20 March 2018
On July 20, 2009 the French Senate adopted a bill to ratify a protocol (the “Protocol”) to the 1994 U.S.-France income tax treaty (last amended in 2004) (the “Treaty”). On September 9, 2009 President Obama delivered the Protocol to the U.S. Senate for advice and consent.
The Protocol, which was signed by both countries on January 13, 2009, would modify the Treaty in several respects. The most significant changes to the existing Treaty are (i) elimination of withholding tax on intercompany dividends from 80%-owned subsidiaries, (ii) elimination of withholding tax on all royalties paid for the use of intellectual property, (iii) imposition of stricter requirements for companies to qualify for Treaty benefits, (iv) addition of mandatory arbitration when the competent authorities are in disagreement, (v) expansion of required exchanges of information and (vi) clarification on resident status of partnerships, fiscally transparent entities, and certain French investment vehicles.
Once ratified by both countries, and after exchange of instruments and entry into force, the Protocol will become effective in three stages – first, the new withholding tax provisions will apply as of January 1 of that year; second, the mandatory arbitration provisions will apply beginning on the date that the Protocol enters into force; and third, the balance of the Protocol will apply on the first day of the calendar year following the year the Protocol enters into force.
Withholding Rates: The Protocol provides for lower withholding tax rates than under the Treaty on dividends and royalties, as set forth in the summary table, below:
|I. Dividends|| || |
|Individuals||* 15% rate||* Unchanged
|Intercompany||* 5% rate for dividends if recipient company owns 10% or more of voting stock of dividend paying company and latter is a resident of the US||* The 5% rate is unchanged for inter-company investments of at least 10% (and up to 79.9%) (see below)
|RIC or SICAV||* 15% rate||* Unchanged|
|REIT||* 15% if any one of the following 3 REIT tests are not met: (i) the owner holds a 10% or smaller REIT interest, (ii) the dividend is paid with respect to a class of public REIT stock and the owner holds not more than 5% of any class of REIT stock, or (iii) the owner holds 10% or less of REIT stock and the REIT is diversified.
||* Provides default rate of 30% if applicable REIT tests not met|
|II. Interest||* 15% rate||* Unchanged|
|III. Royalties||* No withholding on copyright of literary, artistic, or scientific work, any cinematographic film, any sound or picture recording, or any software||* Zero withholding on all royalties|
Limitations on Benefits:
The Protocol imposes significantly stricter limitations on benefits (“LOB”) rules, generally following the 2006 US Model Tax Treaty, to bring the Treaty generally in conformity with other recent US tax treaties. The Protocol limits treaty benefits to companies that satisfy one of the following five standards:
(1) Publicly Traded Company — The company’s principal class of shares must be regularly traded on one or more recognized exchanges and either (i) the shares are primarily traded on a treatyrecognized exchange in the country of residence or, for French companies, any European Union (EU) exchange identified in the Treaty, and, for US companies, any exchange in North America identified by the Treaty; or (ii) the company’s primary place of management and control is in the country in which the company is resident.
(2) Subsidiary of a Publicly-Traded Company — At least 50% of the aggregate voting power and value of the shares (and at least 50% of any disproportionate class of shares) must be owned directly by five or fewer companies qualifying for the publicly-traded test. In cases of indirect ownership, each intermediary entity must be resident of either the US or France.
(3) Treaty Country Resident Shareholders Satisfy Ownership and Base Erosion Tests — For at least half the tax year, (i) at least 50% of the aggregate voting power and value of the shares of the company (and at least 50% of any disproportionate class of shares) must be owned (directly or indirectly) by residents of the country in which the company is resident; and (ii) less than 50% of the company’s gross income is paid or accrued (directly or indirectly) to persons eligible for benefits under the Treaty in the form of payments that are tax deductible in the residence country (but not including arm’s-length payments in the ordinary course of business for services, tangible property, or certain interest payments).
(4) Seven or Fewer Equivalent Beneficiaries Own 95% of Vote and Value — At least 95% of the aggregate voting power and value of the shares of the company (and at least 50% of any disproportionate class of shares) must be owned, directly or indirectly, by seven or fewer “equivalent beneficiaries” (the term “equivalent beneficiaries” includes any resident of an EU member state or NAFTA country provided that such person would be entitled to treaty benefits for that country and does not otherwise fail an applicable LOB provision).
(5) Active Trade or Business In Residence Country — A company actively engaged in trade or business in its country of residence (either directly or through sufficiently owned subsidiaries) will receive Treaty benefits limited to income connected with the applicable trade or business. If the income is derived through a related party then the business conducted in the residence country must be substantial in relation to the business conducted in the source country, based on the facts and circumstances of each case. This test does not apply to managing investments for one’s own account.
Finally, the LOB article also contains an “anti-triangular” provision under which Treaty benefits for income attributable to a permanent establishment (“PE”) in a third country require that the combined tax of the residence country and the PE country equal 60% or more of the tax payable in the country of residence (if the income were not attributable to the PE).
The Protocol imposes new mandatory arbitration that applies if the competent authorities are unable to reach agreement under the Mutual Agreement procedure. However, the mandatory arbitration provision only applies if: (a) tax returns have been filed in one of the Contracting States for the tax years at issue; (b) the competent authorities do not agree it is not suitable for determination by arbitration; and © all concerned persons agree not to disclose to any other person any information received during the arbitration proceedings.
Mandatory arbitration is a new addition to US tax treaties generally (e.g. Belgium, Germany, as well as in the recent Protocol with Canada).
The Protocol contains entirely new provisions relating to the residence of partnerships and fiscally transparent entities (i.e., taxed only at the owner level). It also clarifies that certain French investment entities are automatically characterized as Residents of France.
First, payments made from the US to certain French “qualified partnerships,” a concept added by the Protocol, will be treated as payments received by a resident of France only if such income is included currently in the taxable income of partners who are French residents. A “qualified partnership” is a partnership that meets all four of the following conditions: (i) that has its place of effective management in France; (ii) that has not elected to be taxed in France as a corporation; (iii) the tax base of which is computed at the partnership-level for French tax purposes; and (iv) each shareholder, associate, or other member is liable for tax in France on their share of partnership profits.
Second, the Protocol adds a look-through rule to apply to fiscally transparent entities. Income, profit, or gain derived through a fiscally transparent entity for local tax purposes is classified as income of a resident of that country provided and to the extent that (i) the entity was formed under the laws of either contracting state (or of a third state if that third state has an exchange-of-information agreement in place with the contracting state from which the payment was made) and (ii) the item is treated under the tax law of such contracting state as income, profit or gain of a resident. In addition, the Protocol (amending the Miscellaneous Provisions of the Treaty) adds a provision that allows France to tax income derived through a fiscally transparent entity that has its place of effective management in France.
Lastly, the Protocol expands the types of French investment vehicles automatically defined as residents to include societes d’investissement immobilier cotee (SIIC) and societes de placement a preponderance immobiliere a capital variable (SPPICAV). However, despite the fact that SIICs and SPPICAVs are characterized as residents, they must also meet the eligibility rules contained in the Protocol’s LOB article.
Exchange of Information:
The Protocol contains a new Exchange of Information provision, generally consistent with the 2006 US Model Income Tax Treaty, that requires each party to supply any requested information, even if such information is held by a bank, other financial institution, nominee or person acting in an agency or fiduciary capacity or it relates to ownership interests in an entity.
Treaty Ratification and Effective Dates:
On July 20, 2009 the French Senate adopted a bill to ratify the Protocol. Presently, the Treaty awaits ratification by the US Senate and the exchange of instruments necessary to bring the Protocol into force has not yet been scheduled.
The US Senate has been slower in ratifying the Protocol, but recent steps in Washington D.C. indicate that ratification should be forthcoming. On September 9, 2009 President Obama officially transmitted the Protocol to the US Senate for its advice and consent. Upon the US Senate’s rendering of its advice and consent, it could ratify the Protocol and exchange instruments with France. Thus, this recent progress indicates the Protocol may be ratified before year-end. Upon entering into force, the Protocol would become effective in three stages, as follows:
First, the new withholding tax provisions (Dividends and Royalties) will apply for amounts paid or credited as of January 1 of the year in which the Protocol enters into force. If the Protocol enters into force in 2009, the withholding tax provisions will apply retroactively for the entire 2009-year.
Second, the mandatory arbitration provisions will apply beginning on the date that the Protocol enters into force.
Third, the balance of the Protocol will apply on the first day of the calendar year following the calendar year in which the Protocol enters into force. In other words, if the Protocol enters into force during 2009, it will not have full force and effect as to all provisions until January 1, 2010.
The Protocol contains no grandfathering provision that would allow taxpayers to elect to continue to apply existing Treaty provisions. Therefore, as the Protocol takes effect it will fully supersede the relevant portions of the Treaty.