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.

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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)

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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

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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 hightaxed 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

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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

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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.

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   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

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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).

Paragraph 6

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).