U.S.-Turkey Tax Treaty Benefits for Turkish Individuals and Companies

The United States and Turkey signed a Convention for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income in 1996, which entered into force in 1997 (the "Treaty"). The Treaty governs the tax treatment of income flowing between the two countries and provides important protections for Turkish residents earning U.S.-source income and for Turkish companies with U.S. operations or investments.

Understanding the Treaty is essential for:

• Turkish individuals receiving dividends, interest, royalties, or capital gains from U.S. sources
• Turkish companies with U.S. subsidiaries, branches, or joint ventures
• Turkish professionals providing services in the United States
• Turkish students and researchers at U.S. institutions

This guide covers the Treaty's most important provisions and their practical application.

Treaty benefits are available to residents of Turkey or the United States. A "resident" for treaty purposes is a person or entity that is subject to tax in that country by reason of domicile, residence, place of management, or similar criteria.

Key point: A Turkish company incorporated in Turkey and subject to Turkish corporate tax is generally a Turkish resident for treaty purposes. A Turkish national living in the United States who is a U.S. tax resident (green card holder or substantial presence test) is generally a U.S. resident for treaty purposes — not a Turkish resident — and cannot claim Turkish resident treaty benefits.

The Treaty contains a Limitation on Benefits (LOB) article that prevents "treaty shopping" — the use of the Treaty by third-country residents who route income through Turkey or the U.S. to obtain treaty benefits they would not otherwise be entitled to.

To qualify for Treaty benefits, a Turkish company must generally be:

• Publicly traded on a recognized Turkish stock exchange, or
• At least 50% owned by Turkish residents (individuals or qualifying entities), or
• Engaged in an active trade or business in Turkey that is substantial relative to the U.S. activity generating the income

Turkish companies that are majority-owned by non-Turkish, non-U.S. residents should analyze LOB compliance before claiming Treaty benefits.

One of the Treaty's most valuable benefits is the reduction of U.S. withholding tax on U.S.-source income paid to Turkish residents. Without the Treaty, the standard U.S. withholding rate on most passive income is 30%. The Treaty reduces these rates significantly.

Note: The U.S.-Turkey Treaty's dividend rate (15%) is less favorable than some other U.S. tax treaties (which provide 5% for parent companies). Turkish companies receiving U.S. dividends should confirm the applicable rate based on their ownership percentage and LOB status.

Practical application: A Turkish bank lending to a U.S. borrower can reduce U.S. withholding on interest payments from 30% to 10% under the Treaty.

Practical application: A Turkish technology company licensing software or patents to a U.S. company can reduce U.S. withholding on royalty payments from 30% to 10% under the Treaty.

To claim reduced withholding rates, a Turkish resident must:

1. Provide the U.S. payer with IRS Form W-8BEN (individuals) or IRS Form W-8BEN-E (entities)
2. Certify their Turkish residency and eligibility for Treaty benefits
3. Provide a U.S. Taxpayer Identification Number (TIN) if required

The U.S. payer is then authorized to withhold at the reduced Treaty rate rather than the 30% statutory rate.

Under the Treaty, a Turkish company is generally subject to U.S. income tax on its business profits only if it has a permanent establishment (PE) in the United States. Without a PE, U.S.-source business profits are taxable only in Turkey.

A PE is a fixed place of business through which the business is wholly or partly carried on. Examples include:

• A place of management
• A branch
• An office
• A factory or workshop
• A mine, oil well, or other place of natural resource extraction

Construction PE: A building site or construction or installation project constitutes a PE only if it lasts more than 12 months. Turkish construction companies working on U.S. projects of less than 12 months may avoid U.S. PE status.

Agency PE: A dependent agent who habitually exercises authority to conclude contracts on behalf of the Turkish company creates a PE. An independent agent acting in the ordinary course of business does not.

The Treaty specifically excludes from PE status:

• Use of facilities solely for storage, display, or delivery of goods
• Maintenance of a stock of goods solely for storage, display, or delivery
• Maintenance of a fixed place of business solely for purchasing goods or collecting information
• Maintenance of a fixed place of business solely for preparatory or auxiliary activities

Practical application: A Turkish company that maintains a U.S. warehouse for storing and shipping goods to U.S. customers — but conducts no other U.S. business activities — generally does not have a U.S. PE and is not subject to U.S. income tax on its business profits.

Under the Treaty, gains from the sale of property (other than real property) by a Turkish resident are generally taxable only in Turkey, not in the United States — unless the Turkish resident has a U.S. PE and the property is connected to that PE.

Gains from the sale of U.S. real property are taxable in the United States regardless of the Treaty. The U.S. Foreign Investment in Real Property Tax Act (FIRPTA) imposes a withholding obligation on the buyer when a foreign person sells U.S. real property. The Treaty does not override FIRPTA.

Gains from the sale of shares in a company whose assets consist primarily of U.S. real property are also subject to U.S. tax under FIRPTA, regardless of the Treaty.

A Turkish resident providing independent professional services (consulting, legal, accounting, engineering) in the United States is taxable in the United States only if they have a fixed base regularly available to them in the U.S. (analogous to a PE for businesses).

A Turkish resident employed by a Turkish company and temporarily working in the United States is exempt from U.S. income tax on their employment income if:

1. They are present in the United States for 183 days or fewer in any 12-month period, and
2. The remuneration is paid by (or on behalf of) an employer who is not a U.S. resident, and
3. The remuneration is not borne by a U.S. PE of the employer

Practical application: A Turkish employee sent to the U.S. for a short-term project (under 183 days) by a Turkish employer with no U.S. PE generally owes no U.S. income tax on their salary.

Directors' fees paid by a U.S. company to a Turkish resident director may be taxed in the United States.

The Treaty provides specific exemptions for Turkish students and researchers at U.S. educational institutions:

Students: A Turkish student studying at a U.S. university is exempt from U.S. tax on payments received from abroad for maintenance, education, or training — for up to five years.

Researchers/Professors: A Turkish professor or researcher visiting a U.S. university or research institution is exempt from U.S. tax on their remuneration for up to two years.

Turkish residents who file U.S. tax returns (e.g., because they have U.S.-source income or a U.S. PE) can claim Treaty benefits by:

1. Disclosing the Treaty position: Filing IRS Form 8833 (Treaty-Based Return Position Disclosure) with the U.S. tax return
2. Identifying the Treaty article: Specifying which Treaty article supports the claimed benefit
3. Providing supporting documentation: Maintaining records of Turkish residency and LOB compliance

Failure to disclose a Treaty-based position when required can result in penalties.

Turkish investors considering U.S. investments should analyze:

• Whether to invest directly or through a U.S. entity
• The Treaty's impact on dividend repatriation (15% withholding vs. 30% statutory rate)
• Whether the investment creates a U.S. PE
• FIRPTA implications for real estate investments

Turkish companies with U.S. subsidiaries must comply with U.S. transfer pricing rules (IRC Section 482), which require intercompany transactions to be priced at arm's length. The Treaty's associated enterprises article provides a framework for resolving transfer pricing disputes through the Mutual Agreement Procedure (MAP).

If a Turkish company believes it has been taxed in a manner inconsistent with the Treaty, it can request MAP assistance from the Turkish tax authority (Gelir İdaresi Başkanlığı), which will then engage with the IRS to resolve the dispute. MAP is an important tool for resolving double taxation that cannot be resolved through unilateral Treaty claims.

The U.S.-Turkey Tax Treaty provides meaningful benefits for Turkish individuals and companies with U.S.-source income or U.S. business activities. Reduced withholding rates on dividends, interest, and royalties can significantly reduce the tax cost of cross-border transactions. The PE concept protects Turkish companies from U.S. income tax on business profits unless they have a substantial U.S. presence.

Effective use of the Treaty requires careful analysis of residency, LOB compliance, and the specific income category at issue. ULF New York advises Turkish companies and individuals on U.S.-Turkey tax treaty planning, withholding tax compliance, and cross-border tax structuring. Contact us to evaluate your Treaty position.

This article is for informational purposes only and does not constitute legal or tax advice. Tax laws and treaty interpretations are subject to change; consult qualified U.S. and Turkish tax counsel for advice specific to your situation.