Article 2. TAXES COVERED

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

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**_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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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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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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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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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.