The US-Turkey Treaty's Warehouse Exclusion Has No Catch

TL;DR

Most modern US tax treaties exclude a warehouse used solely for storage, display or delivery from creating a permanent establishment — but many treaty partners narrowed that exclusion in 2017, adding a requirement that the activity also be merely “preparatory or auxiliary.” That change came through the OECD’s Multilateral Instrument (MLI), and it closed a real loophole: a business whose entire local presence was storage and delivery could otherwise claim the exclusion no matter how large that presence was.

The US-Turkey treaty was never touched by that change, because the United States has never signed the MLI. Article 5(3)(a) and (b) still exclude storage, display and delivery facilities with no qualifier beyond the word “solely” — the pre-2017 structure, standing exactly as written in 1996. The agency rule that could otherwise catch a fulfillment arrangement has an unusually demanding two-part test, and the burden of proving it falls on the IRS, not on you.

If you are a Turkish tax resident with a US LLC holding US inventory, this is one of the stronger treaty positions available to a non-resident seller — genuinely stronger than what many residents of other, larger economies now have.

Why the 2017 change matters, and why it doesn’t apply here

Under the original OECD Model, a fixed list of activities — storage, display, delivery, purchasing, and “preparatory or auxiliary” activities generally — never created a permanent establishment, full stop. Multinationals exploited this: a warehouse could be enormous and central to the business, and still fall inside the storage/delivery exclusion because that exclusion had no size or centrality test.

The OECD’s 2017 Multilateral Instrument fixed this by adding one sentence: even storage, display and delivery must now also be “preparatory or auxiliary” to count. Countries that adopted this provision for a given treaty relationship effectively narrowed their own storage exclusion.

The United States is not, and has never been, a party to the MLI. No US tax treaty has been modified by it — not this one, not any other. Turkey’s separate adoption of the MLI affects its treaties with other MLI parties, not its treaty with the United States. So the 1996 text of Article 5(3) controls exactly as written below, unconditionally.

Fact 1 — the treaty in force

The Agreement Between the Government of the United States of America and the Government of the Republic of Turkey for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, together with a Protocol, was signed at Washington, DC, March 28, 1996. Its general effective date is January 1, 1998, under Article 28.

This was the first income tax treaty between the two countries. The Department of State’s letter of submittal, dated July 30, 1996, notes that before this agreement, Turkey was the only OECD member with which the United States had no tax treaty at all. No later treaty or protocol has amended it. Text verified against the IRS’s published treaty at irs.gov/pub/irs-trty/turkey.pdf.

Fact 2 — the storage exclusion is unconditional

Article 5(3), the two paragraphs that matter to a seller holding US inventory:

a) the use of facilities solely for the purpose of storage, display, or delivery of goods or merchandise belonging to the enterprise; b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or delivery;

Compare the full list, and which subparagraphs actually carry the “preparatory or auxiliary” qualifier:

The word “preparatory or auxiliary” appears exactly twice in this list — in (e) and in (f). It does not appear in (a) or (b). Structurally, the drafters wrote a general residual test for miscellaneous activities and a combination rule, and left storage, display and delivery on their own, unqualified. That is precisely the drafting the 2017 MLI targeted for revision elsewhere — and precisely what was never revised here.

Fact 3 — the agency rule has two hurdles, and the burden runs the other way

The provision that could otherwise turn a US fulfillment arrangement into a permanent establishment is Article 5(4)(b):

[Where a person] has no such authority, but habitually maintains in the first-mentioned State a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the enterprise. The foregoing provisions of this subparagraph shall apply only if it is proved that in order to avoid taxation in the first-mentioned State, such person undertakes not only the regular delivery of the goods or merchandise, but also undertakes virtually all the activities connected with the sale of the goods or merchandise except for the actual conclusion of the sales-contract itself.

Read this against the simple version of the same idea found in older treaties — for contrast, the 1950 US-Greece treaty, where “a stock of merchandise from which he regularly fills orders” is enough, by itself, to create a permanent establishment. Here the same fact pattern requires proving two additional things:

1. A motive test — the arrangement exists in order to avoid taxation.
2. A near-total-activity test — the person holding the goods handles virtually all sale-related activity, stopping only short of signing the contract.

And the phrase “if it is proved” places that burden on the party asserting the permanent establishment — ordinarily the IRS — not on the taxpayer. A standard third-party 3PL or fulfillment center that only stores, picks, packs and ships, while you retain pricing, marketing, customer relationships and contract formation, does not come close to “virtually all the activities connected with the sale.”

Fact 4 — an independent-agent carve-out as a second layer

Article 5(5) adds a further exclusion: using a broker, general commission agent, or other agent of independent status, acting in the ordinary course of that agent’s own business, does not create a permanent establishment. A commercial 3PL that serves many unrelated merchants under standard terms is a natural fit for this description — a genuine second line of defense, on top of Fact 2, if the storage exclusion were ever disputed.

Fact 5 — a Limitation on Benefits article exists

Unlike the 1950 Greece treaty, this one has a real Limitation on Benefits article (Article 22). For a company (other than an individual) to claim treaty relief, Article 22(1) requires that:

• more than 50% of its beneficial ownership is held, directly or indirectly, by individual residents of Turkey or US citizens; and
• its income is not used in substantial part to meet liabilities to persons outside that group.

For the common case — a single-member US LLC wholly owned by one Turkish tax resident individual — this test is generally satisfied on its face: 100% individual Turkish ownership clears the 50% threshold, and a dormant or early-stage entity typically has no third-country liabilities to speak of. This is not a reason to skip the analysis; it is a reason to document ownership clearly before relying on any treaty position.

Fact 6 — if a permanent establishment is found, only its profit is taxable

Article 7(1):

the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment.

This is the modern attribution rule — the opposite of the older force-of-attraction structure. The contrast with the Greece treaty is direct enough to put side by side:

Even in the unlikely event a US warehouse were ever found to cross the line under Article 5(4)(b), the exposure under the Turkey treaty is capped at what that warehouse activity itself would be expected to earn as an independent business — not your worldwide US-source revenue.

What a Turkish resident should actually do

1. Don’t skip the domestic question. The treaty only becomes relevant once a US trade or business exists under US domestic law in the first place; a strong treaty position is a second line of defense, not a substitute for the first. See our FBA and US trade or business analysis for that threshold question.
2. Document that your US presence is “solely” storage, display or delivery. The word “solely” is still doing real work even though it carries no “preparatory or auxiliary” qualifier — keep the 3PL or warehouse contract scoped to fulfillment, not to pricing, marketing, or contract negotiation on your behalf.
3. Watch what authority you give anyone in the US. The moment someone in the US can negotiate or conclude contracts on your behalf — not just hold and ship inventory — Article 5(4)(a) is a simpler, lower bar than 5(4)(b).
4. Confirm Limitation on Benefits eligibility, and keep evidence of ownership on file.
5. File. Under IRC §874(a), a nonresident alien who does not file a return loses the benefit of deductions and credits, which can mean tax on gross rather than net income if the IRS later determines a filing was required. A protective return preserves that right.
6. Disclose any treaty position relied upon on Form 8833.

Frequently Asked Questions

Q: My accountant says treaties never really protect e-commerce inventory. Is that always true? A: No — it depends entirely on which treaty. It’s true for a number of older treaties (Greece’s 1950 convention has no storage exclusion at all) and increasingly narrowed for treaty partners caught by the 2017 MLI. The US-Turkey treaty is neither: it has the exclusion, unconditioned, because the US never joined the MLI that would have narrowed it.

Q: Does this mean I owe no US tax if I store inventory here? A: No. It means US inventory, by itself, is less likely to create a permanent establishment under this treaty than under many others. Whether you have a US trade or business at all under domestic law is a separate, prior question, and income effectively connected with a US trade or business can still be taxable independent of the permanent establishment analysis.

Q: What’s the difference between this and the “Article 5(4)” people usually talk about? A: In the OECD Model and the current US Model treaty, the storage/display/delivery exclusions sit in Article 5(4). In this treaty they’re in Article 5(3) — same concept, different numbering. Citing “5(4)” when discussing this specific treaty is the kind of small error that suggests the analysis wasn’t actually done against this text.

Q: Is Turkey unusual among treaty partners in having this unconditional exclusion? A: It’s a matter of whether the country adopted the MLI’s narrower storage rule for its US relationship — and since the US itself never joined the MLI, every US tax treaty keeps its original, pre-2017 storage language, Turkey’s included. What makes Turkey’s position notably strong is the combination of the unconditional exclusion with the unusually demanding agency test in 5(4)(b) — a pairing not every treaty partner with the same exclusion also has.

Q: Would forming my LLC in a different US state change any of this? A: No. This is a federal treaty question. Formation state affects state filings, fees and registered-agent requirements, not permanent establishment analysis under a federal income tax treaty.

Next Steps

A strong treaty position is not a reason to skip the filing that documents it. The domestic trade-or-business question, a protective return, and — if you rely on this treaty — a properly disclosed Form 8833 position are what turn “the treaty is on my side” into a position that holds up.

See the country-by-country overview at US LLC tax by country for how Turkey compares to other treaty partners, the Greece treaty analysis for the opposite end of that spectrum, and our FBA and US trade or business analysis for the domestic question this treaty position supplements rather than replaces.

This article is general information, not tax advice. It states what the treaty text says; how the IRS applies Articles 5 and 7 to specific facts is a separate question on which we express no view here. Have your specific facts assessed before adopting any position.