Article 8 - SHIPPING AND AIR TRANSPORT

   This Article provides rules governing the taxation of
profits from the operation of ships and aircraft in international

traffic. The term "international traffic" is defined in subpara­ graph 1 i) of Article 3 (General Definitions).

   Paragraph I

   Paragraph 1 provides that profits of an enterprise of a
Contracting State from the operation of ships or aircraft in

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international traffic shall be taxable only in the country of
residence.

Paragraph 2

   Paragraph 2 deals with certain income from the rental of

ships or aircraft. As indicated in paragraph 5 of the OECD

Commentaries to Article 8, income of an enterprise of a Contract­
ing State from the rental of ships or aircraft on a full basis
(i., with crew and supplies) is considered to be operating
income and is, therefore, exempt from tax in the other Contract­
ing State under paragraph 1. Paragraph 2 extends the exemption
under the Article to certain income from the bareboat leasing of
ships and aircraft. Unlike certain other U.S. treaties, however,
this Convention extends the exemption only to bareboat rentals
that are incidental to profits from the operation of ships and
aircraft. Thus, an enterprise that is not in the business of
operating ships or aircraft in international traffic and that
derives income from leasing ships or aircraft would not be able
to claim an exemption from source country tax under Article 8.
Income from such non-incidental leasing of ships or aircraft,
even if the ships or aircraft are used in international traffic,
would be treated as royalty income, unless the income were
attributable to a permanent establishment that the enterprise
deriving the income had in the source State, in which case the

income would be taxable as business profits. If the income is
treated as royalty income, it would be taxable in the source
State at a rate of 5 percent of the gross income under paragraphs
2 and 3 b) of Article 12 (Royalties). If treated as business
profits, it would be taxable on a net basis under Article 7
(Business Profits).

   When Turkey is the source State, Turkey's internal law will
operate to limit the effect of this limited allowance of source
State taxation of nonincidental rental income. Under its inter­
nal law, Turkey generally does not tax nonincidental rental
income if both the lessor and lessee are located outside Turkey
(even if the leased property is used within Turkey), as long as
the rental payment is not reflected in any books of account that
the lessee maintains in Turkey for Turkish tax purposes. Turkey,
therefore, would not, for example, tax payments made by a U.S.

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airline to a U.S. financial institution under an airplane finance
lease, even if the airplane were to fly into Turkey.

   Paragraph 3

Paragraph 3 provides that the profits of an enterprise of a
Contracting State from the use, maintenance, or rental of con­
tainers (including equipment for their transport) for the trans­
port of goods in international traffic will be exempt from tax in
the other Contracting State. This result obtains regardless of
whether the recipient of the income is engaged in the operation
of ships or aircraft in international traffic, and regardless of
whether the enterprise has a permanent establishment in the other
Contracting State. Profits from the use of containers and
related equipment includes charges for their delayed return.

Paragraph 4

   This paragraph clarifies that the provisions of paragraphs 1
and 3 also apply to profits derived by an enterprise of a Con­
tracting State from participation in a pool, joint business, or
international operating agency. This refers to various arrange­
ments for international cooperation by carriers in shipping and
air transport. For example, airlines from two countries may
agree to share the transport of passengers between the two
countries. They each will fly the same number of flights per
week and share the revenues from that route equally, regardless
of the number of passengers that each airline actually trans­
ports. Paragraph 4 makes clear that with respect to each car­
rier, the income dealt with in the Article is that carrier's
share of the total transport, not the income derived from the
passengers actually carried by the airline.

Relation to other articles

   By virtue of paragraph 6 of Article 7 (Business Profits),
profits of an enterprise of a Contracting State that are exempt

in the other Contracting State under paragraph 1 or 3 of Article

8 remain exempt even if the enterprise has a permanent establish­
ment in that other Contracting State to which the profits are

attributable. Income from the nonincidental leasing of ships and

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airplanes, which is not exempt at source under Article 8, may be
taxed on a gross basis at source .at a rate of 5 percent under
paragraphs 2 and 3 b) of Article 12 (Royalties) or, if the
enterprise that derives the income has a permanent establishment
in the source State, may be taxed on a net basis at source under
Article 7 (Business Profits).

   The taxation of gains from the alienation of ships, aircraft
or containers is dealt with in paragraph 4 of Article 13 (Gains).

   Paragraph 3 of Article 15 (Dependent Personal Services)
deals with taxation of employees of shipping and airline enter­
prises.

   This Article is subject to the saving clause of paragraph 3
of Article 1 (Personal Scope). The United States, therefore, may
tax the shipping or air transport profits of a resident of Turkey
if that Turkish resident is a citizen of the United States.

   As with any benefit of the Convention, an enterprise claim­
ing the benefit of this Article must be entitled to the benefit
under the provisions of Article 22 (Limitation on Benefits).