Convention. For purposes of this subparagraph, a French qualified partnership is defined
as a partnership that has its place of effective management in France, has not elected to
be taxed in France as a corporation, the tax base of which is computed at the partnership
level for French tax purposes, and all of the shareholders, associates, or other members of
which, pursuant to the tax laws of France, are liable to tax therein in respect of the share
of profits of that partnership.
New paragraph 3 addresses special issues presented by fiscally transparent
entities. Entities that are fiscally transparent for U.S. tax purposes include partnerships,
common investment trusts under section 584, and grantor trusts. This paragraph also
applied to U.S. limited liability companies (“LLCs”) that are treated as partnerships or as
disregarded entities for tax purposes. In general, new paragraph 3 relates to entities that
are not subject to tax at the entity level, as distinct from entities that are subject to tax, but
with respect to which tax may be relieved under an integrated system.
Because countries may take different views as to when an entity is fiscally
transparent, the risk of double taxation and double non-taxation in these cases is
relatively high. The intention of new paragraph 3 is to eliminate a number of technical
disputes that had arisen under the language of paragraph 2(b)(iv) as it existed prior to the
Protocol, and to adopt the modern U.S. tax treaty approach, with certain modifications
addressing fiscally transparent entities formed or organized in states with which the
source state does not have an agreement containing a provision for the exchange of
information with a view to the prevention of tax evasion with the Contracting State from
which the income, profit or gains is derived.
New paragraph 3 provides that an item of income, profit or gain derived by a
fiscally transparent entity is considered to be derived by a resident of a Contracting State
to the extent that the resident is treated under the taxation laws of the State where he is
resident as deriving the item of income. This paragraph applies to any resident of a
Contracting State who derives income, profit or gain through an entity that is treated as
fiscally transparent under the laws of either Contracting State, where such entity is
formed or organized in either Contracting State or in a state that has concluded an
agreement containing a provision for the exchange of information with a view to the
prevention of tax evasion with the Contracting State from which the income, profit, or
gain is derived.
For example, if a corporation resident in France distributes a dividend to an entity
that is formed or organized in the United States, and is treated as fiscally transparent for
U.S. tax purposes, the dividend will be considered derived by a resident of the United
States only to the extent that the taxation laws of the United States treat one or more U.S.
residents (whose status as U.S. residents is determined, for this purpose, under U.S. tax
laws) as deriving the dividend income for U.S. tax purposes. In the case of a partnership,
the persons who are, under U.S. tax laws, treated as partners of the entity would normally
be the persons whom the U.S. tax laws would treat as deriving the dividend income
through the partnership. Thus, it also follows that persons whom the United States treats
as partners but who are not U.S. residents for U.S. tax purposes may not claim any
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