The Limitation on Benefits Clause
Article 30 of the US–France treaty is an anti-treaty-shopping provision. Treaty shopping is the practice of routing income through a company or entity resident in a treaty country specifically to obtain treaty benefits that would otherwise be unavailable to the ultimate beneficial owner.
Without an LOB clause, a third-country investor could establish a holding company in France or the US solely to access the US–France treaty’s reduced withholding rates and other benefits. The LOB clause prevents this by requiring residents to satisfy objective qualifying tests before treaty benefits are available.
The 2009 Protocol replaced Article 30 in its entirety with a modernized structure that added the derivative benefits test, revised the publicly-traded company test, and tightened the ownership-and-base-erosion conditions.
Who Qualifies: The Qualified Person Tests
Article 30(2) establishes the categories of residents who are automatically entitled to all treaty benefits.
Individuals
Article 30(2)(a): Individuals are automatically qualified persons.
All individual residents of a contracting state are entitled to all treaty benefits without satisfying any further test. This provision means that virtually all US expats in France and French nationals in the US are fully qualified under the LOB clause. The clause imposes no burden on individuals.
Governments and Agencies
Contracting states, their political subdivisions, and agencies and instrumentalities thereof are automatically qualified persons.
Publicly Traded Companies
A company is a qualified person if its principal class of shares is regularly traded on one or more recognized stock exchanges and either:
- The shares are primarily traded on a recognized exchange in the residence state (or, for French companies, on an EU exchange; or for US companies, on a NAFTA-state exchange), or
- The company’s primary place of management and control is in the residence state
A secondary ownership test also qualifies a company if at least 50% of voting power and value is owned by five or fewer publicly-traded companies meeting the above conditions, with each intermediate owner being a resident of either contracting state.
Pension Funds and Tax-Exempt Organizations
A pension trust or tax-exempt organization described in Article 4(2)(b)(ii) is a qualified person if more than 50% of its beneficiaries, members, or participants are individual residents of either contracting state, or the sponsoring organization qualifies for treaty benefits.
Investment Entities
Article 30(2)(f) provides a qualified-person route for certain investment entities described in Article 4(2)(b)(iii). An investment entity qualifies if more than 50% of its beneficial interests are owned by individual residents of the same contracting state or, in the case of a US investment entity, by US citizens. This provision is relevant to French-resident collective investment vehicles and US investment funds with predominantly qualifying ownership. Investment funds that do not satisfy these ownership conditions must look to the derivative benefits test or the active trade or business test.
Other Persons: Ownership and Base-Erosion Test
For persons not qualifying under the above categories, benefits are available if:
- At least 50% of each class of shares or beneficial interests is owned, on at least half the days of the taxable year, by residents of the same contracting state who qualify under Article 30(2)(a) (individuals), 30(2)(b) (governments), 30(2)(c)(i) (publicly traded companies), or 30(2)(d) (pension funds and tax-exempt organizations), with all intermediate owners also being residents of that same state, and
- Less than 50% of gross income for the year is paid or accrued to non-qualifying persons as deductible payments. This base-erosion prong does not count arm’s-length payments for services or tangible property made in the ordinary course of business, or interest on obligations to unrelated financial institutions.
This test is designed to ensure that treaty benefits flow to genuine residents, not to entities controlled by third-country interests that erode the income base through deductible payments to non-qualifying owners.
The Derivative Benefits Test
Article 30(3) provides an alternative to full qualified-person status on an income-by-income basis. A company that is a resident of a contracting state may claim treaty benefits on a specific income item if:
- At least 95% of aggregate voting power and value (and 50% of any disproportionate class) is owned by seven or fewer equivalent beneficiaries, and
- Less than 50% of gross income for the year is paid to non-equivalent beneficiaries as deductible payments
An equivalent beneficiary is generally a resident of an EU member state or NAFTA party who would be entitled to equivalent or better treaty benefits with respect to the income item in question, under that state’s treaty with the source country. This test allows multinational groups headquartered in the EU or North America to access the treaty even through a corporate structure that does not otherwise qualify.
The Active Trade or Business Test
Article 30(4) provides a further alternative for residents engaged in genuine business operations:
A resident not qualifying under paragraphs 2 or 3 may claim benefits on a specific income item if:
- The resident is actively engaged in a trade or business in its state of residence (not merely making or managing investments, unless the business is banking, insurance, or securities dealing by a registered entity)
- The income from the other state is derived in connection with, or is incidental to, that trade or business
- The trade or business in the residence state is substantial in relation to the activity in the other state that gives rise to the income
“Substantial” is determined by comparing the size, scope, and nature of the residence-state and source-state activities. A company whose residence-state operations are purely administrative or nominal relative to its source-state income-generating activity does not satisfy the substantial test.
Competent Authority Discretion
Article 30(6) is the safety-valve provision. Even if a resident fails all other tests, the competent authority of the source state may grant treaty benefits if it determines that neither the establishment, acquisition, or maintenance of the entity, nor the conduct of its operations, had as one of its principal purposes the obtaining of treaty benefits.
This is a facts-and-circumstances determination. Taxpayers who believe they would fail the objective tests but have a genuine reason for their structure can apply to the competent authority. The competent authority has broad discretion.
The Triangular Permanent Establishment Rule
Article 30(5) contains a special rule that can deny treaty benefits otherwise available under the LOB tests. Where income is attributable to a permanent establishment of a resident of a contracting state located in a third country, and the combined tax paid on that income in the residence state and the third country is less than 60% of the tax that would have been due in the residence state had the PE been located there, treaty benefits may be denied with respect to that income.
This rule targets structures that use a low-tax third-country PE to strip income out of the treaty benefit framework. It can apply even where the entity is a qualified person under Article 30(2). For US persons operating through French companies with third-country PE exposure, or French groups with US subsidiaries and third-country branches, Article 30(5) warrants analysis before treaty benefits are claimed on the relevant income items.
Recognized Stock Exchanges
Article 30(7)(d) enumerates the recognized stock exchanges for purposes of the treaty. The current list includes:
- NYSE, NASDAQ, and any other securities exchange registered with the US Securities and Exchange Commission
- French exchanges regulated by the Autorité des marchés financiers (AMF)
- Amsterdam, Brussels, Frankfurt, Hamburg, London, Lisbon, Madrid, Milan, Stockholm, Sydney, Tokyo, and Toronto stock exchanges
- The Swiss stock exchange
- Any other exchange agreed upon by the competent authorities of both contracting states
Practical Significance for US Individual Expats
Individuals: No Impact
The LOB clause has no practical impact on US citizens resident in France or French nationals resident in the US. Individuals automatically qualify under Article 30(2)(a). No LOB analysis is required, no forms are filed in connection with LOB, and no competent authority application is necessary. However, Article 30 qualification does not override the saving clause. US citizens who qualify under Article 30 remain subject to Article 29, which preserves US taxation of citizens regardless of treaty residence. The LOB clause and the saving clause operate independently.
Corporate Structures and Investment Vehicles
The LOB clause is relevant when:
- A US person owns a French company and the French company seeks treaty benefits in the US (for example, reduced US withholding on US-source dividends paid to the French company)
- A French-resident investment fund seeks treaty benefits on US-source income
- A third-country holding structure is used to route income between France and the US
In these situations, the holding entity must qualify as a qualified person or must satisfy the derivative benefits test or the active trade or business test. Failure to qualify means that treaty benefits are denied, and the domestic statutory withholding rates apply.
Protocol History
Article 30 was completely replaced by the 2009 Protocol (Protocol Art. XIV). The prior 1994 treaty LOB article was substantially narrower and less detailed. The 2009 Protocol brought the LOB article into conformity with the US Model Treaty standard as of that period.
The Technical Explanation for the 2009 Protocol provides detailed guidance on each test and the “equivalent beneficiary” concept. The definition of “disproportionate class of shares” and the ownership calculation rules for indirect ownership are addressed in the Technical Explanation.
The US Model Treaty’s LOB article has continued to evolve after 2009. The OECD’s Base Erosion and Profit Shifting (BEPS) project produced a multilateral instrument (the MLI) and revised the OECD Model Treaty LOB provisions. The US–France treaty has not been modified by the MLI; the parties negotiated bilateral protocols rather than adopting the MLI’s revisions. Any future bilateral protocol could further modernize Article 30.