Turkey / Italy and Turkey / Spain Prevention of Double Taxation Treaties and Their Impact on Cross-Border Transactions

Turkey / Italy and Turkey / Spain Prevention of Double Taxation Treaties and Their Impact on Cross-Border Transactions

[The] author believes that the deemed (notional) foreign tax credit available under the Spain/Turkey and Italy/ Turkey tax treaties might offer (additional) benefits in relation to cross-border lending and investments in debt and equity issues, provided that local tax offices can be convinced to apply international tax treaty provisions.

OECD Model Treaty and Tax Convention Recommendations. The 2003 OECD Model Treaty recommends in Article 23A(2) the “ordinary credit” method for passive income from dividends (Article 10) and interest (Article 11). Article 23B of the OECD Model Tax Convention follows the views of the United States and the United Kingdom and recommends in general the use of the “ordinary credit” method for countries wanting to apply the credit system to all types of foreign income, both active and passive. 

Clearer position in the OECD Model Tax Convention? It is remarkable that the recommendation of the tax credit method of Paragraph 12 of the 2003 Commentary has not been specifically adopted by Article 23A(2)of the OECD Model Tax Convention. Namely, Article 23 introduces, in general, methods for the elimination of double taxation and proposes two options: the tax exemption method (Article 23A) or the tax credit method (Article 23B).

But, within Article 23A, a second paragraph has been added, exclusively prescribing the tax credit method for dividends (Article 10) and interest (Article 11).

Treaties between Turkey and most countries comply, in general, with the OECD Model Tax Convention by promulgating the application of the ordinary tax credit method on interest (see e.g., Article 23/(1) and (2) of the French Treaty, Article 23/(1) and (3) of the UK Treaty, Article 23/(1/b/ii) and (2/c) of the Dutch Treaty, Article 23/2/b of the Lux Treaty, Article 23/(2) and (3) of the Italian Treaty, Article 22/1/a of the Spanish Treaty Article 23/(1) and (2) of the US Treaty).

On dividends, on the other hand, there are a number of treaties which do not comply with Article 23A/2nd paragraph of the OECD Model Tax Convention and dictate the application of the tax exemption method (see e.g., Article 22/1/b of the Spanish Treaty, Article 23/1/c of the Portuguese Treaty, Article 23/(1/a) and (2/b) of the Dutch Treaty).

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Tax Planning Opportunities Under the Italian Treaty. An Italy resident investor investing in fixed income securities in Turkey would be in a position to claim a 15% Deemed FTC in Italy which would result in a full 15% benefit since, as explained above, he or she would be subject to a 0% withholding tax in Turkey on the underlying interest income. In the same vein, an Italy resident financial institution would enjoy the full 15% benefit on its cross-border lending to Turkey residents...

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Tax Planning Opportunities under the Spanish Treaty. A Spain resident investor investing in fixed income securities in Turkey would also be in a position to claim a 15% Deemed FTC in Spain which would result in a full 15% benefit since, as explained above, he or she would be subject to a 0% withholding tax in Turkey on the underlying interest income. A Spain resident financial institution would enjoy a 10% benefit on any of its cross-border lending to Turkey residents as the Deemed FTC under the Spanish Treaty on bank lending is only 10%...

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