 of
the OECD
Model
contains language
similar
to that in subparagraph
2
g) of
Article
5 of the Convention,
although
the OECD
Model contains
a
twelve-month,
rather than
a six-month,
test. Turkey
entered
a

reservation
to Article 5
of the OECD Model,
specifying
that it

intends to apply a
six-month rather than a twelve-month
thresh­
old.

Unlike
many U.S. treaties, Article
5 of this Convention
does

not deal explicitly with the determination of when an installa­
tion or drilling
rig or ship used for the
exploration or exploi­
tation of natural
resources constitutes a permanent
establish­
ment. Point IV of the
Protocol, relating to Articles.5,
7

(Business
Profits) and 14 (Independent
Personal
Services),

however,
does deal
with the income
derived
from such an
installa­
tion, rig,
or ship. Point IV specifies
that the mere presence
in

one Contracting State of
an installation, drilling
rig, or ship

that
a resident of the other
Contracting
State uses
for
the

exploration or exploitation of natural resources will never

constitute a permanent establishment of that resident. If,

however, a resident of one
State carries on the drilling
activi­
ties in the other Contracting State for a period or periods

exceeding
in the aggregate 183
days in any continuous 12-month

period or performs the activities through a permanent establish­
ment other than the drilling rig or ship, that presence or

performance shall be treated as analogous to a permanent estab­
-17­
TURKEY
205
Supp. No.
6 (1998)

lishment,
and the other
Contracting
State may tax
the resulting

income.

Paragraph
3

Paragraph
3 contains exceptions
to the general rule
of

paragraph 1 that a fixed place of business through which a

business is carried on constitutes a permanent establishment.

The paragraph lists activities
that may be carried
on
through a

fixed
place of business but that
will not
give rise to
a perma­
nent-establishment.
The use of
facilities solely to store,

display or deliver merchandise belonging to an enterprise will

not constitute a permanent establishment of that enterprise. The

maintenance of a stock of goods belonging to an enterprise solely

for the purpose of storage, display or delivery, or solely for

the purpose of processing by another enterprise will not give

rise to a permanent establishment of the first-mentioned enter­
prise. The maintenance of a fixed place of business solely for

the purchase of goods or merchandise or the collection of infor­
mation for the enterprise,
or for activities that
have a prepara­
tory or auxiliary character for the enterprise (for example,

advertising (other than by an advertising company), the supplying

of
information, or the conduct
of scientific activities)
will not

constitute
a permanent establishment
of the enterprise. Finally,

a combination
of the foregoing
activities will not give rise
to a

permanent establishment
if
the combination
results in
an overall

activity that is of a preparatory or auxiliary character. This

combination rule differs from that in many recent U.S. treaties,

under which
any combination of otherwise
excepted activities
is

not
deemed to give
rise to a
permanent establishment,
without
the

additional requirement that the combination, as distinct from

each constituent
activity, be preparatory
or auxiliary. It
is

assumed
that if
preparatory or
auxiliary activities
are
combined,

the combination
generally will also be
of
a character that is

preparatory
or auxiliary.
If,
however, this
is not the
case,

under this Convention
a permanent establishment
may result from a

combination
of the activities
listed
in paragraph
3.

Paragraph 4

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TURKEY
206
Supp.
No. 6 (1998)

Paragraphs
4 and
5 specify
the circumstances
under
which
an

agent
will constitute
a permanent
establishment
of the principal.

Paragraph 4,.subparagraph
a) contains
the standard
rule that a

dependent
agent
of an enterprise
will be deemed
to be a
permanent

establishment
of the
enterprise
if the agent
has
and habitually

exercises
an
authority to
conclude contracts
in the
name of the

enterprise. If, however,
the agent's activities
are limited to

those activities
specified
in paragraph 3 that
would not consti­
tute a permanent
establishment if carried
on directly by the

enterprise through
a fixed place of business,
the
agent will not

be a permanent
establishment of the enterprise.
This Convention

contains
an additional test, in subparagraph 4 b), for determin­
ing whether a dependent
agent will constitute a permanent
estab­
lishment
of the principal.
Under subparagraph 4 b), which
is

not found in the OECD Model or in most U.S. treaties, even if the

agent
does not have the
authority to conclude contracts
in the

name of the enterprise, it may constitute a permanent establish­
ment of
the enterprise if certain
conditions are met: (1) the

agent maintains
a stock of goods or merchandise
from
which the

agent regularly makes
deliveries on behalf of
the enterprise; (2)

in addition to the regular delivery, the agent also undertakes

virtually
all of the activities connected
with the sale, except

for
the conclusion of the contract;
and
(3) it is proved
that

this pattern is established
to avoid host-State taxation
of the

enterprise. Condition (1) is found in the U.N. Model, but its

applicability is significantly
narrowed by conditions
(2) and

(3).
Paragraph
5
Under paragraph 5, an enterprise will not be deemed to have
a permanent establishment in a Contracting State merely because
it carries
on business in that State
through an independent

agent,
including
a broker or
general commission
agent,
if the

agent is acting in the ordinary course of its business. Thus,

there are
two conditions
that must
be
satisfied:
the
agent
must

be
both legally and
economically
independent of
the enterprise,

and the agent
must be acting in the ordinary
course of its

business in
carrying out
activities on
behalf of the
enterprise.

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TURKEY 207
Supp.
No.
6 (1998)

Whether
the agent
and
the
enterprise
are
independent
is
a

factual
determination.
Among
the
questions
to
be
considered
are

the
extent
to which
the agent
operates
on
the
basis
of instruc­
tions
from
the
enterprise
and
whether
the
agent
or
the
enterprise

bears
the
business
risk
inherent
in
the activities
carried
on by

the agent
on behalf
of the
enterprise.
Furthermore,
even
an

otherwise
independent
commission
agent
would
be
deemed
to
be a

dependent
agent
under
paragraph
4
if the
agent
habitually
exer­
cised
authority
to
conclude
contracts
in
the
name
of the
enter­
prise
(as
descibed
above
in connection
with
paragraph
4),
because

in
such a
case
the
agent would
not
be acting
in the
ordinary

course
of its
trade
or
business
as an
independent
commission

agent.

Paragraph
6

Paragraph
6 clarifies
that
a company
that
is a resident
of
a

Contracting
State
will not
be
deemed
to have
a permanent
estab­
lishment
in the
other Contracting
State merely
because
it
con­
trols, or
is controlled
by,
a company
that is
a resident
of that

other
Contracting
State or that
carries on
business in that
other

Contracting
State. The determination
of
whether or
not a perma­
nent
establishment
exists will
be made solely
on
the basis
of the

factors
described
in paragraphs
1 through
5 of the Article.

Whether
or not a
company
is a permanent
establishment
of
a

related
company,
therefore,
is based
solely
on those
factors
and

not
on the ownership
or control
relationship.between
the
compa­
nies.
Article
6
-INCOME
FROM IMMOVABLE
PROPERTY
(REAL
PROPERTY)
This Article
deals
with the taxation
of income
from immov­
able, or real,
property.
The
two terms
should
be
understood to

have the
same meaning.

Paragraphs I and 3
Paragraph 1
of Article 6
provides that
income of
a resident

of
a Contracting State derived
from real property situated
in the

other Contracting State may be taxed in the Contracting State in

-20­
TURKEY
208
Supp.
No. 6 (1998)

which the property
is situated.
As clarified
in paragraph
3, the

income
referred to in paragraph
1 means income from any
use of

real property,
including,
but not limited
to, income from
direct

use
by the owner and rental
income from the letting
of the

property. Income from real
property also includes income from

agriculture
and forestry.
This Article
does not
grant an exclu­
sive taxing right
to the situs State, but merely
grants
it the

primary right
to tax. The Article does not
impose any limitation

on the situs State in terms of rate or form of tax.
Paragraph 2
Paragraph 2 provides that the terms "immovable property," or
"real
property," have the same
meaning that they have under
the
law of the situs State. In addition, the paragraph specifies
certain classes of property
that, regardless of
internal law
definitions, are to
be
included within the meaning
of the term
for purposes of the Convention. This expanded definition con­
forms to that in the OECD
Model, except that it also
includes (at
Turkey's request)
"fishing
places of
every kind."
The definition
of
"real property" for purposes
of Article 6 is more limited
than
the expansive
definition
of "real property
situated in the Other
Contracting State" in paragraph 2 of Article 13 (Gains), which
includes not only immovable
property as defined in
Article 6 but
certain other interests
in real property.
Paragraph
4

Paragraph
4 clarifies that
the situs State may tax
income
from real property of an enterprise and income from real property
used for the performance of independent personal services,
regardless of
whether the
enterprise or
individual
has a perma­
nent establishment
or fixed
base
in the situs State.
The
Article
does not
include
language
found
in many U.S.

treaties
providing
for a taxpayer
to elect to be taxed on real

property
income on a net
basis.
It
was unnecessary
to include

such a
provision because
both States
allow for net
basis taxation

of real
property
income under
their respective
internal
laws.

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TURKEY
209
Supp. No. 6 (1998)

Article 7 -
BUSINESS PROFITS
This Article
provides
rules
for
the
taxation
by
one of
the

States
of
the
business
profits
of
an enterprise
of the
other

State.
Several
important
rules
regarding
the taxation
of busi­
ness
profits
are
found in
the
Protocol.
These
are
discussed
in
this explanation
of Article
7.

Paragraph 1
Paragraph
1 contains
the
basic
rule
that
business
profits
of

an
enterprise
of one
Contracting
State
may not
be taxed
by the

other
Contracting
State
unless
the
enterprise
carries
on
business

in
that other
State through
a permanent
establishment
(as
defined
in Article
5
(Permanent
Establishment))
situated
there.
Where
this condition
is met, the
State
in which
the permanent
estab­
lishment
is situated
may
tax
the business
profits
of the
enter­
prise
that
are attributable
to the assets
or
activities
of the

permanent
establishment.

Under
Point II
of the
Protocol,
in certain
circumstances,
the State in
which the permanent
establishment
is situated
may
also tax
business
profits
derived
from the
sale of
goods
or
merchandise
or
the provision
of services
even if
the assets
and
activities
of the
permanent-establishment
were
not
involved
in
the
sale
or
services.
This limited
"force
of attraction"
rule is
similar to, but
narrower than,
a rule found
in the U.N.
Model and
is
also similar
to provisions
that appear
in the U.S.
treaties
with
Mexico,
Indonesia,
and
India.
Under
the
Protocol
rule,
if
an
enterprise
of one
Contracting
State derives
income from
the
sale of goods or the
carrying on of other business
activities
through
a permanent
establishment
situated in
the other Contract­
ing State,
certain
income
derived
directly by
the enterprise
:isg_,
not through
the permanent
establishment)
from the
sale of
goods of the
same or similar
kind as
those sold
through the
permanent
establishment
or from the
carrying on
of activities
of
the same or
similar kind
as those carried
on through
the perma­
nent establishment may
be attributed to the permanent
estab­
lishment. Some
countries, using the U.N.
Model, request a force
of attraction rule
to prevent avoidance of their
tax at source.
Unlike the U.N. Model provision
on which it is based,
the force
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of attraction
rule in this Convention is
limited to situations in

which it
can be proved that the transaction
giving rise to the

income was structured
to avoid taxation in the
country
in which

the permanent establishment is situated.
For example, if the

Istanbul
office of a U.S. consulting
firm provides certain

services
to small companies in
Turkey and a very large
Turkish

company
requires
similar services
but on a
scale too large
for

the permanent establishment
to handle, the Turkish
company might

enter into a contract with the consulting firm's home office in

the United
States to provide those services
directly. The income

from
that transaction would not
be attributed to the permanent

establishment
because
it could
not be shown
that
the
transaction

was structured through
the U.S. office in order
to avoid Turkish

tax. If, however, some small
Turkish companies are
served by the

Istanbul office and
other similar-sized companies
are served

directly from
the United States, it might be possible to prove

that services were carried
out through the home office
to avoid

Turkish
tax. If such a case were
made, the income from these

contracts
with the home office
would be attributed to the
perma­
nent establishment.

Protocol
Point
V
Point V of the Protocol
clarifies
that income
or gain may be

attributable
to a
permanent
establishment
and
may
be taxed
in the

State
in which the
permanent establishment
is situated even
if

the
payment is
deferred until
after the permanent
establishment

no longer exists.
This same
deferred
payment
rule applies
with

respect
to income
from independent
personal services
attributable

to
a fixed base
under Article
14 (Independent
Personal Services).

The deferred
income rule also
applies for
purposes of
determining

whether
income
is
attributable
to a
permanent
establishment
or

fixed base
under paragraph
5 of Article
10 (Dividends),
paragraph

5 of Article
11 (Interest),
paragraph
4 of Article
12 (Royal­
ties),
and paragraph
2
of Article
21 (Other
Income)
and whether

gain is
from the
alienation
of personal
property
forming
part
of

the
business
property
of a permanent
establishment
or
a
fixed

base under
paragraph 3
of Article 13
(Gains).
This paragraph

incorporates
into
the Convention
the
rule
of
Code section
864(c)­
(6)­
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211
Supp.
No. 6 (1998)

Paragraph 2
Paragraph
2 provides rules
for the attribution of business

profits
to a permanent establishment.
It provides that the

Contracting
States will attribute
to a permanent establishment

the profits
that it would have earned
had it been an independent
entity, engaged
in the same or similar activities
under the same
or
similar circumstances.
The computation
of the business
profits attributable to a permanent establishment takes into
account the expenses that are deductible in accordance with the
rules of
paragraph 3. The profits
attributable to a permanent
establishment may be from sources within or without a Contracting
State.
Thus, certain items of
foreign source income described
in
Code section 864(c) (4) (B) or (C) may be attributed to a U.S.
permanent establishment
of a Turkish enterprise
and subject to
tax in the United States. The concept of "attributable to" in
the Convention is narrower than the concept of "effectively
connected"
in Code section 864(c).
The limited "force of
attrac­
tion" rule in Code section
864(c)(3), therefore, is
not applica­
ble under
the Convention to the extent
that it is broader than
the rule of Point II of the Protocol.
Paragraph 2 differs in one respect from the comparable
paragraph in the
OECD Model, which speaks
of treating a permanent
establishment
as if it were a "distinct
and separate enterprise,"
and
refers to it as dealing wholly
independently with the
enter­
prise of which it is a permanent
establishment. The
language in
paragraph
2 of this Convention
is intended
to make
clear
that the
permanent establishment
is to be treated
as if it were a totally
independent
enterprise, i.e., one that
deals independently with
all related
companies,
or with other
permanent establishments
of
the
enterprise,
not just its home
office.
Paragraph 3

Paragraph
3 of the Article
complements paragraph
2 by
providing
rules for
determining
the
amount of
income
attributable
to a permanent establishment.
Paragraph 3
provides that in
determining
the
business profits
of a permanent establishment,
deductions
shall be allowed
for expenses
incurred
for the purpos­
es of
the permanent establishment.
Deductions
are to be allowed
-24­
TURKEY
212
Supp.
No.
6 (1998)

regardless of where the
expenses are incurred and
regardless of

whether
they are incurred directly
by the permanent establishment

or whether
they are
actually reimbursed
by the
permanent

establishment. Unlike many
U.S. treaties, the paragraph
does not

specify
that deductions are
to be allowed for a reasonable

allocation of expenses. However, as indicated in paragraph 16 of

the OECD Commentary to Article 7, certain expenses may be esti­
mated
and allocated. The United States, for example, allocates

interest expense
under the rules of Code
section 882 and will

continue
to do so under
the treaty.

Point III of the Protocol
clarifies, as does
the UN Model

and
the Commentary to the OECD
Model, that payments of interest,

royalties, commissions
and other similar
payments by a permanent

establishment
to its
head office or to other permanent
establish­
ments of the enterprise
will be allowed as
deductions only to the

extent that they represent reimbursements of actual expenses.

The point of
this provision
is to clarify
that because
the head

office and the permanent establishment are parts of a single

entity, there should be no profit element in intra-company

transfers. To the extent, therefore, that a payment includes

what would normally be a profit element (e.a., that part of a

royalty
payment that
represents profit
of the owner of the

intangible, as opposed to
the part that is a reimbursement
for
the costs
of developing the intangible),
it will not be deduct­
ible. The Protocol rule does not require that payments be
specifically traceable to the permanent establishment to be
deductible
nor does it require that
traced payments be deductible
Paragraph
4
Paragraph
4 provides that no profits
will be attributed to
a
permanent establishment merely because it purchases goods or
merchandise for the enterprise
of which it is a permanent
estab­
lishment. This rule
refers to a permanent establishment
that
performs more than one function for the enterprise, including
purchasing. For example, the permanent establishment may pur­
chase
raw materials
for the
enterprise's manufacturing
operation
and sell the manufactured output. While business profits may be
attributable
to the permanent
establishment
with
respect
to its
sales activities,
no profits
are attributable
to
its purchasing
-25­
TURKEY 213
Supp.
No.
6
(1998)

activities.
If the
sole
activity
were the purchasing
of goods
or

merchandise
for
the enterprise,
the issue
of
the
attribution
of

income
would
not
arise because,
under
subparagraph
3 .d) of
Article
5
(Permanent
Establishment),
there
would
be no permanent
establishment.

Paragraph 5
Paragraph
5 provides
that only those
business
profits
derived
from a
permanent establishment's
assets
or activities
are
to be
attributed
to the permanent
establishment.
This
rule
clarifies
(as noted
in connection
with
paragraph
2 of
the Arti­
cle) that the Code's limited
"force of attraction"
principle is
not incorporated
into the Convention.
Where it is applicable,
Point II of the Protocol
takes precedence
over paragraph 5.
Paragraph 6

Paragraph
6 explains the relationship
between the provisions
of Article
7 and
other provisions
of the
Convention.
Under
paragraph
6, where
business'profits
include
items
of income
that
are dealt
with separately under other
articles of the Convention,
the provisions
of those articles will, except
where they specifi­
cally provide to the contrary, take precedence over the provi­
sions of
Article 7. Thus, for example,
the taxation of interest
will be determined by the rules of Article 11 (Interest), and not
by
Article 7 unless,
as provided
in paragraph
5 of Article
11,
the interest is attributable to a permanent establishment, in
which case the provisions of Article 7 will apply.
Protocol Point IV

As discussed in the explanation to paragraph 2 of Article 5
(Permanent Establishment), point IV of the Protocol deals with

the taxation
of income from offshore
mineral exploration. Point
IV first clarifies
that income from these activities
is business

profits or independent
personal services
income. As such, the

income is generally only taxable by the non-resident
State if it

is attributable to a permanent establishment in that State.
Under the provisions of Point IV, the mere presence in a country
of an installation, drilling
rig or ship for carrying
out
mineral
-26­
TURKEY 214
Supp. No. 6 (1998)

exploration or exploitation does not give rise to a permanent

establishment. Business profits will nonetheless be taxable in
the country where the exploration
activity takes place
if either
(i) there
is a permanent
establishment,
other than
the installa­
tion, rig or ship, through
which the income-generating
activities

are
performed or (ii) the period
during which the exploration
activities or services
are performed exceeds 183
days in a

continuous 12-month period. While application of Protocol Point
IV does
not technically result in
a permanent
establishment,
it

does treat an enterprise that exceeds the 183-day threshold

analogously
to an enterprise
that has a permanent establishment

in the host country.

Relation
to other articles

This Article
is subject to the saving
clause of paragraph 3
of Article
1 (Personal
Scope). Thus,
if, for example,
a citizen
of the United States who is a resident of Turkey derives business
profits
from the United States
that are not attributable
to a
permanent
establishment in the United
States, the United States
may tax those
profits as part of the worldwide
income of the
citizen, notwithstanding
the fact that this
Article generally
would exempt
such income
of a Turkish
resident from
U.S. tax.

As with other benefits-of the Convention, the enterprise
claiming the benefit of Article
7 must be entitled to
the
benefit

under
the provisions of Article
22 (Limitation on Benefits).
Article 8 -
SHIPPING AND AIR
TRANSPORT
This
Article provides
rules governing the
taxation of

profits
from the operation
of ships and
aircraft in international

traffic. The term "international traffic" is defined in subpara­
graph
1 i) of Article 3 (General Definitions).
Paragraph I

Paragraph 1 provides that profits of an enterprise of a

Contracting State from the operation of ships or aircraft in

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TURKEY 215
Supp. No. 6 (1998)

international
traffic
shall
be
taxable
only
in the country
of

residence.

Paragraph 2
Paragraph
2 deals
with certain
income from
the rental
of
ships
or aircraft.
As indicated
in
paragraph
5 of
the OECD
Commentaries
to
Article
8, income
of
an enterprise
of a Contract­
ing State
from
the rental
of ships
or aircraft on
a full basis
(i.,
with crew
and supplies)
is considered
to
be
operating

income
and
is, therefore,
exempt
from
tax in
the other
Contract­
ing State
under
paragraph
1. Paragraph
2
extends
the exemption

under the
Article
to certain
income
from the
bareboat
leasing
of

ships
and
aircraft.
Unlike certain
other
U.S.
treaties,
however,

this
Convention
extends
the
exemption
only to
bareboat
rentals

that
are incidental
to
profits
from the
operation
of ships
and

aircraft.
Thus,
an
enterprise
that is not
in the business
of

operating
ships or
aircraft in international
traffic and that

derives
income
from leasing ships or
aircraft would not be able

to claim an
exemption from
source
country
tax under
Article 8.

Income
from such non-incidental
leasing of ships
or aircraft,

even if the
ships or aircraft
are used
in international
traffic,

would be treated
as royalty
income,
unless the income
were

attributable
to
a
permanent
establishment
that the enterprise

deriving
the income had in the source
State,
in which case the

income
would be taxable as business
profits. If the income
is

treated
as royalty income, it would
be taxable in the source

State at a rate
of 5 percent of the gross
income under paragraphs

2 and 3 b) of Article
12 (Royalties). If treated
as business

profits,
it would be taxable on
a net basis under Article
7

(Business
Profits).

When Turkey is the source
State, Turkey's internal
law will

operate
to limit the effect of
this limited allowance of
source

State taxation of nonincidental rental income. Under its inter­
nal law, Turkey generally does not tax nonincidental rental

income if both the lessor and lessee are located outside Turkey

(even if
the leased property is used
within Turkey), as long
as

the rental payment is not reflected in any books of account that

the lessee maintains in Turkey for Turkish tax purposes. Turkey,

therefore, would not, for example, tax payments made by a U.S.

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TURKEY
216
Supp.
No. 6 (1998)

airline to a U.S. financial
institution under an airplane
finance

lease, even if the airplane were to fly into Turkey.

Paragraph 3

Paragraph 3 provides that the profits of an enterprise of a

Contracting
State from the use,
maintenance, or rental
of con­
tainers (including equipment for their transport) for the trans­
port
of goods
in international traffic will
be exempt from tax in

the other Contracting State. This result obtains regardless of

whether the recipient
of the income is engaged
in the operation

of ships or aircraft
in international traffic,
and regardless of

whether
the enterprise has a permanent
establishment in the
other

Contracting State.
Profits from the
use of containers and

related
equipment includes charges for their delayed return.

Paragraph 4
This paragraph clarifies that the provisions of paragraphs 1

and 3 also apply to profits derived by an enterprise of a Con­
tracting State from participation in a pool, joint business, or

international
operating agency. This refers
to various arrange­
ments
for international cooperation by carriers in shipping and

air transport. For example, airlines from two countries may

agree to share the transport
of passengers between
the two

countries.
They each
will fly the same number
of flights per

week
and share
the revenues from that route
equally, regardless

of the number of passengers that each airline actually trans­
ports. Paragraph 4 makes clear that with respect to each car­
rier, the income dealt
with in the Article is that
carrier's

share of the total transport, not the income derived from the

passengers actually
carried by the
airline.

Relation to other articles
By virtue of paragraph
6 of Article 7 (Business
Profits),
profits
of an enterprise of a Contracting
State that are exempt
in the other Contracting
State under paragraph
1 or 3 of Article
8 remain
exempt
even if the enterprise
has a permanent establish­
ment in that other Contracting
State to which the
profits are
attributable.
Income from
the nonincidental
leasing
of ships and
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TURKEY
217
Supp.
No.
6 (1998)

airplanes,
which
is not
exempt
at
source
under Article
8, may
be

taxed on
a gross
basis at
source .at
a rate
of 5 percent
under

paragraphs
2
and 3
b) of
Article
12 (Royalties)
or,
if
the

enterprise
that
derives
the income
has
a
permanent
establishment

in the source State,
may be taxed on a net basis
at source under

Article
7 (Business
Profits).

The taxation
of gains from the alienation
of ships, aircraft

or
containers is
dealt with in
paragraph 4
of Article 13
(Gains).

Paragraph 3
of Article 15 (Dependent
Personal Services)

deals
with
taxation of
employees of
shipping and
airline enter­
prises.

This Article is subject
to the saving clause of
paragraph 3

of Article 1 (Personal
Scope). The United
States, therefore, may

tax the shipping or air transport profits of a resident of Turkey

if that Turkish resident is a citizen of the United States.

As with any benefit of the Convention, an enterprise claim­
ing the benefit of this Article must be entitled to the benefit

under the provisions of Article 22 (Limitation on Benefits).

Article 9 -ASSOCIATED ENTERPRISES
Article 9 incorporates into the Convention the general
arm's-length principles reflected in the U.S. domestic transfer
pricing
provisions. It provides
that when associated enterprises
(i.e., related persons described in subparagraphs
1 a) and 1 b))
engage in transactions that are not at arm's length, the Con­
tracting States may make
appropriate adjustments to
the taxable

income and tax liability of such enterprises to reflect the

income these enterprises
would have earned
or the tax for which

they would
have been liable
had the transaction
between
them been

at arm's length.
Paragraph 1
Paragraph 1 deals with the circumstance where an enterprise

of a Contracting
State
is related to
an enterprise
of the other

Contracting
State,
and the
enterprises
make
arrangements
or

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TURKEY 218
Supp.
No. 6
(1998)

impose
conditions
in their
commercial
or
financial
relations

different
from those
that
would
be made between
independent

persons. Under these
circumstances a Contracting
State may

adjust
the income
(or loss) of
its residents
to reflect
the

income
that would have
been earned
in the absence
of such
a

relationship.

The paragraph
specifies
what the
term "associated
enter­
prise" means in this context.
An enterprise of one
Contracting

State is associated with an enterprise of the other Contracting

State if it participates directly or indirectly in the manage­
ment, control, or capital of the other. Two enterprises also are

associated if there is a "brother-sister" type connection between

them in that a third person or persons participate directly or

indirectly
in the management, control, or capital of both. The

term "control" includes any kind of control, whether or not

legally enforceable and however exercised or exercisable.

The fact that a transaction is entered into between such

related
enterprises does not, in and of itself, mean that a

Contracting State may adjust the income (or loss) of one or both

of the enterprises under the provisions of this Article. If the

conditions
of the transaction are
consistent
with those that

would be made between independent persons, the income arising

from that transaction should
not be the subject of
adjustment

under this Article.

Similarly, the
fact that associated
enterprises
may have

concluded
arrangements,
such as cost sharing
arrangements or

general services
agreements, is not in itself
an indication that

the two enterprises
have entered into
a non-arm's-length transac­
tion that should give.rise to an adjustment under pararaph 1.

Both related
and unrelated
parties
enter
into such
arrangements

(e.a., joint venturers
may share some development costs). As

with any other
kind of transaction,
when
related parties
enter

into
an arrangement,
the
specific
arrangement
must be examined
to

see whether
or not it meets
the arm's-length
standard.
In the

event
that it does not, an appropriate
adjustment may be
made,

which may include
modifying the terms
of the agreement or

recharacterizing the transaction to reflect its substance.

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219
Supp.
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6
(1998)

Paragraph 2

The
adjustments
allowed
by the
provisions
of
paragraph
1 can

give
rise to
taxation
of the same
income
by both
Contracting

States
in
the
hands of
the two
related
parties.
To address
this

potential
double
taxation,
paragraph
2 provides
that
where
a

Contracting
State
has
made
an adjustment
to
the
profits
of an

enterprise
of
that State
that
the
other
State
agrees
is
consis­
tent
with the
provisions
of paragraph
1 (i..,
that
was appropri­
ate to
reflect
arm's
length
conditions),
the
other
State
will

make
a
corresponding,
or correlative,
adjustment
to the
tax

liability
of the
associated
enterprise
resident
in
that other

State. The
Contracting
State
making
such an
adjustment
will take

the
other provisions
of the Convention,
where
relevant,
into

account. For
example, if
the United States
makes an
adjustment

under
paragraph
1 that increases
the income
of a U.S.
parent

corporation,
and
Turkey, under
paragraph 2,
makes a correlative
adjustment
to
the income
of the
Turkish subsidiary,
the effect
of

the
correlative
adjustment
may
be to
treat
the Turkish
subsidiary

as having
made a distribution
of
profits to
its U.S. parent

corporation,
in which
case
the provisions
of
Article
10 (Divi­
dends)
will apply,
and Turkey may impose
a withholding tax on the

dividend.
The rate of the tax
will be determined by the
provi­
sions of
Article 10. The competent
authorities are authorized
to

consult, if
necessary, to
resolve any differences
in
the applica­
tion of
these provisions.
For example,
there may
be a disagree­
ment over whether an
adjustment made by a Contracting
State under

paragraph 1
was appropriate.

Relation
to other
articles
and the
Code

Paragraph
2 of
Article 25
(Mutual Agreement
Procedure)

explains that
the corresponding adjustment
by the other Con­
tracting State called for by paragraph 2 of Article 9 will not be

prevented by a domestic statute of limitations or other procedur­
al limitation,
as long as the competent
authority of that other

State
receives notification of
the case within five years
of the

taxable year
to which the
case relates.

The saving clause
of paragraph 3 of
Article 1 (Personal

Scope) does not apply
to paragraph 2 of Article
9 (see the

-32­
TURKEY 220
Supp. No. 6 (1998)

exceptions to the saving
clause
in subparagraph a) of
paragraph 4

of
Article
1). Thus, even if the statute
of
limitations has run,

or there is a closing agreement between the Internal Revenue

Service and the taxpayer,
a refund of tax may be
required
in

order to implement a correlative adjustment arising under para­
graph 2 of Article
9. Statutory or procedural
limitations,

however,
cannot be
overridden
to impose additional
tax because,

under
paragraph 2
of Article 1, the Convention
cannot restrict

any statutory benefit.

It is understood that this Article does not replace but
rather complements adjustments
provided for under
internal law
provisions
of the Contracting
States.
Such adjustments
--the
distribution,
apportionment,
or allocation
of income,
deductions,
credits
or allowances
--are
permitted even
if
they are
different
from, or go beyond,
those authorized
by paragraph 1 of the
Article,
so long
as they accord
with the general
principles
of
paragraph
1, i-.c, that
the adjustment
reflects
what would have
transpired had
the related
parties been
acting at arm's
length.
This
Article also
permits tax
authorities
to deal with
thin
capitalization
issues. They
may, in the
context of Article
9,
scrutinize more
than the
rate of interest
charged
on a loan
between
related
persons. They
also may examine
the capital
structure
of
an enterprise
in
determining
whether
a'
related
party
loan would have
been made
at arm's length,
whether a
payment in
respect
of that
loan should
be treated
as interest,
and, if it
is
treated
as interest,
under what
circumstances
interest deductions
should
be
allowed
to the
payor.
As
discussed
in the
Commentaries
to Article
9 of the OECD
Model, this
understanding
is consistent
with
the views
of most
OECD
member
countries.
Article 10 -DIVIDENDS
Article
10 provides
rules
for
both source
and
residence

country
taxation
of dividends.
Generally,
the
Article provides

for
full residence
country
taxation
of dividends
and dividend

equivalents
and
for a limited
source
State
right to
tax such

income.
Article
10 also
provides
rules for
the imposition
of a

tax
at source
on branch
profits,
analogous
to
the tax
on divi­
dends
paid by a
subsidiary
to its parent
company.

-33­
TURKEY
221
Supp. No. 6 (1998)

Paragraph 1
Paragraph
1 preserves
the residence
country's
general
right

to tax dividends
arising
in the source
country. The
same result

is achieved by
the saving clause of paragraph
3 of Article 1

(Personal Scope).

Paragraph 2

Paragraph 2
permits the
source State
to tax dividends
but
limits
the
rate of source State
tax
if the dividends are
benefi­
cially owned
by
a resident of the other
State. If the beneficial
owner
of the
dividends is a resident of
the other Contracting
State, the source State
tax is limited to 20 percent
of the gross
amount of the dividends unless the beneficial owner is a company
that owns
at least 10 percent of the
voting power of the company
paying
the dividends,
in which case the rate
of source State tax
is limited to 15 percent
of the gross amount
of the dividends.
Indirect ownership of voting shares (eug., through tiers of
corporations) and direct ownership of nonvoting shares are not
considered for purposes of determining eligibility for the 15
percent direct dividend rate. Notwithstanding the source State's
treaty obligation to limit the rate of tax it applies to divi­
dends, that State may withhold on dividends at the applicable
domestic rates, as long as the State refunds in a timely manner
any excess amount withheld over the maximum rates established by
the treaty.
The rates of source-country
tax provided for
in this Conven­
tion are higher than in most U.S. treaties. It is Turkey's

policy to retain high source-country
taxing rights
in its trea­
ties, as indicated
in its reservation to Article
10 of the OECD

Model. In fact,
however, Turkey generally
does
not, under its

internal
law, impose what the United
States would consider to
be

a true
shareholder-level tax
on dividends paid to foreign
per­
sons. (Resident
shareholders
are subject
to tax
on the
dividends

they
receive,
with at least a partial
credit for tax paid by the

corporation, if total
dividends received by a
shareholder from a

Turkish
corporation
exceed
a certain
inflation-adjusted
threshold

amount, currently TL 900 million). Corporate income is subject

to
two different taxes, for which
the corporation is liable:
(i)

-34­
TURKEY
222
Supp. No. 6 (1998)

a 25 percent tax on corporate profits and (ii) a "withholding"

tax imposed on
the after-tax profits,
without regard to
actual

dividend
distributions.
Although the "withholding
tax" is
imposed on the corporation
and not on the shareholders,
it is
understood
that Article 10 applies to this tax.
Paragraph
2 relaxes the limitations
on source-country
taxation of dividends
paid
by certain U.S.
and Turkish conduit
entities.
Dividends paid
by U.S. Regulated
Investment
Companies
("RICs")
and by Turkish
Securities
Investment
Corporations
or
Securities
Investment Funds, which
are similar to U.S. RICs, are
denied
the 15
percent direct
dividend
rate and instead
are
subject
to the
20 percent
portfolio
dividend
rate
regardless
of
the percentage
of voting
shares of
the RIC or the
comparable
Turkish
entity held
directly
by a corporate
beneficial
owner
of
the
dividend.
Dividends
paid
by a U.S. Real
Estate Investment
Trust
("REIT")
and by a Turkish
Real Estate
Investment
Corpora­
tion or Real
Estate Investemnt
Fund also
are denied the 15
percent
direct dividend
rate.
The 20 percent
rate is
only
available
for dividends
from
the REIT
(or similar
Turkish
entity)
if
they are
beneficially
owned
by an individual
owning less
than
10
percent of
the REIT
(or similar
Turkish entity).
Ths,
divi­
dends
paid by
a REIT
or
by a Turkish
Real Estate
Investment

Corporation
or
Real
Estate
Investment
Fund,
which
are similar
to

U.S.
REITs,
are generally
taxed
at source
at
the full
statutory
rate (30 percent
in the United
States).

The
denial
of
the 15
percent
withholding
rate
at source
to

all shareholders
in
RICs,
REITs,
and comparable
Turkish
entities

and the
denial
of
the 20
percent
rate
to
most
shareholders
of

REITs
and
similar
Turkish
entities
is intended
to
prevent
the
use

of
these
conduit
entities
to
gain
unjustifiable
benefits
for

certain
shareholders.
For example,
a
Turkish
corporation
that
wishes
to
hold
a
diversified
portfolio
of
U.S.
corporate
shares

may hold
the
portfolio
directly
and
pay
a U.S.
withholding
tax
of

20 percent
on all
of
the dividends
that
it
receives.
Alterna­
tively,
it may
place
its
portfolio
of U.S.
stocks
in a
RIC,
in

which
the
Turkish
corporation
owns
more
than
10
percent
of
the

shares.
Because
the
RIC
pays
no
U.S.
corporate
tax
with
respect
to
income
it
distributes,
the
shareholder-level
tax is
the
only

tax
the
United
States
would
impose.
The
RIC,
therefore,
could
be

-35­
TURKEY 223
Supp. No. 6 (1998)

a
pure
conduit,
and
there
may be
no U.S.
tax
costs
to the
Turkish

corporation
of interposing
the
RIC as
an intermediary
in
the

chain
of ownership.
In
the absence
of
the
special
rules
in

paragraph
2,
the interposition
of
the RIC
would
transform
portfo­
lio
dividends
into
direct
investment
dividends,
taxable
at source

by
the United
States
at only
15
percent.

Similarly,
a resident
of
Turkey
may
hold
U.S.
real
property

directly,
in
which
case
it
would
pay
U.S.
tax
either
at
a 30

percent
rate
on gross
income
or
at
the
ordinary
income
tax-rates

specified
in Code
section
1 or
11 on
the
net
income.
As
in the

preceding
example,
by placing
the
real
estate
holding
in
a REIT,

the Turkish
investor
could
transform
real
estate
income
into

dividend
income
and,
absent
the
special
rule,
transform
high-

taxed
real estate
income
into lower-taxed
dividend
income.
In

the
absence
of the
special
rule,
if
the REIT
shareholder
is a

Turkish
corporation
that owns
at
least
a 10 percent
interest
in

the
REIT,
the withholding
rate
would
be 15 percent;
in
all other

cases
it would
be
20 percent.
In
either
event,
the
tax would
be

less
than that
applicable
to income
from
direct
real property

holdings.
One
exception
to this
rule is
the relatively
small

individual
investor
who might
be subject
to
a
relatively
low U.S.

tax
on the
net income
even
if
he earned
the
real
estate
income

directly.
Under
the
special
rule
in paragraph
3, such
individu­
als,
defined as
those holding
less than a
10 percent interest
in

the
REIT, will
be taxable
at
source at
the maximum
20
percent

rate.

Although
the treaty
permits Turkey
to tax
dividends from
the

Turkish
equivalent
of a
RIC at a
rate of
20 percent
and to
apply

a higher
rate
to
most dividends
from
the Turkish
equivalent
of a

REIT,
in fact,under
Turkish law,
at least through
1999,
Turkey

will not
tax a U.S.
person on the
receipt of distributions
from

the Turkish
equivalent of RICs
and REITs.

The applicability of the reduced rates in paragraph 2 to the

"beneficial
owner" of dividends ensures
that if a dividend paid

by
a resident of one State is received, for example, by a nominee

or agent that
is a resident of the other
State on
behalf of a

person that is not
a resident of that other State,
the
dividend

will not
be
entitled to the benefits
of this Article. However,
a

-36­
TURKEY 224
Supp. No. 6 (1998)

dividend received
by the nominee on behalf
of a resident of that

other State would be entitled to the benefits.
Paragraph 3
Paragraph 3 defines the
term "dividends," as
used in the

Convention.
The
term includes
income from
shares or other
rights
(including
"joussiance"
shares
or
rights
or
founders
shares)
that
are
not debt-claims
and that
participate
in profits.
It also
includes income
derived from
other corporate
rights that is
subjected to
the
same taxation
treatment
as income from
shares by
the
domestic
taxation
laws of
the Contracting
State of
which the
company making
the
distribution
is a
resident.
Thus,
a construc­
tive
dividend that
results
from
a non-arm's
length transaction
between
a corporation
and a related
party is
a dividend.
The
term "dividends"
further
specifically
includes
income
from
arrangements
(including
instruments
denominated
as debt
claims)
that
carry the right
to participate
in profits,
or that
are
determined
by reference
to
profits,
to the
extent the
income
from
the
arrangement
is characterized
as a dividend
under the
law of
the Contracting State
in which the income
arises.

In
general, this definition
has the effect of deferring
to

the
source State's
characterization
of
income as
a dividend.
It
ensures,
for
example,
that
the
source
State
may apply
its
inter­
nal laws to
"thin capitalization"
cases
to tax income
as divi­
dends
even where
the income
is denominated
as "interest."
It
also
preserves
the right
of the
source State
to apply
its
law to

characterize
as dividends
payments
arising
in
connection
with

certain
financial
transactions
that
give
rise to
income
that
is

the
economic
equivalent
of a dividend.
In the
case
of the
United
States,
the
term "dividend"
also
includes
amounts
treated
as a

dividend
under
U.S.
law
upon the
sale
or
redemption
of shares
or

upon a
transfer of shares
in a reorganization.
S=, e.g.,
Rev.
Rul.
92-85,
1992-40
IRB 10
(sale
of foreign
subsidiary's
stock
to
U.S.
sister
company
is a deemed
dividend
to extent
of
subsid­
iary's
and
sister's
earnings
and
profits).
Further,
a distribu­
tion from
a U.S.
publicly
traded limited
partnership,
which
is

taxed
as a
corporation
under
U.S.
law,
is
a dividend
for purposes

of
Article
10. However,
a
distribution
by a
limited
liability
-37­
TURKEY
225
Supp. No.
6 (1998)

company
("LLC")
is not
taxable
by the
United
States
under
Article
10, provided the LLC
is not characterized
as an association

taxable
as a
corporation
under U.S.
law.

Point
VI of the Protocol clarifies
that the term "dividend"

includes
distributions
from Turkish
securities
investment
funds

and
real estate investment
funds.
Although
these funds are
not

distinct
legal
persons
under
Turkish
law, they
are defined
as

corporate
bodies under Turkey's
income tax laws and, for
income

tax purposes,
their distributions
are treated as dividends.

Paragraph 4

Paragraph 4 provides
for the imposition of
a branch profits

tax.
This paragraph
provides
the
basic
authority
under
the
Convention
for
a State
to impose
an additional
tax (e0a.,
a
branch
profits
tax such
as that imposed
by
section
884(a) of
the
Code)
on a company that is resident
in the other Contracting

State and
that has a permanent
establishment
in
the first-men­
tioned State.
Subparagraph
b) also permits
the
United
States to
impose an
additional tax on a Turkish
company that is subject
to

net basis
taxation
in the
United
States under
Article
6 (Income

from
Immovable
Property
(Real
Property))
or
under
paragraph
1 of
Article
13 (Gains).
(See Code sections
882(d)
and 884(d)).
The
United
States may
not impose
its branch
profits tax
on the
business profits
of a Turkish corporation
that are effectively
connected
with a U.S. trade or business
but that are not attrib­
utable to a permanent
establishment and are
not
otherwise subject

to net basis U.S.
taxation under Article 6
or paragraph 1 of

Article
13.

In the case of Turkey, the base of the tax is the amount of

profits attributable to the Turkish permanent.establishment of a

U.S. enterprise,
after payment of the Turkish
corporate tax under
the
provisions
of Article 7
(Business Profits).
This is
narrower
than the base
of the Turkish branch profits
tax under its inter­
nal law. Under Turkish
law, income of a foreign
corporation,
including
capital
gains, may be subject
to branch profits tax
even if it is not attributable to a permanent establishment in
Turkey.
-38­
TURKEY
226
Supp. No. 6 (1998)

In
the
case
of
the
United
States,
the
base
to
which
the

additional
tax
is
applied
is only
the
"dividend
equivalent

amount"
of
the
business
profits
or
income
of
a
Turkish
company

attributable
to a
U.S.
permanent-establishment
or subject
to
tax

on
a
net
basis
under
Article
6 or
paragraph
1 of
Article
13.
It

is
understood
that
the
term
"dividend
equivalent
amount"
refers

to Code
section
884(b),
as
it
may
be
amended
from
time
to
time.

Paragraph
4 provides
that
the
branch
profits
tax
shall
not

be
imposed
at
a rate
exceeding
the
direct
dividend
withholding

rate
of
15
percent
that
is
provided
for
in
paragraph
2
a).

Paragraph
5
Paragraph
5
applies
to dividends
paid
with
respect
to hold­
ings
that
form
part
of the
business
property
of
a permanent
establishment
or,
in the
case of
a
resident
of
Turkey,
of
a fixed

base
in
the
United
States.
Paragraph
5 excludes
such
dividends

from
the general
source
country
limitations
of
paragraph
2 and

provides
that
their
taxation
at source
is governed
instead
by

Articles
7 (Business
Profits)
or
14
(Independent
Personal
Servic­
es).
Under
these
Articles,
the
State
in
which
the
permanent

establishment
or
fixed
base
is located
may
tax the
dividends
on
a

net
basis,
using
the
rates
and
rules
of
taxation
generally

applicable
in
that
State,
as
long
as
the
taxation
is
in accor­
dance
with
the
rules
set
forth
in those
Articles.

In
the
case
of
dividends
attributable
to
a
fixed
base,

paragraph
5 provides
for
net basis
treatment
only when
the
fixed

base is
that of a
Turkish
resident
in the United
States
and not

when
a U.S.
resident
has
a fixed
base
in Turkey.
This
unilateral

treatment
was
necessary
because
of particular
provisions
in

Turkish
internal
law.
Turkey
does
not
have the
capacity
under

its
internal
law to
attribute
income
other
than
personal
services

income
to
a fixed
base;
dividend
income
is not,
technically,

personal
services
income.
Therefore,
if paragraph
5 required

Turkey
to tax a
dividend
attributable
to a
Turkish
fixed base
of
a U.S.
resident
only
as personal
services
income,
Turkey
would
not be in a
position to tax
the dividend
at all, even
though the

dividend
would
be
appropriately
sourced
in
Turkey.
Because
of

the
unilateral
language
in
paragraph
5, Turkey
may continue
to

-39­
TURKEY
227
Supp.
No.
6 (1998)

tax dividends
sourced
in Turkey and
attributable
to a U.S.

resident's
fixed
base
in Turkey
as dividends
and
in accordance

with the limitations
of paragraph
2.

The
provisions
of paragraph
5 also apply
if the permanent

establishment
or
fixed base has
ceased to exist
when the
divi­
dends
are received
as long
as the
dividends
are attributable
to a

permanent
establishment
or
fixed base
that
did exist
in
an

earlier
year
(see
Point
V
of
the
Protocol).

Paragraph6
Paragraph
6 bars
one State from
imposing
any tax on
divi­
dends
paid by a company resident
in the other State,
except
insofar
as such dividends are
paid to a resident of the
first-mentioned
Contracting
State or
are held as
part of the
property
of a permanent
establishment
or
a
fixed base situated
in
such first-mentioned
State., Thus,
a State may not impose
a
"secondary withholding tax" on dividends paid by a nonresident

company out of earnings
and profits from
that State.

Relation
to other articles
Notwithstanding
the foregoing
limitations on source
country

taxation
of dividends, the saving
clause of paragraph 3
of

Article 1 (Personal
Scope) permits the Contracting
States to tax

dividends
received by their residents,
and the United States
to

tax dividends received by its citizens, as if the Convention had

not come into effect.

As with other benefits of the Convention, a resident of one

of the States claiming the benefit of this Article must be

entitled to the benefit under the provisions of Article 22

(Limitation
on Benefits).

Article 11 -INTEREST
Article 11 governs
the taxation of interest.
Generally, the

Article provides
for full residence
country taxation of interest

and for a limited source State right to tax such income.

-40­
TURKEY 228
Supp. No. 6 (1998)

Paragraph 1
Paragraph
1 preserves
the general
right of
each Contracting

State
to
tax its residents
on interest
arising
in the other
Con­
tracting
State.
The same result
is achieved by
the saving clause

of paragraph
3 of Article 1 (Personal
Scope).

Paragraph 2
Paragraph
2 grants to
the source
State
the
right to tax

interest
payments beneficially
owned by a resident
of the other

Contracting State. The rate of the source country tax is limit­
ed. The maximum rate of tax allowed by the source State varies,

however, depending on the nature of the interest payment. Under

the provisions of paragraph 3,
certain classes of interest

payments are exempt from source
country tax.

The general rate of source country tax applicable to inter­
est payments under paragraph 2 is 15 percent. This is higher
than
the rate of source country
tax on interest in most
U.S.
treaties, and higher than that in the OECD Model. Turkey,
however, entered a reservation in the OECD Model indicating its
intention to provide for higher rates of withholding on interest
than the 10 percent provided for in the Model.
Paragraph
2 also provides, however,
that the rate of source
country tax on interest derived with respect-to any kind of loan
granted
by a financial institution
may not exceed 10 percent.
For
this purpose the term "financial
institution" includes
banks,
savings institutions and insurance companies.
The beneficial owner of an interest payment for purposes of
Article 11 is the
person
to which the interest income
is attrib­
utable
for tax purposes. Thus,
if interest arising in one
of the
States is received,
for example,
by a nominee
or agent
that is a

resident
of the other
State on
behalf of a person
that is
not a

resident of
that other
State, the interest
will not
be entitled

to the
benefits
of
this Article.
However,
interest
received
by

the nominee
on behalf
of a resident
of that
other State would
be

entitled
to
the
benefits.

-41­
TURKEY 229
Supp.
No.
6 (1998)

Paragraph 3

Paragraph 3
specifies certain
categories
of interest
that

are
exempt
from
source
State
taxation.
The categories
of exempt

interest
are interest
arising
in one Contracting
State paid
to

the Government
of the
other Contracting
State or
to the
central

bank
of the other
Contracting
State
(st,
The Central
Bank of

Turkey
or any Federal
Reserve
Bank of the
United States)
and

interest
arising in
connection with
a debt obligation
that
is

guaranteed
or insured
by
the other
Contracting
State.
Subpara­
graph
3
c) is understood
to
refer to
loans
guaranteed
or insured

by such
U.S. institutions
as the Export-Import
Bank
and the Over­
seas
Private
Investment
Corporation.
The competent
authorities

may
interpret
subparagraph
c)
as including
other
similar
insti­
tutions of either
Contracting
State.

Paragraph 4

Paragraph
4 of Article
11 defines
the term "interest"
as

used in this
Article. Subparagraph
a)
of paragraph
4 contains

the general
definition.
Under
subparagraph
a),
"interest" is

defined to mean income from
debt-claims of every kind,
whether or

not
the
claim is secured by a
mortgage,
and whether or
not it

carries a
right
to participate
in the
profits of the
debtor. The

definition of interest includes
all other forms of
income that

are characterized
as
income from money
lent under
the laws of
the

Contracting
State in which the income
arises. Income from

Government securities
and from bonds or debentures, including

premiums
or prizes attaching to
such
securities, bonds, or
deben­
tures
is considered
interest
for purposes
of Article
11.

Although
not made explicit in
this paragraph, the definition
of

interest also encompasses an excess inclusion with respect to a

residual interest in a real estate mortgage investment conduit.

A special rule is provided in paragraph 8 for the source

country's
taxation
of this category
of interest. The definition

of interest excludes any
item of income that is
treated as a

dividend under Article 10 (Dividends), even if such dividends are

income
arising
from debt-claims.
Unlike most
U.S. treaties,
the

definition of
interest does not exclude
from
the scope of the

term penalty charges for late payment. Under Turkish law such

-42­
TURKEY
230
Supp. No. 6 (1998)

payments are regarded
as interest and will,
therefore, be subject

to
Turkish tax, subject to
the provisions of Article
11.

Subparagraph b) of paragraph 4 includes within the defini­
tion of interest,
applicable only for
purposes of U.S. tax,
certain
"excess interest," on which
U.S. tax is imposed under
section
884(f)(1)(B) of the Code. Under the Code rule, "excess
interest"
is generally the
excess of the total amount
allowable
as a deduction in computing the U.S. effectively connected income
of a foreign corporation
over the total interest paid by the
foreign corporation's
U.S. trade or business.
The
Convention
permits the United States to apply its tax on excess interest
(but at the lowered treaty rate) to the excess, if any, of (i)
interest that is borne
by (ie., deductible
in computing the
income of) a U.S. permanent
establishment, fixed base,
or trade

or business subject
to tax in the United States
on a net basis,

over
(ii) the
interest paid
by such permanent
establishment,

fixed base,
or trade or
business.
Under current
U.S. law, the

excess
amount
is deemed paid
by a U.S. corporation to a
Turkish

corporation.
Current U.S. law imposes
branch level interest

taxes only on foreign corporations and not on non-corporate
foreign residents.
Interest will be considered
"borne by" a
permanent
establishment
even
if the interest
is not
fully

deductible
in that
year, provided
it is allocable
in that
year to

the permanent
establishment's
U.S. income
under U.S. domestic

rules.

Paragraph 5
Paragraph 5 provides
an exception from the
rules of para­
graphs
1, 2, and 3 in
cases where
interest is
attributable
to a

permanent
establishment
or, in
the case of a
resident of
Turkey,

to
a fixed base in the United
States. Such interest instead
is

governed by Article 7
(Business Profits) or 14
(Independent

Personal
Services).
Under these
Articles, the
State in which
the

permanent
establishment
or
fixed base is
located may
tax the

interest on
a net basis using
the rules
and rates
of taxation

generally
applicable
in that State,
as long as
the taxation
is in

accordance
with the rules
set forth
in Article 7
or 14. In the

case of
interest attributable
to a fixed base,
paragraph
5

provides for
net basis tax
only when the
fixed base
is that of a

-43­
TURKEY 231
Supp. No.
6(1998)

Turkish resident in the Unted States and not when a U.S. resident
has a fixed base in Turkey. This unilateral treatment was
necessary because of particular provisions in Turkish law.
Turkey does not
have the capacity under
its internal law to
attribute
income, other than personal
services income, to a fixed
base; interest
income
is not considered
to be personal
services
income.
Therefore; if paragraph
5 required Turkey to tax
interest
attributable
to a Turkish
fixed base
of a U.S.
resident
only
as personal
services income,
Turkey
would not be
in a
position to tax the
interest at all, even if
the interest is
appropriately
sourced in
Turkey. Because
of the
unilateral
language
in paragraph
5, Turkey may
continue to
tax interest

sourced
in Turkey and
attributable
to a U.S.
resident's fixed

base in
Turkey as
interest
and in
accordance
with the
limitations

of paragraphs
2 and 3.

Paragraph
6
Paragraph
6 provides
a
source
rule
for interest.
It
provides
that
interest
shall
be deemed
to arise
in a
State
when
the
payer
is the
State
itself
or a
political
subdivision,
local
authority,
or
resident
of
that
State.
In
addition,
interest
paid
by
any
person
(whether
or not
a
resident)
and
borne
by
a perma­
nent
establishment,
fixed
base,
or trade
or business
subject
to
tax
on
a net
basis
in one
of
the States
is deemed
to
arise
in
the
State
in
which
the
permanent
establishment,
fixed
base,
or
trade
or business
is situated.
Paragraph
6 clarifies
that
the excess
interest
described
in subparagraph
b) of
paragraph
4 is
treated
as arising
in the
United
States.
As indicated
in connection
with
the discussion
of paragraph
4 b),
interest
is
considered
"borne
by"
a permanent
establishment,
fixed base,
or trade
or business

if
it
is
allocable
to
(whether
or
not deductible
from)
taxable
income
of
that
permanent
establishment,
fixed
base,
or trade
or
business.
If
the actual
amount
of interest
on
the books
of
a
U.S.
branch
of
a Turkish
business
exceeds
the
amount
of interest
allocated
to
the
branch
under
Section
882,
any
such
interest
will

not
be considered
U.S.
source
interest
for purposes
of
this

Article.
Conversely,
the
total
amount
of interest
allocated
to
the
branch
under
the
section
882
regulations
will
be
U.S.
source

even
if
the amount
exceeds
branch
book interest.
-44­
TURKEY 232
Supp. No. 6 (1998)

Paragraph 7
Paragraph 7 deals with cases where there is a special

relationship between the payer and the beneficial owner of

interest. The
provisions of Article 11
will apply only to the
amount of
interest payment that would
have been made absent such

special relationship (i.., an arm's length interest payment).
Any excess amount of interest paid remains taxable according to

the laws
of the source State, with
due regard to the other

provisions
of the Convention.
Thus, for example, if the
excess
amount would be treated as a distribution of profits, such amount

could be taxed as a
dividend rather than as interest,
but the tax

would
be
subject, if
appropriate,
to the rate
limitations
of

paragraph
2 of Article
10 (Dividends).

Paragraph
8

Paragraph 8
deals with two additional
classes
of interest

that are
not subject to the limitations
of paragraphs 2 and
3.

Subparagraph
a) of paragraph 8
deals with excess inclusions
with

respect to a residual interest
in a U.S. real estate
mortgage

investment
conduit
(REMIC).
Such income
may be taxed
in the
United
States under
its internal law.
Under U.S.
law, this class
of income
is subject
to a statutory
withholding
tax of 30
per­
cent.
The legislation
that created
REMICs in 1986
provided
that
such
excess inclusions
were to
be taxed at
the full 30 percent

statutory
rate, regardless
of any
then-existing
treaty provisions

to the contrary.
Without a full tax at
source, foreign purchas­
ers of residual
interests would
have
a competitive advantage over

U.S. purchasers at
the time these interests
are initially of­
fered.
Also, absent
this rule,
the U.S. fisc
would suffer
a
revenue
loss with
respect to mortgages
held
in
a REMIC because
of

opportunities
for tax avoidance
created
by differences
in
the
timing of taxable
and economic
income
produced by these
inter­
ests.

Subparagraph
b)
of paragraph
8 deals
with
contingent
inter­
est
of the type
that
does not
qualify as
portfolio
interest
under

U.S. law
and
to analogous
types of
interest under
Turkish law.

Paragraph
VII of the
Protocol
notes
the understanding
that the

term "contingent
interest"
is to
be defined
for purposes
of
-45­
TURKEY
233
Supp. No.
6 (1998)

paragraph
8 in accordance
with
the definition
in sections
871(h)­
(4)
and 881(c)(4)
of the
Code.
Such
interest
will
be subject
to

tax
at source
under
the provisions
of Article
10 (Dividends).

Thus, such
interest
payments
would
be subject
to source
country

tax
at the rates
specified
in paragraph
2 of Article
10.

Relation
to other
articles

Notwithstanding
the
limitations
on source country
taxation

of interest
contained
in this Article,
the
saving
clause
of

paragraph 3
of Article 1
(Personal Scope)
permits
the United

States
to tax interest
received
by its residents
and citizens
as

if
the Convention
had
not come
into
effect.

As with any other
benefit of the Convention,
a resident of

one
of the States claiming
the benefit of this Article
must be

entitled
to the
benefit under
the provisions
of Article
22

(Limitation on Benefits).

Article 12 -ROYALTIES
Article
12 provides rules for source
and residence country

taxation of royalties. Generally, the Article provides for full

residence country taxation of royalties and for a limited source

State right to tax such income.

Paragraph 1
Paragraph
1 preserves the residence
State's right to
tax its

residents on royalties arising in the other State. The same

result
is achieved
by the saving clause of paragraph
3 of Article

1 (Personal Scope).

Paragraph
2

Paragraph
2 grants to the source
State
the right to tax

royalty payments but
limits the rate of source
State tax if the

royalties are
beneficially owned by a
resident of the other

Contracting State. The maximum
rate of tax allowed
by the source

State varies depending
upon the nature of
the payment. The

-46­
TURKEY 234
Supp.
No. 6 (1998)

maximum rate
of source
country tax is
10
percent
if the royalty

payment is described in paragraph
3 a). Paragraph 3
a) generally

describes
royalties
received
for
the use, the
right to use,
or

the contingent
sale of
literary and
artistic
property,
certain

kinds
of intellectual
property,
and certain
property
frequently

referred
to as
"know-how."
The
10 percent
rate
is higher
than

the
rate of
source country
tax
on royalties
in most
U.S.
treaties

and in
the OECD
Model,
which provides
for
exemption
at source.

Turkey, however, entered
a reservation in the OECD Model
indicat­
ing its
intention to
provide for positive
rates
of
withholding
at

source on royalties. If the royalty payment is described in

paragraph
3
b), then
paragraph
2 provides
for a
maximum
rate of

source
country
tax of
5 percent.
Paragraph
3 b)
defines
as a

"royalty"
any
payment
received
in connection
with certain
equip­
ment leases.

The
beneficial owner
of royalty income for purposes
of

Article 12 is
the person to which the income
is attributable for

tax purposes. Paragraph
2's focus on the
"beneficial owner"

ensures
that if
a royalty arising
in one
of the States
is

received, for example, by a nominee or agent that is a resident

of the other State
on behalf of a person that
is not a resident

of that other
State, the
royalty will not
be entitled
to the

benefits
of this
Article.
However,
royaltiesreceived
by the

nominee
on behalf of a resident
of that other State would
be

entitled to the benefits.

Paragraph
3
Paragraph
3 defines the
term "royalties"
for
purposes
of the

Article.
Subparagraph a) of paragraph 3 defines the term to mean

payments
of any kind received as a consideration for the use of,

or the right
to use, any copyright of a
literary, artistic, or

scientific
work; for the use of,
or the right to use, any
patent,

trademark, design or model, plan, secret formula or process; or

for information
concerning industrial, commercial,
or scientific

experience (sometimes referred to as "know-how"). The term

includes gains derived from the alienation of any such right or

property
that
are contingent
on
the productivity,
use, or further

alienation thereof;
as a consequence, such
amounts may be taxed

in accordance
with this Article rather than
being
exempt from tax

-47­
TURKEY 235
Supp.
No. 6
(1998)

at source
under paragraph
5 of Article
13 (Gains).
In
addition,

payments
received
in connection
with
the
use or right
to use

motion
pictures
or
works on film,
tape, or other
means of
repro­
duction
used for
radio or television
broadcasting
are included
in

the
definition of
royalties.
The reference
to "other means
of

reproduction"
makes clear
that future technological
advances in

the field
of radio and
television broadcasting
will
not affect

the inclusion of payments
relating
to the use of such
means of

reproduction within the definition of royalties. It is understood

that whether payments for the use or the right to use computer

software are treated
as royalties or as business
profits will

depend on the facts and circumstances of the transaction. It is

also
understood that payments
received
in connection with
the

transfer of so-called "shrink-wrap" computer software are treated

as business profits.

Subparagraph b) of paragraph 3, in deviation from the OECD

Model and from
most
U.S. treaties, adds to the
definition of the
term
"royalties" payments received
as consideration for
the use

of, or the right to use,
industrial, commercial or
scientific

equipment.

Some Turkish treaties specify in the definition of royalties

that the term does not include income payments for the perfor­
mance of personal
services. It is understood
that the absence of

this explicit exclusion in this Convention should not be inter­
preted as meaning that the income arising from the performance of

such services
may be treated as royalties
and-taxed under
Article

12
on a gross basis.
Such services
income
would be covered
under

Article 7 (Business
Profits) or 14 (Independent
Personal Servic­
es).

Paragraph 4
Paragraph
4 of Article
12 provides
an exception
to the rules

in paragraphs
1
and 2
in
cases where
the beneficial
owner of
the

royalties
carries on
business through
a permanent
establishment
in the
source State
or, in the
case of a beneficial
owner that
is

resident
of
Turkey,
performs
independent
personal
services
from
a

fixed
base situated
in the United
States.
In such
cases, the

source
State
may tax
the
royalties
if
they are
attributable
to

-48­
TURKEY 236
Supp. No. 6 (1998)

the permanent
establishment or fixed
base, in accordance with the

provisions of Article 7 (Business Profits) or Article 14 (Inde­
pendent
Personal Services).
Under those Articles,
the State in

which the permanent establishment or fixed base is located

generally
will tax the royalties
on a net basis, using rates
and

rules of taxation generally applicable in that State. In the

case
of royalties
attributable
to a fixed base,
paragraph
4

provides for net
basis treatment only
when the fixed base is
that

of a Turkish
resident in the United States and not when a
U.S.

rsident
has a fixed base in Turkey.
This unilateral treatment
is

a result of Turkey's internal law, which does not attribute

income other
than
personal services
income to a fixed base;

royalties are
not considered personal services
income for this

purpose. Therefore, if paragraph 4 required Turkey to tax

royalties
attributable
to a fixed
base that a
U.S. resident
has

in Turkey
only as personal
services
income, Turkey
would not be

in
a position to tax the royalty
at all, even if the royalty
is

appropriately
sourced
in Turkey.
Because of the unilateral

language
in paragraph
4, Turkey may
continue to
tax royalties

sourced in Turkey and attributable to a U.S. resident's fixed

base
in Turkey as
royalties and
in acordance
with the limitations

of paragraph
2.

The same
rule applies if the permanent
establishment
or

fixed base has ceased
to exist when the royalties
are received,

as long as the
royalties would have been
attributable to the

permanent establishment or fixed base had they been paid or

accrued in
the earlier
year.

Paragraph 5
Paragraph
5 provides
rules for
determining
the source
of

royalty
payments. Under paragraph
5, royalties are generally

deemed
to
arise in
a
Contracting
State
if paid
by a resident
of

that
State.
However,
if
the
obligation
to
pay the
royalties
was

incurred
in connection
with
a permanent
establishment
or
a fixed

base
in one
of the
Contracting
States,
and
the royalties
are

borne
by that permanent
establishment
or fixed
base, the
royal­
ties
are deemed
to arise
in that
State,
regardless
of whether
the

payor is
resident in
one of the Contracting
States.
In general,

royalties
are
considered
borne by
a
permanent
establishment
or

-49­
TURKEY
237
Supp. No. 6(1998)

fixed
base if
deductible
in computing
the
taxable
income of
that

permanent
establishment
or fixed base.
If royalties
are neither

paid by
a resident
of one
of the Contracting
States nor
borne
by

a
permanent establishment
or
fixed base in
either State,
but they

relate
to the
use
of a right
or
property
in one of the
Contract­
ing
States, they
will be deemed
to arise
in the State
where the

right
or property
is used. For
example,
if
a Turkish resident

were to
grant franchise
rights to
a resident of
Mexico for use
in

the United
States, the
royalty paid
by the Mexican
resident to

the Turkish resident for those rights would be U.S. source income

under
this Article,
subject to
U.S. withholding
at the 10
percent

rate provided
in paragraph
2.

The rules of this Article differ from those provided under

U.S. domestic law. Under U.S. domestic law, a royalty is consid­
ered to be from U.S. sources if it is paid for the use of, or the

privilege
of using, an intangible
within the United States;
the

residence of the payor is irrelevant. If paid to a nonresident

alien individual
or
other foreign
person, a U.S.
source
royalty

is
generally subject to withholding
tax
at a rate of 30
percent

under U.S. domestic law. By reason of paragraph 2 of Article 1

(Personal Scope), a
Turkish resident would be
permitted to apply
the rules of U.S. domestic law to its royalty income if those
rules produced a more favorable
result
in its case
than those of
this Article. However, under a basic principle of tax treaty
interpretation,
the prohibition
against so-called "cherry-pick­
ing," the
Turkish resident would
be
precluded from claiming
selected
benefits under the Convention
(e.a., the tax rates
only)
and
other benefits
under U.S. domestic
law (etg., the source
rules only)
with respect to its royalties.
Sne, e.g., Rev. Rul.
84-17, 1984-1 C.B. 308. For example, if a Turkish company
granted
franchise rights
to a resident
of the United
States
for
use 50
percent in
the United
States
and 50
percent in
Mexico,
the
Convention
would
permit the
Turkish company
to treat all
of its
royalty
income from
that
single
transaction
as
U.S. source
income
entitled to the withholding
tax reduction under
paragraph 2.
U.S. domestic
law would
permit the
Turkish company
to treat
50

percent
of its royalty
income as
U.S. source
income subject
to a

30
percent withholding tax and
the other 50 percent as
foreign

source income
exempt
from
U.S. tax.
The Turkish
company
could

choose
to apply
either
the
provisions
of U.S.
domestic
law
or
the

-50­
TURKEY 238
Supp. No. 6 (1998)

provisions
of the
Convention
to the
transaction,
but would
not
be

permitted
to claim
both the
U.S. domestic
law
exemption
for
50
percent
of
the income
and the
convention's
reduced
withholding

rate
for the
remainder
of
the income.

Paragraph 6

Paragraph
6 deals
with
cases involving
special
relationships

between
the payer
and beneficial
owner
of a
royalty.
Paragraph
6

provides that
the provisions
of Article
12 will apply
to royalty

payments
between related
persons
only
to the extent
that such

payments
would have
been made absent
their special
relationship

(iU-e, an arm's length
royalty
payment).
Any amount in excess
of

an arm's
length
payment
remains
taxable according
to the laws
of

the
source State, with due regard
to the other provisions
of the

Convention.
If, for example, the excess
amount
is treated as
a

distribution of
profits under the law of
the source State, such

excess
amount will
be taxed as a dividend
rather than as a

royalty payment, but the tax imposed on the dividend payment will

be subject, if appropriate, to the rate limitations of paragraph

2 of Article 10 (Dividends).

Relation to other articles

Notwithstanding
the limitations
on source country taxation

of royalties
contained
in this
Article, the
saving clause
of

paragraph 3 of
Article 1 (Personal Scope)
permits the United

States to tax royalties received by its residents and citizens

as if
the Convention had
not come into effect.

As with other benefits of the Convention, a resident of one

of the States
claiming
the benefit
of this Article must
be

entitled to the benefit
under
the provisions of
Article 22

(Limitation on Benefits).

ARTICLE 13 -GAINS
Article 13 provides
rules governing when a
Contracting State

may tax gains from the alienation of property by a resident of

the other Contracting State.

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TURKEY
239
Supp. No.
6(1998)

Paragraph 1
Paragraph
1 preserves
the
situs
State's
right
to
tax gains
derived
by a resident
of
the other
Contracting
State
from the
alienation
of either
real
property,
defined
in paragraph
2,
or an
interest
in
a partnership,
estate
or
trust
to the
extent
the
interest
is attributable
to
real property
situated
in
the first-
mentioned
State.
The
Convention
does not
interfere
with
the
domestic
law rules
on
the taxation
of such
gains,
other
than
to
require
nondiscriminatory
treatment
under
Article
24 (Non-Dis­
crimination).
Paragraph
1
does
not grant
the
situs
State
an
exclusive
right
to tax
these
gains.
The
residence
State
may
also
tax
gains
from
real
property,
subject
to
the
rules
of
Article
23
(Relief
from
Double
Taxation).

Paragraph
2
Paragraph
2 elaborates
on
the
rule of
paragraph
1 by
ex­
plaining
that
the
term "real
property
situated
in
the
other
Contracting
State"
includes
not only
such property
held
directly,
but also
indirectly.
Thus,
paragraph
2 defines
the
term
to
include
(i) real
property
referred
to in Article
6
(Income
from
Immovable
Property
(Real
Property)),
(ii) a
United
States real

property
interest
or an equivalent
interest
in Turkish
real

property,
and
(iii) an
interest
in a partnership,
trust or
estate

to the
extent
the interest
is attributable
to real
property
(see

Code
section
897(g)).
A "United
States
real
property
interest"

is
understood
to
refer
to that
term
as it
is
defined
in Code
section
897 or
any successor
to that provision.
It
includes,
therefore,
an
interest
in a U.S.
corporation,
if
at least
50
percent of the
assets of
the corporation
consist
of
U.S. real
property.
The
definition
of
"real property
situated
in a Contracting

State"
for purposes
of Article
13 is intended
to permit
both

Turkey and the
United States to apply their
domestic laws to the

taxation
of gain
in respect
of real property
situated
within

their
respective
borders.
The
definition
applies
solely
for
purposes of Article
13. Therefore,
this
definition has
no effect
on the right to tax
income covered in other
articles of the
-52­
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240
Supp.
No. 6 (1998)

Convention,
such
as Article
6
(Income
from
Immovable
Property

(Real
Property)).

Paragraph 3

Paragraph 3
deals
with the taxation
of gains from the

disposition
of movable property that
forms part of the business

property
of a permanent establishment or fixed base that a

resident of one
Contracting State
has
in the
other State.
Such

gains may be taxed
by the State where the permanent
establishment

or fixed base is located. This includes gains from the

disposition
of such a permanent establishment
(alone or with the
whole enterprise) or of such a fixed base. Point V of the
Protocol permits source State taxation of gains from the

disposition of movable
property that was part
of a permanent

establishment
or fixed base even
if the gains are deferred
until

after the permanent establishment or fixed base has ceased to

exist. This rule
preserves
the U.S. tax imposed
under Code

section
864(c) (6), except
that the
treaty substitutes
a permanent
establishment threshold.

This provision permits gains from the alienation by a

resident of a State of an interest in a partnership, trust or

estate that has
a permanent establishment
situated in the other

State to be
taxed as gains
attributable
to such permanent
estab­
lishment
under paragraph
3. Thus,
for example,
the United States
may tax gains derived from the disposition of an interest in a
partnership
that
has
a
permanent
establishment
in
the United
States,
whether
or not the assets
of such
partnership consist
of
movable property.

Paragraph 4

Paragraph 4 provides
that gains derived from
the disposition

of ships, aircraft, containers, or related equipment (including
trailers,
barges, and
related equipment
used
for the transport
of
containers)
operated in
international
traffic are taxable
only in

the State
in which the
alienator is resident.
Occasional
use
of
a ship, aircraft, container, or related equipment in domestic

traffic should
not
cause the
disposition
of such
property
to fall

outside the scope of this provision.

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241
Supp. No. 6(1998)

Paragraph 5
Paragraph
5 generally grants to
the residence State the

exclusive
right to tax
gains from
the
disposition
of property
not

specifically
referred
to
in the preceding
paragraphs
of Article

13. The second
sentence
of the paragraph
provides
an
exception
to this general
rule, not
found in other
U.S. treaties,
dealing
with the taxation of income
from the alienation
of corporate
shares or
bonds. Under
this rule,
a Contracting
State may, in
accordance with
its law, tax
a resident
of the other
Contracting
State
on gain
from
the alienation
of
shares or
bonds
issued
by
a
corporation
that is a resident of the
first-mentioned Contracting
State if three
conditions
are satisfied:
(1) the shares or bonds
are not quoted on a stock exchange in that State; (2) the shares
or bonds are
alienated to
a resident of
that State;
and (3) the
alienator
held
the securities
prior to alienation
for one
year or
less. Under
Turkish law at the time
of
signature of the Conven­
tion, a U.S. person disposing of shares or bonds of a Turkish
corporation would be taxable in Turkey if the three conditions
were met (iue., if the non-listed securities of a Turkish company
were alienated by the U.S. resident to a resident of Turkey, and
the U.S. resident held the securities for one year or less). The
United States, at the time
of signature, does not have
statutory
authority
to impose
tax in these circumstances.
However, para­
graph
6 is drafted
reciprocally; therefore,
if the United States
were
to introduce a tax on the share gains of foreign persons, it
could impose that tax in accordance with this paragraph.
Relation
to other articles

Gains described
in Article
12 (Royalties)
(j.t.,
gains from

the
disposition of an intangible
where
the amount
of the

consideration is contingent
upon the productivity,
use
or

disposition
of the intangible)
are taxable
in accordance
with the

provisions of Article 12, and not this Article.

Notwithstanding the
foregoing limitations
on source country

taxation
of certain
gains, the saving
clause
of
paragraph 3
of

Article
1 (Personal
Scope)
permits
the
United States
to tax
gains

realized
by its
residents
and citizens
as
if the Convention
had

not come into effect.

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Supp. No.
6 (1998)

As with other
benefits
of this Convention,
a
resident
of one

of the States claiming the benefit of this Article must be

entitled to
the benefit under the provisions
of Article 22

(Limitation
on Benefits).

Article 14 -
INDEPENDENT PERSONAL
SERVICES
The Convention deals in separate articles with different

classes of income from personal services. Article 14 deals with
the general class of income from independent personal services
and Article 15 deals
with the general class
of income from

employment,
referred to as dependent
personal service
income.

Exceptions or additions
to these general rules
are found in

Articles 16 through 20 for directors' fees (Article 16);

performance income of artistes
and athletes (Article
17); pen­
sions in respect of
personal service income,
social security
benefits, and
annuities (Article 18); government
service salaries
and pensions
(Article 19); and students,
apprentices, and teach­
ers (Article 20).

Paragraph
1
Article
14 provides the general rule
that an
individual who

is
a resident of
a Contracting
State and who
derives income
from

the performance of personal
services in an independent
capacity

will be exempt from
tax in respect of that income
by the other

Contracting
State
unless certain conditions
are satisfied. The

income
may be taxed
by the other
State (the
"host State")
if the
services are performed in the host State and if the income is

attributable
to a
fixed base that
is regularly
available
to the

individual in the
host State for the purpose
of performing his

services.
Even if there
is no fixed
base, the host
State may
tax
the
income from
services performed
there
if the individual

deriving
the
income
is present
in the
host
State
to perform
the
services
for
a
period
or periods
exceeding
in
the aggregate
183

days
in any continuous
12-month period.

The
term "fixed
base" is not
defined in
the Convention,
but
its meaning
is
understood
to be
analogous
to that
of the
term
"permanent
establishment,"
as
defined
in Article
5 (Permanent
-55­
TURKEY
243
Supp. No. 6 (1998)

Establishment).
Similarly,
the rules
of
Article
7 (Business
Profits) for attributing
income and expenses
to a permanent
establishment
are generally
relevant
for
attributing
income
to
a

fixed
base.
In particular,
the income
attributed
to the
services
must be taxed
on a net basis,
after allowance
of deductions
for

business
expenses. The taxing
right conferred by this
Article
with
respect
to income
from independent
personal
services
is,

however, somewhat
more limited than that
provided in Article 7
for the
taxation
of business
profits.
In
both Articles
7 and
14
the
income
of a resident
of
one Contracting
State
must
be

attributable
to a permanent
establishment
or fixed
base
in the

host
State
in order
for that
State
to
have a taxing
right.
In
Article
14, however,
the income
also must
be
attributable
to

services
that
are performed
in
the host
State, while
Article
7 is

not
concerned
with the place
of performance
of the
income-

generating
activities
so long as the
income is attributable
to

the permanent establishment.

The rule in Point V of the Protocol dealing with deferred
income
of a permanent
establishment
or fixed base
applies to
this
Article.
Thus, income or gain that
is attributable to a fixed
base but is deferred until after the fixed base is no longer
available to the performer
of the services may
nevertheless be
taxed
by the State in
which the fixed base was
located.
Paragraph
2
Article
14 also applies to
permit the non-resident State
to

tax an enterprise
of the other State
in respect of personal

services if those
services are performed
in the non-resident

State and are either attributable to a permanent establishment in

that State or are performed
over a period that exceeds
183 days
in any continuous 12-month period. The enterprise deriving this
income may elect to be taxed on a net basis, consistent with the

provisions
of Article 7 (Business
Profits). This provision was
added to accommodate Turkish rules that treat all personal

services income derived by a nonresident alike, regardless of
whether the services
are performed by an individual
or by a
business
entity. Paragraph 2 permits
Turkey to apply its
withholding
tax to the professional
services
income
of a U.S.

enterprise
taxable under Article 14
only if Turkey permits the

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244
Supp.
No.
6 (1998)

enterprise
to elect
to be subject
to net basis
taxation
by

claiming
the
same
deductions
to
which
it would
be entitled
were

the provisions
of Article
7 (Business Profits)
to apply;
Article

7 ordinarily
applies
to
this type
of income
earned
by
an

enterprise,
and the United
States will
rely on Article
7 when
a

Turkish enterprise
provides
personal
services
in
the United

States.

By
permitting the taxation
of an enterprises's profits

derived
from services
that continue
for more
than 183
days,
whether or not
there is a fixed place of
business,
paragraph 2

effectively broadens
the source taxation of
services income

beyond
what would
be permitted
under Articles
7 (Business
Prof­
its) and 5 (Permanent Establishment). Although the preferred
U.S. treaty policy is that services do not give rise to a perma­
nent
establishment
and are not
taxable at
source unless
they are
performed
through
a fixed place
of business
or by a dependent

agent, the United
States has agreed to
provisions
similar to
those
in paragraph
2 in other
treaties with
developing countries.
Relation to other articles
If an individual
who performs independent
personal services

in the United
States is
a Turkish
resident and
is also a U.S.

citizen, the United States
may, by virtue of the saving
clause of

paragraph
3 of Article 1 (Personal
Scope), tax the income
of that

person without regard to the restrictions of this Article.

Article 15 -DEPENDENT PERSONAL SERVICES
Article 15 deals with the taxation of remuneration derived
by a resident of
a Contracting State
as an employee.
Paragraph 1

Under paragraph 1, remuneration
in respect of
employment

derived
by an individual who is a resident of a Contracting State

generally may be taxed only by the State of residence. To the
extent,
however, that the remuneration
is derived from an
employ­
-57­
TURKEY 245
Supp. No. 6(1998)

ment exercised
in the other
State ("the host
State"), the remu­
neration
may
also
be
taxed by
the host
State,
subject
to the

conditions
specified
in paragraph
2. In such a
case the individ­
ual's
State
of
residence
will relieve
double
taxation
in accor­
dance
with
the provisions
of Article
23 (Relief
from Double

Taxation). Consistent
with the general rule of
construction that

the more specific rule takes precedence over the more general,

employment income
dealt with in Articles 16 (Directors' Fees), 18

(Pensions and
Annuities),
19 (Government
Service) and 20 (Stu­
dents, Apprentices, and
Teachers) is governed by the
provisions

of those articles rather than this Article. Thus, even though

the State of source has a right to tax employment income general­
ly under Article 15, it may not have the right to tax a particu­
lar type of income under the Convention if that right is pro­
scribed
by
one of the aforementioned
articles. Similarly, these

other
articles may expand the
source State's right to tax
beyond

the circumstances in which
Article 15 would permit
it to tax.

Paragraph 2
Paragraph 2 provides that the host State may tax the remu­
neration of
a resident of
the other State
derived
from services

performed
in the host
State if one
of the following
is true:
(i)

the individual
is present
in.the host
State for
a period or

periods
exceeding 183 days in any continuous
twelve-month period;

(ii) the
remuneration
is paid by,
or on behalf
of, an employer

who
is a resident
of the host State;
or (iii)
the remuneration
is

borne as a deductible
expense by a permanent
establishment or

fixed
base that
the employer
has in the
host State.
If a foreign

employer
pays the salary of an employee,
but a host State corpo­
ration
or permanent
establishment
reimburses
the foreign
employer

in a deductible
payment that
can be identified
as a
reimburse­
ment,
either condition
(ii) or
(iii), as the
case may be, will
be

considered
to
have been fulfilled.
Conditions
(ii)
and (iii)
are

intended
to assure that
a Contracting
State will
not
be required

both to
allow a
deduction
to the payor
for
the amount
paid and
to

exempt
the employee
on
the
amount
received.
Failure
to satisfy

any of the three
conditions
will result
in exclusive
residence

State taxation
of employment
income.

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TURKEY
246
Supp.
No.
6 (1998)

The 183-day
period
in
condition (i)
is to be measured
using

the
"days of physical presence"
method. Under this method,
the

days that are counted include any day in which a part of the.day

is spent in the host
country. (Rev. Rul. 56-24,
1956-1 C.B.

851.) Thus, days that are counted include the days of arrival

and departure;
week-ends and holidays
on which the employee does

not
work but is present within
the country; vacation days
spent

in the country before, during
and after the employment
period,

unless the individual's
presence before or after
the employment

can be shown
to be independent of his
presence there for

employment
purposes; and time during
periods of sickness,

training
periods, strikes, etc.,
when the individual is
present

but not working. If illness
prevented the individual
from

leaving the
country
in sufficient time to
qualify
for the

benefit, those
days will not count. Also,
any part of a day

spent in
the host country while in transit
between
the two points

outside
the host country is
not counted. These rules
are

consistent
with
the description
of the
183-day period
in

paragraph
5 of
the
Commentary
to
the OECD
Model.

Paragraph 3
Paragraph
3 contains
a special
rule applicable
to remunera­
tion
for
services
performed
by an individual
resident
of one
Contracting
State as an
employee aboard
a ship
or aircraft
operated
in international
traffic.
Under this paragraph,
the
employment
income of
such persons
may be taxed
in the State
of
residence
of
the enterprise
operating
the
ship or
aircraft.
This
is not an
exclusive taxing
right. The
State of residence
of the
employee
may also
tax the
remuneration.
This provision
is
taken
from the
OECD Model,
at Turkey's
insistence.
The United
States
prefers
not to
use this
rule in
treaties
because U.S.
internal
law does
not impose
tax
on non-U.S.
source
income
of
a person
who

is
neither
a U.S. citizen
nor
a U.S.
resident,
even
if that
person is
an employee
of a U.S.
resident
enterprise.
Paragraph
3 deals
only
with
those
employees
who
are
members
of the
"regular
complement"
of a
ship or
aircraft.
The "regular
complement"
includes
the crew.
In the
case of
a cruise
ship, for
example,
it
may also
include
others,
such as
entertainers,
lecturers,
etc.,
employed
by the
shipping
company
to serve
on
the
-59­
TURKEY
247
Supp. No. 6(1998)

ship
during
its voyage.
The use
of the term
"regular complement"

is intended
to
clarify
that
a
person
who
exercises
his
employment

as,
for example,
an
insurance
salesman,
while
aboard
a
ship
or

aircraft
is not
covered
by
this
paragraph.

Relation
to other
articles
A U.S. citizen
who is resident
in Turkey
and who
performs
dependent
services
in the
United States
will
be
taxable in the
United States on his remuneration by virtue of the saving clause
of paragraph 3 of Article 1 (Personal Scope) even if , under
paragraph 2, he would be exempt from U.S. tax were he not a U.S.
citizen.
Article 16 -DIRECTORS' FEES
This Article provides that a Contracting State may tax the

fees paid by a company that is a resident of that State for

services performed in that State by a resident of the other State

as a director of the company. Only the State of residence of

the director, however, may
tax any portion of the
remuneration

that is derived in respect of services performed outside the

other Contracting State.

The fees covered by this Article include directors' fees as

well as other similar payments. For this purpose, "similar

payments" include fixed salaries (or the portion thereof) paid

for services performed as a director (not to include any portion

of such salary paid for performance as an officer).

Relation to other articles
This rule is an
exception to the more general
rules of

Article 14
(Independent Personal Services) and Article 15 (Depen­
dent Personal Services).
Thus, for example, a U.S.
resident who

is a director
(and not an employee) of a Turkish company may be

subject to tax
in
Turkey on
his or her
director's fee
whether or

not the fee
is attributable to a fixed base in Turkey
and whether

or not
he or she is present in Turkey more than 183 days.

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248

Supp.
No.
6 (1998)

This
Article
is subject
to
the
saving
clause
of
paragraph
3

of Article
1 (Personal
Scope).
Thus,
if a
U.S.
citizen
who
is
a

Turkish
resident
is
a director
of
a U.S.
corporation,
the United

States
may
tax
his
full
remuneration
regardless
of
the
place
of

performance
of
his
services.

Article
17
-ARTISTES
AND
ATELETES
This
Article
deals
with
the
taxation
of
artistes
(iU..,

performing
artists
and
entertainers)
and
athletes
resident
in
one

Contracting
State
from
the
performance
of
their
services
as
such

in the
other
Contracting
State.
The
Article
applies
both
to
the

income
of an
entertainer
or
athlete
who
performs
services
on
his

own
behalf
and
one
who
performs
his
services
on behalf
of another

person,
either
as an
employee
of
that
person,
or
pursuant
to any

other
arrangement.
This
Article
applies,
however,
only
with

respect
to
the
income
of performing
artists
and
athletes.
Others

involved
in
a performance
or athletic
event,
such
as
producers,

directors,
technicians,
managers,
coaches,
etc.,
remain
subject

to
the provisions
of Articles
14 (Independent
Personal
Services)

and
15 (Dependent
Personal
Services).

Paragraph
1
Paragraph
1
describes
the
circumstances
in
which
one
State

may
tax the
performance
income
of an
entertainer
or
athlete
who

is a
resident
of the
other
State.
Income
derived
by
a resident

of one State
from
his personal
activities
as
an
entertainer
or

athlete
exercised
in the
other
State
may be
taxed
in that
other

State
if the
amount
of the
gross
receipts
derived
by
the individ­
ual for
the taxable
year concerned
exceeds
$3,000
(or
its equiva­
lent
in Turkish
Lira).
The
$3,000 includes
only
gross
compensa­
tion
for the
services
rendered
and does
not
include
expenses

reimbursed
to the individual
or
borne on his
behalf. If
the

gross
receipts
exceed
$3,000,
the
full
amount,
not only
the

excess,
may be
taxed in
the State
of performance.

The
OECD Model
permits
the country
in which
the
performance

occurs
to tax
the
remuneration
of entertainers
or athletes
with

no
dollar or
time threshold.
The United
States
introduces
the

-61­
TURKEY 249
Supp.
No. 6(1998)

dollar
threshold test in its treaties
to distinguish between
two

groups of entertainers and
athletes --those who are
paid very
large sums of money
for very short periods of
service and who

would, therefore,
normally be exempt from
host country tax under
the standard personal services income rules, and those who earn
only modest amounts and are, therefore, not clearly distinguish­
able from those who earn other types of personal service income.

Paragraph 1 overrides
the limitations on source
State
taxation in Articles 14 (Independent Personal Services) and 15

(Dependent Personal
Services). Thus, an
individual who would be
exempt from tax in the State where the services are performed
under those Articles may nevertheless be subject to tax in that

State under Article 17 if his gross receipts exceed the $3,000

threshold. An entertainer or athlete who receives less than the
$3,000 threshold amount and who, therefore, is not subject to tax
under the provisions of Article 17 may nevertheless be subject to

tax in the host country under Article 14 or 15 if the tests for

taxation at source under
those Articles are met. For
example, if
an
entertainer who
is an independent contractor
earns only $2,500

in the taxable year, but
the income is attributable
to a fixed

base regularly available to him in the State of performance (such
as a cocktail lounge in which
he regularly performs),
that State
may tax his income under Article 14.
Income derived from one State by an entertainer or athlete
who is a resident of
the other State in connection
with his or
her
activities as such, but from
other than actual performance
is
not covered by this Article.
Such incomp is covered
instead by
other
articles of the Convention,
as appropriate. For
example,
Article 12 (Royalties) would apply to any royalty income derived
by the entertainer
in connection with his or her
activities. In
determining whether
income falls under
Article 17 or another

article,
the controlling
factor will
be whether
the income in
question
is predominately
attributable
to
the performance
itself

or to other activities
or
property
rights.

Paragraph 2

Paragraph
2 is intended
to eliminate
the
potential
for
abuse
when
income from
a performance
by
an entertainer
or athlete
does

-62­
TURKEY 250
Supp. No. 6(1998)

not accrue to the performer himself, but to another person.

Foreign entertainers commonly perform in the United States as
employees of, or under contracts with, companies or other per­
sons. The relationship may truly be one of employee and employ­
er, such as in the case of a member of a team, with no abuse of
the tax system either
intended or realized.
On the other hand,

the "employer"
may, for example, be a company
established and

owned by the performer, which is merely acting as the nominal

income recipient in respect of the remuneration for the entertai­
ner's performance. The entertainer may be acting as an "employ­
ee," receiving a modest salary, and arranging to receive the

remainder of the income from his performance in another form or
at a later
time. In such case, absent
the provisions of para­
graph
2, the company providing
the entertainer's services
might
escape
host country tax because
it earns business profits
but has

no permanent establishment
in that country. The
entertainer may

largely
or entirely
escape host country
tax by receiving only a
small salary in the year
the services are performed,
perhaps
small enough
to place him
below the $3,000
threshold
in paragraph

1. He would arrange
to receive further payments
in a later year,

when he
is not
subject
to host country
tax,
perhaps
as salary

payments,
dividends
or
liquidating
distributions.

Paragraph 2 seeks
to prevent this type of abuse
while at the

same time protecting
the taxpayer's
right
to the
benefits
of the

Convention
when there
is a legitimate
employee-employer
relation­
ship
between the
performer and
the person
providing his
services.

Under paragraph
2, when the
income accrues
to a person
other than
the
performer, and
the performer
(or persons
related to
him)
participates,
directly or indirectly,
in the profits
of that
other person,
the income of
that other person
may be
taxed in the

Contracting
State
where
the performer's
services
are
exercised,

without
regard
to the
provisions
of the Convention
concerning

business
profits
(Article 7)
or independent
personal services

(Article
14).
Thus,
even
if the "employer"
has no
permanent
establishment
or fixed
base in
the host
country,
its
income
may

be subject
to
tax
there
under
the
provisions
of paragraph
2.

Taxation
under paragraph
2 is imposed
on
the
person
providing
the

services
of the
entertainer
or athlete.
This
paragraph
does
not

affect
the
rules
of paragraph
1,
which apply
to the
entertainer

or athlete himself.
The income taxable
by virtue of
paragraph 2

-63­
TURKEY 251
Supp. No. 6 (1998)

is
reduced
to the
extent
of
salary
payments
to
the performer,
which
are addressed
by paragraph
1.

For
purposes
of
paragraph
2, income is
deemed to accrue
to

another person (i-.., the
person providing the services
of the
entertainer
or athlete)
if that other
person has
control over,
or
the
right
to receive,
gross
income in
respect
of the services
of

the
entertainer
or athlete.
Direct
or
indirect
participation
in
the profits
of
a person
may include,
but
is not limited
to,
the
accrual
or receipt of deferred remuneration,
bonuses, fees,

dividends, partnership
income or other income
or distributions.

The paragraph 2 override
of the protection of
Articles 7

(Business
Profits) and
14 (Independent
Personal
Services) does
not
apply if it is
established
that neither
the entertainer
or

athlete,
nor any
persons related
to the entertainer
or
athlete,
participate
directly
or indirectly
in the profits
of the
person

providing
the services
of the entertainer
or athlete.
Thus,
for
example, assume that
a circus owned by a U.S.
corporation per­
forms in Istanbul, and the
Turkish promoters of the
performance
pay the circus, which, in turn, pays salaries to the clowns. The
circus has
no permanent establishment
in Turkey. Since the
clowns do not participate in the profits of the circus, but
merely receive their
salaries out of the circus'
gross receipts,

the circus is protected by Article 7 and its income is not

subject to Turkish tax, except to the extent consistent with the
provisions of Article
7. Whether the salaries
of the clowns are
subject to Turkish tax depends on whether they exceed the $3,000
threshold
in paragraph
1, and, if not,
whether they
are taxable
under Article 15 (Dependent Personal Services).

This exception to the paragraph 2 override of the Articles 7

and 14 protection of persons providing the services of entertain­
ers and athletes is not found in the OECD Model. The OECD Model
would override Articles 7 and 14 even in non-abusive situations,
i.e., even where the performer does not participate in the

profits
of the person providing the
services and receiving the

income.
The paragraph 2 override
in this Convention, however,
applies only
in the potentially abusive
situation where the

performer
participates in the profits
of the venture. The
-64­
TURKEY 252
Supp.
No. 6
(1998)

language of this paragraph
is consistent with
the U.S. reserva­
tion to paragraph
2 of the OECD
Model.

Paragraph 3

Under paragraph 3,
neither paragraph 1 nor
2 will apply to

certain income derived by entertainers or athletes or their

sponsoring
organizations. In
these cases, the provisions
of

Article 7 (Business Profits), 14 (Independent Personal Services)

or 15 (Dependent Personal Services) will apply. The cases
covered by paragraph
3 are those where the performance
by the
entertainer or athlete in the host State is substantially sup­
ported by
either a non-profit organization
of the other Contract­
ing State,
or by that other State itself
or a political subdivi­
sion or local authority
of that State. The income
of enter­
tainers
or athletes
whose performances come within
these
categor­
ies is subject to Article 14 (Independent Personal Services) or
15 (Dependent Personal Services),
and the income of
the sponsor­
ing organization would
be subject to Article 7
(Business Profits)
or 14 (Independent Personal
Services). Thus, for example,
if the
New York Philharmonic gave a concert in Istanbul, the members of
the Orchestra would not be subject to Turkish tax even if their

income
from the
performances in Turkey exceeded
$3,000 in a year,

so long as they were not present in Turkey for more than 183 days

in a continuous 12-month period.

Relation to other articles
As indicated, the provisions of Article 17 generally expand

the circumstances
in which the source
State may tax beyond those

provided in Articles 14 (Independent Personal Services) or 15

(Dependent Personal
Services). It also
overrides Article 7
(Business Profits) or
14 (Independent Personal
Services) in cases

described in paragraph
2. Where Article
17 does not operate to
permit source
State taxation, the
source
State may nonetheless

tax
in accordance with provisions
of these other Articles.

This Article is subject
to the provisions of
the saving

clause
of paragraph
3 of Article
1 (Personal
Scope). Thus,
if an
entertainer or athlete
who is resident in Turkey
is a citizen of
the
United States, the United
States may tax all of his
income

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TURKEY 253
Supp. No. 6(1998)

from
performances
in
the United
States
without
regard
to the
provisions
of
this Article.

Article
18 -
PENSIONS
AND ANNUITIES
Article
18
deals
with
the
taxation
of private
(i.e.,
non-go­
vernment)
pensions,
annuities,
social
security,
and
similar
benefits.

Paragraph
1

Paragraph
1 provides
that private
pensions
and
other
similar

remuneration
paid
in
consideraion
of past
employment
are
gener­
ally taxable
only in the residence
State.
It is understood
that
the rules
of this paragraph
apply
even if the
payee of the
pension is not
the person
who performed
the past employment.
For
example,
a pension
paid to a
surviving spouse
who is a
resident
of Turkey
would be
exempt from
tax by the United
States
on the
same basis as
if the right
to the pension
had been earned
direct­
ly
by the
surviving
spouse.
A pension
may be
paid periodically
or in a
lump sum.
The
rules of
this paragraph
do
not apply
to
government
service
pensions,
which
are dealt
with in
paragraph
2
of Article
19 (Government
Service), nor
do they deal
with social
security
benefits,
which are
dealt with
in paragraph
2
of Article
18.

Paragraph 2
Paragraph
2 provides
that
payments made
by one of
the

Contracting
States
under
the
provisions
of its
social security

system
or similar
legislation
to a resident
of the other
State or

to a
citizen of the
United States
will be taxable
only
in the

paying
State. Pensions
in respect
of government
service that
fall under
the provisions
of a social
security
system as de­
scribed in this
paragraph
are covered
by this rule,
and not by

the rule of paragraph
2 of Article 20 (Government
Service). The
phrase "similar legislation" is intended to include United States
tier 1 Railroad Retirement benefits. The reference to U.S.

citizens is necessary
to ensure that a social security
payment by
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TURKEY
254
Supp. No. 6
(1998)

Turkey
to a U.S.
citizen
not resident
in
the United
States
will

not be
taxed by
the United
States.

Paragraph 3
Paragraph 3 of
the Article provides for
exclusive residence
country taxation
of annuities.
The
term "annuity"
as used in
this
paragraph
is defined
to mean
a stated
sum
paid
periodically
at stated
times
during life
or during
a specified
number
of years
under
an obligation
to
make the
payment
in return
for adequate
and
full consideration
(other
than
services
rendered)
in money
or
money's worth.
An annuity
received in
consideration
for services
rendered
would
be treated
as deferred
compensation
and generally
would
be
taxable
in
accordance
with Article
15 (Dependent
Personal
Services).
This
paragraph
is
intended
to cover
traditional
annuity
arrangements
that provide
retirement
benefits

to individuals.
It is
not intended
to exempt
from
tax
at
source

income
from arrangements
that are a variation of
traditional

annuities
and that
accrues to corporations
or other legal

persons.

Relation
to
other articles
Paragraph
2 is one
of the exceptions
listed
in paragraph

4 a) of
Article
1 (Personal
Scope)
to the
saving
clause
of para­
graph
3 of that
Article.
Thus,
the
United
States
will
not
tax

social
security
benefits
paid
by
Turkey
to
a U.S.
citizen
or

resident.
The
provisions
of paragraphs
1 and
3 of
this Article

are subject
to
the saving
clause
of paragraph
3
of Article
1

(Personal
Scope).
Thus,
for example,
a periodic
pension
or

annuity
payment
received
by a resident
of
Turkey who
is a U.S.

citizen
may be taxed
by the United
States,
regardless
of the

provision
for exclusive
residence
taxation
for those
classes
of

income.

Article
19
-GOVERNMENT
SERVICE
Article
20 deals
with
the taxation
of
income
(including

pensions)
from
governmental
employment.
It generally
follows
the

corresponding
provisions
of the
OECD
Model.

TURKEY
255
Supp. No. 6(1998)

Paragraph 1
Subparagraphs a)
and b) of paragraph 1 deal
with the taxa­
tion
of government
compensation
other
than a pension.
Subpara­
graph a)
provides the
general rule
that wages,
salaries,
and

other
remuneration
paid by one
of the Contracting
States
or
by

its political
subdivisions
or local
authorities
to any individual

are
generally
exempt
from tax
by the
other State,
if the
compen­
sation
is in respect
of
governmental
services
rendered
to
that

State,
subdivision or
authority.
Under subparagraph
b),
however,
such payments
are taxable only in the
other State if the services

are rendered
there and if the individual
is a resident of that
State who
is either a national
(Ju.,
in the case
of the United
States, a citizen)
of that
State or who
was a resident
of that
State
prior to
taking the governmental
job
(or who otherwise
did
not
become resident
of that State
solely
for purposes
of
taking
the job).
Thus,
an individual
who, after
establishing
U.S.
residence,
is hired
by the
Turkish
Embassy
in Washington,
would
be subject
to U.S. (and
not Turkish)
tax on his
Turkish salary.
It is understood
that the rule of subparagraph,
b) does not apply
to the spouse
of a government employee described
in paragraph 1

if the spouse
becomes employed by the
sending State after taking

up residence in the host State.

Paragraph. 2

Paragraph 2 deals
with the taxation of a pension
paid by, or
out of funds created by,
one of the States or a political
subdi­
vision
or a local authority
thereof
to an individual
in respect
of services rendered
to that State or subdivision
or authority.
Subparagraph a) provides the general rule that such a pension is
taxable only by the
paying State. Subparagraph
b), however,
provides an exception
under which such a
pension is taxable only

in the
residence State
if the individual
is a
resident of,
and a

national of, that other
State. If a Government
pension otherwise

covered by this paragraph is in the form of a social security
benefit, paragraph 2 of Article 18 (Pensions and Annuities),
rather
than
this
Article, applies.
Paragraph 3
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TURKEY 256
Supp.
No. 6 (1998)

Paragraph 3 provides
that the provisions
of Articles
15

(Dependent
Personal
Services),
16
(Directors'
Fees),
and 18

(Pensions
and
Annuities)
shall
apply to
remuneration
and
pensions

in respect
of services
rendered
in
connection
with
a business

carried
on by one
of the
States or
a political
subdivision
or
a

local
authority
thereof.

Relation
to other
articles

Under
paragraph
4 b) of
Article
1
(Personal
Scope),
the

saving
clause (paragraph
3 of Article
1) does
not apply to
the

benefits
conferred
by
one of the
States
under Article
20
if the

recipient
of the
benefits is
neither a citizen
of, nor
has

immigrant
status
in, that
State.
Thus, for
example,
a Turkish

resident
who receives
a pension paid
by Turkey
in respect of

services rendered
to the Government
of Turkey
shall be
taxable on
this pension only
in Turkey unless the individual
is a U.S.
citizen or acquires
a U.S. green
card.

Article 20 -STUDENTS, APPRENTICES, AND TEACHERS
Article
20 deals with visiting
students, apprentices,
business
trainees, and
teachers.
Paragraph 1
An individual who, immediately before his visit, is a

resident of one of the Contracting States and who visits the

other Contracting State for the purpose of full-time education or

training will not be taxed by that other State on amounts

received from
abroad to cover the cost
of his maintenance,

education or training. The reference to "full-time" is not

intended to deny the benefits of this Article to a student or

trainee who, in accordance with his visa, may hold a part-time

job in addition
to his studies or
training.
Such a person will

still be entitled to benefits as long as he participates in a

full-time
program of
study or training.
However,
if the visitor

comes to the host State principally to work and also is a part-

time student, he would
not be entitled to benefits.
Whether a

student
is considered
"full-time"
will be determined
by the rules

-69­
TURKEY 257
Supp.
No. 6 (1998)

of the educational
institution
at
which he is
studying. The

requirement
in
the OECD
Model
that studies
or training
be
the

sole
purpose
of
the visit
makes
the result
less
clear
when
the

visitor
engages
both in
studies
or training
and
in
work

activities.

The exemption under
paragraph 1 does not in
any event extend

to amounts
received
as compensation
for services
rendered,
which

are covered
under
Article
14 (Independent
Personal
Services)
or

Article
15 (Dependent
Personal
Services).
The exemption
also

does not
apply
to any
grant
provided
from
within
the
host
State,

which
is taxable
in accordance
with the
domestic
laws
of that

State.

Paragraph
2
Paragraph
2 deals
with certain
remuneration
of teachers
or

instructors who are
residents of one Contracting
State
and who

visit the
other State
for
a period
not exceeding
two
years for

the
purpose
of
teaching
or
engaging
in
research
in that
other

State. Paragraph
2 exempts
such visitors
from taxation
in the

host
State with
respect
to any remuneration
for their
teaching
or

research
that arises
outside
that
State. Remuneration
arising

within
the host
State
is subject
to the
provisions of
Articles 14

(Independent
Personal
Services)
or
15 (Dependent
Personal

Services),
as
the
case may
be.
If the
visit
exceeds
two
years,

the exemption
is lost for the
entire period.

If a U.S. resident professor
at an American
university

spends
a sabbatical
year teaching
at a university
in Turkey
and

receives a salary from the U.S. university or receives a research

grant from a
U.S. institution,
these
items of income
would be

exempt
in Turkey, so long as
his stay in Turkey does not
exceed

two years. If he is also paid by the Turkish university that he

is visiting, that income would not be covered by Article 20, but

would
be dealt with
under the provisions
of the other
articles

dealing
with personal
services income.

Relation
to other articles
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TURKEY
258
Supp. No. 6 (1998)

Under subparagraph
4 b)
of Article
1
(Personal
Scope),

Article
20 is an
exception
to
the saving
clause
of paragraph
3
of

Article
1 for
individuals
who
are residents
of a
Contracting

State
under
its law,
but who
are not
nationals
or
permanent

residents
of
that State.
The saving
clause
does,
however,
apply

for nationals
or permanent
residents
of a Contracting
State

(ists, in
the United
States, citizens
or green
card holders).
A
U.S.
citizen who
is a resident
of Turkey and
who
studies
at a

U.S.
university
would, therefore,
not be
entitled to any
of the

benefits
of this
Article

Article
21 -
OTHER INCOME
This Article
provides
the rules for
the taxation
of items of

income not
dealt
with in
the other
articles
of the
Convention.

An
item of income
is "dealt
with"
in an article
when an
item
in

the same
category
is a subject of
the article,
whether or not
any

treaty
benefit
is granted
to that
item
of income.
Article
21

deals with
classes
of income
that
are not
dealt with
elsewhere,

such as lottery
winnings,
punitive
(but not compensatory)
damages,
covenants
not to
compete, and
income from
certain
financial instruments not
dealt with in other articles
to the
extent
derived by persons
that are
not engaged
in the trade
or
business
of dealing in
such instruments
(if the
transaction
giving rise
to the income
is related to
a trade or business,
it
is
dealt with
under Article
7 (Business
Profits)).
The article

also deals with income of the same class as income dealt with in

another
article
of the Convention,
but from sources in
third

States,
where the other article deals
only with items of that

class of income from sources within one of the Contracting States

(eS., Article
11
(Interest)
or Article
12 (Royalties)).
Paragraph I
Paragraph
1 contains the general
rule that items of income

not dealt with in the other articles of the Convention derived by

a resident
of one of the States
will be taxable only in the
State

of residence. This
exclusive right of
taxation applies

irrespective of whether
the residence State exercises
its right

to tax the income
covered by the Article.
The phrase "items of

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TURKEY 259
Supp. No. 6
(1998)

income of
a resident"
should
be understood
to mean
"items
of

income
beneficially
owned by
a resident."
Thus, is an
item of

income
otherwise
covered
by this
paragraph
is
paid to
a resident

of a Contracting
State
as a nominee
on behalf of
a
third-country

resident,
that income would not
be exempt from source basis

taxation
under paragraph
1 but would
fall outside
the treaty

altogether.

Paragraph
2
Paragraph
2 contains an exception
to the general
rule of

paragraph
1 for
income,
other than
income
from real
property,

that is
attributable
to a permanent
establishment
or fixed
base

maintained
in
a Contracting
State
by a
resident
of the other

Contracting
State.
The
taxation
of such
income
is
governed
by

the provisions
of Articles
7 (Business
Profits) and
14 (Indepen­
dent
Personal Services).
Thus,
in general,
third-country
income

that is
attributable
to a permanent
establishment
maintained
in

the United
States
by a Turkish
enterprise
would
be taxable
by
the

United States
under Article
7. There
is an exception
to this

rule
for income
from real property,
as defined
in paragraph
2 of

Article 6 (Income
from Immovable
Property
(Real Property)).
If,

for
example, a
Turkish resident
derives income
from real
property

located
outside the United States but that is attributable
to the

resident's permanent
establishment or fixed
base
in the United

States, only Turkey
and
not the United States
may tax that

income.
This special rule
for foreign-situs real
property is

consistent
with the general
rule, also reflected in Article
6,

that only the situs and residence states may tax real property

income. Even
if such property is part
of the property of a

permanent establishment
or fixed base in a
Contracting State,

that State
may not impose
tax if neither the situs of
the proper­
ty nor the residence of the owner is in that State.

The rule in Point V of the Protocol dealing with deferred

income of a permanent
establishment or fixed base
applies to this

Article. Thus, income or gain from third-country sources that is

attributable to a permanent establishment or fixed base, but that

is deferred until after the permanent establishment or fixed base
has ceased to
exist, may nevertheless be
taxed in the State in

which the permanent establishment or fixed base was located.

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TURKEY 260
Supp.
No.
6(1998)

This Article is subject
to the saving clause
of paragraph 3

of Article 1 (Personal Scope). Thus,
the United States may tax

the income of a Turkish resident not dealt with elsewhere in the

Convention, if that Turkish resident is a citizen of the United

States.

As with other benefits
of the Convention, a resident
of one

of the States
claiming the benefit
of this Article must
be

entitled
to the benefit under
the provisions of Article
22

(Limitation
on
Benefits).

Article 22 -LIMITATION ON BENEFITS
Article
22 assures that .taxbenefits
granted by a Contract­
ing
State pursuant
to the
Convention
are limited
to the intended
beneficiaries
--residents
of
the other
Contracting
State
--and
are not extended
indirectly
to residents
of third
States not
having
a substantial
business
nexus
with
or presence
in the
other
Contracting
State.
For example,
a resident
of a third
State
might establish
a legal
entity in Turkey
that has
no substantial
business
nexus with Turkey,
but is in Turkey
for the principal
purpose
of deriving
income from
the United
States and claiming
the
benefits of
the Convention
with respect
to that
income.

Absent Article
22,
the entity
would
generally
be entitled
to

benefits
as
a resident
of Turkey,
subject,
however,
to such

limitations
(eug.,
business
purpose,
substance-over-form,
step

transaction
or
conduit
principles)
as may
be applicable
to the

transaction
or arrangement
under
the domestic
law
of
the
United

States.

Examples
used
throughout
the
following
discussion
involve
a

Turkish
resident
claiming
U.S.
benefits.
The
provisions
of the

Article are
reciprocal, and
all of the
examples, therefore,
can

be read
as relating
to
a claim
of Turkish
benefits
by a
U.S.

resident.

Paragraph 1
Paragraph
1 provides
a two-part
test,
the
so-called
owner­
ship
and
base
erosion
tests,
both
of
which
must
be
met
for
a

-73­
TURKEY 261
Supp. No. 6 (1998)

resident
to be entitled
to
benefits
under this
paragraph.
(If
a

person
fails to
qualify
under
this
paragraph,
benefits
may still

be
granted
if
the person
qualifies
under
the
provisions
of

paragraphs
2 through
6.)
Under the
ownership
aspect
of the

test,
more than
50 percent
of the
beneficial
interest
in
the

resident
(or, in
the case
of a company,
more
than 50
percent
of

each
class
of its shares)
must
be owned,
directly
or indirectly,

by
individual
residents
of a
Contracting
State
(determined
under

Article
4
(Resident)),
by
U.S. citizens,
or
by persons
that

qualify
for
benefits
under the
provisions
of paragraph
3,
4 or 5

(i,., publicly
traded companies or their subsidiaries,

governments,
or certain
not-for-profit
organizations).
The
base-

erosion
aspect
of the
test
will
be satisfied
as long
as
a

substantial
part of the
resident's income
is not
used, directly

or indirectly,
to
meet liabilities
in
the form
of deductible
pay­
ments
(including
interest
and
royalties)
to persons
who are

neither
individual
residents
of a Contracting
State
(determined

under
Article 4 (Resident)),
U.S. citizens,
nor persons

qualifying
for benefits
under
the
provisions
of paragraphs
3, 4

or
5. It is understood
that
the term
"income," as
used in

subparagraph b), is to
be interpreted as "gross income"
under

U.S.
law. Thus,
in general,
the term should
be understood
to
mean gross
receipts less
cost of goods sold.

The rationale for this two-part test is that treaty benefits

can
be indirectly
enjoyed not
only by equity
holders of
an entity

but also
by that entity's various
classes of obligees, such
as

lenders,
licensors,
service
providers,
insurers
and
reinsurers,

and others. It is not enough, therefore, to require substantial

equity ownership by treaty country residents. To prevent

benefits from inuring substantially to third-country residents,

it is also necessary to limit the amount of an entity's

deductible payments that
are made to persons
that
are not

themselves
qualified treaty country
residents. For example,
a

third-country resident
could lend funds to
a Turkish-owned

Turkish corporation deriving income in the United States. While

the Turkish corporation would be subject to Turkish corporate

income tax, its taxable
income could be substantially
reduced by

the deductible
interest paid to the third-country
resident. If,

under a Convention between Turkey and the third country, that

interest were subject to reduced Turkish tax, a substantial

-74­
TURKEY 262
Supp. No. 6 (1998)

portion of the
U.S. treaty
benefit
with
respect to
the
U.S.­
source
income would have flowed
to the third-country resident.

Under
paragraph 1, individuals
who
are residents
of a

Contracting State under
Article 4 (Resident) are,
without further

testing, entitled to benefits.
It is unlikely that
an individual

would
be
used to derive treaty-benefitted
income on behalf
of a

third-country
person. Moreover, treaty
benefits are ordinarily
denied unless
the beneficial owner of the
income is a resident in

a
Contracting State.

Paragraph 2

Paragraph 2 provides
a test for eligibility for
benefits

that
looks at the
nature of
the activity
in the residence
State

by the
resident and
at the connection
between
that activity
and

the
income for which treaty
benefits
are claimed. Under
this

"active trade
or business"
test, a
resident of Turkey
will be

entitled to benefits with respect to income derived in the United

States if that resident is engaged in an active trade or business

in Turkey and if the item of income in question is derived in

connection with, or is incidental to, that trade or business. It

is understood
that the active trade
or business requirement may

be satisfied by a person related to the resident. The assumption

underlying the active
trade or business test
is that a third

country resident that establishes
a substantial operation
in one

State
and that derives income
from a similar activity
in the

other State would
not do so primarily to avail
itself of the

benefits of the Convention;
it is presumed in such
a case that

the investor had a valid business purpose for investing in the

first
State, and that the link between that trade or business and

the activity that generates the treaty-benefitted income

manifests a business purpose. It is considered unlikely that the

investor
would incur the expense of
establishing a substantial

trade or business in the first State simply to obtain the

benefits
of the
Convention.

For this purpose, the business of making or managing

financial
investments is not
a qualified active trade
or

business, unless those
investment activities
are banking or

insurance
activities
carried on by
a bank or insurance
company.

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TURKEY
263
Supp. No. 6 (1998)

Otherwise,
the term
"active
conduct
of a trade
or business"
is

not specifically
defined
in the treaty.
Pursuant to
paragraph 2
of Article
3 (General
Definitions),
when determining
whether
a
resident
of Turkey
is entitled
to the benefits
of
the Convention

with respect
to
income
derived
from U.S.
sources,
the United

States
will
ascribe
to the
term
the
meaning
it has
under U.S.

internal
law. Accordingly,
the U.S.
competent authority
will
refer
to the regulations
issued
under section
367(a) for
the
definition
of
an active
trade or
business.
U.S.-source
income derived
in connection
with
an
active

trade
or business in Turkey will
not
qualify for benefits
under

paragraph
2
unless the
trade or
business
in Turkey
is substantial

in
relation to
the activity
in the United
States that gives
rise

to the
income. To
be
considered
substantial,
it is not necessary

that
the
Turkish trade or business
be as large as the
U.S.

income-generating
activity.
The
Turkish trade
or
business

cannot, however, in terms
of income, assets, or similar
measures,

be
only a very small percentage
of the size of the U.S. activity.

The substantiality
requirement is
intended to prevent
treaty-shopping
abuses.
For example,
a
third-country
resident
may want
to acquire
a U.S. company
that manufactures
television
sets for
worldwide markets; however,
if its country of residence
has no tax treaty
with the United States,
any dividends generated
by the investment would
be subject to a U.S.
withholding tax of
30 percent. Absent a substantiality test, the investor could
establish
a Turkish corporation
that would operate a small
outlet
:in Turkey to sell a few of the television sets manufactured by
the U.S. company. That Turkish corporation would then acquire
the U.S.
manufacturer.with capital
provided by the third-country
resident. It might be argued that the U.S.-source income is
generated from business activities in the United States related
to the television sales
activity of the Turkish
parent and that
the dividend income should be subject to U.S. tax at the 15
percent rate provided
by paragraph
2 a) of Article 10
(Dividends)
of the Convention.
However, the substantiality
test would not be
met in this example,
and, unless the
Turkish
company were a
qualified resident under another paragraph of this Article, the
dividends would remain
subject to withholding
in the United
States at a
rate of 30 percent.
-76­
TURKEY 264
Supp.
No. 6 (1998)

Income
is
considered
derived
"in connection"
with
an active
trade
or
business
in
the United
States
if, for
example,
the

income-generating
activity
in the United
States is "upstream,"
"downstream,"
or parallel
to that
conducted
in Turkey.
Thus, if
the
U.S. activity
consisted
of
selling
the
output
of a
Turkish
manufacturer
or
providing
inputs to
the manufacturing
process,
or
of selling
in the
United States
the
same types
of products
that

are
sold by
the Turkish
trade
or business
in
Turkey,
the
income
generated
by that
activity
would
be
treated
as
earned
in

connection
with
the
Turkish
trade
or business.

Income
is considered
"incidental"
to
the Turkish
trade
or

business if,
for example,
it arises
from the short-term
invest­
ment of
working capital of the Turkish
resident in U.S. securi­
ties.

An item of
income will be
considered
to be earned
in connec­
tion with
or to be incidental
to
an active trade
or business
in
Turkey
if the income
is derived
by the resident
of Turkey
claim­
ing the
benefits directly
or indirectly
through
one or more other
persons
that
are residents
of the
United
States.
Thus,
for
example, a Turkish
resident
could claim
benefits with
respect to
an
item of
income
earned by
a U.S.
operating
subsidiary
but
derived
by the
Turkish
resident
indirectly
through
a wholly-owned

U.S.
holding
company
interposed
between
it
and
the operating
subsidiary.

In general,
it is expected
that if
a person qualifies
for

benefits
under one
of the objective
tests
of
paragraphs 1,
3, 4

or 5, no
inquiry
will be
made into
qualification
for
benefits

under
paragraph
2. Upon satisfaction
of
any of the other
tests

of the Article (except paragraph
6), any income derived
by the

beneficial
owner from
the other Contracting
State
is entitled
to
treaty benefits. Under
paragraph 2, however, the
test is applied
separately for each item of income.

It is intended that the provisions of paragraph 2 will be

self-executing. Unlike the provisions of paragraph 6, discussed
below, claiming benefits under this subparagraph does not require
advance
competent authority ruling
or approval. The tax
authori­
ties may,
of course, on review, determine
that the taxpayer has

-77

TURKEY
265
Supp. No. 6(1998)

improperly
interpreted
the paragraph
and is not
entitled to
the

benefits claimed.

Paragraph 3

Under subparagraph
3 a), a company
that is a resident of
a

Contracting
State
is entitled
to treaty benefits if there
is

substantial
and regular
trading
in the company's
principal
class

of
shares on a
recognized stock
exchange.
Under subparagraph
3

b), the company will be entitled to benefits if it is wholly

owned, directly
or indirectly, by such a
publicly traded company.

If there is more than one company in the chain of ownership

between
the publicly traded company
and the company claiming

treaty
benefits, each company
in the chain must be a resident
of

a Contracting
State. Benefits are
granted to a company under

this paragraph
whether or not the ownership
and base erosion

tests of paragraph
1 or the active business connection
tests of

paragraph 2 are met.

The
term "recognized stock exchange" is defined in the

paragraph to mean, in the United States, the NASDAQ System and

any stock exchange registered as a national securities exchange

with the Securities Exchange
Commission and, in
Turkey, the

Istanbul Stock Exchange.
The
competent authorities
may, by

mutual agreement, recognize additional exchanges for purposes of

paragraph 3.

Paragraph 4

Paragraph 4 makes
clear that a Contracting
State, political

subdivision
or local
authority
thereof is entitled
to benefits.

A
government or governmental
entity
is unlikely
to allow itself

to be used for purposes of treaty shopping.

Paragraph 5

Paragraph
5 provides that
a not-for-profit organization

(including
a pension fund (providing
pensions
and other benefits

to employees
pursuant
to a plan)
and a private
foundation)
that

is a resident
of
a
Contracting
State
is entitled
to
benefits
from

the other
Contracting
State
if it
satisfies two
conditions:
(1)

-78­
TURKEY 266
Supp. No. 6 (1998)

it
is generally
exempt
from
tax in
its State
of residence
by

virtue
of
its not-for-profit
status,
and
(2) either
more
than
half
of its
support
is
expended
for the
benefit
of persons
that
qualify
for
benefits
under
paragraphs
1,
3,
4,
or
5, of
the

Article
(including
an individual
resident
of
a Contracting
State
or
a U.S.
citizen),
or
more
than half
of
its support
is
derived

from
such persons.

Thus, for example,
a pension
fund resident
in Turkey
would

be
entitled
to the
benefits
of the Convention
with
respect
to
any

income
it derives
from the
United
States if
more than
half of
its

beneficiaries
are
Turkish
residents.
A Turkish
charitable
organization
that
expends
its funds
principally
outside
of

Turkey,
but
raises
the
bulk of
its
revenues
from
contributions

from Turkish
residents,
would also
be
entitled
to U.S. benefits

with
respect
to
its
U.S. source
income.

Paragraph
6
Paragraph 6 provides that
a resident of a Contracting
State
that derives
income
from
the other
Contracting
State and is
not
entitled to the benefits of the Convention under other provisions
of the Article
may, nevertheless,
be
granted benefits
at the
discretion
of the
competent authority
of the
Contracting
State
in
which the income arises.
This paragraph implicitly
acknowledges
that
the mechanical tests of
the foregoing paragraphs
cannot

account
for every
case in which
a taxpayer
is not treaty

shopping.

This discretionary provision is included in recognition

that, with the increasing scope and diversity of international

economic relations,
there may be cases where
significant

participation by third country residents in an enterprise of a
Contracting
State is warranted
by sound business practice
or

long-standing business structures and does not necessarily

indicate a motive
of attempting to -derive unintended
Convention
benefits.

The
competent authority
of a State will
base a determination

under this paragraph
on whether the establishment,
acquisition,

or maintenance of the.person seeking benefits under the

-79­
TURKEY
267
Supp. No. 6 (1998)

Convention,
or
the
conduct
of
such
person's
operations,
has or

had
as one
of its
principal
purposes
the obtaining
of benefits

under
the
Convention.
Thus,
persons
that establish
operations
in

one of the States
with a
principal purpose
of obtaining
the

benefits
of the Convention
ordinarily
will not
be granted relief

under
paragraph 6.
The
competent
authority
may
determine
to grant
all
benefits

of the Convention,
or
it may determine
to grant
only
certain

benefits. For
instance,
it
may determine
to grant benefits
only

with respect to a particular
item
of income in
a manner similar

to paragraph 2. Further, the competent authority may set time

limits
on the duration of any
relief granted.

It is assumed that, for purposes of implementing paragraph

6, a taxpayer will be permitted to present his case to competent

authority
for an advance determination based on the facts, and

will not be required to wait until the tax authorities of one of

the
source State have determined
that benefits are denied.
In

these
circumstances, it is also expected that if the competent

authority determines that benefits are to be allowed, they will

be allowed retroactively to the time of entry into force of the

relevant treaty provision or the establishment of the structure

in question, whichever is later.

ARTICLE 23 (RELIEF FROM DOUBLE TAXATION)
This Article
describes
the manner
in which each
Contracting

State
undertakes to relieve double
taxation. The United
States

uses the foreign tax credit
method under its internal
law, and by

treaty. Turkey also
uses a foreign tax
credit method.

Paragraph I
The United States agrees,
in paragraph 1, to allow
to its

citizens and
residents
a credit against
U.S. tax for
income taxes

paid
or
accrued to Turkey.
Paragraph
1 also provides
that
the

taxes referred
to in subparagraph a)
of paragraph 2 and paragraph

3
of Article 2
(Taxes Covered)
are income
taxes for U.S.
purposes

(but see below
the description of Point
IX of the Protocol).

-80­
TURKEY 268
Supp. No. 6 (1998)

This provision
is based
on the Treasury
Department's
review of

Turkey's
laws.

The credit under the Convention is allowed in accordance

with the provisions and
subject to the limitations
of U.S. law,

as
that law may be amended over
time, so long as the
general

principle of this Article, ie., the allowance of a credit, is

retained.
Thus, although the
Convention provides for a
foreign

tax credit, the terms of the credit are determined by the

provisions, at
the time a credit is given,
of the U.S. statutory

credit.

Subparagraph b) provides for a deemed-paid credit, consis­
tent
with section
902 of the
Code, to
a U.S. corporation
in

respect of dividends received
from
a corporation resident
in the

other
Contracting State of which
the U.S. corporation
owns at

least 10 percent
of the voting
stock. This
credit is
for the tax

paid by or on behalf
of the Turkish corporation
on the profits

out of which the dividends are considered paid.

As
indicated,
the U.S.
credit under
the
Convention
is
subject
to the
various
limitations
of U.S.
law (=
Code sections
901 -908). For example,
the credit against U.S.
tax generally
is limited to the amount of U.S. tax due with respect to net

foreign source
income
within the relevant
foreign
tax credit

limitation
category (= Code section
904(a) and (d)), and the
dollar amount of the
credit is determined in accordance
with U.S.
currency translation rules
(see, e., Code section
986).
Similarly,
U.S. law
applies to
determine carryover
periods
for
excess
credits and other inter-year
adjustments. Point
VIII of
the Protocol
provides
that
a credit will
be allowed
against
the
alternative
minimum
tax (ANMT) for
taxes paid
to Turkey. However,
such credit
cannot offset
more than
90 percent
of the AMT.
Unused credits
(because
of the 90
percent
limitation)may
be
carried forward
or backward
to be used
against
other
years' AMT
liability.
Nothing
in the Convention
prevents
the limitation
of
the U.S.
credit from being applied
on a per-country basis,
an
overall basis, or to
particular categories of
income (
Code section
865(h)).
The
application
of
this
general
principle

to the determination of
the source of income for credit
purposes

is discussed below in connection with paragraph 3.

-81­
TURKEY
269
Supp. No. 6 (1998)

It is
not
U.S.
policy
to
allow
a
credit
by
treaty
for
taxes
that
are
not
creditable
under
the
Code.
Accordingly,
a credit
is
allowed
under
the
Convention
for
the
income
taxes
of
Turkey
specified
in
subparagraph
a) of
Article
2,
because
they
have
been
judged
to be
creditable
income
taxes
under
the Code.
The
withholding
tax under
Article
94
of Turkey's
Income
Tax
Law,
however,
is not
considered
an
income
tax
under
paragraph
1 of
Article
23
(see
Point
IX of
the
Protocol).
Article
94 requires
corporations
and
business
partnerships
to
pay a
gross
withholding

tax
on progress
payments
as they
are
made
during
a
construction

contract
of
longer
than
one
year's
duration.
That
tax
is
then

used
to offset
the
amount
of
corporate
income
tax
owed
upon

completion
of the
contract.
Issues
exist
about
whether
the

Article
94 withholding
tax
is creditable
either
as
a
tax
on net

income
under
section
901 or
as a
tax "in
lieu
of" a
net income

tax
under section
903 of
the Code
because
it
is
a gross
basis
tax

that
is paid
in addition
to
the corporate
income
tax.
The

Convention
does
not
independently
provide
for
a credit
of
this

long-term
construction
contract
withholding
tax.

Paragraph 2

Turkey
agrees,
in
paragraph
2, to
allow its
residents,
who

may
be taxed
by both
Contracting
States
under the
Convention,
a

credit
against
Turkish
tax
for
income
taxes
paid
to
the United

States.
The credit
under
the
Convention
is allowed
subject
to

the provisions
of
Turkish
taxation
laws.
The credit
cannot

exceed
the pre-credit
amount
of
Turkish income
tax
appropriate
to

the
income that
may be taxed
in the.
United States.

Paragraph
3
Where income
derived by
a resident
of a Contracting
State

may
be taxed in
accordance
with the Convention
in the
other

Contracting
State (except
where that
right is solely
on the basis

of citizenship
under the saving
clause of paragraph
3 of Article

1 (Personal Scope)), paragraph 3 provides that the item of income

is treated as arising
in the other Contracting
State for purposes

of
computing the Convention's
foreign tax credit. As a
general

matter, the source of income
for credit purposes,
determined as

described in the
preceding sentence, will
be consistent with the

-82­
TURKEY 270
Supp. No.
6 (1998)

source
rules
provided
in
the Code
for purposes
of
computing
the

foreign
tax credit
under the Code.
If, however,
there is
an

inconsistency
between
Convention
and
Code source
rules,
paragraph

3 provides
that
the
Code source
rules
will be used
to determine

the limits for
the allowance
of a credit under
the Convention.

Relation to other articles

By virtue of the exceptions
in subparagraph 4 a)
of Article

l(Personal
Scope), this Article
is not subject to the
saving

clause of paragraph 3 of Article 1. Thus, the United States will

allow a credit to its citizens and residents in accordance with

the
Article, even
if such credit were to provide
a benefit not

available under the Code.

Article 24 -NON-DISCRIMINATION
Article 24 assures nondiscriminatory taxation of similarly

situated persons. Paragraph 1 provides nondiscrimination rules

for nationals of a Contracting State, and paragraphs 2 thorough 6

provide nondiscrimination rules for residents of a Contracting

State. Generally, for purposes ,of this Article, non-discrimina­
tion means providing national treatment. This Article does not

require identical treatment
of taxpayers. There
may be

distinctions in treatment based upon differences in taxpayers'

circumstances.

Each of the relevant
paragraphs of the Article
provides a

standard
to determine
whether
two
persons are comparably
situated
and when, therefore, their
tax treatment should be
compared to
determine if discrimination
exists. Although
the actual words

differ from paragraph
to paragraph (e.g.,
paragraph 1 refers to

two nationals "in the same
circumstances,"
paragraph
2 refers to

two
enterprises
"carrying on the
same activities," and paragraph

4 refers
to two enterprises
that
are "similar"),
the common

underlying premise is that
if the difference in
treatment is

directly related
to a tax-relevant
difference
in
the situations

of the domestic
and foreign persons
being compared, that

-83­
TURKEY
271
Supp. No. 6 (1998)

difference
is
not to
be treated
as discriminatory
(e.ag.,
one
person is taxable
in a Contracting
State
on worldwide
income and

the other
is not, or tax
may be collectible
from one
person at
a

later stage,
but not from the other).
Other factors that can
lead to nondiscriminatory
differences in treatment
will be noted
in the discussions
of each paragraph.

The
operative paragraphs
of
the Article also
use different

language
to identify
the kinds
of differences
in
taxation

treatment
that will be
considered discriminatory.
For example,
paragraphs
1 and 4 speak
of "any taxation
or any requirement

connected therewith which is other or more burdensome," while

paragraph
2 specifies that a tax "shall not be less favorably

levied." Regardless of these differences in language, only

differences in tax treatment that materially disadvantage the

foreign person
relative to the domestic person are properly the
subject of the Article.

Paragraph 1
Paragraph 1 provides that a national of one Contracting

State (as
defined in subparagraph
1 f) of Article 3 (General

Definitions) may not be subject to taxation or connected require­
ments in the other Contracting State that-are other or more
burdensome than the taxes and connected requirements imposed upon

nationals
of that other State in the same circumstances. For

this
purpose, the phrase "same
circumstances" refers particularly
to residence, or taxation
on worldwide income. Nationals
of a
Contracting State are
afforded protection under
this paragraph
even if they
are not residents of either
Contracting
State.

Thus, a U.S. citizen
who is resident in a
third country is

entitled, under this paragraph, to the same tax treatment by

Turkey as
a Turkish citizen who is resident
in that third country

and
in the same
circumstances

Paragraph 1 does not, however,
obligate the United
States to
apply the same taxing
regime
to a Turkish citizen
who is not
resident
in the
United States and a U.S.
citizen who is not
resident in the United States.
Paragraph 1 applies
only when the
citizens of
the two States
are in the
same circumstances.
United
States citizens
who are not residents of
the United States but
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272
Supp. No. 6 (1998)

who are,
nevertheless, subject to
United States tax on their

worldwide income are not in the same circumstances with respect

to United States taxation as citizens of Turkey who are not

United States residents. Therefore, Article 24 would not entitle

a Turkish
citizen not resident
in the United
States to the net

basis
taxation
of U.S. source dividends
or
other investment

income that applies
to a U.S. citizen
not resident in the
United

States.

Paragraph 2
.Paragraph 2 provides that a permanent establishment in one
of the Contracting
States
of an enterprise
of the other
Contract­
ing State
may not be less
favorably
taxed in the first-mentioned

State than
an enterprise
of that
first-mentioned
State
that
is

carrying
on the
same.activities
in the first-mentioned
State.

Section
1446
of
the Code
imposes
on any partnership
with
income
that
is effectively
connected
with
a U.S.
trade
or
busi­
ness
the obligation
to withhold
tax on amounts
allocable
to a
foreign partner.
In the context
of the
Convention,
this obliga­
tion applies with respect
to a Turkish resident
partner's share
of the partnership
income
attributable
to
a U.S.
permanent
establishment.
There
is no similar
obligation with
respect to
the
distributive
shares of U.S.
resident partners.
It
is under­
stood, however,
that this
distinction is
not a form
of discrimi­
nation
within
the meaning
of either
paragraph
1 or 2. No
distinction
is
made between
U.S. and
Turkish partnerships,
since
the
law requires
that
both domestic
and foreign
partnerships
withhold
tax
in respect
of
the partnership
shares of
non-U.S.
partners.
The
requirement
to withhold
on
the Turkish
but not
the
U.S.
partners'
shares is not
discriminatory
taxation,
but, like
other
withholding
on
nonresident
aliens,
is merely
a reasonable
method
for
the
collection
of tax
from
persons
who
are not
continually
present
in
the United
States,
and as
to whom
it
otherwise
may
be difficult
for the United
States
to enforce
its
tax
jurisdiction.
(CL.
the
"backup
withholding"
rules
of section
3406, which
apply only
to U.S. citizens
and
residents
and serve
a
similar
purpose.)
If tax
has been
overwithheld,
the
partner
can,
as
in other
cases
of overwithholding,
file
for a
refund.
-85­
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Supp. No. 6 (1998)

The
fact
that
a U.S.
permanent
establishment
of
a Turkish

enterprise
is
subject
to U.S.
tax
only
on income
that is

attributable
to
the
permanent
establishement,
while
a U.S.

corporation
engaged
in the
same
activities
is
taxable
on its

worldwide
income
is
not,
in
iteslf,
a
sufficient
difference
to

deny
national
treatment
to
the
permanent
establishment.
There
are
cases,
however,
where
the
two
enterprises
would
not
be

similarly
situated
and
differences
in
treatment
may

be
warranted.
For
instance,
it would
not be
a
violation
of
the

nondiscrimination
protection
of paragraph
2 to
require
the

Turkish
enterprise
to
provide
information
in
a manner
that
may
be

different
from
the
information
requirements
imposed
on
a resident

enterprise
because
information
may
not
be as
readily
available

from
a
foreign
as
from
a domestic
enterprise.

The
relationship
between paragraph
2 and the
imposition
of

the
branch
tax
is
dealt
with
below
in the
discussion
of
paragraph

6.
Paragraph
3

Paragraph
3 prohibits
discrimination
in the allowance
of

deductions.
When
a resident
of one
of the
Contracting
States

pays
interest,
royalties
or
other disbursements
to a resident
of

the other
Contracting
State,
the
first-mentioned
State
must
allow

a deduction
for
those
payments
in computing
the taxable
profits
of the
enterprise
under the
same conditions
as if the
payment
had
been made
to a
resident
of
the
first-mentioned
State.
An excep­
tion
to this rule
is provided
for cases where
the provisions
of
paragraph 1 of
Article 9 (Associated
Enterprises),
paragraph
7 of
Article
11 (Interest)
or paragraph
6 of Article
12 (Royalties)
apply, because
these provisions
permit
the denial of
deductions

in certain circumstances
in respect of
transactions between

related
persons.
The term
"other
disbursements"
is
understood
to
include a reasonable
allocation
of executive
and general
adminis­
trative
expenses, research and
development expenses and
other

expenses incurred for the
benefit of a group of related
persons

that includes
the person
incurring
the
expense.

The rules under section 163(j) of the Code relating to

earnings-stripping
are not
discriminatory
within the
meaning of
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274
Supp. No.
6 (1998)

paragraph 3.
First, section 163(j) applies equally to interest
paid to domestic or
foreign related parties, as
interest paid to

all
domestic tax-exempt
entities related to the
payor corporation

(applying a greater than 50% ownership test) is subject to the

provision. Second,
as noted above, paragraph
3 does not apply to

payments
falling under Article
9(1) or 11(5), relating
to
transactions
not conducted in
accordance with the arm's
length

standard. As
noted in the
Commentary
to
Article 9
in
the OECD

Model, Article
9 is generally
considered
to be consistent
with

the application
of thin capitalization
rules. This would
include

the
application of
the rules under
Code section
163(j), as
long
as
such rules
continue to be
consistent
with the arm's
length

standard.

Paragraph
4
Paragraph
4 requires
that a Contracting
State
not impose
other or more
burdensome taxation
or connected
requirements
on an
enterprise
of that State
which is
wholly or partly
owned or
controlled,
directly
or indirectly,
by residents
of
the other
State, than
the
taxation
or connected
requirements
which
it
imposes
on other
similar
enterprises
of
that first-mentioned
State.
For
the reasons
discussed
above in
connection with
the

explanation
of paragraph
2 of
the Article,
it is
also understood

that application
of section
1446 of
the Code, which
prescribes

withholding tax
on non-U.S. partners,
is consistent with the

United
States'
obligations
under
paragraph
4.
It is
further
understood
that
the ineligibility
of a
U.S.

corporation
with nonresident
alien
shareholders
to
make an
election
to be
an "S"
corporation
does
not
violate
paragraph
4
of
this Article.
If
a corporation
elects
to be
an "S" corporation,
it generally
is
not subject
to income
tax,
and the
shareholders

take
into
account
their pro-rata
shares
of
the corporation's

items of
income,
loss,
deduction
or credit.
(The
purpose
of
the

provision
is to
allow
an individual
or
small
group
of
individuals

to conduct
business
in corporate
form
while
paying
taxes
at

individual
rates as
if the business
were
conducted
directly.)
A

nonresident
alien
does
not
pay
U.S. tax
on
a net basis,
and,

-87­
TURKEY
275
Supp. No. 6(1998)

thus,
does not generally take
into account items of
loss,
deduction
or credit.
Thus,
"S" corporation
status
is not

available for
corporations
with nonresident
alien
shareholders

because
such shareholders are not
net basis taxpayers. The
S

corporation regime
is also unavailalble
for corporations with
other
types of shareholders,
where
the purpose
of the regime
cannot be fulfilled or its
mechanics implemented.
For example,
corporations
with corporate
shareholders
are excluded
because
the
goal of permitting
individuals to conduct
a business in corporate
form at individual tax
rates would not be furthered
by their
inclusion.
Paragraph 5

Paragraph 5 makes
clear that nothing in the
Article obliga­
tes a Contracting State
to
grant to a resident
of the other
Contracting
State any personal
allowances, reliefs, or
other
reductions
for taxation purposes
that it grants to its own
residents on account of their civil status or family responsibil­
ities. Thus, if an
individual resident in Turkey
owns a Turkish
enterprise that has a permanent
establishment
in
the United
States, in assessing income tax on the profits attributable to
the permanent establishment, paragraph 2 of the Article would not
obligate
the United States
to allow to the Turkish
resident the
personal
allowances for himself
and his family that would
be
permitted
if the permanent establishment
were a sole proprietor­
ship owned and operated by a U.S. resident.
Paragraph 6
Paragraph 6 of the
Article specifies that
no provision of
the Article will prevent either Contracting State from imposing
the branch taxes described
in paragraph 4 of
Article 10 (Divi­
dends) and subparagraph 4 b) of Article 11 (Interest). Thus, even
if the branch taxes were
judged to violate the provisions
of
paragraph
2 or 4 of the Article, neither
Contracting State would
be constrained from imposing those taxes.
Paragraph 7
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6(1998)

As noted above,
notwithstanding the
specification of taxes

covered
by the Convention
in
Article 2 (Taxes
Covered),
the

nondiscrimination protection
offered by this Article extends to

taxes of every kind and
description imposed by
one of the

Contracting States
or a political subdivision or local
authority

thereof. Customs
duties are not considered to be taxes
for this

purpose.

Relation
to other
articles
The saving clause of paragraph 3 of Article 1 (Personal

Scope) does not apply to this Article, by virtue of the excep­
tions
in subparagraph 4 a) of
Article 1. Thus, for example,
a

U.S. citizen who is resident in Turkey may claim benefits in the

United States
under this
Article.

Article
25 -MUTUAL
AGREEMENT PROCEDURE
Article 25 provides for cooperation between the competent

authorities
of the Contracting
States
to resolve
disputes
that

may
arise under the
Convention
and to resolve
cases
of
double

taxation
not
provided
for in the Convention.
The
competent

authorities
of the two States
are identified in
subparagraph 1 h)

of Article 3 (General Definitions).

Paragraph 1
Paragraph
1 provides
that
when a person
considers
that the
actions
of one or both
Contracting
States result
or will result
for him
in taxation that is not
in accordance with the
Convention,
he may present
his case to
the competent
authority of
the
State of which he
is a resident or citizen.
It is not
necessary
for a person
first to have
exhausted
the remedies
provided
under
the national
laws
of the Contracting
States
before
presenting a
case to the
competent authorities.
(On
the other
hand, it
may be
necessary
for the
person
to present
his case
to
competent
authority
in order
to claim
certain
treatment
under
domestic
law, such
as
the
right to
claim foreign
tax
credits
in
the
United States.
See.
e.,
Rev. Rul.
92-75,
1992-2 C.B.
197.)
-89­
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277
Supp. No. 6(1998)

Paragraph 2
Paragraph
2 provides that if
the competent authority
of
the

Contracting
State to which
the case is
presented judges
the case
to have
merit, and
cannot
reach a unilateral
solution,
it shall
seek agreement
with the
competent
authority of the
other State
to

avoid
taxation not
in accordance
with the
Convention.
If
agreement
is reached
under
this
provision, it
is to be imple­
mented, and
any agreed
refund made,
even if implementation
is
otherwise barred
by the statute of limitations
or by some other

procedural limitation,
such as a closing agreement.
Because
subparagraph

2 a) of Article 1 (Personal Scope) provides that the Convention

cannot operate
to increase a taxpayer's
liability, time or other

procedural limitations can be overridden under this paragraph

only for the purpose of making refunds and not to impose

additional tax.

In order for
time or procedural limitations
to be overridden

to give effect to a
competent authority agreement,
however, the
competent authority of the
second State (i.., not
the State to
which
the taxpayer first brings
the case under paragraph
1) must
have been notified
of the existence of the case
within five years
from the end of the taxable
year to which the case
relates. The
notification
may be given by the competent
authority of the other
Contracting State, the taxpayer that has brought the case, or a
relevant related
party. The person giving
notice may do so at
any time after a case is known to exist, and need not wait until

the case is fully resolved in the first-mentioned State. Thus,
as soon as the presence of a case in the first State is known,

the statute of limitations can be held open in the other State by

giving notification.

Paragraph X of the Protocol makes clear that if a taxpayer

is entitled to a refund from Turkey as a result of a mutual

agreement
under paragraph
2, such refund
must be claimed within
a

period
of one year from the time
the taxpayer has been notified

by the tax administration
of the fact that
the mutual agreement

has
resulted in
a
refund.

Paragraph 3
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Supp. No.
6 (1998)

Paragraph
3 authorizes the
competent authorities to
seek to

resolve
difficulties or doubts that
may arise as to the applica­
tion or interpretation
of the Convention.
The paragraph includes

a non-exhaustive list
of examples of the kinds
of matters about

which
the competent authorities may reach agreement. With the

exception of subparagraph f), this list is purely illustrative of

authority that is
already implicitly given by
the introductory

sentence of paragraph 3. The competent authorities may, for

example, agree to the same attribution of income, deductions,

credits or allowances between an enterprise in one Contracting

State
and its permanent establishment
in the other (subparagraph

a)) or between related persons (subparagraph b)). These alloca­
tions are to be made in accordance with the arm's length

principles
of Article 7 (Business
Profits) and Article
9

(Associated
Enterprises).
Agreements reached under
these

subparagraphs
may include
agreement on a methodology
for

determining
an
appropriate transfer
price,
and upon an acceptable

range of results under that
methodology. They may
also agree to

apply
this methodology
and
range of results
prospectively
to

future
transactions
and time periods (seea,
in the application of
advance pricing
agreements). The competent
authorities may also
agree on standards
for determining when
a relationship between
related
parties
qualifies
as
a legitimate
cost-sharing
arrange­
ment, and
will not, therefore,
if it
conforms to those
standards,
be
treated
as a non-arm's-length
transaction.
As indicated
in subparagraphs
c),
d) and e),
the competent

authorities
may also
agree
to settle
a
variety of
conflicting

applications
of the Convention.
Thus, they may agree
to

characterize
particular
items
of income in
the same way
(subpara­
graph c)), to apply the
same source rules to particular
items of

income (subparagraph
d))
and to use
a common meaning
of a term

(subparagraph
e)).

Subparagraph
f) of paragraph
3 authorizes
the
competent

authorities
to
increase any
dollar
amounts
referred to
in
the

Convention to
reflect economic
and monetary
developments.
This

refers to
Article 17 (Artistes and
Athletes).
The rule would

permit the competent
authority, for example,
to increase the

$3,000
exemption
threshold
for
entertainers
after
the Convention

has
been in
force for
some time
and if
inflation
rates
at that

-91­
TURKEY 279
Supp.No. 6 (1998)

time have
been
such
as to
make the
$3000
unrealistically
low
in

terms of
the original
objectives
intended
in setting
the thresh­
old;
the competent
authorities
in this
case
could
agree
to a

higher
threshold
without
the
need for
formal
amendment
to the

treaty
and ratification
by the
Contracting
States.
This
authori­
ty
can be exercised,
however,
only to the
extent necessary
to

restore
the original
objectives.
Because
of paragraph
2 of

Article
1 (Personal Scope),
this provision
can be
applied only
to

the benefit
of taxpayers
(i.e.,
only to increase
thresholds,
not

to reduce them).

Subparagraph
g)
makes
clear
that
the
competent
authorities:

can agree
to the common
application,
consistent
with the objec­
tive of avoiding
double
taxation, of
procedural provisions
of the

internal laws
of the Contracting States,
including those regard­
ing penalties, fines
and interest. One of the
more important

elements
that may be dealt
with by the competent
authorities

under this subparagraph is the question whether interest will be

charged on deficiencies
and paid on refunds growing
out of

competent
authority adjustments.
A mismatching of the rules
of

the Contracting
States on such matters
can lead to unresolved

double taxation (if the State making the initial adjustment

charges interest on
the deficiency but the
State making the

secondary, correlative, adjustment does not pay interest) or to a

windfall benefit (if the former State does not charge interest,

but
the latter State pays interest).
It would be useful
for the

competent authorities to
be able to agree to a bilateral
proce­
dure regarding the
charging and payment of interest
in a manner

that will avoid both double tax and windfalls. It might be

agreed, as a general matter, for example, that interest will be

charged by a Contracting State on deficiencies only when the

other Contracting State
pays interest on refunds.
It might also

be possible, even when
a general solution cannot
be found, for

the
competent authorities
to
agree on a procedure
for particular

cases. A similar difficulty
may arise from currency
fluctuations

associated
with
adjustments
to income.
If exchange
rates from

different time periods (ea., the time of the original

transaction
and the
time of the
adjustment)
are used, the
amount

of
the allocation
of income and
the correlative
adjustment
can be

affected.
Competent
authorities may
seek agreement
on where
the

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TURKEY 280
Supp.
No. 6
(1998)

risks of currency fluctuation should be borne and how to take

account of that fluctuation in reaching a mutual agreement.

Finally, paragraph 3 authorizes the competent authorities to

consult for the purpose
of eliminating double
taxation in cases

not provided for
in the Convention. This
provision is intended

to permit the competent
authorities to implement the
Convention

in particular cases
in a manner that is consistent
with its ex­
pressed general
purposes.
It permits
the competent
authorities

to deal
with cases that are within
the spirit of the provisions

but that
may not
be
specifically
addressed.
An
example of
such

a case
might be
double
taxation
arising from
a transfer pricing

adjustment
between
two permanent
establishments
of a third-count­
ry resident, one
in the United States, and
one in Turkey. Since

no resident
of a
Contracting
State
is involved
in the
case (both

permanent
establishments
being residents
of the third
State),
the

Convention
does
not, by
its terms,
apply,
but the
competent

authorities
may, nevertheless,
use the
authority
of the
Conven­
tion to
seek
to
prevent
the
double
taxation.
The provision
is

not,
however,
intended
to authorize
the
competent
authorities
to

resolve
problems
of
major policy
significance
that
normally
would

be the subject
of
negotiations
between
the
Contracting
States

themselves.

Agreements
reached
by
the competent
authorities
under

paragraph
3 need
not
conform
to
the internal
law provisions
of

either Contracting State.

Paragraph
4

Paragraph
4
provides
that the
competent
authorities
may

communicate
with
each other
directly
for the
purpose
of reaching

an
agreement.
This
makes
clear
that
the
competent
authorities
of

the two
Contracting
States
may
communicate
without
going
through

diplomatic
channels.
Such
communication
may
be in
various
forms,

including,
where
appropriate,
through
face-to-face
meetings
of

representatives
of the
competent
authorities.

Relation
to
other articles

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281
Supp.
No. 6
(1998)

By virtue
of
the
exceptions
in
paragraph
4 a) of
Article
1

(Personal
Scope),
this
Article
is not
subject
to the saving

clause
of paragraph
3 of
that Article.
Thus,
rules,
definitions,
procedures,
etc.,
that
are
agreed
upon
by the
competent
authori­
ties
under
this
Article
may
be applied
by
the Contracting
States

with
respect
to
their
citizens
and residehts
even
if they
differ

from
the comparable
internal
law provisions.
Similarly,
as

indicated
above,
internal
law
may be overridden
by a Contracting

State
to provide
refunds
of tax
to
its citizens
or
residents

under
this
Article.

Article
26
-EXCHANGE
OF
INFORMATION
Article
26
provides
for the
exchange
of information
between

the competent
authorities
of the
Contracting
States.
The infor­
mation
to be exchanged
is
that necessary
for
carrying
out
the

provisions
of
the Convention
or the domestic
laws
of
the
United

States
or Turkey
concerning
the taxes covered
by the Convention.
This
article
covers
all taxes
imposed
at the national
level
by

the two
Contracting
States.

Paragraph
1
Paragraph
1 states
that information
exchange
is not
re­
stricted by Article
1 (Personal Scope) .
This means that informa­
tion
may be requested
and
provided under
this Article
with
respect
to persons
who are not
residents of
either Contracting

State.
For example, if a third-country
resident
has a permanent
establishment in Turkey,
and that permanent establishment
engages
in transactions with a U.S. enterprise, the United States could

request information
with respect to that permanent establishment,

even though it
is
not a resident of either
Contracting State.

Similarly,
if a third-country resident maintains a bank account

in Turkey, and the Internal Revenue Service has reason to believe

that funds in
that account should have been
reported for U.S. tax
purposes but have not been so reported, information can be

requested from Turkey with respect to that person's account.

The taxes covered
by the Convention
for purposes of this

Article constitute a broader category of taxes than those

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TURKEY
282
Supp. No. 6 (1998)

referred
to
in Article
2 (Taxes
Covered).
As
provided
in

paragraph
4,
for purposes
of
exchange
of
information,
covered

taxes
include
all
taxes
imposed
by
the Contracting
States.

Exchange
of information
with respect
to
domestic
laws
is

authorized
insofar
as
the taxation
is not
contrary
to the

Convention.
Thus,
for
example,
information
may
be exchanged
with

respect
to a
covered
tax,
even if
the
transaction
to
which
the

information
relates
is a purely
domestic
transaction
in
the

requesting
State
and,
therefore,
the
exchange
is not
made
for
the

purpose
of carrying
out
the Convention.

Paragraph
I also provides
assurances
that any
information
exchanged
will
be treated
as secret,
subject
to
the same
disclo­
sure
constraints
as information
obtained
under the
laws
of the
requesting
State.
Information
received
may
be disclosed
only
to
persons, including
courts
and administrative
bodies,
concerned
with
the assessment,
collection,
enforcement
or
prosecution
in
respect
of the
taxes to
which the
information
relates,
or
to
persons
concerned
with the
administration
of
these
taxes.
The
information must be
used by these persons in
connection with
these designated
functions.
Persons concerned
with
the adminis­
tration
of
taxes in
the United
States
include
legislative
bodies,
such as the
tax-writing
committees
of Congress and
the General
Accounting Office.
Information
received
by these bodies
is for
use in the performance of their role in overseeing the
administration
of U.S. tax laws.
Information received may
be
disclosed in
public court
proceedings
or in judicial
decisions.
It is contemplated
that the Contracting
States will utilize

Article
26 to exchange
information
on a routine
basis, on request

in relation to. a specific case, or spontaneously.

Paragraph 2
Paragraph 2 explains that the obligations undertaken
in
paragraph
1 to exchange information
do not require a Contracting
State to carry out administrative measures that are at variance
with the laws or administrative practice of either State. Nor is

either State obliged to supply information not obtainable under

the laws or administrative
practice of
either State, or to

disclose trade secrets
or other information,
the disclosure of

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Supp. No. 6 (1998)

which
would
be
contrary
to public
policy
(ordre
public)
.
However,
either
Contracting
State
may, subject
to the
limitations

of
this
paragraph
and
its
internal
law,
provide
information
which

it
is not
obligated
to provide
under
this
Article.

It
is
understood
that
information
contained
in
banking

documents,
including,
for
example,
banking
documents
pertaining

to
third
persons
involved
in
transactions
with
residents
of

either
Contracting
State,
will
be made
available
under
this

Article.
Thus,
any domestic
laws regarding
bank
secrecy
will
not

be invoked
to
prevent
or
undermine
the
effective
exchange
of

information
or
documents
under
this
Article.

Paragraph
3

Paragraph
3 provides
that
when
information
is
requested
by
a

Contracting
State
in accordance
with
this
Article,
the
other

Contracting
State
is
obligated
to
obtain
the requested
informa­
tion
as
if
the tax
in
question
were
the tax
of
the
requested

State,
even
if
that
State
has no
direct
tax
interest
in the
case

to which
the-request
relates.
The
paragraph
further
provides

that
the
requesting
State
may specify
the
form
in
which
informa­
tion is
to be
provided.
The
requested
State
should,
if possible

under
its
laws
and administrative
practice,
provide
the
informa­
tion
in the
form requested
so
as to permit
the
exchange
to help

carry
out
the
purposes
of
the Article.
If,
for example,
the

requesting
State
intends
to
use the
requested
information
in
a

judicial
proceeding,
it may
wish
to have
the
information
in the

form
of
depositions
of
witnesses
or authenticated
copies
of

original
documents.

Paragraph 4

Paragraph
4 provides
that
the
competent
authorities
may

exchange
information
concerning
every
tax
imposed by
a Contract­
ing State, not
just the taxes
listed
in Article 2
(Taxes Cov­
ered).
Customs
duties are
not
considered
taxes
for
this purpose.

Article
27 -
MEMBERS OF
DIPLOMATIC
MISSIONS
AND
CONSULAR
POSTS
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284
SuO.
No. 6(1998)

Article
27
confirms
that
any
fiscal
privileges
to
which

members
of
diplomatic
missions
or
consular
posts
are
entitled
under
general
provisions
of
international
law
or
under
special

agreements
will
apply
notwithstanding
any
provisions
to
the

contrary
in
the Convention.
The
agreements
referred
to
include
any
bilateral
agreements,
such
as
consular
conventions,
that

affect
the
taxation
of
diplomats
and
consular
officials
and any

multilateral
agreements
dealing
with
these issues,
such as
the

Vienna
Convention
on
Diplomatic
Relations
and
the
Vienna
Conven­
tion
on
Consular
Relations.
This
Article
is
consistent
with
the
provisions
of paragraph
2 of Article
1
(Personal
Scope).
The
saving
clause
of paragraph
3
of Article
1 (Personal

Scope)
does
not
apply,
by
virtue
of
the
exceptions
in subpara­
graph
4 b) of
Article
1,
to override
any
benefits
of
this Article
available
to
an individual
who is
neither
a citizen
of
the United

States
nor has
immigrant
status
there.

Article
28 -
ENTRY INTO FORCE
The Convention
is
subject
to ratification.
Instruments
of

ratification
will
be exchanged
at Ankara.

The
Convention
enters
into force
on
the date
on which
the

instruments
of ratification
are exchanged.
Its provisions
with
respect
to
withholding
taxes will
have
effect
for
amounts
paid
or

credited
on or
after
January
1
following
the date
on which
the

instruments
are
exchanged.
With
respect
to other
taxes,
the
provisions
will have
effect for
taxable periods
beginning
on or

after
that same
date.
Thus,
for example,
if instruments
of

ratification
are
exchanged
in November,
1996,
the
provisions
of
the Convention
will
take
effect
as of
January
1,
1997
for

withholding
taxes
on amounts
paid or
credited
on or after
that

date,
and for taxable
periods
beginning on
or after
January
1,

1997
for
other
taxes.

Article
29
-TERMINATION
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285
Supp. No. 6(1998)

The Convention
shall remain in force
indefinitely unless

terminated
by one of the
Contracting
States. Either
State may

terminate the Convention at any time after five years from the

date on which
it enters into force by giving at least six months

prior
notice through diplomatic channels. In that event, the

Convention will
cease to have effect with respect to taxes

withheld
at the source for amounts
paid or credited on or
after

January 1 following
the expiration
of the six-month period, and

with respect to other
taxes for taxable periods
beginning on or
after January 1 following the expiration of the six-month period.
Thus, for example,
if notice of termination is
given in July or

later
of a calendar year, the
termination will not be effective

as of the following January
1 but as of the second
January
1

because the
notice period must continue for at least six months.

Protocol

The provisions of the Protocol are an integral part of the

Convention.
Each has been described
in the discussion
of the

article to
which it refers.

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No. 6 (1998)

Ukraine