lighted bridge over water at night time

Impact of MLI on Turkey: The Netherlands double tax treaty

February 18, 2021

There are numerous reasons why the Netherlands, for many years, has been a favorite jurisdiction for Turkish investors setting up so-called “HoldCos” when investing outside of Turkey (into third countries) as well as international investors with Turkish investments: its robust economy and well-established legal and commercial system, and perhaps more importantly, the advantageous provisions of the double tax treaty in force since 1986 between Turkey and the Netherlands (the “Dutch DTT”). One of the beneficial provisions of this Dutch DTT is the “elimination of double taxation” clause, which allows Turkish companies and even Turkish resident individuals to benefit from a tax exemption under the Dutch DTT, i.e. qualified dividend income (arising from the shares corresponding to at least 10% of the share capital) received from Dutch companies may be exempt from corporate and income tax in Turkey.

However, recent developments in the Turkish tax legislation raise questions on the future of the Dutch DTT.

As part of OECD’s Base Erosion and Profit Shifting (BEPS) Action Plan, both Turkey and the Netherlands signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (Multilateral Instrument or "MLI"). The MLI, which entered into force on July 1, 2018 and currently covers more than 90 countries aims to “ update international tax rules and lessen the opportunity for tax avoidance by multinational enterprises.”1 This will be achieved by implementing new measures in existing bilateral tax treaties, or the so-called “Covered Tax Agreements”, and includes measures to prevent treaty abuse and artificial avoidance of permanent establishment status. A Covered Tax Agreement is an existing double tax treaty between two parties to the MLI, for which both parties notified that they would like to amend the agreement using the MLI.

Article 5 of the MLI deals specifically with the “elimination of double taxation” clause. Where the Netherlands has selected “Option A” (the tax exemption provision), Turkey has selected “Option C” (the tax credit provision). In most MLI provisions, different choices by states mean that no change will be effectuated, however, Article 5 is different:

Article 5 – Application of Methods for Elimination of Double Taxation

  1. A Party may choose to apply either paragraphs 2 and 3 (Option A), paragraphs 4 and 5 (Option B), or paragraphs 6 and 7 (Option C), or may choose to apply none of the Options. Where each Contracting Jurisdiction to a Covered Tax Agreement chooses a different Option (or where one Contracting Jurisdiction chooses to apply an Option and the other chooses to apply none of the Options), the Option chosen by each Contracting Jurisdiction shall apply with respect to its own residents.

The above (if entered into force and subject to the below observation) would mean that, for instance, in the context of Dutch dividends being received by Turkish residents such dividends should become subject to tax in Turkey with merely a tax credit for any Dutch taxes withheld at source.

It is important to note that Turkey signed the MLI in June 2017 at the first signing ceremony with certain reservations and that it has not yet been approved and transposed into national law. A legislative proposal in this regard is currently pending before the Turkish Parliament, which, if passed will replace “tax exemption” with “tax credit mechanism (deduction)” in the avoidance of double taxation under all of Turkey’s double tax treaties. A tax credit mechanism does not exempt the relevant income from taxation, but deducts the amount of the tax paid outside of Turkey from the tax to be paid in Turkey. Almost 80% of Turkey’s double tax treaties already apply the tax credit mechanism. The Dutch DTT is one (and perhaps the most important) of the remaining 20%, which apply tax exemption.

As mentioned above. this change will have a significant effect on Turkish companies with holding companies in the Netherlands since dividend income from Dutch companies would become subject to taxation in Turkey. Although the Turkish tax administration may wish to apply the tax credit mechanism to protect its tax base, this approach may result in Turkish companies being effectively subject to double taxation for dividend income received from underlying foreign subsidiaries whose dividend stream flows over a Dutch holding company to its Turkish shareholder.

It remains to be seen if there will be any changes to the draft law during the legislative process. To avoid this unforeseen result, it is possible that the MLI be left unchanged, but the local tax legislation be amended to avoid adverse tax consequence for Turkish investors. However, if no changes are made, then Turkish investors might need to take action by carefully studying any adverse consequences.


1 For more detailed information, please see