What you need to know:
A recently ratified amendment to the US-France income tax treaty provides for reduced withholding rates on cross-border dividend and royalty payments.
What you need to do:
Clients should determine whether they may be able to take advantage of the new, favorable withholding rates on cross-border dividend and royalty payments between the US and France. Clients should also keep in mind the other notable changes described below.
In early December, the United States Senate unanimously ratified the latest protocol to the US-France income tax treaty. On the same day, France published a law approving the protocol. Signed in Paris last January, the protocol makes significant changes to the treaty. The protocol will enter force as soon as each country notifies the other that ratification is complete.
Highlights of changes to US-France income tax treaty
Among other things, the ratified protocol:
- Eliminates withholding tax on cross-border dividend payments by a subsidiary corporation to a parent corporation owning at least 80% of the stock of the subsidiary (so long as such stock has been held for at least one year);
- Eliminates withholding tax on all cross-border royalty payments (previously 5%);
- Contains a revised “limitation on benefits” anti-abuse article that is intended to make it even more difficult for residents of third-party countries to claim benefits under the treaty (known as “treaty shopping”);
- Provides for mandatory arbitration in cases where the US and French governments are unable to agree on how the treaty applies to a particular matter; and
- Clarifies the determination of who is considered the “beneficial owner” of cross-border payments when such payments are derived through a fiscally transparent entity such as a partnership or LLC.
In addition to the 80% ownership threshold requirement, the zero rate of withholding tax on cross-border intercompany dividends is conditioned upon the recipient parent company’s meeting certain anti-treaty shopping requirements in the limitation on benefits article. The treaty continues to impose a 5% withholding tax on cross-border dividends paid to a company that owns 10% or more of the stock or capital of the payor corporation, and a 15% withholding tax on all other cross-border dividends.
The notable changes described above bring the US-France treaty in line with other recently ratified US treaties, such as those with Canada and Iceland.
As noted above, the protocol enters into force as soon as the two countries notify each other that ratification is complete. The protocol is effective with respect to withholding taxes paid or credited on or after January 1 of the year in which the protocol enters force. Thus, if the protocol enters into force by the end of 2009, the new withholding tax rates on royalties and certain dividends are retroactively effective as of January 1, 2009. The mandatory arbitration provision of the protocol will be effective with respect to cases that are either pending or arising on or after the protocol enters into force.