[Code of Federal Regulations]
[Title 26, Volume 18, Parts 500 to 599]
[Revised as of April 1, 2000]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR514.105]

[Page 95-96]
 
                       TITLE 26--INTERNAL REVENUE
 
     CHAPTER 1--INTERNAL REVENUE SERVICE DEPARTMENT OF THE TREASURY 
                               (Continued)
 
PART 514--FRANCE--Table of Contents
 
                       Subpart--General Income Tax
 
Sec. 514.105  Scope of convention with respect to determination of ``industrial and commercial profits'' of a nonresident alien individual resident of France, 

          or of a French corporation or other entity carrying on a 
          French enterprise in the United States.

    (a) General. Article 3 of the convention adopts the principle that 
an enterprise of one of the contracting States shall not be taxable in 
the other contracting State in respect of its industrial and commercial 
profits unless it has a permanent establishment in the latter State. 
Hence, a French enterprise is subject to United States tax upon its 
industrial and commercial profits from sources within the United States 
only if it has a permanent establishment within the United States. From 
the standpoint of Federal income taxation, the article has application 
only to a French enterprise and to the industrial and commercial income 
thereof from sources within the United States. It has no application, 
for example, to compensation for labor or personal services performed in 
the United States, to income derived from real property located in the 
United States or any interest therein, including rentals and royalties, 
to gains from the sale or other disposition of such real property or 
interest, to dividends and interest, to rentals and royalties arising 
from leasing personal property or any interest in such property, 
including rentals and royalties for the use of patents, copyrights, 
secret processes and formulae, good will, trade marks, trade brands, 
franchises, and other like property, or to profits from the sale or 
exchange of capital assets. Such enumerated items of income, to the 
extent covered by the convention, are treated separately elsewhere in 
this subpart and are subject to the rules laid down

[[Page 96]]

in the sections having specific references to the respective items of 
income.
    (b) No United States permanent establishment. A nonresident alien 
individual who is a resident of France, or a French corporation or other 
French entity carrying on a French enterprise, but having no permanent 
establishment in the United States, is not subject to United States 
income tax upon industrial and commercial profits from sources within 
the United States. For example, if such French corporation sells stock 
in trade, such as wines or perfumery or cheese, through a bona fide 
commission agent or broker in the United States, the resulting profit 
is, under the terms of Article 3 of the convention, exempt from United 
States income tax. Such French corporation, however, remains subject to 
tax upon all other items of income from sources within the United States 
which are not expressly exempted from such tax under the convention.
    (c) United States permanent establishment. A nonresident alien 
individual who is a resident of France, or a French corporation or other 
entity, carrying on a French enterprise having a permanent establishment 
in the United States is subject to tax upon his or its industrial and 
commercial profits from sources within the United States. In the 
determination of the income of such resident of France or French 
corporation or other entity from sources within the United States, all 
industrial and commercial profits from such sources shall be deemed to 
be allocable to the permanent establishment within the United States. 
Hence, for example, if a French enterprise, having a permanent 
establishment in the United States, sells directly in the United States 
through a commission agent or broker therein goods produced in France, 
the resulting profits derived from United States sources from the latter 
transactions are allocable to such permanent establishment. The net 
income from sources within the United States, including the industrial 
and commercial profits, shall be determined in accordance with the 
provisions of section 119 of the Internal Revenue Code and the 
regulations thereunder. In determining industrial and commercial profits 
no account shall be taken of the mere purchase of merchandise effected 
in the United States by such French enterprise. A nonresident alien who 
is a resident of France, a member of a French partnership having a 
permanent establishment within the United States, shall by reason of 
such fact be deemed to have a permanent establishment within the United 
States.