Passive Income and the Treaty
Dividends, interest, and royalties represent the primary categories of passive cross-border income. Without treaty relief, both the source country (where the paying company or borrower is located) and the residence country (where the investor lives) assert taxation on the same payment. Source-state withholding and residence-state income tax stack on the same income.
The US–France treaty addresses each category with specific rules. Articles 10, 11, and 12 allocate taxing rights and establish withholding rates that reduce or eliminate source-state taxation. The 2009 Protocol made substantial changes to all three articles.
Article 10: Dividends
Withholding Rates
France imposes withholding tax on dividends paid to non-resident shareholders. The treaty reduces those rates as follows:
| Shareholder | Condition | Treaty Rate |
|---|---|---|
| Any beneficial owner | Portfolio investment | 15% |
| Corporate shareholder | Direct ownership ≥10% of capital | 5% |
| Corporate parent | Direct/indirect ownership ≥80% of voting power for 12 months, plus LOB test | 0% |
The 0% rate under Article 10(3) is available only to corporate shareholders that also satisfy one of the Limitation on Benefits tests under Article 30: the publicly-traded company test, the active-trade-or-business test combined with the ownership-and-base-erosion test, or the derivative-benefits test. Individuals cannot qualify for the 0% rate.
The 15% rate applies to all other cases, including US individual shareholders and US corporate shareholders below the 10% threshold.
Investment Fund Carve-Outs (Article 10(5))
The reduced 5% and 0% rates are not available for dividends distributed by:
- French SIICs (sociétés d’investissements immobiliers cotées) or SPPICAVs
- US REITs (real estate investment trusts) or RICs (regulated investment companies)
- French SICAVs (sociétés d’investissement à capital variable)
For these investment fund distributions, the 15% rate applies only in limited circumstances. If the conditions for the reduced rate are not met, the domestic statutory withholding rate applies.
Branch Profits Tax
A branch profits tax equivalent to a deemed dividend on permanent establishment (PE) profits may be imposed by either country. The rate is capped at 5% under Article 10(8), consistent with the corporate dividend rate. The branch profits tax cannot be imposed on companies that qualify for the 0% dividend rate or that meet certain LOB tests.
The Avoir Fiscal: Abolished
The 1994 treaty included provisions for France’s avoir fiscal, a tax credit paid by France to non-resident shareholders to equalize the treatment of dividends with domestic investors. France abolished the avoir fiscal for domestic purposes. The 2009 Protocol eliminated the treaty’s avoir fiscal provisions, which had already been largely defunct.
Article 11: Interest
Zero Withholding
Interest arising in France and beneficially owned by a US resident is taxable only in the US. France imposes no withholding tax on interest paid to a US beneficial owner. This rule applies to bank interest, bond interest, and other debt income.
The rule works in both directions: US-source interest paid to a French resident is taxable only in France.
Profit-Participating Interest
An exception applies to interest whose rate is determined with reference to the issuer’s profits. Such profit-participating interest may be taxed in the source state, subject to a 15% maximum rate. This exception covers hybrid instruments where the return is economically equivalent to a dividend.
PE Exception
If the interest is effectively connected with a PE or fixed base of the beneficial owner in the source state, the PE/fixed base rules under Article 7 or 14 govern rather than Article 11. The zero-withholding rule does not apply to PE-connected interest.
Article 12: Royalties
Zero Withholding (Post-2009)
Royalties arising in France and beneficially owned by a US resident are taxable only in the US. France imposes no withholding tax. This applies to all categories of royalties, including:
| Royalty Category | Treaty Treatment |
|---|---|
| Software copyrights and reproduction rights | 0% French withholding |
| Patents | 0% French withholding |
| Trademarks and brand licenses | 0% French withholding |
| Industrial knowhow and trade secrets | 0% French withholding |
| Literary, artistic, and scientific works | 0% French withholding |
| Contingent gains on alienation of royalty rights | 0% French withholding |
This represents a significant improvement from the pre-2009 position, under which industrial and commercial royalties were subject to 5% French withholding and only certain literary and artistic royalties were zero-rated.
The 2009 Protocol Change
The 2009 Protocol replaced Article 12 in its entirety. Under the original 1994 treaty, two different categories of royalties existed: literary/artistic works at 0% and industrial/commercial royalties at 5%. The 2009 Protocol merged both categories into a single zero-withholding provision. All royalties from France to US residents, and from the US to French residents, are now subject to exclusive residence-state taxation.
PFIC Rules and French Investments
Treaty Does Not Protect Against PFIC Classification
The PFIC rules of the Internal Revenue Code (IRC sections 1291–1298) constitute a treaty override. French investment funds, including fonds communs de placement (FCPs), sociétés d’investissement à capital variable (SICAVs), and assurance-vie contracts that hold foreign sub-funds, may qualify as PFICs for US holders.
The treaty does not prevent PFIC classification and does not modify the US tax treatment of PFIC excess distributions or the mark-to-market regime. A US holder of a French PFIC faces:
- A tax on excess distributions computed at the highest ordinary rate, plus an interest charge on deemed prior-year tax deferral
- Annual mark-to-market income inclusion if the mark-to-market election is made
- QEF income inclusion on Form 8621 if a qualifying electing fund election is made, assuming the PFIC provides required financial information
French dividends received through a PFIC structure are not subject to the treaty’s 15% withholding reduction for purposes of the US PFIC tax calculation. The treaty withholding rate governs only the French withholding at source; the US computation of PFIC income proceeds under domestic law.
US Citizens Holding French Stocks Directly
A US citizen holding French shares directly (not through a pooled vehicle) is subject to 15% French withholding on dividends, and owes US income tax on the gross dividend. The French withholding tax is creditable on Form 1116. Direct French equity holdings do not raise PFIC issues, provided the French company is not itself a passive entity.
Protocol History
Article 10 was completely replaced by the 2009 Protocol, which introduced the 0% rate for 80%-or-more corporate parents, eliminated the avoir fiscal, and modernized the branch profits tax rules.
Article 11 was not substantively amended by either protocol. The zero-withholding treatment for interest was part of the original 1994 treaty and reflects the US Model Treaty position that interest should be taxed only in the residence state.
Article 12 was completely replaced by the 2009 Protocol. The prior 5% rate on industrial royalties was eliminated. The new zero-withholding rule applies to all royalty categories under a single definition that includes gains from the alienation of royalty-type rights contingent on productivity, use, or further alienation.
The beneficial owner requirement in Articles 10–12 means that conduit arrangements through which a non-qualifying intermediate entity passes payments to the ultimate recipient do not qualify for treaty benefits. The beneficial owner must itself be a US resident entitled to benefits under the Limitation on Benefits article.
Frequently Asked Questions
What withholding rate applies to dividends paid by a French company to a US individual shareholder?
The standard treaty rate is 15% under Article 10(2)(b). A US corporate shareholder owning at least 10% of the French company’s capital qualifies for the 5% rate under Article 10(2)(a). A corporate parent owning at least 80% of voting power and meeting Limitation on Benefits conditions qualifies for the 0% rate under Article 10(3).
Is French bank interest subject to withholding for US residents?
No. Under Article 11(1), interest arising in France and beneficially owned by a US resident is taxable only in the US. France imposes no withholding on interest paid to a US beneficial owner. The exception for profit-participating interest allows France to withhold up to 15% on interest determined with reference to the issuer’s profits.
What happened to French royalty withholding after the 2009 Protocol?
The 2009 Protocol replaced Article 12 in its entirety. Royalties of all types, including software licenses, patents, trademarks, and knowhow, are now subject to exclusive residence-state taxation with zero withholding at source. Prior to the 2009 Protocol, France imposed a 5% withholding rate on industrial and commercial royalties.
Does the treaty protect French investment funds from US PFIC rules?
No. The PFIC regime (IRC sections 1291-1298) operates as a treaty override. French investment funds, fonds communs de placement, and assurance-vie contracts holding foreign sub-funds that constitute PFICs are subject to US PFIC taxation regardless of any treaty benefit. The treaty does not provide protection against PFIC classification or the punitive tax and interest regime on excess distributions.
Do treaty dividend rates apply to distributions from French REITs (SIICs)?
No. Article 10(5) carves out SIICs, SPPICAVs, REITs, RICs, and SICAVs from the reduced 5% and 0% rates. A US individual holding less than 10% of a publicly traded SIIC, or a US holder of a diversified REIT with less than 10% ownership, may qualify for the 15% rate. Otherwise, domestic statutory rates apply to these distributions.
Does the saving clause apply to dividend income received by US citizens in France?
Yes. The saving clause (Article 29) preserves US taxation of US citizens on worldwide dividend income. A US citizen resident in France who receives French dividends owes US tax on those dividends, in addition to any French tax. The treaty reduces French withholding but does not reduce US tax. The foreign tax credit offsets the French tax paid.