Foreign Relations of the United States Diplomatic Papers, 1937, The British Commonwealth, Europe, Near East and Africa, Volume II
The Secretary of State to the Ambassador in France ( Bullitt )
Sir: The Department refers to the Embassy’s despatch No. 390 of March 2, 1937, and previous correspondence concerning the possible conclusion of an addendum to the Double Taxation Convention between the United States and France, and now encloses copies of a letter19 of March 29, 1937, and the enclosures thereto, received from the Treasury Department in further relation to this matter. The enclosures consist (1) of a draft addendum to the Convention on Double Taxation between the United States of America and France, of April 27, 1932; (2) of a protocol annexed to the foregoing addendum; and (3) of a commentary on the proposed draft.
It is suggested that you transmit the substance of the information contained in the letter of the Treasury Department, together with the [Page 287] copies of the enclosures enumerated above, to the Foreign Office for the consideration of the appropriate French authorities.
In transmitting these documents to the Foreign Office you may state that the draft might serve as a useful basis for further informal discussions between officials of both countries, and that, should the Foreign Office so desire, the Department will be pleased to ascertain from the Treasury Department whether it will be agreeable to have Mr. Eldon D. King, or such other person or persons as the Treasury Department may wish to designate, participate in such informal discussions.
Very truly yours,
Addendum to the Convention on Double Taxation Between the United States of America and the French Republic, Signed at Paris on April 27, 1932
Being desirous of further reducing the barriers to the flow of commerce between the two countries which result from conflicting principles and methods of taxation, the High Contracting Parties have agreed to the following provisions:
The first paragraph of Article I of the Convention of April 27, 1932 is amended to read as follows:
An enterprise of one of the contracting States shall not be subject to taxation in the other contracting State on the basis of:
- industrial and commercial profits and other income unless directly derived from sources within its territory and, in the case of industrial and commercial profits, allocable in accordance with the articles of this Convention to a permanent establishment in the latter State;
- gains or other income realized upon dissolution or merger except such income directly attributable to a permanent establishment in the latter State;
- property or capital except property situated or capital employed within its territory and, in the case of movable property or capital, allocable to a permanent establishment in the latter State.
- For the purposes of this Convention, the term “industrial
and commercial profits” shall not include the following: [Page 288]
- Income from immovable property;
- Income from mortgages, from public funds, bonds (including mortgage bonds), loans, deposits and current accounts;
- Dividends and other income from shares in a corporation;
- Rentals or royalties arising from leasing personal property or from any interest in such property, including rentals or royalties for the use of, or for the privilege of using, patents, copyrights, secret processes and formulae, goodwill, trade marks, trade brands, franchises and other like property;
- Profit or loss from the casual purchase and sale of immovable or movable property.
- Notwithstanding the provisions of paragraph 1 above, the
term “industrial and commercial profits” shall include, in
so far as banking and financial enterprises are concerned,
all items which, in conformity with the laws in force
governing national enterprises, enter into the computation
of profit and loss; it shall not, however, include the
- Income from immovable property;
- Income from mortgages.
- In determining industrial and commercial profits there shall be excluded with the above-mentioned items of income the related expenses (including general overhead) and charges.
- Such items of income shall be taxed separately or together with industrial and commercial profits, in accordance with the laws of the contracting States, the applicable provisions of the Convention of April 27, 1932, and the present Convention.
Article II of the Convention of April 27, 1932 is replaced by the following:
- If an enterprise of one of the contracting States has a permanent establishment in the other contracting State, there shall be attributed to such permanent establishment the net industrial and commercial profit which it might be expected to derive if it were an independent enterprise engaged in the same or similar activities under the same or similar conditions. Such net profit will, in principle, be determined on the basis of the separate accounts pertaining to such establishment. Subject to the provisions of this Convention and the Convention of April 27, 1932, such net profit shall be taxed in accordance with the legislation of the contracting State in which such establishment is situated.
- The fiscal authorities of the contracting States shall, when necessary, in execution of the preceding paragraph, rectify the accounts produced, notably to correct errors or omissions, or to re-establish the prices or remunerations entered in the books at the value which would prevail between independent persons dealing at arm’s length.
- If an establishment does not produce an accounting showing its own operations, or if the accounting produced does not correspond to the normal usages of the trade in the country where the establishment is situated, or if the rectifications provided for in the preceding paragraph cannot be effected, or if the taxpayer agrees, the fiscal authorities may determine empirically, the net industrial and commercial profit by applying a percentage to the turnover of that establishment. This percentage is fixed in accordance with the nature of the transactions in which the establishment is engaged and by comparison with the results obtained by similar enterprises operating in the country.
- The property or capital which is allocable to the permanent establishment shall be determined on the basis of the separate accounts pertaining to such establishments, and, subject to the provisions of this Convention, shall be taxed in accordance with the legislation of the contracting State in which such establishment is situated. The fiscal authorities of the contracting State shall make such rectifications of such accounts as are necessary to reflect the property situated within such State and such capital as corresponds to the permanent capital the establishment would have if it were an independent enterprise engaged in the same or similar activities under the same or similar conditions.
- The net income of banking and financial enterprises shall be determined in conformity with the principles laid down in Article III.
- Where a permanent establishment of an enterprise in one
contracting State is in the position of a creditor or debtor
in relation to a permanent establishment of such enterprise
in the other contracting State, the following provisions
- If a permanent establishment in one State (creditor establishment) supplies funds, whether in the form of an advance, loan, overdraft, deposit, or otherwise, to a permanent establishment in the other State (debtor establishment), for tax purposes interest shall be deemed to accrue as income to the creditor establishment and as a deduction from gross income to the debtor establishment, and such interest shall be computed at the interbank rate for similar transactions in the currency used.
- Contrary to the provisions of the preceding paragraph, from the interest accruing as income to the creditor establishment and deductible from gross income by the debtor establishment there shall be excluded the interest corresponding to the permanent capital allotted to the debtor establishment whether in the form of advances, loans, overdrafts, deposits, or otherwise.
Income from maritime shipping and air navigation enterprises shall be taxable only in the State to which the enterprise belongs as provided, respectively, with regard to shipping enterprises, in the exchange of notes between the United States of America and the French [Page 290] Republic of June 11 and July 8, 1927,20 and, with regard to air navigation enterprises, in Article III of the Convention of April 27, 1932.
Article VI of the Convention of April 27, 1932, is replaced by the following:
An American corporation shall not be subject to the obligations prescribed by Article 3 of the Decree of December 6, 1872, by reason of any participation in the management or in the capital of, or any other relations with, a French corporation. Except as otherwise provided in this Convention the tax on income from securities continues to be levied, in conformity with French legislation, on the dividends, interest and all other products distributed by the French enterprise; but it is moreover exigible, if the occasion arises, and subject to the measures of appeal applicable in the case of the tax on income from securities, on the profits which the American corporation derives from the French corporation under the conditions prescribed in Article IV.
Compensation paid by one of the contracting States to its citizens for labor or personal services performed in the other State is exempt from tax in the latter State.
Transactions initiated in one contracting State and effected on stock, security or commodity exchanges in the other contracting State shall be taxable only in the latter contracting State.
Mutual administrative assistance in preventing tax evasion. (The scope and language of this article to be left for discussion between representatives of the two governments)
This Convention shall be ratified and the instruments of ratification exchanged at Paris as soon as possible.
This Convention shall be effective as of the date on which the Convention signed April 27, 1932 became effective, namely January 1, 1936, and shall remain effective for the same period, namely, five years, and thereafter until twelve months from the date on which either contracting Party gives notice of its termination.
American corporations which prior to May 1, 1930 have not had their liability to tax under Article 3 of the Decree of December 6, 1872, finally determined by the court of last resort shall not be subject to the [Page 291] application of said article for any years preceding the coming into force of this Convention.
In witness whereof, the respective Plenipotentiaries have signed the above articles, both in English and French languages, and have hereunto affixed their seals,
Done in duplicate at. . . . ., on. . . . . . .
At the moment of signing the present Convention, concluded on this day’s date between the United States of America and the French Republic, the undersigned Plenipotentiaries, duly authorized by their respective Governments, have made the following declarations, which shall form an integral part of the said Convention:
1. The taxes referred to in this Convention include the following:
(a) for the United States:
—in Article 1, paragraphs (a) and (b), the Federal income and excess profits taxes, except that paragraph (a) does not exempt from tax (1) compensation for labor or personal services performed in the United States; (2) income derived from real property located in the United States, or from any interest in such property, including rentals and royalties therefrom; (3) dividends; (4) interest; and paragraph (c), the Federal capital stock tax.
—in Articles II, III, IV, V, and VII, the Federal income tax and the Federal excess profits tax where applicable.
—in Article VIII, the Federal stamp tax.
(b) for France:
—in Article 1, paragraphs (a) and (b), the tax on industrial and commercial profits, the tax on income from securities and other income taxes; and paragraph (c), the patente tax.
—in Articles II, III, IV, V, VI, and VII, the tax on industrial and commercial profits, the tax on income from securities, the tax on wages and salaries, and any other taxes appropriate to the type of income specified in said articles.
—in Article VII, the general income tax.
—in Article VIII, the taxes on transactions on the stock, security and commodity exchanges and stamp taxes.
2. The provisions of this Convention shall not be construed to affect in any manner any exemption, deduction, credit or other allowance accorded by the laws of one of the contracting States in the determination of the tax imposed by such State, or any exemption granted by the Convention of April 27, 1932.
3. As used in this Convention:
(a) The term “enterprise” includes every form of undertaking, whether carried on by an individual, partnership (société en nom collectif), corporation (société anonyme), or any other entity.[Page 292]
(b) The term “enterprise of one of the contracting States” means, as the case may be, “American enterprise” or “French enterprise”.
(c) The term “American enterprise” means an enterprise carried on in the United States by a citizen of the United States or by an American corporation or other entity; the term “American corporation or other entity” means a partnership, corporation or other entity created or organized in the United States or under the law of the United States or of any State or Territory of the United States.
(d) The term “French enterprise” is defined in the same manner, mutatis mutandis, as the term “American enterprise”.
(e) The American corporations mentioned in Article VI are those which, owing to their form or organization, are subject to Article 3 of the Decree of December 6, 1872.
(f) The term “permanent establishment” includes branches, mines and oil-wells, plantations, factories, workshops, warehouses, offices, agencies, installations, and other fixed places of business of an enterprise, but does not include a subsidiary company.
When the term “permanent establishment” is used with reference to a particular State, it includes all the permanent establishments, whatever their form, which are situated within such State.
The fact that an enterprise of one of the contracting States has business dealings in the other contracting State through an agent of genuinely independent status (e. g., broker, commission agent, or custodian) shall not be held to mean that it has a permanent establishment in the latter State.
When an enterprise of one contracting State regularly has business relations in the other contracting State through an agent established there who is authorized to act on its behalf, it shall be deemed to have a permanent establishment in the latter State.
A permanent establishment shall, for instance, be deemed to exist when the agent established in the State:
(1) Is a duly accredited agent (fondé de pouvoir) who habitually enters into contracts for the enterprise for which he works; or
(2) Is bound by an employment contract and habitually transacts commercial business on behalf of the enterprise in return for remuneration from the enterprise; or
(3) Is habitually in possession, for the purpose of sale, of a depot or stock of goods belonging to the enterprise.
As evidence of an employment contract under the terms of (2) above may be taken, moreover, the fact that the administrative expenses of the agent, in particular the rent of premises, are paid by the enterprise. A broker who places his services at the disposal of an enterprise in order to bring it into touch with customers does not in his own person constitute a permanent establishment of the enterprise, even if his work for the enterprise is to a certain extent continuous or is carried on at regular periods. Similarly, a commission agent (commissionaire), who acts in his own name for one or more enterprises and receives a normal rate of commission, does not constitute a permanent establishment of any such enterprise.[Page 293]
A permanent establishment shall not be deemed to exist in the case of commercial travellers not coming under any of the preceding categories.
(g) The term “United States”, when used in a geographical sense, includes only the States and the Territories of Alaska and Hawaii, and the District of Columbia.
(h) The term “France” when used in a geographical sense, indicates the country of France, exclusive of Algeria and the Colonies.
Done in duplicate at. . . . ., the. . . . . . . .
Commentary on the Proposed Draft of a Convention to supplement the existing convention relative to double taxation between the United States of America and the French Republic, signed at Paris on April 27, 1932
The attached draft was proposed as a result of the suggestion of the French Government21 that an addendum to the double taxation convention of April 27, 1932 be concluded to be effective as of January 1, 1936.
The draft embodies most of the points raised in the informal discussions which took place in Paris October 29 [30?]–November 3, 193622 between French officials and American officials, as well as a few other provisions which appear to be useful in clarifying and extending the existing treaty so as to prevent conflicts in jurisdiction and thereby reduce friction and encourage commerce between the two countries. Other points are left for further discussion.
Since the existing treaty was negotiated in the summer of 1930,23 there has been a marked development in treaties of this nature and in the model conventions concerning double taxation prepared by the Fiscal Committee of the League of Nations.
The draft convention for the allocation of business income between States for tax purposes, originally contained in the 1933 report of the Fiscal Committee (Official No. C.399.M.204.1933.II.A., F./Fiscal.76.) and published again in slightly amended form in the 1935 report of the Fiscal Committee (Official No. C.252.M.124.1935.II.A., F./Fiscal.83.), has been studied by this Government, which has indicated its willingness to the Secretariat of the League of Nations to employ it, with certain minor modifications, as a basis for the negotiation of agreements with other countries.[Page 294]
The draft convention for the allocation of property and capital between States for the purposes of taxation contained in Annex II of the 1936 report of the Fiscal Committee (Official No. C.450, M.266. 1936.11.A., F./Fiscal.91.) also appears to be a useful basis for negotiations. Consequently, it has seemed appropriate, in formulating a draft convention between the United States and France, to take as a framework the draft convention for the allocation of business income, using the articles which supplement advantageously the existing treaty with slight amendments in language where necessary, and adding thereto other articles which embody the principles of the draft convention for the allocation of property and capital between States for the purposes of taxation, as well as articles which supplement or clarify the existing treaty.
Briefly, the purposes of the various articles are as follows:
Article I extends reciprocally the principle of territoriality, contained in Article I of the existing treaty with regard to the tax on industrial and commercial profits, to other taxes, with a view to precluding the extraterritorial application and conflicts of jurisdiction.
Article II is based on Article II of the draft convention for the allocation of business income, with necessary references to the convention of April 27, 1932 and the proposed convention.
In Article III the first three paragraphs are based on Article III of the draft convention for the allocation of business income and the fourth paragraph is added to prescribe allocation criteria for the principle concerning property and capital enunciated in Article I, paragraph (c).
Article IV is copied from the draft convention for the allocation of business income.
Article V follows Article V of the draft convention for the allocation of business income in confirming existing arrangements between the two countries for reciprocal exemption of shipping and air navigation profits.
Article VI is intended to bring Article VI of the existing convention in line with equivalent provisions in the French treaties with Belgium, Italy and Germany. Inasmuch as these treaties were negotiated subsequently to the negotiations between the United States and France and do not require a declaration similar to that provided for in paragraph 1 of Article VI of the existing convention, it is proposed that Article VI of the existing convention be amended so as to omit the declaration requirement in paragraph 1 and consequently render unnecessary paragraphs 2 and 3 of that article.
Article VII reproduces Article VII of the present convention with a view to making it clear in the protocol that this exemption applies [Page 295] to the French general income tax, as well as to the tax on wages and salaries.
Article VIII extends the principle of territoriality to transactions on stock, security and commodity exchanges.
Article IX. Inasmuch as the question of mutual administrative assistance in preventing tax evasion involves consideration of the laws and policies of the two countries, it is left open for discussion between their representatives.
Article X meets the French request that this additional convention be made applicable as from January 1, 1936 in order to tie it to the existing convention. The removal of the declaration requirement in Article VI of the convention of April 27, 1932 would involve a removal of the reference thereto in the third paragraph of Article X of such convention and therefore no reference is made thereto in the third paragraph of Article X of the present draft. Furthermore, it is proposed that the third paragraph of Article X of the existing convention be clarified so as to permit the dismissal of all claims against American corporations arising under Article 3 of the decree of December 6, 1872, which are still pending, and especially those claims which arose subsequently to May 1, 1930, when the negotiations of the existing convention were begun and would therefore not have arisen if the American corporations had been able to enjoy the benefits of the convention at that time. This involves recognition of the fact that the words “finally determined” mean final determination of liability to tax, whether in principle or as to amount, after all possibility of recourse to judicial tribunals has been exhausted. It is also necessary to acknowledge the fact that under Article VI of the existing convention the tax on income from securities is applicable to diverted profits only as from January 1, 1936.
The protocol is modeled after the protocol of the existing convention and that of the draft convention for the allocation of business income with appropriate changes in language where necessary or desirable to clarify or amplify provisions in the protocol of the existing convention.
- Letter not printed.↩
- Foreign Relations, 1927, vol. ii, pp. 705–707.↩
- See despatch No. 2238, October 14, 1935, from the Chargé in France, Foreign Relations, 1935, vol. ii, p. 251.↩
- See despatch No. 96, November 10, 1936, from the Ambassador in France, ibid., 1936, vol. ii, p. 120.↩
- See ibid., 1930, vol. iii, pp. 6 ff.↩