[Senate Executive Report 111-1]
[From the U.S. Government Publishing Office]


111th Congress                                              Exec. Rept.
                                 SENATE
 1st Session                                                      111-1

======================================================================



 
 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\
---------------------------------------------------------------------------
    \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).
---------------------------------------------------------------------------
    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

                              ----------                              


                  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.

                                    

      
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