U.S.-France tax treaty: withholding rates on interest, dividends, royalties and services

What sets the U.S.-France treaty apart

Since the 2009 protocol, the U.S.-France treaty exempts all royalties and almost all interest at source, and has a 0% rate for qualifying parent dividends. Two features run against what payers expect. Pensions and Social Security are taxable only in the country that pays them, so a U.S. pension paid to a French resident is withheld on as usual. And income through partnerships and other transparent entities qualifies only under specific rules, including a requirement that a third-country entity be organized in a country with an information exchange agreement.

Common payments at a glance

Assumes the payee is the beneficial owner, is resident under the treaty, meets its limitation-on-benefits article and gives a valid W-8BEN, W-8BEN-E or Form 8233. Article references are to the treaty as amended.

Rates on investment and other income

Treaty in effect generally from Jan. 1, 1996. Protocols in effect from: Jan. 1, 2007; Jan. 1, 2010. IRS country code FR.

"n/a" means the payment type is not covered by the royalty article: equipment leasing is business profits (no withholding without a permanent establishment) or other income. Superscript letters are the IRS's own conditions, listed at the end of this page.

Pay for personal services performed in the United States

Each row is an exemption the treaty gives, with the limits the IRS lists. All conditions in a row must be met; if any is not, the pay is withheld on at 30% (contractors) or under the wage rules (employees). Services performed entirely outside the United States are foreign-source and need no treaty claim.

Reading the U.S.-France treaty as a payer

Documents and dates

The convention was signed in Paris on August 31, 1994 and has been in effect generally since January 1, 1996. A protocol signed on December 8, 2004 rewrote the pension article and the partnership rules; a protocol signed on January 13, 2009, with an arbitration memorandum, replaced the dividend, royalty, other income and limitation-on-benefits articles and added arbitration. The IRS tables list the protocols as effective January 1, 2007 and January 1, 2010. The 2009 protocol's withholding changes apply to amounts paid on or after January 1 of the year it entered into force (2009 Protocol Art. XVI(2)).

Partnerships and transparent entities

Article 4(3), added in 2009, treats income derived through an entity that is transparent under either country's law as derived by a resident only to the extent the resident's country taxes it as the resident's income. The entity must be organized in the U.S., in France, or in a country that has an information exchange agreement with the source country; otherwise nothing flows through (TE to the 2009 Protocol, Art. I, Example 2). Partners who are not French residents get nothing under this treaty.

A French partnership that is itself the claimant must meet four conditions for U.S.-source income to count as derived by French residents: its place of effective management is in France, it has not elected to be taxed as a corporation, its tax base is computed at the partnership level, and all its members are liable to French tax on their shares (Art. 4(2)(c)). Even then, relief extends only to the share included in French-resident members' income. U.S. RICs, REITs and REMICs, and French SICAVs, SIICs and SPPICAVs, are residents (Art. 4(2)(b)(iii)).

Limitation on benefits

The 2009 version of Article 30 qualifies individuals, governments, publicly traded companies that also trade primarily in their home region (for a French company, anywhere in the EU) or are managed and controlled at home, subsidiaries at least 50% owned by five or fewer such companies, pension trusts and exempt organizations, and companies passing an ownership and base erosion test. Derivative benefits require at least 95% ownership by seven or fewer EU or NAFTA equivalent beneficiaries. Income connected with an active trade or business in France also qualifies, item by item; a company acting solely as a headquarters is not an active business. The 2009 protocol dropped the 1994 headquarters test and the 7.5% and 10% safe-harbor ratios. A third-country permanent establishment rule caps dividends, interest and royalties at 15% where the combined tax is less than 60% of the French tax.

Dividends

For dividends from a U.S. company, the 5% rate needs a company owning directly at least 10% of the voting stock; for a French payer, 10% of the capital directly or indirectly (Art. 10(2)(a)). The 0% rate needs a company owning 80% or more of the voting power of a U.S. payer, directly or through U.S. or French residents, for the 12 months ending on the date entitlement is fixed, and either: it passes the public company test; it passes both the ownership and base erosion test and the active business test; it qualifies under derivative benefits; or the competent authority grants it (Art. 10(3)). Unlike the U.K., German and Japanese treaties, the text of Article 10(3) gives no separate 0% rate to pension funds.

RIC dividends get 15%. REIT dividends get 15% only for an individual or pension organization holding 10% or less, a holder of 5% or less of a listed class, or a holder of 10% or less of a diversified REIT (Art. 10(5)). The branch profits tax is capped at 5% and is 0% for companies that qualify for the 0% dividend rate. The 2009 protocol removed the old avoir fiscal refund regime.

Interest and royalties

Interest is taxable only in France (Art. 11(1)), except interest determined by reference to the profits of the issuer or an associated enterprise, which may be taxed at up to 15% (Art. 11(2)), REMIC excess inclusions, and the excess over an arm's-length amount. Since 2009 all royalties are exempt at source (Art. 12(1)); before then, patent, trademark and know-how royalties carried 5%. The definition covers copyright, film and recordings, software, patents, trademarks, designs, secret formulas and know-how. The technical explanation excludes equipment leasing, after-sales service and technical assistance, and professional services such as software development or engineering design, which fall under Articles 7 or 14.

Services

France keeps an independent personal services article. A French individual's fees for work in the U.S. are taxable here only if attributable to a fixed base regularly available in the U.S., and only for the services performed here (Art. 14). There is no day count. Construction and installation projects become a permanent establishment after more than 12 months (Art. 5(3)).

Employees are exempt only if present 183 days or fewer in any 12-month period beginning or ending in the tax year, paid by a non-U.S. employer and not borne by a U.S. permanent establishment or fixed base; a deductible recharge to a U.S. host defeats the last two (TE Art. 15). Directors' fees are taxable in the company's country only for services rendered there (Art. 16). Performers and athletes are taxable once gross receipts for the year, including reimbursed expenses, exceed $10,000, and then on the whole amount (Art. 17).

Pensions and Social Security

Since the 2004 protocol, pensions, similar remuneration and Social Security benefits are taxable only in the country where they arise, whether periodic or lump sum (Art. 18(1)). A pension arises in a country only if paid by a plan established there. This reverses the 1994 rule. For a U.S. payer, a pension, IRA or 401(k) distribution, or Social Security, paid to a French resident is U.S.-taxable and withheld on under the Code; the IRS table shows 30% for pensions. In the other direction, French Social Security paid to a U.S. citizen is taxable only in France. Contributions to a plan in the other country are deductible where the plans correspond and contributions began before the move.

Teachers, students and trainees

A French teacher or researcher invited to teach or research at a university or recognized institution is exempt for up to two years from arrival, once only, with no dollar limit (Art. 20). Students and grant recipients are exempt on gifts from abroad, qualifying grants and up to $5,000 a year of service income, and Articles 20 and 21 combined are limited to five tax years (Art. 21(1)). A trainee or employee of a French company is exempt on up to $8,000 in total for 12 consecutive months (Art. 21(2)). The education articles still state their limits in French francs alongside dollars.

Other income and arbitration

Income not dealt with elsewhere and beneficially owned by a French resident is taxable only in France (Art. 22(1)). The technical explanation lists gambling winnings, punitive damages, covenants not to compete, derivatives income of non-dealers, securities lending fees and most guarantee fees. Mandatory "last best offer" arbitration applies after two years.

Where payers get it wrong

• Withholding on royalties. All royalties have been exempt since 2009, including patents and trademarks.
• Treating the pension rule like other treaties. U.S. pensions and Social Security paid to a French resident are taxable only in the U.S., so they are withheld on.
• Granting 0% on a parent dividend on ownership alone. The 12-month holding and one of the Article 10(3) routes are required; the active business test alone does not qualify.
• Letting a partnership claim for its partners. Benefits flow only to French-resident partners, only through entities organized in the U.S., France or an information exchange country, and a French partnership must meet all four conditions.
• Exempting a performer's first $10,000. Above $10,000 of gross receipts the whole amount is taxable.

Read from the treaty documents: Convention of Aug. 31, 1994 and exchanges of notes; Protocols of Dec. 8, 2004 and Jan. 13, 2009; Treasury Technical Explanations of the Convention and the 2009 Protocol. Texts and technical explanations: United States income tax treaties, A to Z.

How the payee claims these rates

• Individuals claim a reduced rate on interest, dividends, royalties or pensions in Part II of Form W-8BEN: treaty country, article, rate and any conditions. Most claims need a U.S. TIN or a foreign TIN on the form.
• Entities claim in Part III of Form W-8BEN-E, which also asks which limitation-on-benefits test the entity meets (the France treaty's LOB provision is Article 30).
• Pay for services performed in the United States by an individual is exempted on Form 8233, not the W-8BEN, one form per tax year and per payer.
• The payer reports the payment on Form 1042-S with the income code shown above and chapter 3 exemption code 04 (exempt or reduced withholding under a tax treaty). From 2026 an exemption code is required whenever less than 30% is withheld.

Questions payers ask

The IRS notes behind the figures

Notes to the rates (IRS Table 1)

• g Exemption or reduced rate does not apply to an excess inclusion for a residual interest in a real estate mortgage investment conduit (REMIC).
• t The provision does not apply to annuities. For Denmark, annuities are exempt from U.S. tax.
• u If enterprise earns income from leasing of equipment in the conduct of a trade or business, covered by Business Profits article (net tax). If passive income from the leasing of equipment, and not in Royalty article, covered by the Other Income article, if any. In Pakistan payment for TV broadcasting rights are covered by the Royalty article but not rental income from motion picture films.
• jj The rate is 15% (10% for Bulgaria and Spain; 30% for Austria, Germany, and Switzerland) for contingent interest that does not qualify as portfolio interest. In general, contingent interest is interest that is determined with reference to (a) receipts, sales, income, profits or other cash flow of the debtor or a related person, (b) any change in the value of any property of the debtor or a related person, or (c) any dividend, partnership distribution, or similar payment made by the debtor or related person. For Sweden and Germany, contingent interest is covered by the dividends article of the treaty.
• mm The rate in column 6 applies to dividends paid by a regulated investment company (RIC) or real estate investment trust (REIT). However, that rate applies to dividends paid by a REIT only if the beneficial owner of the dividends is (a) an individual (or pension fund, in some cases) holding not more than a 10% interest in the REIT, (b) a person holding not more than 5% of any class of the REIT's stock and the dividends are paid on stock that is publicly traded, or (c) a person holding not more than a 10% interest in the REIT and the REIT is diversified.
• oo Dividends received from an 80% owned corporate subsidiary are exempt if certain ownership period and limitation on benefits conditions are met by the recipient. For Japan, greater than 50% ownership is necessary. See specific treaty article to determine other conditions.
• ss 15% rate applies if income is attributable to a permanent establishment which that enterprise has in a third state, if the tax that is actually paid with respect to such income in the third state is less than 60 percent of the tax that would have been payable in the treaty country if the income were earned in by the enterprise and were not attributable to the permanent establishment in the third state, unless derived in the active conduct of a trade or business in that third state.

Notes to the services table (IRS Table 2)

• 2 Applies only if training or experience is received from a person other than alien's employer.
• 4 Does not apply to compensation for research work primarily for private benefit.
• 5 Grant must be from a nonprofit organization. In many cases, the exemption also applies to amounts from either the U.S. or foreign government. For Indonesia and the Netherlands, the exemption also applies if the amount is awarded under a technical assistance program entered into by the United States or the foreign government, or its political subdivisions or local authorities.
• 7 Exemption does not apply to the extent income is attributable to the recipient's fixed U.S. base. For residents of Korea and Norway, the fixed base must be maintained for more than 182 days (for Norway, 30 days in the case of the exploration or exploitation of the seabed and sub-soil and their natural resources); for residents of Morocco, the fixed base must be maintained for more than 89 days.
• 8 Does not apply to fees paid to a director of a U.S. corporation.
• 12 Fees paid to a resident of the treaty country for services performed in the United States as a director of a U.S. corporation are subject to U.S. tax.
• 15 Does not apply to payments from the National Institutes of Health under its Visiting Associate Program and Visiting Scientist Program.
• 17 The exemption does not apply if the employee's compensation is borne by a permanent establishment (or in some cases a fixed base) that the employer has in the United States.
• 30 Exemption does not apply if gross receipts (or compensation for Portugal and Venezuela), including reimbursements, exceed this amount. Income is fully exempt if visit to the United States is substantially supported by public funds of the treaty country or its political subdivisions or local authorities.
• 43 The combined period of benefits under Articles 20 and 21(1) cannot exceed 5 years.
• 44 Exemption does not apply if the individual previously claimed the benefit of this Article.
• 58 Remuneration derived by a resident of a contracting State in respect of an employment as a member of the regular compliment of a ship or aircraft operated in international traffic may only be taxed in that State.

Transcribed from the IRS Tax Treaty Tables. Treaty texts and technical explanations: United States income tax treaties, A to Z.

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