1. Taxation Principle: Residence vs. Source
- The OECD Model supports taxation primarily in the country of residence, keeping withholding taxes in the source country limited.
- The UN Model, in line with the interests of developing countries, grants stronger taxation rights to the source country, allowing higher taxation where the income is generated.
2. Definition of Permanent Establishment (PE)
- The OECD Model offers a stricter definition based on a fixed place of business, with a 12-month threshold for construction sites.
- The UN Model provides a broader definition, including service PEs and allows a 6-month threshold, giving the source country more taxing power.
3. Dividends, Interest, and Royalties (Investment Income)
- The OECD Model generally keeps withholding tax rates low (e.g., 5–15% for dividends) and assigns primary taxation to the residence country.
- The UN Model allows for higher or more flexible withholding rates, increasing tax revenues in the source country.
4. Capital Gains
- The OECD Model limits source country taxation rights mostly to gains from real property or assets linked to a PE.
- The UN Model allows broader taxation rights on capital gains in the source country with a more detailed scope.
5. Fees for Services and Technical Payments
- The OECD Model generally does not permit separate taxation of technical service fees.
- The UN Model includes provisions for withholding tax on service and consultancy fees in the source country.
6. Anti-Abuse Mechanisms
- The OECD Model includes strict measures like the Principal Purpose Test (PPT) and Limitation on Benefits (LOB) clause, integrated under the BEPS framework.
- The UN Model applies more flexible anti-abuse rules; PPT and LOB may be included depending on the treaty.
7. Dispute Resolution: MAP and Arbitration
- The OECD Model provides mechanisms such as mediation and optional binding arbitration.
- The UN Model relies mainly on mutual negotiations and does not include mandatory arbitration.
Relevance for Turkey: Which Model Is Applied?
Turkey, as an active member of the OECD, negotiates most of its tax treaties based on the OECD Model. However:
- When protecting source country taxation rights is important, Turkey may incorporate elements from the UN Model.
- Particularly in areas like PE definition, taxation of passive income, and withholding taxes on service fees, Turkey’s treaty model may reflect a hybrid leaning toward the UN approach.
The OECD Model provides a well-established framework favoring residence-based taxation, ideal for negotiations among developed countries. In contrast, the UN Model offers a more flexible alternative that strengthens source-country taxation rights — more aligned with the needs of developing economies.
While Turkey predominantly follows the OECD Model due to its membership, it selectively incorporates provisions from the UN Model to protect national interests and taxation rights.
Do you want to understand how Turkey’s tax treaties are shaped by the OECD and UN models, and identify the most effective strategy for your business?
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