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 

PARIS 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. 

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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 “société d’investissement à capital 

variable” (SICAV), “société d’investissement immobilier cotée” (SIIC), and “société de 

placement à prépondérance immobilière à 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 

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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 

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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 

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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. 

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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. 

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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. 

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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. 

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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 publiclytraded 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 

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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. 

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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 

11
 
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 

12
 
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 

13
 
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. 

14
 
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 

15
 
 

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 

16
 
 

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 2a) 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, 

17
 
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. 

18
 
 

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 

19
 
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. 

20
 
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 crossreferences 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 

21
 
 

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. 

22
 
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 

23
 
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 

24
 
 

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 

25
 
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 

26
 
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 4a) makes clear that the obligation to 

27
 
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 3a) 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 4b) of Article 27 

of the existing Convention and corresponds to paragraph 6 of Article 26 of the U.S. 

Model. Subparagraph 4b) 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 4c) of Article 27 

of the existing Convention and corresponds to paragraph 8 of Article 26 of the U.S. 

Model. Subparagraph 4c) 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 4c) 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. 

28
 
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. 

29
 
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 longterm 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. 

30
 
 

 

 

 

 

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 antiabuse 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 

31
 
 

 

 

 

 

 

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 

“Autorité des marchés 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 

32
 
 

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 

33
 
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 

34
 
 

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 

35
 
 

 

 

 

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 twopart 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. 

36
 
 

 

 

 

 

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 

37
 
 

 

 

 

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. 

38
 
 

 

 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 

39
 

 

 

 

 

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 incomeproducing 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 

40
 
 

 

 

 

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 

41
 
 

 

 

 

 

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 

42
 
 

 

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 

43
 
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 

44
 
 

 

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 

45
 
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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