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

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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 baseerosion 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

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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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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.

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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

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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)

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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

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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.