and the citizens thereof on and from the first day of January, one thousand nine hundred and thirty-six. VIN TESTIMONY WHEREOF, I have hereunto set my hand and caused the Seal of the United States of America to be affixed.7%),pomal DONE at the city of Washington this sixteenth day of April in the year of our Lord one thousand nine hundred and thirty-five, and of the Independence of the United States of America the one hundred and fifty-ninth. PAR. C. Section 22 (b) (7), Revenue Act of 1938, provides in part as follows: naik gobostr59 sida to 9, [(b) EXCLUSIONS FROM GROSS INCOME.—The following items shall not be included in gross income and shall be exempt from taxation under this title: vd no 9-89 9d (7)o INCOME EXEMPT UNDER TREATY.—Income of any kind, to the extent required by any treaty obligation of the United States ** * Pursuant to the provisions of section 62 of the Revenue Act of -1938, the following regulations are hereby prescribed to carry into effect the quoted provisions of the convention and protocol, or treaty, between the United States of America and the Republic of France, hereinafter referred to as the convention, for taxable years beginning after December 31, 1937: PART II. Effect of the convention upon the determination of United States taxable income of French citizens and French corporations ARTICLE 1. General. The primary purposes of the convention are to regulate the method of taxation of corporations of either of the contracting States carrying on industrial or commercial activities. through a permanent establishment or a subsidiary corporation in the other State and to avoid double taxation upon certain special classes of income. 10 The specific classes of income relieved from United States income :ewollol es sunq il cheer #261 Ingi no 1956.6 bed edd tax are: (a) Industrial and commercial profits of a French enterprise having no permanent establishment in the United States. (b) Income derived by a French enterprise from the operation of aircraft registered in France and engaged in transportation between the United States and France. (c) Compensation paid by France to its citizens for labor or personal services performed in the United States. 1 (d) War pensions paid by France to persons residing in the United States. 1 tk betha, 900 yd alt i 6. (e) Income paid to a French corporation, or to a citizen of France residing in France Bog & oval of borobiznos zi 0958 (1) as consideration for the right to use patents, secret processes and formulas, trade marks, and other analogous rights; b (2) as copyright royalties; (3) as private pensions and life annuities. 60109.fba97] A .291912 bolin J del de gob & demondt estate Except as to those items of income expressly exempted by the convention, the tax liability of French citizens, not residents of the United States, and French corporations, is determined in accordance with the provisions of the revenue laws of the United States and the regulations thereunder applicable generally to nonresident alien individuals and to foreign corporations. To le a Bangoo 1 ¡¡¡ ...The convention does not affect the liability to tax of French citizens resident in the United States unless and to the extent such citizens are entitled to the benefits of article VII or VIII of the convention. See articles 5 and 6 of these regulations. The tax liability of a United States citizen or United States resident, a member of a French partnership carrying on a French enterprise, is not affected by article I of the convention. Such citizen or resident is subject to United States income tax upon his distributive share of its net income even though the other members of such partnership are not subject to tax upon their share of the partnership's industrial and commercial profits from sources within the United States.s burnih no novitio Notor The convention has no reference to the rates of taxation imposed by the respective countries and concerns only the determination of income arising in one of the contracting States to citizens or corpora, tions of the other contracting State and subject to taxation in the former State. iw zasmoz moi atileset These regulations are limited to a consideration of the factors involved in the application of: (a) the provisions of the convention alone; and (b) the provisions of the convention as extended by the Revenue Act of 1938. These regulations are not concerned with article V or VI of the convention as such articles affect only the application of certain French tax laws and decrees.ni for 2900 irod ART. 2. Definitions. Any word or term used in these regulations which is defined in the convention shall be given the definition assigned to such word or term in such convention. Any word or term used in these regulations which is not defined in the convention but is defined in the Revenue Act of 1938 shall be given the definition contained in the revenue activo ob The term "permanent establishment" includes branches, mines and oil wells, factories, work shops, warehouses, offices, agencies and other fixed places of business. A French enterprise, as defined in the convention, carrying on business in the United States through 401572-41-vol. 35--2 an agent established there who is authorized to contract for its account, is considered to have a permanent establishment in the United States. However, the carrying on of business dealings in the United States by a French enterprise through a bona fide commission agent or broker does not constitute a permanent establishment in the United States. A French corporation doing business in the United States through a domestic subsidiary corporation has not, merely by reason of such fact, a permanent establishment in the United States. The term "enterprise" means any commercial or industrial undertaking whether conducted by an individual, partnership, corporation, or any other entity. It includes such activities as manufacturing, merchandising, mining, banking, and insurance. It does not include the operation of, or the trading in, real property located in the United States. It does not include the rendition of personal services. Hence, a French citizen rendering personal services within the United States is not, merely by reason of such service, engaged in an enterprise within the meaning of the convention and his liability to Federal income tax is unaffected by article I of the convention. The term "French enterprise" means an enterprise carried on in France by a citizen of France or by a French corporation or other entity. The term "French corporation or other entity" of the convention means a partnership, corporation, or other entity created or organized in France or under the law of France. If, for example, a French citizen or French corporation does not carry on an enterprise in France it is not a French enterprise within the meaning of the convention even though it carries on an enterprise in some other foreign country and hence such enterprise is not relieved by the convention from United States income tax upon its industrial and commercial profits from sources within the United States even though it has no permanent establishment therein. The term "industrial and commercial profits" means the profits arising from the industrial, mercantile, or manufacturing or like undertakings of a French enterprise, as defined in this article. For the purpose of the exemption under article I of the convention such term does not include gains from the sale or exchange within the United States of capital assets as defined in section 117 of the Revenue Act of 1938 unless it can be shown by clear and convincing evidence that such sale or exchange was incident, and had a necessary relation, to the commercial and industrial activities of the French enterprise. For treatment of such gains under the Revenue Act of 1938, see articles 8 (b) and 9 (b). Such term does not include dividends, interest, compensation for labor or personal services, or income derived from real property or from any interest in such property including rentals and royalties therefrom and gains from the sale or disposition thereof. ART. 3. Scope of convention with respect to determination of taxable income of French citizen or a French corporation carrying on a French enterprise in the United States. (a) General.-Article I 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 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 the commercial income thereof from sources within the United States. It has no application to compensation for labor or personal services performed in the United States, nor to income derived from real property located in the United States, or from any interest in such property, including rentals and royalties therefrom and gains from the sale or the disposition thereof, nor to dividends or interest. Such latter items of income are, except as otherwise provided in the convention and in these regulations, subject to tax as income of French citizens or French corporations, in the same manner and subject to the same provisions as are applicable to other nonresident aliens and foreign corporations. to what is a "French enterprise," a "permanent establishment,” and "industrial and commercial profits," see article 2. As (b) No United States permanent establishment.-A French citizen or a French corporation carrying on a French enterprise but having no permanent establishment in the United States is not subject to United States income tax upon its industrial and commercial profits from sources within the United States. As to what constitutes a "French enterprise" see article 2. As to what constitutes "industrial and commercial profits" see article 2. For example, if such French corporation sells stock in trade, such as wine or cosmetics, through a bona fide commission agent or broker in the United States, the resulting profit is, under the terms of the convention, relieved 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 and not expressly exempted from such tax under the convention. However, under the provisions of article IX of the convention the following items, otherwise taxable, paid to citizens of France residing in France, or to French corporations, are expressly exempt from the tax: (1) Amounts paid as consideration for the right to use patents, secret processes, and formulas, trade marks, and other analogous rights; >ld (2) Income received as copyright royalties; to 9092 .8 .THA Y the terms OF ART. 4. Control of a domestic enterprise by a French enterprise. Article IV of the convention provides that if a French enterprise by reason of its control of a domestic business imposes conditions different from those which would result from normal bargaining between independent enterprises, the accounts between the enterprises will be adjusted so as to ascertain the true net income of the domestic enter |