The new protocol (Protocol) to the U.S.-France income tax treaty (Treaty) signed January 13, 2009, entered into force December 23, 2009. The Protocol eliminates the dividend withholding tax from certain parent-subsidiary dividends and eliminates source-country taxation of cross-border royalty payments. Under the Protocol, changes with respect to taxes withheld at source are effective for amounts paid or credited on or after January 1, 2009.

For all other taxes, the Protocol provisions will generally be effective for tax years starting on or after January 1, 2010. Taxpayers entitled to new benefits under the Protocol who paid withholding tax in 2009 should act now to apply for a refund of the tax withheld. BKD, LLP, can help taxpayers take advantage of any benefits arising from the Protocol and assist with the tax refund application process to obtain refunds as quickly as possible.

Elimination of Tax on Cross-Border, Parent-Subsidiary Dividends

The Treaty continues to impose a 5 percent withholding tax on cross-border dividends paid to a company that owns 10 percent or more of the stock or capital of the payor corporation and a 15 percent withholding tax on all other cross-border dividends. However, the Protocol provides an exemption from taxation for dividends if the beneficial recipient of the dividend is a company that has, for at least 12 months, directly or indirectly owned at least 80 percent of the voting power in the company paying the dividend and the recipient meets the limitation on benefits provisions.

Royalties

The Protocol eliminates withholding tax on royalties residents of the other contracting state beneficially own. Under Article 12 (Royalties) of the Treaty, royalties were subject to a 5 percent withholding rate.

Refunds

The Protocol provides for retroactive treatment for taxes withheld at source and, therefore, the new zero withholding rate on cross-border dividend and royalty payments are effective for dividends and royalties paid on or after January 1, 2009. Accordingly, taxpayers entitled to zero rates should apply for a refund to fully recover any withholdings made in 2009.

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