Your contacts at Price Waterhouse Zurich, Switzerland, are Werner Schmid and Annamarie Bolzern.

Introduction

France and Switzerland have signed a new protocol to the income tax treaty of 1966/1969 which entered into force on August 1, 1998. The major changes are outlined below. Nevertheless there is still uncertainty whether the protocol will have an impact on the Swiss branches of French companies in regard to the French CFC legislation. The French government is of the opinion that the wording regarding the elimination of double taxation clause implicitly authorizes France to apply its CFC legislation. The validity of this interpretation is currently still being discussed by the respective French and Swiss governmental authorities.

Dividends

Dividends distributed to a corporate shareholder in the other contracting state holding an investment of at least 10% in the company is exempt from withholding tax, provided that

(a) the shareholder is ultimately controlled by persons resident in Switzerland or in the European Union or that

(b) either the distributing company or the corporate shareholder is quoted on a recognized stock exchange.

Compared to the old treaty, the withholding holding rate has been reduced from 5% to 0% and it may be claimed for investments of 10% instead of 20%. For investments of less than 10% and cases where substantial holdings do not meet the new ultimate control and stock exchange tests described above, unrecoverable withholding tax of 15% is applicable.

Furthermore, it is noteworthy that a Swiss resident may claim the "avoir fiscal" on dividends paid by French companies; provided that he is

(a) an individual shareholder or

(b) a corporate shareholder holding directly or indirectly less than 10% in the French company. The refund of the "avoir fiscal" is subject to 15% withholding tax. If a Swiss resident is not entitled to the "avoir fiscal", he may claim a refund of the advance payment ("precompte") levied by the company on the dividend. The gross amount of the refunded "precompte" is subject to 15% withholding tax.

Interest

Interest paid under the treaty is fully exempt from withholding tax in the other contracting state. The old treaty provided for a non-recoverable withholding tax of 10%. In this context it should be noted that based on their internal law neither Switzerland nor Franch levy withholding tax on interest due on intercompany loans.

Royalties

Royalties paid to Swiss residents will continue to be subject to a 5% withholding tax. Unlike the old treaty, leasing payments shall no longer be considered as royalty or license payments and therefore will not be subject to French withholding tax. In the reverse direction, Switzerland does not levy a royalty withholding tax based on internal law.

Capital gains from immovable property

The protocol does not revise, but rather specifies the regulations whereby capital gains from immovable property will be subject to tax in the country where the property is situated. Capital gains newly derived from the sale of shares or other rights in a company, from a trusteeship or other similar bodies whose assets mainly consist of immovable property are considered to be gains from the sale of immovable property, unless the immovable property is used for the company's own commercial activities. This concept of tax transparency of real estate companies not only applies to capital gains, but also to the income derived from such investments.

Anti-avoidance rules

The old anti-avoidance rules in the Swiss-French treaty (apart from the new limitation on benefits provision regarding the nil rate on dividends) remain unchanged.

Method for the elimination of double taxation

Switzerland still applies the exemption-with-progression method, but uses the credit method for dividends and royalties. As a general rule, France now applies the credit method instead of the exemption-with-progression method. Depending on the type of income, France eliminates double taxation through the usual credit method or through a credit equal to French tax. The latter in effect results in an exemption-with-progression method. The main difference to the usual exemption-with-progression method though being, that this latter method applies only conditional to the respective income being subject to tax in Switzerland.

The content of this article is intended to provide a general guideline to the subject matter. Specialist advice should be sought about your specific circumstances.