Obtaining Tax Treaty Benefits in Turkey– Part 2

Compliance with the Principal Purpose Test (PPT), Limitation on Benefits (LOB), and Other Anti-Abuse Rules

Double Taxation Agreements (DTAs) provide significant tax relief for international investors. However, to prevent abuse of treaty benefits, both treaty-level and domestic anti-avoidance provisions have become increasingly strict and central to international tax planning.

Following OECD’s BEPS (Base Erosion and Profit Shifting) recommendations, many countries—including Turkey—have added anti-abuse clauses to their tax treaties. In this article, we focus on three key mechanisms that taxpayers must comply with when claiming treaty benefits:

• Principal Purpose Test (PPT)
• Limitation on Benefits (LOB) clause
• Domestic Turkish anti-avoidance measures

1. What Is the Principal Purpose Test (PPT)?

The PPT is a provision introduced under OECD BEPS Action 6 and implemented through the Multilateral Instrument (MLI). Turkey ratified the MLI in 2021, and since then, the PPT has become part of many of Turkey’s DTAs.

What It Does:

If one of the principal purposes of an arrangement or transaction is to obtain a tax benefit under a DTA, and that benefit is not consistent with the object and purpose of the treaty, then the tax authority can deny the benefit.

How It’s Applied in Turkey:

Many of Turkey’s treaties (e.g., with the Netherlands, Luxembourg, UAE, UK) now include the PPT.

To comply:

• Business structures must be based on commercial, not solely tax-driven, reasons.
• The taxpayer must be able to justify the economic rationale of their arrangement.

2. What Is the Limitation on Benefits (LOB) Clause?

The LOB clause is mainly found in treaties with the United States and limits treaty benefits to persons who meet specific eligibility criteria.

Common LOB Criteria:

• Publicly traded companies
• Entities with substantial business activity and residency in their home country
• Payments between related parties must be supported by active trade or business

How It’s Applied in Turkey:

• The Turkey–U.S. tax treaty includes a full LOB clause.
• While most of Turkey’s other treaties do not include a formal LOB clause, many have anti-abuse language with similar practical effect.

3. Domestic Anti-Abuse Measures in Turkey

In addition to international rules, Turkey has implemented its own domestic anti-avoidance provisions in tax legislation to combat improper use of treaty benefits.

Article 30 of the Corporate Tax Law:

For payments made to non-residents, treaty benefits are conditional on the recipient being the beneficial owner and providing complete documentation, such as a certificate of residence and contracts.

Article 29/A of the Corporate Tax Law:

Introduced in 2021, this article denies tax benefits to artificial structures set up primarily to exploit DTAs.

Transfer Pricing & Hidden Profit Distribution:

If a transaction between related parties is not conducted at arm’s length, the Turkish Tax Authority may recharacterize the transaction and deny treaty benefits.

4. Practical Considerations for Compliance

5. Countries with PPT or LOB in Treaties with Turkey

To successfully claim treaty benefits, it is no longer sufficient to submit documents such as a certificate of residence. Tax authorities now require that each transaction has a legitimate commercial purpose, and that the taxpayer can demonstrate substance, independence, and consistency with treaty objectives.

Turkey, in line with OECD standards, has strengthened both its treaties and domestic law to prevent treaty shopping and abuse.

Before applying for any treaty-based tax relief, a compliance review should be conducted with regard to the PPT, LOB, and domestic anti-abuse rules.

Need guidance? Contact Özbek CPA:
We help businesses structure their cross-border operations in full compliance with treaty and anti-abuse rules to ensure legitimate tax savings.