Rev. Rul. 84-21

1984-1 C.B. 307, 1984-6 I.R.B. 11.

                       Internal Revenue Service
                                 Revenue Ruling

     RATE OF TAX FOR A DIVIDEND PAID BY A UNITED STATES CORPORATION TO ITS
                          FRENCH CORPORATE SHAREHOLDER

                          Published: February 6, 1984

United States-France Income Tax Convention 1968-2 C.B. 691

  Rate of tax for a dividend paid by a United States corporation to its French corporate shareholder.  A dividend received from a U.S. corporation by a French corporate shareholder that owns, directly, at least ten percent of the outstanding shares of the voting stock of the U.S. corporation during the part of the paying corporation's taxable year that precedes the date of the dividend and during the whole of its prior taxable year (if any) is subject to a tax not exceeding 5 percent of the amount actually distributed in accordance with Article 9(2)(b) of the U.S. - France Income Tax Convention.

ISSUE

  Whether a dividend paid by a United States corporation to its French corporate shareholders is subject to the reduced rate of tax of five percent of the amount actually distributed as provided by Article 9(2)(b) of the Income Tax Convention between the United States and France (the French Convention), 1968-2 C.B. 691.

FACTS

  FX, FY and FZ are French corporations that own all of the outstanding stock of X, a domestic corporation.  FX and FY each own 3 percent and FZ owns 94 percent of the voting stock of X.  FZ also owns 99 percent of the outstanding stock of both FX and FY.  The stock ownership of FX, FY, FZ and X has remained the same for 3 years prior to July 1, 1983.

  On July 1, 1983, X paid a cash dividend to FX, FY and FZ.  X uses the calendar year as its taxable year.  X's gross income for the 1982 taxable year did not include any dividend or interest income.  FX, FY and FZ do not have a permanent establishment in the United States.

LAW AND ANALYSIS

  Article 9(2)(a) of the French Convention provides that dividends derived from sources within a Contracting State by a resident of the other Contracting State may be taxed by the former Contracting State, but the tax imposed on such dividends shall not exceed 15 percent of the amount actually distributed. Article 9(2)(b) of the French Convention provides, in part, that when the recipient of the dividend is a corporation, the rate of tax imposed by the former Contracting State shall not exceed 5 percent of the amount actually distributed if--During the part of the paying corporation's taxable year which precedes the date of payment of the dividend and during the whole of its prior taxable year (if any), at least ten percent of the outstanding shares of the voting stock of the paying corporation was owned by the recipient corporation.

  The term "owned" as used in Article 9(2)(b) of the French Convention is not defined in the Convention.  There is nothing in the language of Article 9 or in the history of the French Convention to indicate that the term "owned" should be interpreted to include any type of ownership other than direct ownership.

  Article 2(2) of the Convention provides, in part, that any term not otherwise defined shall, unless the context otherwise requires, have the meaning that it has under the laws of the Contracting State relating to the taxes that are the subject of the Convention. Generally, when the federal income tax laws require ownership of a certain percentage of voting stock, they mean "own" in the ordinary, common sense understanding of the term;  namely, actual or outright ownership.  See, for example, Trotz v. Commissioner, 361 F.2d 927 (10th Cir.1966).  Rev. Rul. 81-132, 1981-1 C.B. 603, holds that in a comparable provision of the U.S. - -Netherlands Tax Convention the terms "owning" and "owned" mean direct ownership.  Therefore, indirect ownership such as parent-subsidiary stock attribution, will not be considered in determining whether the stock ownership requirements of Article 9(2)(b) of the French Convention have been met.

  In the present case, FX and FY each owned directly only 3 percent of the voting stock of X during the part of X's taxable year preceding payment of the dividend and during the whole of its prior taxable year.  FZ owned directly 94 percent of the voting stock of X during the same period.

HOLDING

  The dividends paid to FX and FY are subject to a rate of tax not exceeding 15 percent of the amount actually distributed in

accordance with Article 9(2)(a) of the French Convention.  The dividend paid to FZ is subject to a rate of tax not exceeding 5 percent of the amount actually distributed in accordance with Article 9(2)(b) of the French Convention.

Rev. Rul. 84-21, 1984-1 C.B. 307, 1984-6 I.R.B. 11.