U.S. income tax treaty with Turkey

Treaty documents and protocols

The agreement was signed at Washington on March 28, 1996, together with a Protocol that forms an integral part of it. The IRS lists the Income Tax Treaty and a Technical Explanation, both dated 1996, and the Protocol is published with the treaty text.

Under Article 28 the agreement takes effect for taxes withheld at source on payments from January 1 of the year after it entered into force, and IRS Table 3 shows a general effective date of January 1, 1998.

Convention article structure

The convention contains 29 numbered articles, followed by a Protocol. It covers residence, permanent establishment and the tax treatment of different kinds of income.

• Article 1, Personal Scope, addresses who the agreement applies to.^[2]
• Article 22, Limitation on Benefits, sets out conditions relevant to a person's entitlement to treaty relief.^[2]
• Article 26, Exchange of Information, concerns information exchanged by the countries' competent authorities.^[2]

Dividends, interest and royalties

Article 10 allows dividends paid by a resident of one country to a resident of the other to be taxed in the recipient's country. It also permits taxation in the payer's country under that country's law. When the beneficial owner is resident in the other country, the source-country ceiling is 15 percent of the gross dividend if a company owns at least 10 percent of the payer's voting stock. The stated ceiling is 20 percent in other cases, subject to specific rules for investment companies and real estate investment entities.^[2]

For dividends paid by a U.S. person that is a Regulated Investment Company, the 20 percent rule applies instead of the 15 percent company ownership rate. For dividends from certain real estate investment entities, the 20 percent rate applies only when the beneficial owner is an individual holding less than a 10 percent interest. Otherwise, the applicable rate under domestic law applies. The article has further provisions for dividends attributable to a permanent establishment or fixed base.^[2]

Article 11 permits interest arising in one country and paid to a resident of the other to be taxed in the recipient's country. The source country may also tax the interest under its law. If the beneficial owner is resident in the other country, the general ceiling is 15 percent of the gross interest. For interest derived from a loan granted by a financial institution, including a bank, savings institution or insurance company, the ceiling is 10 percent. Separate paragraphs specify exemptions for certain government-related interest and address cases where interest is connected to a permanent establishment or fixed base.^[2]

Article 12 handles royalties the same way: the recipient's country may tax them, and the source country may also tax them under its law, subject to a ceiling when the beneficial owner resides in the other country. The ceiling is 10 percent for royalties tied to copyright, patents, trademarks, designs, plans, processes or related information. For royalties from use of industrial, commercial or scientific equipment, it is 5 percent.

Residence and dual residence

Article 4 generally defines a resident of a country as a person liable to tax there because of domicile, residence, place of management, place of incorporation or a similar criterion. For income of a partnership, similar pass-through entity, estate or trust, the definition applies only to the extent that the income is subject to tax in that country as the income of a resident. A person liable to tax there only on income sourced there is excluded from this definition.^[2]

For an individual who qualifies as a resident of both countries under the first paragraph, the treaty applies a sequence of tests. The individual is assigned to the country where a permanent home is available. If a home is available in both, the test turns to closer personal and economic relations. If that cannot be determined, or there is no permanent home in either country, habitual abode is considered. If habitual abode is in both countries or neither, nationality applies. If the individual is a national of both countries or neither, the competent authorities are to settle the matter by mutual agreement.^[2]

Exchange of information

Article 26 provides for the countries' competent authorities to exchange information needed to carry out the convention or domestic tax laws covered by it, when the taxation is consistent with the convention. The exchange provision is not limited by Article 1's personal scope. Information received is subject to the receiving country's domestic rules for handling such information and may be disclosed only to specified persons or authorities involved in tax administration or related proceedings. Those recipients may use it only for those purposes.^[2]

Information exchange does not require a country to take administrative measures that conflict with the laws or administrative practice of either country. It also does not require supplying information unavailable under those laws or normal administrative practice. A separate paragraph addresses how a country handles a request and the form of information that may be provided when specifically requested.^[2]

Limitation on benefits

Article 22 is a limitation on benefits provision concerning when a person may receive relief under the convention. Its first paragraph sets ownership and income-use conditions for a resident person other than an individual deriving income from the other country. Other paragraphs describe circumstances for active business, companies with shares traded on a recognized stock exchange, governments and certain not-for-profit organizations. The final paragraph permits the competent authority where income arises to grant benefits in a case that does not qualify under the other provisions of the article.^[2]

Protocol provisions

For residence, the Protocol says the citizenship and permanent residence tests in Article 4 are applied to decide whether a citizen of either country is resident of the United States, Turkey or a third country. For business profits, it allows profits from sales or activities of the same or similar kind as those of a permanent establishment to be attributed to it where a proof condition in the Protocol about how those sales or activities were structured is met, and it denies deductions for interest, royalties and commissions paid to the head office or other establishments, other than reimbursements of actual expense.^[2]

It treats income from installations, drilling rigs and ships used to explore or exploit natural resources as business profits or independent personal services income, with a 183 day test for taxing service income. It states that income or gain may be attributable to a permanent establishment even if deferred until after it has closed, and that for Turkey dividends include distributions from securities investment funds and real estate investment funds.^[2]

For relief from double taxation, the United States allows a credit against the alternative minimum tax for Turkish tax, limited to 90 percent of that tax with a carryover. Turkey's withholding tax under Article 94 of its Income Tax Law is not treated as an income tax by the Protocol, so whether it is creditable depends on U.S. standards. For the mutual agreement procedure, a Turkish taxpayer must claim any refund within one year after being notified of the result.^[2]

Relevance for U.S. citizens

The agreement's citizenship language is directly relevant because it says the United States may tax its citizens by reason of citizenship as if the agreement had not come into effect, subject to a stated exception.

Treaty treatment varies by country and by item of income.

Related reading

For comparison, see the U.S. income tax treaty with Greece.

Questions and answers

Related resources

Related glossary terms

• Treaty rate table: A treaty rate table summarizes income categories and tax rates or exemptions under U.S. income tax treaties. The IRS explains the tables' scope and limits.
• Tax residence: Tax residence describes a person's status in a country for tax purposes. Treaty texts address how it affects income items and applicable treaty requirements.
• Income tax treaty: An income tax treaty may provide reduced U.S. tax rates or exemptions for specified U.S.-source income. Rules vary by country and income type under each treaty.

Related articles and guides

• U.S. income tax treaty with Greece: The U.S.-Greece income tax convention: the IRS-listed documents, selected provisions on income and residence, information exchange, and U.S. citizen treatment.
• U.S. income tax treaty with Spain: The U.S. income tax treaty with Spain is the 1990 convention as amended by a 2013 Protocol, which replaced the articles on income from investments in full.

Related pages

• Tax treaties: All treaty partners listed by the IRS.
• Treaty documents lookup: Find IRS-listed treaty documents by country.