[Senate Executive Report 111-1]
[From the U.S. Government Publishing Office]
111th Congress Exec. Rept.
SENATE
1st Session 111-1
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PROTOCOL AMENDING THE CONVENTION BETWEEN THE GOVERNMENT OF THE UNITED
STATES OF AMERICA AND THE GOVERNMENT OF THE FRENCH REPUBLIC FOR THE
AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH
RESPECT TO TAXES ON INCOME AND CAPITAL (TREATY DOC. 111-4)
_______
December 1, 2009.--Ordered to be printed
_______
Mr. Kerry, from the Committee on Foreign Relations,
submitted the following
REPORT
[To accompany Treaty Doc. 111-4]
The Committee on Foreign Relations, to which was referred
the Protocol Amending the Convention between the Government of
the United States of America and the Government of the French
Republic for the Avoidance of Double Taxation and the
Prevention of Fiscal Evasion with Respect to Taxes on Income
and Capital, signed at Paris on August 31, 1994, as Amended by
the Protocol signed on December 8, 2004, signed January 13,
2009, at Paris, together with a related Memorandum of
Understanding, signed January 13, 2009 (the ``Protocol'')
(Treaty Doc. 111-4), having considered the same, reports
favorably thereon with one declaration and one condition, as
indicated in the resolution of advice and consent, and
recommends that the Senate give its advice and consent to
ratification thereof, as set forth in this report and the
accompanying resolution of advice and consent.
CONTENTS
Page
I. Purpose..........................................................2
II. Background.......................................................2
III. Major Provisions.................................................2
IV. Entry Into Force.................................................3
V. Implementing Legislation.........................................3
VI. Committee Action.................................................4
VII. Committee Recommendation and Comments............................4
VIII.Text of Resolution of Advice and Consent to Ratification.........5
IX. Annex 1.--Technical Explanation..................................9
I. Purpose
The purpose of the Protocol, along with the underlying
treaty, is to promote and facilitate trade and investment
between the United States and France. Principally, the Protocol
would amend the existing tax treaty with France (the ``Treaty''
or ``Convention'') in order to eliminate withholding taxes on
cross-border dividend and royalty payments, establish a
mandatory arbitration scheme for resolving disputes between the
parties to the treaty, prevent inappropriate use of the treaty,
as amended, by third-country residents, and facilitate the
exchange of information between tax authorities in both
countries.
II. Background
The United States has a tax treaty with France that is
currently in force, which was concluded in 1994. This Protocol
is the second protocol to the 1994 treaty. This Protocol was
negotiated to modernize our relationship with France in the
areas set forth above and to update the 1994 treaty to better
reflect U.S. and French domestic law.
III. Major Provisions
A detailed article-by-article analysis of the Protocol may
be found in the Technical Explanation published by the
Department of the Treasury on November 10, 2009. In addition,
the staff of the Joint Committee on Taxation prepared an
analysis of the Protocol, JCX-49-09 (November 6, 2009), which
was of great assistance to the committee in reviewing the
Protocol. A summary of the key provisions of the Protocol is
set forth below.
Mandatory Arbitration
The Protocol incorporates mandatory, binding arbitration in
certain cases that the competent authorities of the United
States and France have been unable to resolve after a
reasonable period of time under the mutual agreement procedure.
See Article X of the Protocol which amends Article 26(5) of
the Treaty. This arrangement is largely consistent with the
arbitration provisions included in recent treaties negotiated
with Canada, Germany, and Belgium, although certain
modifications were made that were intended to address concerns
expressed by the Senate during its approval of the other
treaties: First, the Protocol provides the opportunity for
taxpayer participation by providing information directly to the
arbitral panel through position papers. Second, the Protocol
prohibits both the United States and France from appointing an
employee of their respective tax administrations as a member of
the panel. And, finally, the Protocol does not prescribe a
hierarchy of legal authorities to which the arbitration board
must adhere.
Taxation of Cross-Border Dividends and Royalty payments
The withholding tax rates under the Protocol would be the
same or lower than those in the existing treaty. The Protocol
would reduce or eliminate source-country taxation of
intercompany dividends distributed by a company resident in one
Contracting State to a resident in the other Contracting State.
See Article II of the Protocol which amends Article 10 of the
Treaty. The Protocol would also replace the existing treaty's 5
percent limit on source-country withholding tax on cross-border
royalty payments with an exemption from source-country
withholding tax on such payments, which is consistent with the
U.S. Model Treaty. See Article III of the Protocol which
amends Article 12 of the Treaty.
Fiscally Transparent Entities
The Protocol would modernize the provisions of the
Convention relating to the treatment of fiscally transparent
entities, such as partnerships and certain trusts and estates.
These changes would achieve closer conformity with current U.S.
treaty policy and reduce the high risks of double taxation in
this area, given that countries take different views on when an
entity is fiscally transparent. The Protocol would also
eliminate certain technical issues that have prevented United
States Regulated Investment Companies and Real Estate
Investment Trusts from claiming treaty benefits through
fiscally transparent entities. See Article I of the Protocol
which amends Article 4 of the Treaty; see also Article II of
the Protocol which amends Article 10 of the Treaty.
Limitation on Benefits
The Protocol would strengthen the existing treaty's
``Limitation of Benefits'' provision and make it more
consistent with current U.S. tax treaty practice. The new
provision is designed to address ``treaty shopping,'' which is
the inappropriate use of a tax treaty by third-country
residents. See Article XIV of the Protocol which amends
Article 30 of the Treaty.
Exchange of Information
The Protocol would replace the existing Convention's tax
information exchange provisions with updated rules that are
consistent with current U.S. tax treaty practice. The Protocol
would allow the tax authorities of each country to exchange
information relevant to carrying out the provisions of the
Convention or the domestic tax laws of either country. It would
also enable the United States to obtain information (including
from financial institutions) from France whether or not France
needs the information for its own tax purposes. See Article XI
of the Protocol which amends Article 27 of the Treaty.
IV. Entry Into Force
The United States and France shall notify each other when
their respective constitutional and statutory requirements for
the entry into force of this Protocol have been satisfied. This
Protocol shall enter into force on the date of receipt of the
later of such notifications. The various provisions of this
Protocol shall have effect as described in paragraphs 2 and 3
of Article XVI of the Protocol.
V. Implementing Legislation
As is the case generally with income tax treaties, the
Protocol is self-executing and does not require implementing
legislation for the United States.
VI. Committee Action
The committee held a public hearing on the Protocol on
November 10, 2009. Testimony was received from Manal Corwin,
International Tax Counsel, U.S. Department of Treasury, and
Thomas A. Barthold, Chief of Staff, Joint Committee on
Taxation. The committee will publish the transcript of this
hearing in a future report.
On November 17, 2009, the committee considered the Protocol
and ordered it favorably reported by voice vote, with a quorum
present and without objection.
VII. Committee Recommendation and Comments
The Committee on Foreign Relations believes that the
Protocol will stimulate increased trade and investment,
strengthen rules for denying treaty-shoppers the benefits of
the underlying tax treaty, and promote closer co-operation
between the United States and France. The committee therefore
urges the Senate to act promptly to give advice and consent to
ratification of the Protocol, as set forth in this report and
the accompanying resolution of advice and consent.
The committee appreciates the efforts of the Treasury
Department to include in the arbitration provisions of the
Protocol elements designed to address concerns expressed by the
Senate about similar provisions in other treaties. The
committee looks forward to the availability of a body of
practice under U.S. tax treaties that provide for arbitration
in order to better determine whether that mechanism ultimately
serves as an effective tool for the appropriate resolution of
disputes between tax authorities. The committee also looks
forward to seeing how the provisions of this Protocol providing
for taxpayer participation in arbitration proceedings work in
practice and whether they provide a meaningful opportunity for
taxpayer input into the arbitration process. Accordingly, the
committee has included one condition related to arbitration in
the recommended resolution of advice and consent. This
condition would broaden a reporting requirement that is
currently applicable to arbitration provisions in tax treaties
with Belgium, Canada, and Germany, so that the requirement
would also apply to this Protocol.\1\
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\1\See Executive Report 110-15 for the original reporting
requirement contained in the resolution of advice and consent to the
Protocol Amending the Convention between the United States of America
and Canada with Respect to Taxes on Income and on Capital (Treaty Doc.
110-15). The above-mentioned tax treaties with Germany and Belgium are,
respectively, the 2006 Protocol Amending the Convention between the
United States of America and the Federal Republic of Germany for the
Avoidance of Double Taxation and the Prevention of Fiscal Evasion with
Respect to Taxes on Income and Capital and to Certain Other Taxes
(Treaty Doc. 109-20), and the Convention between the Government of the
United States of America and the Government of the Kingdom of Belgium
for the Avoidance of Double Taxation and the Prevention of Fiscal
Evasion with Respect to Taxes on Income, and accompanying protocol
(Treaty Doc. 110-3).
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The committee has also included one declaration in the
recommended resolution of advice and consent. The declaration
states that the Protocol is self-executing, as is the case
generally with income tax treaties. In the past, the committee
generally included such statements in the committee's report,
but in light of the Supreme Court decision in Medellin v.
Texas, 128 S. Ct. 1346 (2008), the committee has determined
that a clear statement in the Resolution is warranted. A
further discussion of the committee's views on this matter can
be found in Section VIII of Executive Report 110-12.
VIII. Resolution of Advice and Consent to Ratification
Resolved (two-thirds of the Senators present concurring
therein),
SECTION 1. SENATE ADVICE AND CONSENT SUBJECT TO A DECLARATION AND A
CONDITION
The Senate advises and consents to the ratification of the
Protocol Amending the Convention between the Government of the
United States of America and the Government of the French
Republic for the Avoidance of Double Taxation and the
Prevention of Fiscal Evasion with Respect to Taxes on Income
and Capital, signed at Paris on August 31, 1994, as Amended by
the Protocol signed on December 8, 2004, signed on January 13,
2009, at Paris, together with a related Memorandum of
Understanding, signed January 13, 2009 (the ``Protocol'')
(Treaty Doc. 111-4), subject to the declaration of section 2
and the condition of section 3.
SECTION 2. DECLARATION
The advice and consent of the Senate under section 1 is
subject to the following declaration:
The Protocol is self-executing.
SECTION 3. CONDITION
The advice and consent of the Senate under section 1 is
subject to the following condition:
1. Not later than two years from the date on which
this Protocol enters into force and prior to the first
arbitration conducted pursuant to the binding
arbitration mechanism provided for in this Protocol,
the Secretary of Treasury shall transmit the text of
the rules of procedure applicable to arbitration
panels, including conflict of interest rules to be
applied to members of the arbitration panel, to the
committees on Finance and Foreign Relations of the
Senate and the Joint Committee on Taxation.
2. Sixty days after a determination has been reached
by an arbitration panel in the tenth arbitration
proceeding conducted pursuant to this Protocol, the
2006 Protocol Amending the Convention between the
United States of America and the Federal Republic of
Germany for the Avoidance of Double Taxation and the
Prevention of Fiscal Evasion with Respect to Taxes on
Income and Capital and to Certain Other Taxes (the
``2006 German Protocol'') (Treaty Doc. 109-20), the
Convention between the Government of the United States
of America and the Government of the Kingdom of Belgium
for the Avoidance of Double Taxation and the Prevention
of Fiscal Evasion with Respect to Taxes on Income, and
accompanying protocol (the ``Belgium Convention'')
(Treaty Doc. 110-3), or the Protocol Amending the
Convention between the United States of America and
Canada with Respect to Taxes on Income and on Capital
(the ``2007 Canada Protocol'') (Treaty Doc. 110-15),
the Secretary of Treasury shall prepare and submit a
detailed report to the Joint Committee on Taxation and
the Committee on Finance of the Senate, subject to law
relating to taxpayer confidentiality, regarding the
operation and application of the arbitration mechanism
contained in the aforementioned treaties. The report
shall include the following information:
I. The aggregate number, for each treaty, of
cases pending on the respective dates of entry
into force of this Protocol, the 2006 German
Protocol, the Belgium Convention, and the 2007
Canada Protocol, along with the following
additional information regarding these cases:
a. The number of such cases by treaty
article(s) at issue;
b. The number of such cases that have
been resolved by the competent
authorities through a mutual agreement
as of the date of the report; and
c. The number of such cases for which
arbitration proceedingshave commenced
as of the date of the report.
II. A list of every case presented to the
competent authorities after the entry into
force of this Protocol, the 2006 German
Protocol, the Belgium Convention, and the 2007
Canada Protocol, with the following information
regarding each case:
a. The commencement date of the case
for purposes of determining when
arbitration is available;
b. Whether the adjustment triggering
the case, if any, was made by the
United States or the relevant treaty
partner;
c. Which treaty the case relates to;
d. The treaty article(s) at issue in
the case;
e. The date the case was resolved by
the competent authorities through a
mutual agreement, if so resolved;
f. The date on which an arbitration
proceeding commenced, if an arbitration
proceeding commenced; and
g. The date on which a determination
was reached by the arbitration panel,
if a determination was reached, and an
indication as to whether the panel
found in favor of the United States or
the relevant treaty partner.
III. With respect to each dispute submitted
to arbitration and for which a determination
was reached by the arbitration panel pursuant
to this Protocol, the 2006 German Protocol, the
Belgium Convention, and the 2007 Canada
Protocol, the following information shall be
included:
a. In the case of a dispute submitted
under this Protocol, an indication as
to whether the presenter of the case to
the competent authority of a
Contracting State submitted a Position
Paper for consideration by the
arbitration panel;
b. An indication as to whether the
determination of the arbitration panel
was accepted by each concerned person;
c. The amount of income, expense, or
taxation at issue in the case as
determined by reference to the filings
that were sufficient to set the
commencement date of the case for
purposes of determining when
arbitration is available; and
d. The proposed resolutions (income,
expense, or taxation) submitted by each
competent authority to the arbitration
panel.
3. The Secretary of Treasury shall, in addition,
prepare and submit the detailed report described in
paragraph (2) on March 1 of the year following the year
in which the first report is submitted to the Joint
Committee on Taxation and the Committee on Finance of
the Senate, and on an annual basis thereafter for a
period of five years. In each such report, disputes
that were resolved, either by a mutual agreement
between the relevant competent authorities or by a
determination of an arbitration panel, and noted as
such in prior reports may be omitted.
4. The reporting requirements referred to in
paragraphs (2) and (3) supersede the reporting
requirements contained in paragraphs (2) and (3) of
Section 3 of the resolution of advice and consent to
the 2007 Canada Protocol, approved by the Senate on
September 23, 2008.
ANNEX
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IX. Annex 1.--Technical Explanation
DEPARTMENT OF THE TREASURY TECHNICAL EXPLANATION OF THE PROTOCOL SIGNED
AT PARIS ON JANUARY 13, 2009 AMENDING THE CONVENTION BETWEEN THE
GOVERNMENT OF THE UNITED STATES OF AMERICA AND THE GOVERNMENT OF THE
FRENCH REPUBLIC FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION
OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME AND CAPITAL, SIGNED
AT ARIS ON AUGUST 31, 1994, AS AMENDED BY THE PROTOCOL SIGNED ON
DECEMBER 8, 2004
This is a technical explanation of the Protocol and the
related Memorandum of Understanding signed at Paris on January
13, 2009 (hereinafter the ``Protocol'' and ``Memorandum of
Understanding'' respectively), amending the Convention between
the Government of the United States of America and the
Government of the French Republic for the avoidance of double
taxation and the prevention of fiscal evasion with respect to
taxes on income and capital, signed at Paris on August 31,
1994, as amended by the Protocol signed on December 8, 2004
(together, the ``existing Convention'').
Negotiations took into account the U.S. Department of the
Treasury's current tax treaty policy and the Treasury
Department's Model Income Tax Convention, published on November
15, 2006 (the ``U.S. Model''). Negotiations also took into
account the Model Tax Convention on Income and on Capital,
published by the Organisation for Economic Cooperation and
Development (the ``OECD Model''), and recent tax treaties
concluded by both countries.
This Technical Explanation is an official guide to the
Protocol and Memorandum of Understanding. It explains policies
behind particular provisions, as well as understandings reached
during the negotiations with respect to the interpretation and
application of the Protocol and Memorandum of Understanding.
References to the ``existing Convention'' are intended to
put various provisions of the Protocol into context. The
Technical Explanation does not, however, provide a complete
comparison between the provisions of the existing Convention
and the amendments made by the Protocol. The Technical
Explanation is not intended to provide a complete guide to the
existing Convention as amended by the Protocol and Memorandum
of Understanding. To the extent that the existing Convention
has not been amended by the Protocol and Memorandum of
Understanding, the Technical Explanations of the Convention
signed at Paris on August 31, 1994 (the ``1994 Convention'')
and the Protocol signed on December 8, 2004 (the ``2004
Protocol'') remain the official explanation. To the extent that
a paragraph from the 1994 Convention or the 2004 Protocol has
not been changed, the technical explanations to the 1994
Convention and the 2004 Protocol, respectively, remain the
official explanation. References in this Technical Explanation
to ``he'' or ``his'' should be read to mean ``he or she'' or
``his or her.'' References to the ``Code'' are to the Internal
Revenue Code of 1986, as amended.
On the date of signing of the Protocol, the United States
and France also signed a memorandum of understanding relating
to the implementation of new paragraphs 5 and 6 of Article 26
(Mutual Agreement Procedure), which provide for binding
arbitration of certain disputes between the competent
authorities (``Arbitration MOU'').
ARTICLE I
Article I of the Protocol revises Article 4 (Resident) of
the existing Convention by revising paragraph 2 and adding a
new paragraph 3. The changes to paragraph 2 clarify the meaning
of ``resident'' in certain cases, and address the treatment of
cross-border investments made through certain entities. New
paragraph 3 replaces the specific rules in the case of income
derived through specified fiscally transparent entities such as
partnerships and certain estates and trusts.
The Protocol revises subparagraph (b) (iii) of paragraph 2
of Article 4 of the existing Convention and clarifies that a
French ``societe d'investissement . . . capital variable''
(SICAV), ``societe d'investissement immobilier cotee'' (SIIC),
and ``societe de placement . . . preponderance immobiliere . .
. capital variable'' (SPPICAV) will be treated as residents of
France for purposes of the Convention. The term ``resident of a
Contracting State'' is defined in paragraph 1 of Article 4 of
the Convention. In general, this definition incorporates the
definitions of residence in U.S. and French law by referring to
a resident as a person who, under the laws of a Contracting
State, is liable to tax therein by reason of his domicile,
residence, place of management, place of incorporation or any
other similar criterion.
New clause (iii) also retains the clarification in the
existing Convention that certain entities that are nominally
subject to tax but that in practice are rarely required to pay
tax also would generally be treated as residents and therefore
accorded benefits under the Convention. For example, a U.S.
Regulated Investment Company (RIC) and a U.S. Real Estate
Investment Trust (REIT) are residents of the United States for
purposes of the Convention. Although the income earned by these
entities normally is not subject to U.S. tax in the hands of
the entity, they are taxable to the extent that they do not
currently distribute their profits, and therefore may be
regarded as ``liable to tax.'' They also must satisfy a number
of requirements under the Code in order to be entitled to
special tax treatment.
New subparagraph (c) of paragraph 2 of Article 4 clarifies
that certain items of income paid from the United States to a
French qualified partnership will be considered derived by a
resident of France. The provision is intended to ensure that
French qualified partnerships are eligible for benefits under
Article 4 as amended by the Protocol to the same extent as they
were eligible for benefits under subparagraph (b) (iv) of
paragraph 2 of Article 4 of the existing Convention prior to
the entry into force of the Protocol. The provision provides
that an item of income paid from the United States to a French
qualified partnership is considered derived by a resident of
France only to the extent that such income is included
currently in the taxable income of a shareholder, associate, or
other member that is otherwise treated as a resident of France
under the provisions of this Convention. For purposes of this
subparagraph, a French qualified partnership is defined as a
partnership that has its place of effective management in
France, has not elected to be taxed in France as a corporation,
the tax base of which is computed at the partnership level for
French tax purposes, and all of the shareholders, associates,
or other members of which, pursuant to the tax laws of France,
are liable to tax therein in respect of the share of profits of
that partnership.
New paragraph 3 addresses special issues presented by
fiscally transparent entities. Entities that are fiscally
transparent for U.S. tax purposes include partnerships, common
investment trusts under section 584, and grantor trusts. This
paragraph also applied to U.S. limited liability companies
(``LLCs'') that are treated as partnerships or as disregarded
entities for tax purposes. In general, new paragraph 3 relates
to entities that are not subject to tax at the entity level, as
distinct from entities that are subject to tax, but with
respect to which tax may be relieved under an integrated
system.
Because countries may take different views as to when an
entity is fiscally transparent, the risk of double taxation and
double non-taxation in these cases is relatively high. The
intention of new paragraph 3 is to eliminate a number of
technical disputes that had arisen under the language of
paragraph 2(b)(iv) as it existed prior to the Protocol, and to
adopt the modern U.S. tax treaty approach, with certain
modifications addressing fiscally transparent entities formed
or organized in states with which the source state does not
have an agreement containing a provision for the exchange of
information with a view to the prevention of tax evasion with
the Contracting State from which the income, profit or gains is
derived.
New paragraph 3 provides that an item of income, profit or
gain derived by a fiscally transparent entity is considered to
be derived by a resident of a Contracting State to the extent
that the resident is treated under the taxation laws of the
State where he is resident as deriving the item of income. This
paragraph applies to any resident of a Contracting State who
derives income, profit or gain through an entity that is
treated as fiscally transparent under the laws of either
Contracting State, where such entity is formed or organized in
either Contracting State or in a state that has concluded an
agreement containing a provision for the exchange of
information with a view to the prevention of tax evasion with
the Contracting State from which the income, profit, or gain is
derived.
For example, if a corporation resident in France
distributes a dividend to an entity that is formed or organized
in the United States, and is treated as fiscally transparent
for U.S. tax purposes, the dividend will be considered derived
by a resident of the United States only to the extent that the
taxation laws of the United States treat one or more U.S.
residents (whose status as U.S. residents is determined, for
this purpose, under U.S. tax laws) as deriving the dividend
income for U.S. tax purposes. In the case of a partnership, the
persons who are, under U.S. tax laws, treated as partners of
the entity would normally be the persons whom the U.S. tax laws
would treat as deriving the dividend income through the
partnership. Thus, it also follows that persons whom the United
States treats as partners but who are not U.S. residents for
U.S. tax purposes may not claim any benefits under the
Convention for the dividend paid to the entity. Although these
partners are treated as deriving the income for U.S. tax
purposes, they are not residents of the United States for
purposes of the Convention. If, however, they are treated as
residents of a third country under the provisions of an income
tax convention which that country has with France, they may be
entitled to claim a benefit under that convention. In contrast,
if an entity is organized under U.S. laws and is classified as
a corporation for U.S. tax purposes, dividends paid by a
corporation resident in France to the U.S. entity will be
considered derived by a resident of the United States since the
U.S. corporation is treated under U.S. taxation laws as a
resident of the United States and as deriving the income.
Because the entity classification rules of the State of
residence govern, the results in the examples discussed above
would obtain even if the entity were viewed differently under
the tax laws of France (e.g., as not fiscally transparent in
the first example above where the entity is treated as a
partnership for U.S. tax purposes or as fiscally transparent in
the second example where the entity is viewed as not fiscally
transparent for U.S. tax purposes). Moreover, these results
follow regardless of whether the entity is organized in the
United States, France, or in a third country, so long as the
third country has concluded an agreement containing a provision
for the exchange of information with the Contracting State from
which the income, profit, or gain is derived. Where income is
derived through an entity organized in a third state that has
owners resident in one of the Contracting States, the
characterization of the entity in that third state is
irrelevant for purposes of determining whether the resident is
entitled to benefits under the Convention with respect to
income derived by the entity. The results follow regardless of
whether the entity is disregarded as a separate entity under
the laws of one jurisdiction but not the other, such as a
single owner entity that is viewed as a branch for U.S. tax
purposes and as a corporation for tax purposes under the laws
of France.
The following examples illustrate the application of new
paragraph 3.
Example 1. Income from sources in France is received
by an entity organized under the laws of France, which
is treated for U.S. tax purposes as a corporation and
is owned by a U.S. shareholder who is a U.S. resident
for U.S. tax purposes. Such income is not considered
derived by the shareholder of that corporation even if,
under the tax laws of France, the entity is treated as
fiscally transparent.
Example 2. Income from sources in France is received
by XCo, an entity organized in Country X and owned by a
U.S. shareholder who is a resident for U.S. tax
purposes. XCo is treated for U.S. tax purposes as
fiscally transparent. Country X has not concluded an
agreement containing a provision for the exchange of
information with a view to the prevention of tax
evasion with France. Accordingly, the U.S. shareholder
is not considered under new paragraph 3 to have derived
the French-source income.
These principles also apply to trusts to the extent that
they are fiscally transparent in either Contracting State. For
example, if X, a resident of France, creates a revocable trust
in the United States and names persons resident in a third
country as the beneficiaries of the trust, the trust's income
would be regarded as being derived by a resident of France only
to the extent that the laws of France treat X as deriving the
income for its tax purposes, perhaps through application of
rules similar to the U.S. ``grantor trust'' rules.
Paragraph 3 is not an exception to the saving clause of
paragraph 4. Accordingly, paragraph 3 does not prevent a
Contracting State from taxing an entity that is treated as a
resident of that State under its own tax law. For example, if a
U.S. LLC with members who are residents of France elects to be
taxed as a corporation for U.S. tax purposes, the United States
will tax that LLC on its worldwide income on a net basis,
without regard to whether France views the LLC as fiscally
transparent.
ARTICLE II
Article II of the Protocol replaces Article 10 (Dividends)
of the existing Convention. Article 10 provides rules for the
taxation of dividends paid by a company that is a resident of
one Contracting State to a beneficial owner that is a resident
of the other Contracting State. The Article provides for full
residence country taxation of such dividends and a limited
source-State right to tax. Article 10 also provides rules for
the imposition of a tax on branch profits by the State of
source. Finally, the Article prohibits a State from imposing
taxes on a company resident in the other Contracting State,
other than a branch profits tax, on undistributed earnings.
Paragraph 1 of Article 10
The right of a shareholder's country of residence to tax
dividends arising in the source country is preserved by
paragraph 1, which permits a Contracting State to tax its
residents on dividends paid to them by a company that is a
resident of the other Contracting State. For dividends from any
other source paid to a resident, Article 22 (Other Income)
grants the residence country exclusive taxing jurisdiction
(other than for dividends attributable to a permanent
establishment in the other State).
Paragraph 2 of Article 10
The State of source also may tax dividends beneficially
owned by a resident of the other State, subject to the
limitations of paragraphs 2, 3, and 4. Paragraph 2 generally
limits the rate of withholding tax in the State of source on
dividends paid by a company resident in that State to 15
percent of the gross amount of the dividend. If, however, the
beneficial owner of the dividend is a company resident in
France and owns directly shares representing at least 10
percent of the voting stock of the U.S. company paying the
dividend, then the U.S. rate of withholding tax is limited to 5
percent of the gross amount of the dividend. Shares are
considered voting shares if they provide the power to elect,
appoint or replace any person vested with the powers ordinarily
exercised by the board of directors of a U.S. corporation.
If the beneficial owner of the dividends is a company
resident in the United States that owns, directly or indirectly
at least 10 percent of the capital of the French company paying
the dividends, then the French rate of withholding tax is
limited to 5 percent of the gross amount of the dividend.
Subparagraph (a) of paragraph 2 of Article 10 is in all
material respects the same as subparagraph (a) of paragraph 2
of Article 10 of the 2004 Convention.
The benefits of paragraph 2 may be granted at the time of
payment by means of reduced rate of withholding tax at source.
It also is consistent with the paragraph for tax to be withheld
at the time of payment at full statutory rates, and the treaty
benefit to be granted by means of a subsequent refund so long
as such procedures are applied in a reasonable manner.
The determination of whether the ownership threshold for
subparagraph 2 is met for purposes of the 5 percent maximum
rate of withholding tax is made on the date on which
entitlement to the dividend is determined. Thus, in the case of
a dividend from a U.S. company, the determination of whether
the ownership threshold is met generally would be made on the
dividend record date.
The term ``beneficial owner'' is not defined in the
Convention, and is, therefore, defined under the internal law
of the State granting treaty benefits (i.e., the source State).
The beneficial owner of the dividend for purposes of Article 10
is the person to which the dividend income is attributable for
tax purposes under the laws of the source State. Thus, if a
dividend paid by a corporation that is a resident of one of the
States (as determined under Article 4 (Resident)) is received
by a nominee or agent that is a resident of the other State on
behalf of a person that is not a resident of that other State,
the dividend is not entitled to the benefits of Article 10.
However, a dividend received by a nominee on behalf of a
resident of that other State would be entitled to benefits.
These limitations are confirmed by paragraph 12 of the
Commentary to Article 10 of the OECD Model.
Special rules, however, apply to shares that are held
through fiscally transparent entities. In that case, the rules
of paragraph 3 of Article 4 (Resident) will apply to determine
whether the dividends should be treated as having been derived
by a resident of a Contracting State. Subject to certain
limitations described in paragraph 3 of Article 4, residence
State principles shall be used to determine who derives the
dividends, to assure that the dividends for which the source
State grants benefits of the Convention will be taken into
account for tax purposes by a resident of the residence State.
Source State principles of beneficial ownership shall then
apply to determine whether the person who derives the
dividends, or another resident of the other Contracting State,
is the beneficial owner of the dividends. The source State may
conclude that the person who derives the dividends in the
residence State is a mere nominee, agent, conduit, etc., for a
third country resident and deny benefits of the Convention. If
the person who derives the dividends under paragraph 3 of
Article 4 would not be treated under the source State's
principles for determining beneficial ownership as a nominee,
agent, custodian, conduit, etc., that person will be treated as
the beneficial owner of the dividends for purposes of the
Convention.
Assume, for instance, that a company resident in France
pays a dividend to LLC, an entity which is treated as fiscally
transparent for U.S. tax purposes but is treated as a company
for French tax purposes. USCo, a company incorporated in the
United States, is the sole interest holder in LLC. Paragraph 3
of Article 4 provides that USCo derives the dividend. France's
principles of beneficial ownership shall then be applied to
USCo. If under the laws of France USCo is found not to be the
beneficial owner of the dividend, USCo will not be entitled to
the benefits of Article 10 with respect to such dividend. The
payment may be entitled to benefits, however, if USCo is found
to be a nominee, agent, custodian or conduit for another person
who is a resident of the United States.
If in the above example LLC were formed or organized in a
country that has not concluded an agreement containing a
provision for the exchange of information with a view to the
prevention of tax evasion with France, the dividend will not be
treated as derived by a resident of the United States for
purposes of the Convention. However, LLC may still be entitled
to the benefits of the French tax treaty, if any, with its
country of residence.
Beyond identifying the person to whom the principles of
beneficial ownership shall be applied, the principles of
paragraph 3 of Article 4 will also apply when determining
whether other requirements, such as whether the ownership
threshold of subparagraph 2(a) of Article 10 has been
satisfied.
For example, assume that FranceCo, a company that is a
resident of France, owns all of the outstanding shares in
ThirdDE, an entity that is disregarded for U.S. tax purposes
that is resident in a third country. ThirdDE owns 100 percent
of the stock of USCo. France views ThirdDE as fiscally
transparent under its domestic law, and taxes FranceCo
currently on the income derived by ThirdDE. ThirdDE is formed
or organized in a country that has concluded an agreement
containing a provision for the exchange of information with a
view to the prevention of tax evasion with the United States.
In this case, FranceCo is treated as deriving the dividends
paid by USCo under paragraph 3 of Article 4. Moreover, FranceCo
is treated as owning the shares of USCo directly. The
Convention does not address what constitutes direct ownership
for purposes of Article 10. As a result, whether ownership is
direct is determined under the internal law of the State
granting treaty benefits (i.e., the source State) unless the
context otherwise requires. Accordingly, a company that holds
stock through such an entity will generally be considered to
own directly such stock for purposes of Article 10.
This result may change, however, if ThirdDE is regarded as
non-fiscally transparent under the laws of France, or if
ThirdDE is formed or organized in a country that has not
concluded an agreement containing a provision for the exchange
of information with a view to the prevention of tax evasion
with the United States. If either of these conditions applies,
the income will not be treated as derived by a resident of
France for purposes of the Convention. However, ThirdDE may
still be entitled to the benefits of the U.S. tax treaty, if
any, with its country of residence.
The same principles would apply in determining whether
companies holding shares through fiscally transparent entities
such as partnerships, trusts, and estates would qualify for
benefits. As a result, companies holding shares through such
entities may be able to claim the benefits of subparagraph (a)
of paragraph 2 of Article 10 under certain circumstances. The
lower rate applies when the company's proportionate share of
the shares held by the intermediate entity meets the 10 percent
threshold, and the company meets the requirements of Article
4(3). Whether this ownership threshold is satisfied may be
difficult to determine and often will require an analysis of
the partnership or trust agreement.
Paragraph 3 of Article 10
Paragraph 3 provides exclusive residence-country taxation
(i.e., an elimination of withholding tax) with respect to
certain dividends distributed by a company that is a resident
of one Contracting State to a resident of the other Contracting
State. As described further below, this elimination of
withholding tax is available with respect to certain inter-
company dividends and with respect to certain pension funds.
Subparagraph (a) of paragraph 3 provides for the
elimination of withholding tax on dividends beneficially owned
by a company that has owned, directly or indirectly through one
or more residents of either Contracting State, 80 percent or
more of the voting power of the company paying the dividend for
the 12-month period ending on the date entitlement to the
dividend is determined. The determination of whether the
beneficial owner of the dividends owns at least 80 percent of
the voting power of the company is made by taking into account
stock owned both directly and indirectly through one or more
residents of either Contracting State.
Eligibility for the elimination of withholding tax provided
by subparagraph (a) is subject to additional restrictions based
on, and supplementing, the rules of Article 30 (Limitation on
Benefits of the Convention). Accordingly, a company that meets
the holding requirements described above will qualify for the
benefits of paragraph 3 only if it also: (1) meets the
``publicly traded'' test of subparagraph 2(c) of Article 30,
(2) meets the ``ownership-base erosion'' and ``active trade or
business'' tests described in subparagraph 2(e) and paragraph 4
of Article 30, (3) meets the ``derivative benefits'' test of
paragraph 3 of Article 30, or (4) is granted the benefits of
paragraph 3 of Article 10 by the competent authority of the
source State pursuant to paragraph 6 of Article 30.
These restrictions are necessary because of the increased
pressure on the limitation on benefits tests resulting from the
fact that the United States has relatively few treaties that
provide for such elimination of withholding tax on inter-
company dividends. The additional restrictions are intended to
prevent companies from re-organizing in order to become
eligible for the elimination of withholding tax in
circumstances where the limitation on benefits provision does
not provide sufficient protection against treaty shopping.
For example, assume that ThirdCo is a company resident in a
third country that does not have a tax treaty with the United
States providing for the elimination of withholding tax on
inter-company dividends. ThirdCo owns directly 100 percent of
the issued and outstanding voting stock of USCo, a U.S.
company, and of FCo, a French company. FCo is a substantial
company that manufactures widgets; USCo distributes those
widgets in the United States. If ThirdCo contributes to FCo all
the stock of USCo, dividends paid by USCo to FCo would qualify
for treaty benefits under the active trade or business test of
paragraph 4 of Article 30. However, allowing ThirdCo to qualify
for the elimination of withholding tax, which is not available
to it under the third state's treaty with the United States (if
any), would encourage treaty shopping.
In order to prevent this type of treaty shopping, paragraph
3 requires FCo to meet the ownership-base erosion requirements
of subparagraph 2(e) of Article 30 in addition to the active
trade or business test of paragraph 4 of Article 30. Because
FCo is wholly owned by a third country resident, FCo could not
qualify for the elimination of withholding tax on dividends
from USCo under the combined ownership-base erosion and active
trade or business tests of paragraph 3(b). Consequently, FCo
would need to qualify under another test in paragraph 3 or
obtain discretionary relief from the competent authority under
Article 30(6). For purpose of Article 10(3)(b), it is not
sufficient for a company to qualify for treaty benefits
generally under the active trade or business test or the
ownership-base erosion test unless it qualifies for treaty
benefits under both.
Alternatively, companies that are publicly traded or
subsidiaries of publicly-traded companies will generally
qualify for the elimination of withholding tax. Thus, a company
that is a resident of France and that meets the requirements of
Article 30(2)(c)(i) or (ii) will be entitled to the elimination
of withholding tax, subject to the 12-month holding period
requirement of Article 10(3).
In addition, under Article 10(3)(c), a company that is a
resident of a Contracting State may also qualify for the
elimination of withholding tax on dividends if it satisfies the
derivative benefits test of paragraph 3 of Article 30. Thus, a
French company that owns all of the stock of a U.S. corporation
may qualify for the elimination of withholding tax if it is
wholly-owned by a company that falls within the definition of
``equivalent beneficiary'' in Article 30(7)(f).
The derivative benefits test may also provide benefits to
U.S. companies receiving dividends from French subsidiaries
because of the effect of the Parent-Subsidiary Directive in the
European Union. Under that directive, inter-company dividends
paid within the European Union are free of withholding tax.
Under subparagraph (g) of paragraph 7 of Article 30 that
directive will be taken into account in determining whether the
owner of a U.S. company receiving dividends from a French
company is an equivalent beneficiary. Thus, a company that is a
resident of a member state of the European Union will, by
virtue of the Parent-Subsidiary Directive, satisfy the
requirements of Article 30(7)(f)(1)(bb) with respect to any
dividends received by its U.S. subsidiary from a French
company. For example, assume USCo is a wholly-owned subsidiary
of ICo, an Italian publicly-traded company. USCo owns all of
the shares of FCo, a French company. If FCo were to pay
dividends directly to ICo, those dividends would be exempt from
withholding tax in France by reason of the Parent-Subsidiary
Directive. If ICo meets the other conditions to be an
equivalent beneficiary under subparagraph 7(f) of Article 30,
it will be treated as an equivalent beneficiary by reason of
subparagraph 7(g) of that article.
A company also may qualify for the elimination of
withholding tax pursuant to Article 10(3)(c) if it is owned by
seven or fewer U.S. or French residents who qualify as an
``equivalent beneficiary'' and meet the other requirements of
the derivative benefits provision. This rule may apply, for
example, to certain French corporate joint venture vehicles
that are closely-held by a few French resident individuals.
Subparagraph (f) of paragraph 7 of Article 30 contains a
specific rule of application intended to ensure that for
purposes of applying Article 10(3) certain joint ventures, not
just wholly-owned subsidiaries, can qualify for benefits. For
example, assume that the United States were to enter into a
treaty with Country X, a member of the European Union, that
includes a provision identical to Article 10(3). USCo is 100
percent owned by FCo, a French company, which in turn is owned
49 percent by PCo, a French publicly-traded company, and 51
percent by XCo, a publicly-traded company that is resident in
Country X. In the absence of a special rule for interpreting
the derivative benefits provision, each of PCo and XCo would be
treated as owning only their proportionate share of the shares
held by FCo in USCo. If that rule were applied in this
situation, neither PCo nor XCo would be an equivalent
beneficiary, because neither would meet the 80 percent
ownership test with respect to USCo. However, since both PCo
and XCo are residents of countries that have treaties with the
United States that provide for elimination of withholding tax
on inter-company dividends, it is appropriate to provide
benefits to FCo in this case.
Accordingly, the definition of ``equivalent beneficiary''
includes a rule of application that is intended to ensure that
such joint ventures qualify for the benefits of Article 10(3).
Under that rule, each of the shareholders is treated as owning
shares of USCo with the same percentage of voting power as the
shares held by FCo for purposes of determining whether it would
be entitled to an equivalent rate of withholding tax. This rule
is necessary because of the high ownership threshold for
qualification for the elimination of withholding tax on inter-
company dividends.
If a company does not qualify for the elimination of
withholding tax under any of the foregoing objective tests, it
may request a determination from the relevant competent
authority pursuant to paragraph 6 of Article 30. Benefits will
be granted with respect to an item of income if the competent
authority of the Contracting State in which the income arises
determines that the establishment, acquisition or maintenance
of such resident and the conduct of its operations did not have
as one of its principal purposes the obtaining of benefits
under the Convention.
Paragraph 4 of Article 10
Paragraph 4 provides that paragraphs 2 and 3 do not affect
the taxation of the profits out of which the dividends are
paid. The taxation by a Contracting State of the income of its
resident companies is governed by the internal law of the
Contracting State, subject to the provisions of paragraph 3 of
Article 25 (Non-Discrimination).
Paragraph 5 of Article 10
Paragraph 5 imposes limitations on the rate reductions
provided by paragraphs 2 and 3 in the case of dividends paid by
a RIC, a REIT, a SICAV, a SIIC, or a SPPICAV.
Subparagraph 5(a) provides that dividends paid by a RIC, a
REIT, a SICAV, a SIIC, or a SPPICAV are not eligible for the 5
percent rate of withholding tax provided in subparagraph 2(a)
or the elimination of withholding tax provided in paragraph 3.
The first sentence of subparagraph 5(b) provides that the
15 percent maximum rate of withholding tax of subparagraph 2(b)
applies to dividends paid by RICs or SICAVs.
The second sentence of subparagraph 5(b) provides that the
15 percent rate of withholding tax also applies to dividends
paid by a REIT, a SIIC, or a SPPICAV, provided that one of the
three following conditions is met. First, the beneficial owner
of the dividends is an individual or a pension trust or other
organization maintained exclusively to administer or provide
retirement or employee benefits that is established or
sponsored by a resident, in either case holding an interest of
not more than 10 percent in the REIT, SIIC, or SPPICAV. Second,
the dividends are paid with respect to a class of stock that is
publicly traded and the beneficial owner of the dividend is a
person holding an interest of not more than 5 percent of any
class of the REIT, SIIC, or SPPICAV's shares. Third, the
beneficial owner of the dividends holds an interest in the
REIT, SIIC, or SPPICAV of not more than 10 percent and, in the
case of a REIT, the REIT is ``diversified.''
Subparagraph 5(c) provides that a REIT is diversified if
the gross value of no single interest in real property held by
the REIT exceeds 10 percent of the gross value of the REIT's
total interest in real property. Foreclosure property is not
considered an interest in real property, and a REIT holding a
partnership interest is treated as owning directly its
proportionate share of any interest in real property held by
the partnership.
The restrictions set out above are intended to prevent the
use of RICs or REITs to gain inappropriate U.S. tax benefits,
or the use of SICAVs, SIICs, or SPPICAVs to gain inappropriate
French tax benefits. For example, a company resident in France
that wishes to hold a diversified portfolio of U.S. corporate
shares could hold the portfolio directly and would bear a U.S.
withholding tax of 15 percent on all of the dividends that it
receives. Alternatively, it could hold the same diversified
portfolio by purchasing 10 percent or more of the interests in
a RIC that in turn held the portfolio. Absent the special rule
in paragraph 5, such use of the RIC could transform portfolio
dividends, taxable in the United States under the Convention at
a 15 percent maximum rate of withholding tax, into direct
investment dividends taxable at a 5 percent maximum rate of
withholding tax or eligible for the elimination of source-
country withholding tax on dividends provided in paragraph 3.
Similarly, a resident of France directly holding U.S. real
property would pay U.S. tax upon the sale of the property
either at a 30 percent rate of withholding tax on the gross
income or at graduated rates on the net income. As in the
preceding example, by placing the real property in a REIT, the
investor could, absent a special rule, transform income from
the sale of real estate into dividend income from the REIT,
taxable at the rates provided in Article 10, significantly
reducing the U.S. tax that otherwise would be imposed.
Paragraph 5 prevents this result and thereby avoids a disparity
between the taxation of direct real estate investments and real
estate investments made through REITs. In the cases in which
paragraph 5 allows a dividend from a REIT to be eligible for
the 15 percent rate of withholding tax, the holding in the REIT
is not considered the equivalent of a direct holding in the
underlying real property.
Paragraph 6 of Article 10
Paragraph 6 is in all material respects the same as
paragraph 5 of Article 10 of the existing Convention. Paragraph
6 defines the term dividends broadly and flexibly. The
definition is intended to cover all arrangements that yield a
return on an equity investment in a corporation as determined
under the tax law of the State of source, as well as
arrangements that might be developed in the future.
The term includes income from shares, ``jouissance'' shares
or rights, mining shares, founders' shares, or other rights
(not being debt claims), participating in profits, as well as
income derived from other rights that is subjected to the same
taxation treatment as income from shares by the laws of the
Contracting State of which the company making the distribution
is a resident. Thus, a constructive dividend that results from
a non-arm's length transaction between a corporation and a
related party is a dividend. In the case of the United States
the term dividend includes amounts treated as a dividend under
U.S. law upon the sale or redemption of shares or upon a
transfer of shares in a reorganization. See, e.g., Rev. Rul.
92-85, 1992-2 C.B. 69 (sale of foreign subsidiary's stock to
U.S. sister company is a deemed dividend to extent of the
subsidiary's and siter company's earnings and profits).
Further, a distribution from a U.S. publicly traded limited
partnership, which is taxed as a corporation under U.S. law, is
a dividend for purposes of Article 10. However, a distribution
by a limited liability company is not taxable by the United
States under Article 10, provided the limited liability company
is not characterized as an association taxable as a corporation
under U.S. law.
The term ``dividends'' also includes income from
arrangements, including debt obligations, that carry the right
to participate in profits or that are determined with reference
to profits of the issuer or one of its associated enterprises,
to the extent that such income is characterized as a dividend
under the law of the source State. A payment denominated as
interest that is made by a thinly capitalized corporation may
be treated as a dividend to the extent that the debt is
recharacterized as equity under the laws of the source State.
Distributions to directors as compensation for their services
are not treated as dividends under this Article, but as
directors' fees under Article 16 (Directors' Fees). As such
they are taxable in France to the extent that the services are
performed in France. The provisions of this Article also apply
to beneficial owners of dividends that hold depository receipts
in place of the shares themselves.
Paragraph 7 of Article 10
Paragraph 7 is in all material respects the same as
paragraph 6 of the Article 10 of the existing Convention.
Paragraph 7 excludes from the general source State limitations
under paragraphs 2 through 4 dividends attributable to a
permanent establishment or fixed base of the beneficial owner
in the source State. In such case, the rules of Article 7
(Business Profits) or 14 (Independent Personal Services) shall
apply. Accordingly, the dividends will be taxed on a net basis
using the rates and rules of taxation generally applicable to
residents of the State in which the permanent establishment or
fixed base is located, as such rules may be modified by the
Convention.
Paragraph 8 of Article 10
Paragraph 8 is substantially similar to paragraph 7 of
Article 10 of the existing Convention. Paragraph 8 permits a
Contracting State to impose a branch profits tax on a company
resident in the other Contracting State. The tax is in addition
to other taxes permitted by the Convention.
Paragraph 8 clarifies that such tax may be imposed (subject
to the limitations described in paragraph 9 of Article 10) only
on the portion of the business profits of the company
attributable to the permanent establishment and the portion of
the income of the company derived from real property in the
Contracting State imposing the branch profits tax that is taxed
on a net basis under Article 6 (Income from Real Property), or
that is realized as gains taxable in that State under paragraph
1 of Article 13 (Capital Gains). In the case of the United
States, the imposition of such tax is limited to the portion of
the aforementioned items of income and profits that represents
the ``dividend equivalent amount.'' In the case of France, the
imposition of such tax is limited to the portion of the
aforementioned items of income and profits that is included in
the base of the French withholding tax in accordance with the
provisions of Article 115 ``quinquies'' of the French tax code.
Consistency principles prohibit a taxpayer from applying
provisions of the Code and this Convention inconsistently. In
the context of the branch profits tax, this consistency
requirement means that if a French company uses the principles
of Article 7 to determine its U.S. taxable income then it must
also use those principles to determine its dividend equivalent
amount. Similarly, if the French company instead uses the Code
to determine its U.S. taxable income it must also use the Code
to determine its dividend equivalent amount. As in the case of
Article 7, if a French company, for example, does not from year
to year consistently apply the Code or the Convention to
determine its dividend equivalent amount, then the French
company must make appropriate adjustments or recapture amounts
that would otherwise be subject to U.S. branch profits tax if
it had consistently applied the Code or the Convention to
determine its dividend equivalent amount from year to year.
Paragraph 9 of Article 10
Paragraph 9 limits the rate of the branch profits tax that
may be imposed under paragraph 8 to 5 percent. Paragraph 9 also
provides that the branch profits tax shall not be imposed on a
company in any case if certain requirements are met. In
general, these requirements provide rules for a branch that
parallel the rules for when a dividend paid by a subsidiary
will be subject to exclusive residence-country taxation (i.e.,
the elimination of source-country withholding tax).
Accordingly, the branch profits tax cannot be imposed in the
case of a company that: (1) meets the ``publicly traded'' test
of subparagraph 2(c) of Article 30, (2) meets the ``ownership-
base erosion'' and ``active trade or business'' tests described
in subparagraph 2(e) and paragraph 4 of Article 30, (3) meets
the ``derivative benefits'' test of paragraph 3 of Article 30,
or (4) is granted benefits with respect to the elimination of
the branch profits tax by the competent authority pursuant to
paragraph 6 of Article 30. If the company did not meet any of
those tests, but otherwise qualified for benefits under Article
30, then the branch profits tax would apply at a rate of 5
percent, unless the company is granted benefits with respect to
the elimination of the branch profits tax by the competent
authority pursuant to paragraph 6 of Article 30.
It is intended that paragraph 9 apply equally if a taxpayer
determines its taxable income under the laws of a Contracting
State or under the provisions of Article 7. For example, as
discussed above in the explanation to paragraph 8, consistency
principles require a French company that determines its U.S.
taxable income under the Code to also determine its dividend
equivalent amount under the Code. In that case, paragraph 9
would apply even though the French company did not determine
its dividend equivalent amount using the principles of Article
7.
Paragraph 10 of Article 10
Paragraph 10 is in all material respects the same as
paragraph 8 of Article 10 of the existing Convention. The right
of a Contracting State to tax dividends paid by a company that
is a resident of the other Contracting State is restricted by
paragraph 10 to cases in which the dividends are paid to a
resident of that Contracting State or are attributable to a
permanent establishment or fixed base in that Contracting
State. In the former case, the country of residence may tax the
dividends by virtue of paragraph 2 of Article 29 (Miscellaneous
Provisions). In the latter case, the dividends are taxable by
France or the United States under Article 7 (Business Profits)
or 14 (Independent Personal Services). Thus, a Contracting
State may not impose a ``secondary'' withholding tax on
dividends paid by a nonresident company out of earnings and
profits from that Contracting State.
The paragraph also restricts the right of a Contracting
State to impose corporate level taxes on undistributed profits,
other than a branch profits tax. The paragraph does not
restrict a State's right to tax its resident shareholders on
undistributed earnings of a corporation resident in the other
State. Thus, the authority of the United States to impose taxes
on subpart F income and on earnings deemed invested in U.S.
property, and its tax on income of a passive foreign investment
company that is a qualified electing fund is in no way
restricted by this provision.
Relationship to Other Articles
Notwithstanding the foregoing limitations on source country
taxation of dividends, the saving clause of paragraph 2 of
Article 29 (Miscellaneous Provisions), as amended by the
Protocol, permits the United States to tax dividends received
by its residents and citizens, subject to the special foreign
tax credit rules of paragraph 2(b) of Article 24 (Relief from
Double Taxation), as renumbered by paragraph 1 of Article VIII
of the Protocol, as if the Convention had not come into effect.
The benefits of Article 10 are also subject to the
provisions of Article 30. Thus, if a resident of a Contracting
State is the beneficial owner of dividends paid by a
corporation that is a resident of the other Contracting State,
the shareholder must qualify for treaty benefits under at least
one of the tests of Article 30 in order to receive the benefits
of Article 10.
ARTICLE III
Article III of the Protocol revises Article 12 (Royalties)
of the Convention by generally granting to the State of
residence the exclusive right to tax royalties beneficially
owned by its residents and arising in the other Contracting
State. Prior to its amendment by the Protocol, the existing
Convention permitted the source State to tax royalties
beneficially owned by a resident of the other Contracting State
at a maximum withholding rate of 5 percent of the gross amount
of the royalty. To reflect the elimination of source-country
taxation of royalties, Article III of the Protocol replaces
paragraph 1, deletes paragraphs 2 and 3, and revises paragraphs
4 and 5 of Article 12 of the existing Convention.
Paragraph 1
Paragraph 1 of Article III of the Protocol replaces
paragraph 1 of Article 12 of the Convention. New paragraph 1
generally grants to the State of residence the exclusive right
to tax royalties beneficially owned by its residents and
arising in the other Contracting State.
The term ``beneficial owner'' is not defined in the
Convention, and is, therefore, defined under the internal law
of the State granting treaty benefits (i.e., the State of
source). The beneficial owner of the royalty for purposes of
Article 12 is the person to which the income is attributable
under the laws of the source State. Thus, if a royalty arising
in a Contracting State is received by a nominee or agent that
is a resident of the other State on behalf of a person that is
not a resident of that other State, the royalty is not entitled
to the benefits of Article 12. However, a royalty received by a
nominee on behalf of a resident of that other State would be
entitled to benefits. These limitations are confirmed by
paragraph 4 of the OECD Commentary to Article 12.
Paragraph 2
Paragraph 2 deletes paragraphs 2 through 5 of Article 12 of
the existing Convention.
Paragraph 3
Paragraph 3 amends Article 12 of the existing Convention by
adding new paragraphs 2 and 3. New paragraph 2 defines the term
``royalties'' as used in Article 12 to mean any consideration
for the use of, or the right to use, any copyright of literary,
artistic, or scientific work or any neighboring right
(including reproduction rights and performing rights), any
cinematographic film, sound or picture recording, any software,
any patent, trademark, design or model, plan, secret formula or
process, or other like right or property, or for information
concerning industrial, commercial, or scientific experience.
The term ``royalties'' also includes gains derived from the
alienation of any right or property described in the previous
sentence that are contingent on the productivity, use, or
further alienation thereof. The term ``royalties'' does not
include income from leasing personal property.
The term ``royalties'' is defined in the Convention and
therefore is generally independent of domestic law. Certain
terms used in the definition are not defined in the Convention,
but these may be defined under domestic tax law. For example,
the term ``secret process or formulas'' is found in the Code,
and its meaning has been elaborated in the context of sections
351 and 367. See Rev. Rul. 55-17, 1955-1 C.B. 388; Rev. Rul.
64-56, 1964-1 C.B. 133; Rev. Proc. 69-19, 1969-2 C.B. 301.
Consideration for the use or right to use cinematographic
films, or works on film, tape, or other means of reproduction
of audio or video is specifically included in the definition of
royalties. It is intended that, with respect to any subsequent
technological advances in the field of audio or video
recording, consideration received for the use of audio or video
recording using such technology will also be included in the
definition of royalties.
If an artist who is resident in one Contracting State
records a performance in the other Contracting State, retains a
copyrighted interest in a recording, and receives payments for
the right to use the recording based on the sale or public
playing of the recording, then the right of such other
Contracting State to tax those payments is governed by Article
12. See Boulez v. Commissioner, 83 T.C. 584 (1984), aff'd, 810
F.2d 209 (D.C. Cir. 1986). By contrast, if the artist earns in
the other Contracting State income covered by Article 17
(Artistes and Sportsmen), for example, endorsement income from
the artist's attendance at a film screening, and if such income
also is attributable to one of the rights described in Article
12 (e.g., the use of the artist's photograph in promoting the
screening), Article 17 and not Article 12 is applicable to such
income.
The term ``industrial, commercial, or scientific
experience'' (sometimes referred to as ``know-how'') has the
meaning ascribed to it in paragraph 11 et seq. of the
Commentary to Article 12 of the OECD Model. Consistent with
that meaning, the term may include information that is
ancillary to a right otherwise giving rise to royalties, such
as a patent or secret process.
Know-how also may include, in limited cases, technical
information that is conveyed through technical or consultancy
services. It does not include general educational training of
the user's employees, nor does it include information developed
especially for the user, such as a technical plan or design
developed according to the user's specifications. Thus, as
provided in paragraph 11.3 of the Commentary to Article 12 of
the OECD Model, the term ``royalties'' does not include
payments received as consideration for after-sales service, for
services rendered by a seller to a purchaser under a warranty,
or for pure technical assistance.
The term ``royalties'' also does not include payments for
professional services (such as architectural, engineering,
legal, managerial, medical, software development services). For
example, income from the design of a refinery by an engineer
(even if the engineer employed know-how in the process of
rendering the design) or the production of a legal brief by a
lawyer is not income from the transfer of know-how taxable
under Article 12, but is income from services taxable under
either Article 7 (Business Profits) or Article 14 (Independent
Personal Services). Professional services may be embodied in
property that gives rise to royalties, however. Thus, if a
professional contracts to develop patentable property and
retains rights in the resulting property under the development
contract, subsequent license payments made for those rights
would be royalties.
New paragraph 3 of Article 12 is in all material respects
the same as paragraph 5 of Article 12 of the existing
Convention. This paragraph provides an exception to the rule of
new paragraph 1 that gives the State of residence exclusive
taxing jurisdiction in cases where the beneficial owner of the
royalties carries on business through a permanent establishment
or fixed base in the State of source and the royalties are
attributable to that permanent establishment or fixed base. In
such cases, the provisions of Article 7 (Business Profits) or
Article 14 (Independent Personal Services), as the case may be,
will apply. The source State may not impose tax on copyright
royalties described in new subparagraph 2(a) that are
beneficially owned by a resident of the other Contracting
State.
Paragraph 4
Paragraph 4 of Article III of the Protocol renumbers
paragraphs 6 and 7 of Article 12 of the Convention prior to
amendment by the Protocol as paragraphs 4 and 5, respectively.
New paragraphs 4 and 5 are identical to paragraphs 6 and 7 of
Article 12 of the existing Convention, respectively.
Relationship to Other Articles
Notwithstanding the foregoing limitations on source country
taxation of royalties, the saving clause of paragraph 2 of
Article 29 (Miscellaneous Provisions), as amended by the
Protocol, permits the United States to tax its residents and
citizens, subject to the special foreign tax credit rules of
paragraph 2(b) of Article 24 (Relief from Double Taxation), as
renumbered by paragraph 1 of Article VIII of the Protocol, as
if the Convention had not come into force.
As with other benefits of the Convention, the benefits of
Article 12 are available to a resident of a Contracting State
only if such resident qualifies for treaty benefits under
Article 30 (Limitation on Benefits of the Convention).
ARTICLE IV
Article IV of the Protocol replaces paragraph 5 of Article
13 (Capital Gains) of the existing Convention. Paragraph 5 is
in all material respects the same as paragraph 5 of Article 13
of the existing Convention. The only difference is that a
reference to paragraph 2 of Article 12 (Royalties) has been
revised to conform with the changes made to Article 12 by
Article III of the Protocol.
ARTICLE V
Article V of the Protocol revises paragraph 1 of Article 17
(Artistes and Sportsmen) of the existing Convention. Paragraph
1 is in all material respects the same as paragraph 1 of
Article 17 of the existing Convention. The only difference is
that the reference to ``French francs'' has been replaced with
a reference to ``euros.''
ARTICLE VI
Article VI of the Protocol revises paragraph 1 of Article
18 (Pensions) of the Convention. Paragraph 1 of Article 18 of
the existing Convention provides for exclusive source country
taxation of social security benefits, distributions from
pensions and other similar remuneration arising in one
Contracting State in consideration of past employment paid to a
resident of the other Contracting State. The Protocol revision
clarifies that, notwithstanding the saving clause of paragraph
2 of Article 29 (Miscellaneous Provisions) of the Convention,
and pursuant to the provisions of paragraph 3 of Article 29,
France has the exclusive jurisdiction to tax payments under its
social security or similar legislation to a resident of France
who is a citizen of the United States.
ARTICLE VII
Article VII of the Protocol replaces Article 22 (Other
Income) of the existing Convention. Revised Article 22 conforms
with the corresponding U.S. Model provision. The Article
generally assigns taxing jurisdiction over income not dealt
with in the other Articles of the Convention to the State of
residence of the beneficial owner of the income. In order for
an item of income to be ``dealt with'' in another article it
must be the type of income described in the Article and, in
most cases, it must have its source in a Contracting State. For
example, all royalty income that arises in a Contracting State
and that is beneficially owned by a resident of the other
Contracting State is ``dealt with'' in Article 12 (Royalties).
However, profits derived in the conduct of a business are
``dealt with'' in Article 7 (Business Profits) whether or not
they have their source in one of the Contracting States.
Examples of items of income covered by Article 22 include
income from gambling, punitive (but not compensatory) damages
and covenants not to compete. The Article would also apply to
income from a variety of financial transactions, where such
income does not arise in the course of the conduct of a trade
or business. For example, income from notional principal
contracts and other derivatives would fall within Article 22 if
derived by persons not engaged in the trade or business of
dealing in such instruments, unless such instruments were being
used to hedge risks arising in a trade or business. It would
also apply to securities lending fees derived by an
institutional investor. Further, in most cases guarantee fees
paid within an intercompany group would be covered by Article
22, unless the guarantor were engaged in the business of
providing such guarantees to unrelated parties.
Article 22 also applies to items of income that are not
dealt with in the other articles because of their source or
some other characteristic. For example, Article 11 (Interest)
addresses only the taxation of interest arising in a
Contracting State. Interest arising in a third State that is
not attributable to a permanent establishment, therefore, is
subject to Article 22.
Distributions from partnerships are not generally dealt
with under Article 22 because partnership distributions
generally do not constitute income. Under the Code, partners
include in income their distributive share of partnership
income annually, and partnership distributions themselves
generally do not give rise to income. This would also be the
case under U.S. law with respect to distributions from trusts.
Trust income and distributions that, under the Code, have the
character of the associated distributable net income would
generally be covered by another article of the Convention. See
Code section 641 et seq.
Paragraph 1 of Article 22
The general rule of Article 22 is contained in paragraph 1.
Items of income not dealt with in other articles and
beneficially owned by a resident of a Contracting State will be
taxable only in the State of residence. This exclusive right of
taxation applies whether or not the residence State exercises
its right to tax the income covered by the Article.
The reference in this paragraph to ``items of income
beneficially owned by a resident of a Contracting State''
rather than simply ``items of income of a resident of a
Contracting State,'' as in the OECD Model, is intended merely
to make explicit the implicit understanding in other treaties
that the exclusive residence taxation provided by paragraph 1
applies only when a resident of a Contracting State is the
beneficial owner of the income. Thus, source taxation of income
not dealt with in other articles of the Convention is not
limited by paragraph 1 if it is nominally paid to a resident of
the other Contracting State, but is beneficially owned by a
resident of a third State. However, income received by a
nominee on behalf of a resident of that other State would be
entitled to benefits.
The term ``beneficially owned'' is not defined in the
Convention, and is, therefore, defined as under the internal
law of the State granting treaty benefits (i.e., the source
State). The person who beneficially owns the income for
purposes of Article 22 is the person to which the income is
attributable for tax purposes under the laws of the source
State.
Paragraph 2 of Article 22
This paragraph provides an exception to the general rule of
paragraph 1 for income that is attributable to a permanent
establishment or a fixed base maintained in a Contracting State
by a resident of the other Contracting State. The taxation of
such income is governed by the provisions of Article 7
(Business Profits) or Article 14 (Independent Personal
Services), as the case may be. Therefore, income arising
outside the United States that is attributable to a permanent
establishment or a fixed base maintained in the United States
by a resident of the other Contracting State generally would be
taxable by the United States under the provisions of Article 7
or Article 14. This would be true even if the income is sourced
in a third State.
Relationship to Other Articles
This Article is subject to the saving clause of paragraph 2
of Article 29 (Miscellaneous Provisions). Thus, the United
States may tax the income of a resident of the other
Contracting State that is not dealt with elsewhere in the
Convention, if that resident is a citizen of the United States.
The Article is also subject to the provisions of Article 30
(Limitation on Benefits). Thus, if a resident of the other
Contracting State earns income that falls within the scope of
paragraph 1, but that is taxable by the United States under
U.S. law, the income would be exempt from U.S. tax under the
provisions of this Article only if the resident satisfies one
of the tests of Article 30 for entitlement to benefits.
ARTICLE VIII
Paragraph 1
Paragraph 1 revises the numbering incorporated in the
alternat of the United States of the existing Convention. In
both the English and French versions of the United States
alternat, what is paragraph 1 of Article 24 (Relief From Double
Taxation) of the existing Convention is renumbered paragraph 2,
and what is paragraph 2 of Article 24 (Relief From Double
Taxation) of the existing Convention is renumbered paragraph 1.
This change is intended to make the numbering of the paragraphs
of Article 24 of the Convention in the alternat of the United
States and the alternat of France consistent.
Paragraph 2
Paragraph 2 revises what was subparagraph 2(a)(iii) of the
United States alternat of the existing Convention, and is
renumbered subparagraph 1(a)(iii) by paragraph 1 of this
Article of the Protocol. The revision deletes the reference to
Article 12 (Royalties) in subparagraph 1(a)(iii). This revision
is consistent with the Protocol's revision of paragraph 1 of
Article 12, to provide for exclusive residence State taxation
of royalties beneficially owned by its residents and arising in
the other Contracting State. Royalties are covered under
subparagraph 1(a) as revised by the Protocol, but are addressed
under clause (i), as income other than that referred to in
clauses (ii) and (iii).
Paragraph 3
Paragraph 3 revises clause (i) of subparagraph (b) of
paragraph 1 of Article 24, as renumbered by paragraph 1 of this
Article of the Protocol. The Protocol updates cross-references
and makes them consistent with amendments made by this Protocol
to other articles of the Convention.
Paragraph 4
Paragraph 4 revises clause (i) of subparagraph (e) of
paragraph 1 of Article 24, as renumbered by paragraph 1 of this
Article of the Protocol, to clarify that France may continue to
allow companies resident in France to elect to be taxed on a
worldwide basis and allow a tax credit, instead of applying its
general system of exempting foreign business income.
Paragraph 5
Paragraph 5 deletes subparagraph (c) of paragraph 2 of
Article 24 of the Convention, as amended by paragraph 1 of this
Article of the Protocol. The provision was previously intended
to ensure that French government employees performing
government services in the United States who were dual
nationals (i.e., U.S. citizens as well as nationals of France)
would not be subject to double taxation. Under new paragraph 9
of Article 29 (Miscellaneous Provisions) of the Convention, as
added by the Protocol, remuneration for such services by such
persons is taxable only in the United States, and therefore
subparagraph (c) of paragraph 2 of Article 24 of the Convention
(as it is numbered subsequent to the amendment provided for in
paragraph 1 of this Article) is not necessary.
ARTICLE IX
Paragraphs 1 and 2 revise paragraphs 2 and 3 of Article 25
(Non-Discrimination), respectively. The Protocol updates cross-
references and makes them consistent with amendments made by
this Protocol to other articles of the Convention.
ARTICLE X
Article X of the Protocol replaces paragraph 5 of Article
26 (Mutual Agreement Procedure) of the Convention with new
paragraphs 5 and 6. New paragraphs 5 and 6 provide a mandatory
binding arbitration proceeding (Arbitration Proceeding). The
Arbitration MOU provides additional rules and procedures that
apply to a case considered under the arbitration provisions.
New paragraph 5 provides that a case shall be resolved
through arbitration when the competent authorities have
endeavored but are unable to reach a complete agreement
regarding a case and the following three conditions are
satisfied. First, tax returns have been filed with at least one
of the Contracting States with respect to the taxable years at
issue in the case. Second, the case is not a case that the
competent authorities agree before the date on which
arbitration proceedings would otherwise have begun, is not
suitable for determination by arbitration. Third, all concerned
persons and their authorized representatives agree, according
to the provisions of subparagraph (d) of paragraph 6, not to
disclose to any other person any information received during
the course of the arbitration proceeding from either
Contracting State or the arbitration board, other than the
determination of the board (confidentiality agreement). The
confidentiality agreement may also be executed by any concerned
person that has the legal authority to bind any other concerned
person on the matter. For example, a parent corporation with
the legal authority to bind its subsidiary with respect to
confidentiality may execute a comprehensive confidentiality
agreement on its own behalf and that of its subsidiary.
New paragraph 5 provides that an unresolved case shall not
be submitted to arbitration if a decision on such case has
already been rendered by a court or administrative tribunal of
either Contracting State.
The United States and France have agreed in the Arbitration
MOU that binding arbitration will be used to determine the
application of the Convention in respect of any case where the
competent authorities have endeavored but are unable to reach
an agreement under Article 26 regarding such application. The
competent authorities may, however, agree that the particular
case is not suitable for determination by arbitration.
New paragraph 6 provides additional rules and definitions
to be used in applying the arbitration provisions.
Subparagraph 6(a) provides that the term ``concerned
person'' means the person that brought the case to competent
authority for consideration under Article 26 and includes all
other persons, if any, whose tax liability to either
Contracting State may be directly affected by a mutual
agreement arising from that consideration. For example, a
concerned person does not only include a U.S. corporation that
brings a transfer pricing case with respect to a transaction
entered into with its French subsidiary for resolution to the
U.S. competent authority, but also the French subsidiary, which
may have a correlative adjustment as a result of the resolution
of the case.
Subparagraph 6(c) provides that an arbitration proceeding
begins on the later of two dates: two years from the
commencement date of that case, unless both competent
authorities have previously agreed to a different date, or the
earliest date upon which all concerned persons have entered
into a confidentiality agreement and the agreements have been
received by both competent authorities. The commencement date
of the case is defined by subparagraph 6(b) as the earliest
date on which the information necessary to undertake
substantive consideration for a mutual agreement has been
received by both competent authorities.
Clause (p) of the Arbitration MOU provides that each
competent authority will confirm in writing to the other
competent authority and to the concerned persons the date of
its receipt of the information necessary to undertake
substantive consideration for a mutual agreement. Such
information will be submitted to the competent authorities
under relevant internal rules and procedures of each of the
Contracting States. The information will not be considered
received until both competent authorities have received copies
of all materials submitted to either Contracting State by
concerned persons in connection with the mutual agreement
procedure.
The Arbitration MOU provides several procedural rules once
an arbitration proceeding under paragraph 5 of Article 26 has
commenced, but the competent authorities may complete these
rules as necessary. In addition, the arbitration panel may
adopt any procedures necessary for the conduct of its business,
provided the procedures are not inconsistent with any provision
of Article 26.
Clause (e) of the Arbitration MOU provides that each
Contracting State has 90 days from the date on which the
arbitration proceeding begins to send a written communication
to the other Contracting State appointing one member of the
arbitration panel. The members of the arbitration panel shall
not be employees of the tax administration which appoints them.
Within 60 days of the date the second of such communications is
sent, these two board members will appoint a third member to
serve as the chair of the panel. The competent authorities will
develop a non-exclusive list of individuals familiar in
international tax matters who may potentially serve as the
chair of the panel, but in any case, the chair can not be a
citizen of either Contracting State. In the event that the two
members appointed by the Contracting States fail to agree on
the third member by the requisite date, these members will be
dismissed and each Contracting State will appoint a new member
of the panel within 30 days of the dismissal of the original
members.
Clause (g) of the Arbitration MOU establishes deadlines for
submission of materials by the Contracting States to the
arbitration panel. Each competent authority has 60 days from
the date of appointment of the chair to submit a Proposed
Resolution describing the proposed disposition of the specific
monetary amounts of income, expense or taxation at issue in the
case, and a supporting Position Paper. Copies of each State's
submissions are to be provided by the panel to the other
Contracting State on the date on which the later of the
submissions is submitted to the panel. Each of the Contracting
States may submit a Reply Submission to the panel within 120
days of the appointment of the chair to address points raised
in the other State's Proposed Resolution or Position Paper. If
one Contracting State fails to submit a Proposed Resolution
within the requisite time, the Proposed Resolution of the other
Contracting State is deemed to be the determination of the
arbitration panel in the case and the arbitration proceeding
will be terminated. Additional information may be supplied to
the arbitration panel by a Contracting State only at the
panel's request. The panel will provide copies of any such
requested information, along with the panel's request, to the
other Contracting State on the date on which the request or
response is submitted. All communication from the Contracting
States to the panel, and vice versa, is to be in writing
between the chair of the panel and the designated competent
authorities with the exception of communication regarding
logistical matters.
Clause (h) of the Arbitration MOU provides that the
presenter of the case to the competent authority of a
Contracting State may submit a Position Paper to the panel for
consideration by the panel. The Position Paper must be
submitted within 90 days of the appointment of the chair, and
the panel will provide copies of the Position Paper to the
Contracting States on the date on which the later of the
submissions of the Contracting States is submitted to the
panel.
The arbitration panel must deliver a determination in
writing to the Contracting States within six months of the
appointment of the chair. The determination must be one of the
two Proposed Resolutions submitted by the Contracting States.
The determination may only provide a determination regarding
the amount of income, expense or tax reportable to the
Contracting States. The determination has no precedential value
and consequently the rationale behind a panel's determination
would not be beneficial and may not be provided by the panel.
Unless any concerned person does not accept the decision of
the arbitration panel, the determination of the panel
constitutes a resolution by mutual agreement under Article 26
and, consequently, is binding on both Contracting States.
Within 30 days of receiving the determination from the
competent authority to which the case was first presented, each
concerned person must advise that competent authority whether
the person accepts the determination. In addition, if the case
is in litigation, each concerned person who is a party to the
litigation must also advise, within the same time frame, the
court of its acceptance of the arbitration determination, and
withdraw from the litigation the issues resolved by the
arbitration proceeding. If any concerned person fails to advise
the competent authority and relevant court within the requisite
time, such failure is considered a rejection of the
determination. If a determination is rejected, the case cannot
be the subject of a subsequent arbitration proceeding. After
the commencement of the arbitration proceeding but before a
decision of the panel has been accepted by all concerned
persons, the competent authorities may reach a mutual agreement
to resolve the case and terminate the arbitration proceeding.
Correspondingly, a concerned person may withdraw its request
for the competent authorities to engage in the Mutual Agreement
Procedure and thereby terminate the arbitration proceeding at
any time.
For purposes of the arbitration proceeding, the members of
the arbitration panel and their staffs shall be considered
``persons or authorities'' to whom information may be disclosed
under Article 27 (Exchange of Information). Clause (n) of the
Arbitration MOU provides that all materials prepared in the
course of, or relating to the arbitration proceeding are
considered information exchanged between the Contracting
States. No information relating to the arbitration proceeding
or the panel's determination may be disclosed by members of the
arbitration panel or their staffs or by either competent
authority, except as permitted by the Convention and the
domestic laws of the Contracting States. Members of the
arbitration panel and their staffs must agree in statements
sent to each of the Contracting States in confirmation of their
appointment to the arbitration board to abide by and be subject
to the confidentiality and nondisclosure provisions of Article
27 of the Convention and the applicable domestic laws of the
Contracting States, with the most restrictive of the provisions
applying.
The applicable domestic law of the Contracting States
determines the treatment of any interest or penalties
associated with a competent authority agreement achieved
through arbitration.
Fees and expenses are borne equally by the Contracting
States, including the cost of translation services. In general,
the fees of members of the arbitration panel will be set at the
fixed amount of $2,000 per day or the equivalent amount in
euros. The expenses of members of the panel will be set in
accordance with the International Centre for Settlement of
Investment Disputes (ICSID) Schedule of Fees for arbitrators
(in effect on the date on which the arbitration board
proceedings begin). The competent authorities may amend the set
fees and expenses of members of the board. Meeting facilities,
related resources, financial management, other logistical
support, and general and administrative coordination of the
arbitration proceeding will be provided, at its own cost, by
the Contracting State whose competent authority initiated the
mutual agreement proceedings. All other costs are to be borne
by the Contracting State that incurs them.Article XI
Article XI of the Protocol replaces Article 27 (Exchange of
Information) of the Convention. New paragraph 1 of Article 27
is substantially the same as the first two sentences of
paragraph 1 of Article 27 of the existing Convention. The
substance of the remaining two sentences of former paragraph 1
are found in new paragraph 2 of the Article, discussed below.
Paragraph 1 of Article 27
New paragraph 1 authorizes the competent authorities to
exchange information as may be relevant for carrying out the
provisions of the Convention or to the administration or
enforcement of the domestic laws concerning taxes imposed by
the Contracting States, insofar as the taxation under those
domestic laws is not contrary to the Convention. New paragraph
1 uses the phrase ``may be relevant'', which is used in the
U.S. Model, to clarify that the rule incorporates the standard
in Code section 7602 which authorizes the Internal Revenue
Service to examine ``any books, papers, records, or other data
which may be relevant or material.'' (Emphasis added.) In
United States v. Arthur Young & Co., 465 U.S. 805, 814 (1984),
the Supreme Court stated that ``the language `may be' reflects
Congress's express intention to allow the Internal Revenue
Service to obtain `items of even potential relevance to an
ongoing investigation, without reference to its
admissibility.''' (Emphasis in original.) However, the language
``may be'' would not support a request in which a Contracting
State simply asked for information regarding all bank accounts
maintained by residents of that Contracting State in the other
Contracting State, or even all accounts maintained by its
residents with respect to a particular bank.
The authority to exchange information granted by paragraph
1 is not restricted by Article 1 (Personal Scope) or Article 2
(Taxes Covered), and thus need not relate solely to persons or
taxes otherwise covered by the Convention. For purposes of
Article 27, the taxes covered by the Convention constitute a
broader category of taxes than those referred to in Article 2
(Taxes Covered). Exchange of information is authorized with
respect to taxes of every kind imposed by a Contracting State
at the national level. Accordingly, information may be
exchanged with respect to U.S. estate and gift taxes, excise
taxes or, with respect to France, value added taxes. In this
regard, paragraph 1 is broader than paragraph 1 of Article 27
of the 2004 Convention. Article 27 does not apply to taxes
imposed by political subdivisions or local authorities of the
Contracting States.
Paragraph 2 of Article 27
New paragraph 2 of Article 27 is substantially the same as
the last two sentences of paragraph 1 of Article 27 of the
existing Convention. Under paragraph 2, information may be
exchanged for use in all phases of the taxation process
including assessment, collection, enforcement or the
determination of appeals. Thus, the competent authorities may
request and provide information for cases under examination or
criminal investigation, in collection, on appeals, or under
prosecution.
Any information received by a Contracting State pursuant to
the Convention is to be treated as secret in the same manner as
information obtained under the tax laws of that State. Such
information shall be disclosed only to persons or authorities,
including courts and administrative bodies, involved in the
assessment or collection of, the administration and enforcement
in respect of, the determination of appeals in relation to the
taxes referred to in new paragraph 1 of Article 27, or to the
oversight of the above. The information may be used by such
persons only for such purposes. Although the information
received by persons described in paragraph 2 is to be treated
as secret, it may be disclosed by such persons in public court
proceedings or in judicial decisions.
The provisions of paragraph 2 authorize the U.S. competent
authority to continue to allow legislative bodies, such as the
tax-writing committees of Congress and the Government
Accountability Office, to examine tax return information
received from France when such bodies or offices are engaged in
overseeing the administration of U.S. tax laws or a study of
the administration of U.S. tax laws pursuant to a directive of
Congress. However, the secrecy requirements of paragraph 2 must
be met.
Paragraph 3 of Article 27
New paragraph 3 is substantively the same as paragraph 2 of
Article 27 of the existing Convention. Paragraph 3 provides
that the provisions of paragraphs 1 and 2 do not impose on
France or the United States the obligation to carry out
administrative measures at variance with the laws and
administrative practice of either State; to supply information
which is not obtainable under the laws or in the normal course
of the administration of either State; or to supply information
which would disclose any trade, business, industrial,
commercial or professional secret or trade process, or
information the disclosure of which would be contrary to public
policy.
Thus, a requesting State may be denied information from the
other State if the information would be obtained pursuant to
procedures or measures that are broader than those available in
the requesting State. However, the statute of limitations of
the Contracting State making the request for information should
govern a request for information. Thus, the Contracting State
of which the request is made should attempt to obtain the
information even if its own statute of limitations has passed.
In many cases, relevant information will still exist in the
business records of the taxpayer or a third party, even though
it is no longer required to be kept for domestic tax purposes.
While paragraph 3 states conditions under which a
Contracting State is not obligated to comply with a request
from the other Contracting State for information, the requested
State is not precluded from providing such information, and
may, at its discretion, do so subject to the limitations of its
internal law. In addition, as made clear by paragraph 4, in no
case shall the limitations in paragraph 3 be construed to
permit a Contracting State to decline to obtain information and
supply information because it has no domestic tax interest in
such information.
Paragraph 4 of Article 27
Subparagraph (a) of paragraph 4 corresponds to paragraph 4
of Article 26 of the U.S. Model and provides that if a
Contracting State requests information in accordance with
Article 27, the other Contracting State shall use its
information gathering measures to obtain the requested
information. Subparagraph 4(a) makes clear that the obligation
to provide information is limited by the provisions of
paragraph 3, but that such limitations shall not be construed
to permit a Contracting State to decline to obtain and supply
information because it has no domestic tax interest in such
information. In the absence of such a provision, some taxpayers
have argued that subparagraph 3(a) prevents a Contracting State
from requesting information from a bank or fiduciary that the
Contracting State does not need for its own tax purposes. This
paragraph clarifies that paragraph 3 does not impose such a
restriction and that a Contracting State is not limited to
providing only the information that it already has in its own
files.
Subparagraph (b) of new paragraph 4 is the same as
subparagraph 4(b) of Article 27 of the existing Convention and
corresponds to paragraph 6 of Article 26 of the U.S. Model.
Subparagraph 4(b) provides that the requesting State may
specify the form in which information to be provided, (e.g.,
depositions of witnesses and authenticated copies of original
documents). The intention is to ensure that the information may
be introduced as evidence in the judicial proceedings of the
requesting State. The requested State should, if possible,
provide the information in the form requested to the same
extent that it can obtain information in that form under its
own laws and administrative practices with respect to its own
taxes.
Subparagraph (c) of new paragraph 4 is the same as
subparagraph 4(c) of Article 27 of the existing Convention and
corresponds to paragraph 8 of Article 26 of the U.S. Model.
Subparagraph 4(c) provides that the requested State shall allow
representatives of the requesting State to enter the requested
State to interview taxpayers and look at and copy their books
and records, but only after obtaining the consent of those
taxpayers and the competent authority of the requested State,
and only if the two States agree to allow such inquiries on a
reciprocal basis. Such inquiries will not be considered audits
for purposes of French domestic law. Subparagraph 4(c) was
intended to reinforce that the administrations can conduct
consensual tax examinations abroad, and was not intended to
limit travel or supersede any arrangements or procedures the
competent authorities may have previously had in place
regarding travel for tax administration purposes.
Paragraph 5 of Article 27
New paragraph 5 conforms with the corresponding U.S. and
OECD Model provisions. Paragraph 5 provides that a Contracting
State may not decline to provide information because that
information is held by a financial institution, nominee or
person acting in an agency or fiduciary capacity. Thus,
paragraph 5 would effectively prevent a Contracting State from
relying on paragraph 3 to argue that its domestic bank secrecy
laws (or similar legislation relating to disclosure of
financial information by financial institutions or
intermediaries) override its obligation to provide information
under paragraph 1. This paragraph also requires the disclosure
of information regarding the beneficial owner of an interest in
a person.
ARTICLE XII
Article XII of the Protocol replaces paragraph 5 of Article
28 (Assistance in Collection) of the Convention. The change
revises paragraph 5 so as to remove the now obsolete reference
to the provision of paragraph 4 of Article 10 (Dividends) of
the existing Convention prior to amendment by the Protocol
related to the ``avoir fiscal.''
ARTICLE XIII
Article XIII of the Protocol amends Article 29
(Miscellaneous Provisions) of the Convention.
Paragraph 1
Paragraph 1 replaces Paragraph 2 of Article 29 of the
existing Convention. New paragraph 2 provides that
notwithstanding any provision of the Convention except as
provided in paragraph 3, the United States may tax its
residents and citizens as if the Convention had not come into
effect, and France may tax entities which have their place of
effective management and which are subject to tax in France as
if paragraph 3 of Article 4 of the Convention had not come into
effect.
New paragraph 2 also contains language that corresponds to
former paragraph 2, but revises certain language pertaining to
former citizens and former long-term residents. These changes
bring the Convention into conformity with the U.S. taxation of
former citizens and long-term residents under Code section 877.
Section 877 generally applies to a former citizen or long-term
resident of the United States who relinquishes citizenship or
terminates long-term residency before June 17, 2008 if he fails
to certify that he has complied with U.S. tax laws during the 5
preceding years, or if either of the following criteria exceed
established thresholds: (a) the average annual net income tax
of such individual for the period of 5 taxable years ending
before the date of the loss of status, or (b) the net worth of
such individual as of the date of the loss of status.
The revised language of new paragraph 2 provides that a
former citizen or former long-term resident of a Contracting
State, may, for a period of ten years following the loss of
such status, be taxed in accordance with the laws of the
Contracting State with respect to its income from, or treated
under the domestic laws of that Contracting State as being
from, sources within that Contracting State. A ``long term
resident'' is defined to mean, with respect to either
Contracting State, any individual (other than a citizen of that
Contracting State) who is a lawful permanent resident of that
Contracting State in at least eight taxable years during the
preceding fifteen taxable years. Paragraph 1 also provides that
France may tax entities which have their place of effective
management in France and which are subject to tax in France as
if paragraph 3 of Article 4 (Residence) of the Convention had
not come into effect.
Paragraph 2
Paragraph 2 revises paragraph 3(b) of Article 29 of the
existing Convention so as to make the application of the
exception to paragraph 2 of Article 29 bilateral, consistent
with the bilateral application of the rules pertaining to
former citizens and former long-term residents under paragraph
2 of Article 29 as revised by paragraph 1 of the Article.
Paragraph 3
Paragraph 3 updates the cross-references contained in
paragraph 7(b) of Article 29 of the existing Convention to
conform to the change in the paragraph numbering in Article 24
(Relief from Double Taxation) provided by paragraph 1 of
Article VIII of the Protocol.
Paragraph 4
Paragraph 4 adds a new paragraph 9 to Article 29 of the
existing Convention that overrides the rules of Article 19
(Public Remuneration) of the existing Convention in certain
cases. Under paragraph 1(a) of Article 19 and paragraphs 2 and
3(b) of Article 29 of the existing Convention, remuneration,
other than a pension, paid by France, a local authority
thereof, or an agency or instrumentality of France or a local
authority thereof (collectively the French government), to a
lawful permanent resident (green card holder) of the United
States, whether or not a national of France, for services
provided to the French government in the United States is
taxable in both France and the United States. Double taxation
is relieved under paragraph 1 of Article 24 (Relief from Double
Taxation). See also Announcement 97-61, 1997-29 I.R.B. 13
(extending the resourcing rule of Article 24(1)(c) to green
card holders). This can result in some double taxation if the
limitations of the law of the United States disallow credit for
some of the French tax. New paragraph 9 of Article 29 remedies
this problem by providing that remuneration paid by the French
government to green card holders working for the French
government in the United States will be taxable only in the
United States. The new paragraph also provides that
remuneration paid by the French government to nationals and
residents of the United States for services provided to the
French government in the United States will be taxable only in
the United States even if the service provider is also a
national of France. Under the existing Convention, such
remuneration is exempt from U.S. tax if the service provider is
a national of both countries.
ARTICLE XIV
Article XIV of the Protocol replaces Article 30 (Limitation
on Benefits of the Convention) of the Convention. Article 30
contains anti-treaty-shopping provisions that are intended to
prevent residents of third countries from benefiting from what
is intended to be a reciprocal agreement between two countries.
In general, the provision does not rely on a determination of
purpose or intention but instead sets forth a series of
objective tests. A resident of a Contracting State that
satisfies one of the tests will receive benefits regardless of
its motivations in choosing its particular business structure.
The structure of the Article is as follows: Paragraph 1
states the general rule that a resident of a Contracting State
is entitled to benefits otherwise accorded to residents only to
the extent provided in the Article. Paragraph 2 lists a series
of attributes of a resident of a Contracting State, the
presence of any one of which will entitle that person to all
the benefits of the Convention. Paragraph 3 provides a so-
called ``derivative benefits'' test under which certain
categories of income may qualify for benefits. Paragraph 4 sets
forth the ``active trade or business test,'' under which a
person may be granted benefits with regard to certain types of
income regardless of whether the person qualifies for benefits
under paragraph 2. Paragraph 5 provides special rules for so-
called ``triangular cases'' notwithstanding the other
provisions of Article 30. Paragraph 6 provides that benefits
may also be granted if the competent authority of the State
from which the benefits are claimed determines that it is
appropriate to provide benefits in that case. Paragraph 7
defines certain terms used in the Article.
Paragraph 1 of Article 30
Paragraph 1 provides that a resident of a Contracting State
is entitled to all the benefits of the Convention otherwise
accorded to residents of a Contracting State only to the extent
provided in the Article. The benefits otherwise accorded to
residents under the Convention include all limitations on
source-based taxation under Articles 6 (Income from Real
Property) through 23 (Capital), the treaty-based relief from
double taxation provided by Article 24 (Relief from Double
Taxation), and the protection afforded to residents of a
Contracting State under Article 25 (Nondiscrimination). Some
provisions do not require that a person be a resident in order
to enjoy the benefits of those provisions. For example, Article
26 (Mutual Agreement Procedure) is not limited to residents of
the Contracting States, and Article 31 (Diplomatic and Consular
Officers) applies to diplomatic agents and consular officers
regardless of residence. Article 30 accordingly does not limit
the availability of treaty benefits under such provisions.
Article 30 and the anti-abuse provisions of domestic law
complement each other, as Article 30 effectively determines
whether an entity has a sufficient nexus to a Contracting State
to be treated as a resident for treaty purposes, while domestic
anti-abuse provisions (e.g., business purpose, substance-over-
form, step transaction or conduit principles) determine whether
a particular transaction should be recast in accordance with
its substance. Thus, internal law principles of the source
Contracting State may be applied to identify the beneficial
owner of an item of income, and Article 30 then will be applied
to the beneficial owner to determine if that person is entitled
to the benefits of the Convention with respect to such income.
Paragraph 2 of Article 30
Paragraph 2 has six subparagraphs, each of which describes
a category of residents that are entitled to all benefits of
the Convention. It is intended that the provisions of paragraph
2 will be self-executing. Unlike the provisions of paragraph 6,
discussed below, claiming benefits under paragraph 2 does not
require an advance competent authority ruling or approval. The
tax authorities may, of course, on review, determine that the
taxpayer has improperly interpreted the paragraph and is not
entitled to the benefits claimed.
Individuals--Subparagraph 2(a)
Subparagraph 2(a) provides that individual residents of a
Contracting State will be entitled to all the benefits of the
Convention. If such an individual receives income as a nominee
on behalf of a third country resident, benefits may be denied
under the applicable articles of the Convention by the
requirement that the beneficial owner of the income be a
resident of a Contracting State.
Governments--Subparagraph 2(b)
Subparagraph 2(b) provides that the Contracting States and
any political subdivision or local authority thereof will be
entitled to all the benefits of the Convention.
Publicly-Traded Corporations--Subparagraph 2(c)(i)
Subparagraph 2(c) applies to two categories of companies:
publicly traded companies and subsidiaries of publicly traded
companies. A company resident in a Contracting State is
entitled to all the benefits of the Convention under clause (i)
of subparagraph 2(c) if the principal class of its shares, and
any disproportionate class of shares, is regularly traded on
one or more recognized stock exchanges and the company
satisfies at least one of the following additional tests.
First, the company's principal class of shares is primarily
traded on a recognized stock exchange located in a Contracting
State of which the company is a resident (or, in the case of a
company resident in France, on a recognized stock exchange
located within the European Union or, in the case of a company
resident in the United States, on a recognized stock exchange
located in another state that is a party to the North American
Free Trade Agreement). Second, the company's primary place of
management and control is in its State of residence.
The term ``recognized stock exchange'' is defined in
subparagraph (d) of paragraph 7. It includes (i) the NASDAQ
System and any stock exchange registered with the Securities
and Exchange Commission as a national securities exchange for
purposes of the Securities Exchange Act of 1934; (ii) the
French stock exchanges controlled by the ``Autorite des marches
financiers''; (iii) the stock exchanges of Amsterdam, Brussels,
Frankfurt, Hamburg, London, Lisbon, Madrid, Milan, Stockholm,
Sydney, Tokyo, Toronto and the Swiss stock exchange; and (iv)
any other stock exchange agreed upon by the competent
authorities of the Contracting States.
If a company has only one class of shares, it is only
necessary to consider whether the shares of that class meet the
relevant trading requirements. If the company has more than one
class of shares, it is necessary as an initial matter to
determine which class or classes constitute the ``principal
class of shares.'' The term ``principal class of shares'' is
defined in subparagraph (a) of paragraph 7 to mean the ordinary
or common shares of the company representing the majority of
the aggregate voting power and value of the company. If the
company does not have a class of ordinary or common shares
representing the majority of the aggregate voting power and
value of the company, then the ``principal class of shares'' is
that class or any combination of classes of shares that
represents, in the aggregate, a majority of the voting power
and value of the company. Although in a particular case
involving a company with several classes of shares it is
conceivable that more than one group of classes could be
identified that account for more than 50 percent of the shares,
it is only necessary for one such group to satisfy the
requirements of this subparagraph in order for the company to
be entitled to benefits. Benefits would not be denied to the
company even if a second, non-qualifying, group of shares with
more than half of the company's voting power and value could be
identified. Subparagraph (c) of paragraph 7 defines the term
``shares'' to include depository receipts for shares.
A company whose principal class of shares is regularly
traded on a recognized stock exchange will nevertheless not
qualify for benefits under subparagraph (c) of paragraph 2 if
it has a disproportionate class of shares that is not regularly
traded on a recognized stock exchange. The term
``disproportionate class of shares'' is defined in subparagraph
(b) of paragraph 7. A company has a disproportionate class of
shares if it has outstanding a class of shares that is subject
to terms or other arrangements that entitle the holder to a
larger portion of the company's income, profit, or gain in the
other Contracting State than that to which the holder would be
entitled in the absence of such terms or arrangements. Thus,
for example, a company resident in France has a
disproportionate class of shares if it has outstanding a class
of ``tracking stock'' that pays dividends based upon a formula
that approximates the company's return on its assets employed
in the United States.
The following example illustrates this result.
Example. FCo is a corporation resident in France. FCo
has two classes of shares: Common and Preferred. The
Common shares are listed and regularly traded on a
designated stock exchange in France. The Preferred
shares have no voting rights and are entitled to
receive dividends equal in amount to interest payments
that FCo receives from unrelated borrowers in the
United States. The Preferred shares are owned entirely
by a single investor that is a resident of a country
with which the United States does not have a tax
treaty. The Common shares account for more than 50
percent of the value of FCo and for 100 percent of the
voting power. Because the owner of the Preferred shares
is entitled to receive payments corresponding to the
U.S. source interest income earned by FCo, the
Preferred shares are a disproportionate class of
shares. Because the Preferred shares are not regularly
traded on a recognized stock exchange, FCo will not
qualify for benefits under subparagraph (c) of
paragraph 2.
The term ``regularly traded'' is not defined in the
Convention. In accordance with paragraph 2 of Article 3
(General Definitions), this term will be defined by reference
to the domestic laws of the State from which treaty benefits
are sought, generally the Source State. In the case of the
United States, this term is understood to have the meaning it
has under Treas. Reg. section 1.884-5(d)(4)(i)(B), relating to
the branch tax provisions of the Code. Under these regulations,
a class of shares is considered to be ``regularly traded'' if
two requirements are met: trades in the class of shares are
made in more than de minimis quantities on at least 60 days
during the taxable year, and the aggregate number of shares in
the class traded during the year is at least 10 percent of the
average number of shares outstanding during the year. Section
1.884-5(d)(4)(i)(A), (ii) and (iii) will not be taken into
account for purposes of defining the term ``regularly traded''
under the Convention.
The regularly traded requirement can be met by trading on
any recognized exchange or exchanges. Trading on one or more
recognized stock exchanges may be aggregated for purposes of
this requirement. Thus, a U.S. company could satisfy the
regularly traded requirement through trading, in whole or in
part, on a recognized stock exchange located in France.
Authorized but unissued shares are not considered for purposes
of this test.
The term ``primarily traded'' is not defined in the
Convention. In accordance with paragraph 2 of Article 3, this
term will have the meaning it has under the laws of the State
concerning the taxes to which the Convention applies, generally
the source State. In the case of the United States, this term
is understood to have the meaning it has under Treas. Reg.
section 1.884-5(d)(3), relating to the branch tax provisions of
the Code. Accordingly, stock of a corporation is ``primarily
traded'' if the number of shares in the company's principal
class of shares that are traded during the taxable year on all
recognized stock exchanges in the Contracting State of which
the company is a resident exceeds the number of shares in the
company's principal class of shares that are traded during that
year on established securities markets in any other single
foreign country.
A company whose principal class of shares is regularly
traded on a recognized exchange but cannot meet the primarily
traded test may claim treaty benefits if its primary place of
management and control is in its country of residence. This
test should be distinguished from the ``place of effective
management'' test which is used in the OECD Model and by many
other countries to establish residence. In some cases, the
place of effective management test has been interpreted to mean
the place where the board of directors meets. By contrast, the
primary place of management and control test looks to where
day-to-day responsibility for the management of the company
(and its subsidiaries) is exercised. The company's primary
place of management and control will be located in the State in
which the company is a resident only if the executive officers
and senior management employees exercise day-to-day
responsibility for more of the strategic, financial and
operational policy decision making for the company (including
direct and indirect subsidiaries) in that State than in the
other State or any third state, and the staff that support the
management in making those decisions are also based in that
State. Thus, the test looks to the overall activities of the
relevant persons to see where those activities are conducted.
In most cases, it will be a necessary, but not a sufficient,
condition that the headquarters of the company (that is, the
place at which the Chief Executive Officer and other top
executives normally are based) be located in the Contracting
State of which the company is a resident.
To apply the test, it will be necessary to determine which
persons are to be considered ``executive officers and senior
management employees''. In most cases, it will not be necessary
to look beyond the executives who are members of the Board of
Directors (the ``inside directors'') in the case of a U.S.
company. That will not always be the case, however; in fact,
the relevant persons may be employees of subsidiaries if those
persons make the strategic, financial and operational policy
decisions. Moreover, it would be necessary to take into account
any special voting arrangements that result in certain board
members making certain decisions without the participation of
other board members.
Subsidiaries of Publicly-Traded Corporations--Subparagraph
2(c)(ii)
A company resident in a Contracting State is entitled to
all the benefits of the Convention under clause (ii) of
subparagraph (c) of paragraph 2 if five or fewer publicly
traded companies described in clause (i) are the direct or
indirect owners of at least 50 percent of the aggregate vote
and value of the company's shares (and at least 50 percent of
any disproportionate class of shares). If the publicly-traded
companies are indirect owners, however, each of the
intermediate companies must be a resident of one of the
Contracting States.
Thus, for example, a company that is a resident of France,
all the shares of which are owned by another company that is a
resident of France, would qualify for benefits under the
Convention if the principal class of shares (and any
disproportionate classes of shares) of the parent company are
regularly and primarily traded on a recognized stock exchange
in France. However, such a subsidiary would not qualify for
benefits under clause (ii) if the publicly traded parent
company were a resident of a third state, for example, and not
a resident of the United States or France. Furthermore, if a
French parent company indirectly owned the bottom-tier company
through a chain of subsidiaries, each such subsidiary in the
chain, as an intermediate owner, must be a resident of the
United States or France for the subsidiary to meet the test in
clause (ii).
Pension Trusts and Tax-Exempt Organizations--Subparagraph
2(d)
Subparagraph 2(d) provides rules by which the pension
trusts and tax exempt organizations described in clause (ii) of
subparagraph (b) of paragraph 2 of Article 4 (Resident) will be
entitled to all the benefits of the Convention. A pension trust
and any other organization established in a Contracting State
and maintained exclusively to administer or provide retirement
benefits that is established or sponsored by a person that is a
resident of that State under the provisions of Article 4 will
qualify for benefits if more than 50 percent of the person's
beneficiaries, members or participants are individuals resident
in either Contracting State, or the organization sponsoring
such person is entitled to benefits under the Convention (i.e.,
meets the limitations on benefits provisions of Article 30).
For purposes of this provision, the term ``beneficiaries''
should be understood to refer to the persons receiving benefits
from the pension trust. On the other hand, a not-for-profit
organization other than a pensions trust that is resident in a
Contracting State automatically qualifies for benefits, without
regard to the residence of its beneficiaries or members.
Entities qualifying under this rule are those that are
generally exempt from tax in their State of residence and that
are established and maintained exclusively for religious,
charitable, educational, scientific, artistic or cultural
purposes.
Ownership/Base Erosion--Subparagraph 2(e)
Subparagraph 2(e) provides an additional method to qualify
for treaty benefits that applies to any form of legal entity
that is a resident of a Contracting State. The test provided in
subparagraph 2(e), the so-called ownership and base erosion
test, is a two-part test. Both prongs of the test must be
satisfied for the resident to be entitled to treaty benefits
under subparagraph 2(f).
The ownership prong of the test, under clause (i), requires
that 50 percent or more of each class of shares or other
beneficial interests in the person is owned, directly or
indirectly, on at least half the days of the person's taxable
year by persons who are residents of the Contracting State of
which the person claiming benefits is a resident and that are
themselves entitled to treaty benefits under subparagraphs
2(a), (b), (d), or clause (i) of subparagraph 2(c). In the case
of indirect owners, however, each of the intermediate owners
must be a resident of that Contracting State.
Trusts may be entitled to benefits under this provision if
they are treated as residents under Article 4 (Resident) and
they otherwise satisfy the requirements of this subparagraph.
For purposes of this subparagraph, the beneficial interests in
a trust will be considered to be owned by its beneficiaries in
proportion to each beneficiary's actuarial interest in the
trust. The interest of a remainder beneficiary will be equal to
100 percent less the aggregate percentages held by income
beneficiaries. A beneficiary's interest in a trust will not be
considered to be owned by a person entitled to benefits under
subparagraph 2(a), 2(b), 2(d) or clause (i) of subparagraph
2(c) if it is not possible to determine the beneficiary's
actuarial interest. Consequently, if it is not possible to
determine the actuarial interest of the beneficiaries in a
trust, the ownership test under clause (i) cannot be satisfied,
unless all possible beneficiaries are persons entitled to
benefits under subparagraph 2(a), 2(b), 2(d) or clause (i) of
subparagraph 2(c).
The base erosion prong of clause (ii) of subparagraph (e)
is satisfied with respect to a person if less than 50 percent
of the person's gross income for the taxable year, as
determined under the tax law in the person's State of
residence, is paid or accrued, directly or indirectly, to
persons who are not residents of either Contracting State
entitled to benefits under subparagraph 2(a), 2(b), 2(d) or
clause (i) of subparagraph 2(c), in the form of payments
deductible for tax purposes in the payor's State of residence.
These amounts do not include arm's length payments in the
ordinary course of business for services or tangible property,
or payments in respect of financial obligations to a bank that
is not related to the payor. To the extent they are deductible
from the taxable base, trust distributions are deductible
payments. However, depreciation and amortization deductions,
which do not represent payments or accruals to other persons,
are disregarded for this purpose.
Investment entities--Subparagraph 2(f)
Subparagraph 2(f) provides a rule by which investment
entities described in clause (iii) of subparagraph (b) of
paragraph 2 of Article 4 (Resident) will be entitled to all the
benefits of the Convention. Such an entity will qualify for
benefits if more than half of the shares, rights, or interests
in such entity are owned directly or indirectly by persons that
are resident of the same State of which the investment entity
is a resident and that qualify for benefits under subparagraph
2(a), 2(b), 2(d) or clause (i) of subparagraph 2(c), and U.S.
citizens in the case of an investment entity that is a resident
of the United States. In the case of indirect ownership, each
intermediate owner must be a resident of the Contracting State
of which the investment entity is a resident.
Paragraph 3 of Article 30
Paragraph 3 sets forth a derivative benefits test that is
potentially applicable to all treaty benefits, although the
test is applied to individual items of income. In general, a
derivative benefits test entitles the resident of a Contracting
State to treaty benefits if the owner of the resident would
have been entitled to the same benefit had the income in
question flowed directly to that owner. To qualify under this
paragraph, the company must meet an ownership test and a base
erosion test.
Subparagraph (a) sets forth the ownership test. Under this
test, at least 95 percent of the aggregate voting power and
value of the company and at least 50 percent of any
disproportionate class of shares must be owned by seven or
fewer persons that are ``equivalent beneficiaries'' as defined
in subparagraph 7(f). This definition may be met in two
alternative ways.
Under the first alternative, a person may be treated as a
resident of a member state of the European Union or of a party
to the North American Free Trade Agreement because it is
entitled to equivalent benefits under a treaty between the
country of source and the country in which the person is a
resident. To satisfy this requirement, the person must be
entitled to all the benefits of a comprehensive treaty between
the Contracting State from which benefits of the Convention are
claimed and a qualifying State under provisions that are
analogous to the rules in subparagraph 2(a), 2(b), 2(d), and
clause (i) of subparagraph 2(c). If the treaty in question does
not have a comprehensive limitation on benefits article, this
requirement is met only if the person would be entitled to
treaty benefits under the tests in subparagraphs 2(a), 2(b),
2(d), and clause (i) of subparagraph 2(c) of this Article if
the person were a resident of one of the Contracting States.
In order to satisfy the first alternative with respect to
insurance premiums, dividends, interest, royalties, or branch
tax, paragraph 7(f)(i)(bb) provides that the person must be
entitled to a rate of tax that is at least as low as the tax
rate that would apply under the Convention to such income.
Thus, the rates to be compared are: (1) the rate of tax that
the source State would have imposed if a qualified resident of
the other Contracting State was the beneficial owner of the
income; and (2) the rate of tax that the source State would
have imposed if the third State resident received the income
directly from the source State. For example, USCo is a wholly
owned subsidiary of FCo, a company resident in France. FCo is
wholly owned by ICo, a corporation resident in Italy. Assuming
FCo satisfies the requirements of paragraph 2 of Article 10
(Dividends), FCo would be eligible for a dividend withholding
tax rate of 5 percent. The dividend withholding tax rate in the
treaty between the United States and Italy is 5 percent. Thus,
if ICo received the dividend directly from USCo, ICo would have
been subject to a 5 percent rate of withholding tax on the
dividend. Because ICo would be entitled to a rate of
withholding tax that is at least as low as the rate that would
apply under the Convention to such income, ICo is treated as a
resident of a member state of the European Union or a party to
the North American Free Trade Agreement with respect to the
withholding tax on dividends.
Subparagraph 7(g) provides a special rule to take account
of the fact that withholding taxes on many inter-company
dividends, interest and royalties are exempt within the
European Union by reason of various EU directives, rather than
by tax treaty. If a U.S. company receives such payments from a
French company, and that U.S. company is owned by a company
resident in a member state of the European Union that would
have qualified for an exemption from withholding tax if it had
received the income directly, the parent company will be
treated as an equivalent beneficiary. This rule is necessary
because many European Union member countries have not re-
negotiated their tax treaties to reflect the rates applicable
under the directives.
The requirement that a person be entitled to ``all the
benefits'' of a comprehensive tax treaty eliminates those
persons that qualify for benefits with respect to only certain
types of income. Accordingly, the fact that a Belgian parent of
a French company is engaged in the active conduct of a trade or
business in Belgium and therefore would be entitled to the
benefits of the U.S.-Belgium treaty if it received dividends
directly from a U.S. subsidiary of the French company is not
sufficient for purposes of this paragraph. Further, the Belgian
company cannot be an equivalent beneficiary if it itself
qualifies for benefits only with respect to certain income as a
result of a ``derivative benefits'' provision in the U.S.-
Belgium treaty. However, it would be possible to look through
the Belgian company to its parent company to determine whether
the parent company is an equivalent beneficiary.
The second alternative for satisfying the ``equivalent
beneficiary'' test is available only to residents of one of the
two Contracting States. U.S. or French residents who are
eligible for treaty benefits by reason of subparagraphs (a),
(b), (d), or clause (i) of subparagraph (c) of paragraph 2 are
equivalent beneficiaries under the second alternative. Thus, a
French individual will be an equivalent beneficiary without
regard to whether the individual would have been entitled to
receive the same benefits if it received the income directly. A
resident of a third country cannot qualify for treaty benefits
under any of those subparagraphs or any other rule of the
treaty, and therefore would not qualify as an equivalent
beneficiary under this alternative. Thus, a resident of a third
country can be an equivalent beneficiary only if it would have
been entitled to equivalent benefits had it received the income
directly.
The second alternative was included in order to clarify
that ownership by certain residents of a Contracting State
would not disqualify a U.S. or French company under this
paragraph. Thus, for example, if 90 percent of a French company
is owned by five companies that are resident in member states
of the European Union who satisfy the requirements of clause
(i) of subparagraph 8(f), and 10 percent of the French company
is owned by a U.S. or French individual, then the French
company still can satisfy the requirements of subparagraph (a)
of paragraph 3.
Subparagraph (b) of paragraph 3 sets forth the base erosion
test. A company meets this base erosion test if less than 50
percent of its gross income, as determined under the tax law in
the company's State of residence, for the taxable period is
paid or accrued, directly or indirectly, to a person or persons
who are not equivalent beneficiaries in the form of payments
deductible for tax purposes in the company's State of
residence. This test is the same as the base erosion test in
clause (ii) of subparagraph (e) of paragraph 2, except that the
test in subparagraph 3(b) focuses on base-eroding payments to
persons who are not equivalent beneficiaries.
As in the case of the base erosion test in subparagraph
2(e), deductible payments in subparagraph 3(b) also do not
include arm's length payments in the ordinary course of
business for services or tangible property and payments in
respect of financial obligations to a bank that is not related
to the payor.
Paragraph 4 of Article 30
Paragraph 4 sets forth an alternative test under which a
resident of a Contracting State may receive treaty benefits
with respect to certain items of income that are connected to
an active trade or business conducted in its State of
residence. A resident of a Contracting State may qualify for
benefits under paragraph 4 whether or not it also qualifies
under paragraph 2 or 3.
Subparagraph (a) sets forth the general rule that a
resident of a Contracting State engaged in the active conduct
of a trade or business in that State may obtain the benefits of
the Convention with respect to an item of income derived from
the other Contracting State. The item of income, however, must
be derived in connection with or incidental to that trade or
business.
The term ``trade or business'' is not defined in the
Convention. Pursuant to paragraph 2 of Article 3 (General
Definitions), when determining whether a resident of the France
is entitled to the benefits of the Convention under paragraph 4
of this Article with respect to an item of income derived from
sources within the United States, the United States will
ascribe to this term the meaning that it has under the law of
the United States. Accordingly, the U.S. competent authority
will refer to the regulations issued under section 367(a) for
the definition of the term ``trade or business.'' In general,
therefore, a trade or business will be considered to be a
specific unified group of activities that constitute or could
constitute an independent economic enterprise carried on for
profit. Furthermore, a corporation generally will be considered
to carry on a trade or business only if the officers and
employees of the corporation conduct substantial managerial and
operational activities.
The business of making or managing investments for the
resident's own account will be considered to be a trade or
business only when part of banking, insurance or securities
activities conducted by a bank, an insurance company, or a
registered securities dealer. Such activities conducted by a
person other than a bank, insurance company or registered
securities dealer will not be considered to be the conduct of
an active trade or business, nor would they be considered to be
the conduct of an active trade or business if conducted by a
bank, insurance company or registered securities dealer but not
as part of the company's banking, insurance or dealer business.
Because a headquarters operation is in the business of managing
investments, a company that functions solely as a headquarters
company will not be considered to be engaged in an active trade
or business for purposes of paragraph 4.
An item of income is derived in connection with a trade or
business if the income-producing activity in the State of
source is a line of business that ``forms a part of'' or is
``complementary'' to the trade or business conducted in the
State of residence by the income recipient.
A business activity generally will be considered to form
part of a business activity conducted in the State of source if
the two activities involve the design, manufacture or sale of
the same products or type of products, or the provision of
similar services. The line of business in the State of
residence may be upstream, downstream, or parallel to the
activity conducted in the State of source. Thus, the line of
business may provide inputs for a manufacturing process that
occurs in the State of source, may sell the output of that
manufacturing process, or simply may sell the same sorts of
products that are being sold by the trade or business carried
on in the State of source.
Example 1. USCo is a corporation resident in the
United States. USCo is engaged in an active
manufacturing business in the United States. USCo owns
100 percent of the shares of FCo, a company resident in
France. FCo distributes USCo products in France.
Because the business activities conducted by the two
corporations involve the same products, FCo's
distribution business is considered to form a part of
USCo's manufacturing business.
Example 2. The facts are the same as in Example 1,
except that USCo does not manufacture. Rather, USCo
operates a large research and development facility in
the United States that licenses intellectual property
to affiliates worldwide, including FCo. FCo and other
USCo affiliates then manufacture and market the USCo-
designed products in their respective markets. Because
the activities conducted by FCo and USCo involve the
same product lines, these activities are considered to
form a part of the same trade or business.
For two activities to be considered to be
``complementary,'' the activities need not relate to the same
types of products or services, but they should be part of the
same overall industry and be related in the sense that the
success or failure of one activity will tend to result in
success or failure for the other. Where more than one trade or
business is conducted in the State of source and only one of
the trades or businesses forms a part of or is complementary to
a trade or business conducted in the State of residence, it is
necessary to identify the trade or business to which an item of
income is attributable. Royalties generally will be considered
to be derived in connection with the trade or business to which
the underlying intangible property is attributable. Dividends
will be deemed to be derived first out of earnings and profits
of the treaty-benefited trade or business, and then out of
other earnings and profits. Interest income may be allocated
under any reasonable method consistently applied. A method that
conforms to U.S. principles for expense allocation will be
considered a reasonable method.
Example 3. Americair is a corporation resident in the
United States that operates an international airline.
FSub is a wholly-owned subsidiary of Americair resident
in France. SSub operates a chain of hotels in France
that are located near airports served by Americair
flights. Americair frequently sells tour packages that
include air travel to France and lodging at FSub
hotels. Although both companies are engaged in the
active conduct of a trade or business, the businesses
of operating a chain of hotels and operating an airline
are distinct trades or businesses. Therefore FSub's
business does not form a part of Americair's business.
However, FSub's business is considered to be
complementary to Americair's business because they are
part of the same overall industry (travel), and the
links between their operations tend to make them
interdependent.
Example 4. The facts are the same as in Example 3,
except that FSub owns an office building in France
instead of a hotel chain. No part of Americair's
business is conducted through the office building.
FSub's business is not considered to form a part of or
to be complementary to Americair's business. They are
engaged in distinct trades or businesses in separate
industries, and there is no economic dependence between
the two operations.
Example 5. USFlower is a company resident in the
United States. USFlower produces and sells flowers in
the United States and other countries. USFlower owns
all the shares of FHolding, a corporation resident in
France. FHolding is a holding company that is not
engaged in a trade or business. FHolding owns all the
shares of three corporations that are resident in
France: FFlower, FLawn, and FFish. FFlower distributes
USFlower flowers under the USFlower trademark in
France. FLawn markets a line of lawn care products in
France under the USFlower trademark. In addition to
being sold under the same trademark, FLawn and FFlower
products are sold in the same stores and sales of each
company's products tend to generate increased sales of
the other's products. FFish imports fish from the
United States and distributes it to fish wholesalers in
France. For purposes of paragraph 4, the business of
FFlower forms a part of the business of USFlower, the
business of FLawn is complementary to the business of
USFlower, and the business of FFish is neither part of
nor complementary to that of USFlower.
An item of income derived from the State of source is
``incidental to'' the trade or business carried on in the State
of residence if production of the item facilitates the conduct
of the trade or business in the State of residence. An example
of incidental income is the temporary investment of working
capital of a person in the State of residence in securities
issued by persons in the State of source.
Subparagraph (b) of paragraph 4 states a further condition
to the general rule in subparagraph (a) in cases where the
trade or business generating the item of income in question is
carried on either by the person deriving the income or by any
associated enterprises. Subparagraph (b) states that the trade
or business carried on in the State of residence, under these
circumstances, must be substantial in relation to the activity
in the State of source. The substantiality requirement is
intended to prevent a narrow case of treaty-shopping abuses in
which a company attempts to qualify for benefits by engaging in
de minimis connected business activities in the treaty country
in which it is resident (i.e., activities that have little
economic cost or effect with respect to the company business as
a whole).
The determination of substantiality is made based upon all
the facts and circumstances and takes into account the
comparative sizes of the trades or businesses in each
Contracting State , the nature of the activities performed in
each Contracting State, and the relative contributions made to
that trade or business in each Contracting State. In any case,
in making each determination or comparison, due regard will be
given to the relative sizes of the U.S. and French economies.
The determination in subparagraph 4(b) also is made
separately for each item of income derived from the State of
source. It therefore is possible that a person would be
entitled to the benefits of the Convention with respect to one
item of income but not with respect to another. If a resident
of a Contracting State is entitled to treaty benefits with
respect to a particular item of income under paragraph 4, the
resident is entitled to all benefits of the Convention insofar
as they affect the taxation of that item of income in the State
of source.
The application of the substantiality requirement only to
income from related parties focuses only on potential abuse
cases, and does not hamper certain other kinds of non-abusive
activities, even though the income recipient resident in a
Contracting State may be very small in relation to the entity
generating income in the other Contracting State. For example,
if a small U.S. research firm develops a process that it
licenses to a very large, unrelated, French pharmaceutical
manufacturer, the size of the U.S. research firm would not have
to be tested against the size of the French manufacturer.
Similarly, a small U.S. bank that makes a loan to a very large
unrelated French business would not have to pass a
substantiality test to receive treaty benefits under paragraph
4.
Subparagraph (c) of paragraph 4 provides special
attribution rules for purposes of applying the substantive
rules of subparagraphs (a) and (b). Thus, these rules apply for
purposes of determining whether a person meets the requirement
in subparagraph (a) that it be engaged in the active conduct of
a trade or business and that the item of income is derived in
connection with that active trade or business, and for making
the comparison required by the ``substantiality'' requirement
in subparagraph (b). Subparagraph (c) attributes to a person
activities conducted by a partnership in which that person is a
partner. Subparagraph (c) also attributes to a person
activities conducted by persons ``connected'' to such person. A
person (``X'') is connected to another person (``Y'') if X
possesses 50 percent or more of the beneficial interest in Y
(or if Y possesses 50 percent or more of the beneficial
interest in X). For this purpose, X is connected to a company
if X owns shares representing fifty percent or more of the
aggregate voting power and value of the company or fifty
percent or more of the beneficial equity interest in the
company. X also is connected to Y if a third person possesses
fifty percent or more of the beneficial interest in both X and
Y. For this purpose, if X or Y is a company, the threshold
relationship with respect to such company or companies is fifty
percent or more of the aggregate voting power and value or
fifty percent or more of the beneficial equity interest.
Finally, X is connected to Y if, based upon all the facts and
circumstances, X controls Y, Y controls X, or X and Y are
controlled by the same person or persons.
Paragraph 5 of Article 30
Paragraph 5 deals with the treatment of income in the
context of a so-called ``triangular case.''
An example of a triangular case would be a structure under
which a resident of France earns interest income from the
United States. The resident of France, who is assumed to
qualify for benefits under one or more of the provisions of
Article 30, sets up a permanent establishment in a third
jurisdiction that imposes only a low rate of tax on the income
of the permanent establishment. The French resident lends funds
into the United States through the permanent establishment. The
permanent establishment, despite its third-jurisdiction
location, is an integral part of a French resident. Therefore
the income that it earns on those loans, absent the provisions
of paragraph 5, is entitled to exemption from U.S. withholding
tax under the Convention. Under a current French income tax
treaty with the host jurisdiction of the permanent
establishment, the income of the permanent establishment is
exempt from French tax (alternatively, France may choose to
exempt the income of the permanent establishment from French
income tax by statute). Thus, the interest income is exempt
from U.S. tax, is subject to little tax in the host
jurisdiction of the permanent establishment, and is exempt from
French tax.
Paragraph 5 applies reciprocally. However, the United
States does not exempt the profits of a third-jurisdiction
permanent establishment of a U.S. resident from U.S. tax,
either by statute or by treaty.
Paragraph 5 provides that the tax benefits that would
otherwise apply under the Convention will not apply to any item
of income if the combined tax actually paid in the residence
State and the third state is less than 60 percent of the tax
that would have been payable in the residence State if the
income were earned in that State by the enterprise and were not
attributable to the permanent establishment in the third state.
In the case of dividends, interest and royalties to which this
paragraph applies, the withholding tax rates under the
Convention are replaced with a 15 percent withholding tax. Any
other income to which the provisions of paragraph 5 apply is
subject to tax under the domestic law of the source State,
notwithstanding any other provisions of the Convention.
In general, the principles employed under Code section
954(b)(4) will be employed to determine whether the profits are
subject to an effective rate of taxation that is above the
specified threshold.
Notwithstanding the level of tax on income of the permanent
establishment, paragraph 5 will not apply under certain
circumstances. In the case of royalties, paragraph 5 will not
apply if the royalties are received as compensation for the use
of, or the right to use, intangible property produced or
developed by the permanent establishment itself. In the case of
any other income, paragraph 5 will not apply if that income is
derived in connection with, or is incidental to, the active
conduct of a trade or business carried on by the permanent
establishment in the third state. The business of making,
managing or simply holding investments is not considered to be
an active trade or business, unless these are banking or
securities activities carried on by a bank or registered
securities dealer.
Paragraph 6 of Article 30
Paragraph 6 provides that a resident of one of the
Contracting States that is not entitled to the benefits of the
Convention as a result of paragraphs 1 through 5 still shall be
granted benefits under the Convention if the competent
authority of the State from which benefits are claimed
determines that the establishment, acquisition or maintenance
of such person and the conduct of its operations did not have
as one of its principal purposes the obtaining of benefits
under the Convention. Benefits will not be granted, however,
solely because a company was established prior to the effective
date of a treaty or protocol. In that case a company would
still be required to establish to the satisfaction of the
Competent Authority clear non-tax business reasons for its
formation in a Contracting State, or that the allowance of
benefits would not otherwise be contrary to the purposes of the
treaty. Thus, persons that establish operations in one of the
States with a principal purpose of obtaining the benefits of
the Convention ordinarily will not be granted relief under
paragraph 6.
The competent authority's discretion is quite broad. It may
grant all of the benefits of the Convention to the taxpayer
making the request, or it may grant only certain benefits. For
instance, it may grant benefits only with respect to a
particular item of income in a manner similar to paragraph 4.
Further, the competent authority may establish conditions, such
as setting time limits on the duration of any relief granted.
For purposes of implementing paragraph 6, a taxpayer will
be permitted to present his case to the relevant competent
authority for an advance determination based on the facts. In
these circumstances, it is also expected that, if the competent
authority determines that benefits are to be allowed, they will
be allowed retroactively to the time of entry into force of the
relevant treaty provision or the establishment of the structure
in question, whichever is later. Before denying benefits of the
Convention under this paragraph, the competent authority will
consult with the competent authority of the other Contracting
State.
Finally, there may be cases in which a resident of a
Contracting State may apply for discretionary relief to the
competent authority of his State of residence. This would
arise, for example, if the benefit it is claiming is provided
by the residence country, and not by the source country. So,
for example, if a company that is a resident of the United
States would like to claim the benefit of the re-sourcing rule
of paragraph 2 of Article 24, but it does not meet any of the
objective tests of this Article, it may apply to the U.S.
competent authority for discretionary relief.
Paragraph 7 of Article 30
Paragraph 7 defines several key terms for purposes of
Article 30. Each of the defined terms is discussed above in the
context in which it is used.
ARTICLE XV
Article XV of the Protocol deletes and replaces paragraph 1
of Article 32 (Provisions for Implementation) of the
Convention. The change revises paragraph 5 so as to remove
obsolete cross-reference to provisions of paragraph 4(i)
Article 10 and paragraph 8 of Article 30 of the existing
Convention.
ARTICLE XVI
Article XVI of the Protocol contains the rules for bringing
the Protocol into force and giving effect to its provisions.
Paragraph 1
Paragraph 1 provides generally that the Protocol is subject
to ratification in accordance with the applicable procedures in
the United States and France. Further, the Contracting States
shall notify each other by written notification, through
diplomatic channels, when their respective constitutional and
statutory requirements for the entry into force of the Protocol
have been satisfied. The Protocol shall enter into force on the
date of receipt of the later of such notifications.
In the United States, the process leading to ratification
and entry into force is as follows: Once a treaty has been
signed by authorized representatives of the two Contracting
States, the Department of State sends the treaty to the
President who formally transmits it to the Senate for its
advice and consent to ratification, which requires approval by
two-thirds of the Senators present and voting. Prior to this
vote, however, it generally has been the practice for the
Senate Committee on Foreign Relations to hold hearings on the
treaty and make a recommendation regarding its approval to the
full Senate. Both Government and private sector witnesses may
testify at these hearings. After the Senate gives its advice
and consent to ratification of the protocol or treaty, an
instrument of ratification is drafted for the President's
signature. The President's signature completes the process in
the United States.
Paragraph 2
The date on which a Protocol enters into force is not
necessarily the date on which its provisions take effect.
Paragraph 2, therefore, contains rules that determine when the
provisions of the Protocol will have effect.
Under subparagraph 2(a), the Protocol will have effect with
respect to taxes withheld at source (principally dividends and
royalties) for amounts paid or credited on or after the first
day of January of the year in which the Protocol enters into
force. For example, if the second of the notifications is
received on April 25 of a given year, the withholding rates
specified in paragraph 2 and 3 of Article 10 (Dividends) would
be applicable to any dividends paid or credited on or after
January 1 of that year. This rule allows the benefits of the
withholding reductions to be put into effect for the entire
year the Protocol enters into force. If a withholding agent
withholds at a higher rate than that provided by the Protocol
(e.g., for payments made before April 25 in the example above),
a beneficial owner of the income that is a resident of France
may make a claim for refund pursuant to section 1464 of the
Code.
Under subparagraph 2(b), the Protocol will have effect with
respect to taxes other than those withheld at source for any
taxable period beginning on or after January 1 of the year next
following entry into force of the Protocol. With respect to
taxes on capital, the Convention will have effect for taxes
levied on items of capital owned on or after January 1 next
following the entry into force of the Protocol.
Paragraph 3
Paragraph 3 provides an exception to the provisions of
paragraph 2, incorporating a specific effective date for
purposes of the binding arbitration provisions of paragraphs 5
and 6 of Article 26 (Mutual Agreement Procedure) (Article X of
the Protocol). Paragraph 3 provides that Article X of the
Protocol is effective for cases (i) that are under
consideration by the competent authorities as of the date on
which the Protocol enters into force and (ii) cases that come
under such consideration after the Protocol enters into force.
In addition, paragraph 3 provides that the commencement date
for cases that are under consideration by the competent
authorities as of the date on which the Protocol enters into
force is the date the Protocol enters into force. As a result,
cases that are unresolved as of the entry into force of the
Protocol will go into binding arbitration on the later of two
years after the entry into force of the Protocol unless both
competent authorities have previously agreed to a different
date, and the earliest date upon which the agreement required
by subparagraph (d) of paragraph 6 of Article 26 has been
received by both competent authorities.