Bonjour: Different US Tax Treaties Provide Different US Taxation For Different Groups Of Americans Abroad

Introduction, purpose And summary

It is clear that US citizens, who are tax resident of countries outside the United States are generally subjected to a more punitive system of taxation than US residents. That said, the U.S. has different tax treaties with different countries. Some treaties (example Australia) make living outside the United States very difficult. Other tax treaties (Canada and the UK) make living outside the United States easier in a relative sense. The relative difficulty is somewhat dependent on the extent to which the treaty contains provisions for U.S. citizens who are “resident” in the treaty partner country. These treaties are an additional recognition of U.S. citizenship taxation.

If a U.S citizen contemplating a move abroad asked the following question:

Q. How will I be taxed if I move outside the United States and live as a tax resident of another country?

The answer will be:

A. I don’t really know. It depends what country you are considering moving to.

Not only are US citizens living outside the United States taxed more punitively than U.S. citizens living inside the United States, but their taxation by the United States depends on the country they move to! (In addition, both income tax treaties and estate tax treaties may contain provisions that affect the way U.S. citizens may be taxed by the treaty partner country!)

The curious case of the U.S. France Tax Treaty and U.S. Citizens resident in France

In 1994 the United States and France entered into a new tax treaty. The 1994 treaty replaced the previous treaties. Generally, the 1994 treaty continued the “spirit” of the earlier treaties. Of particular note in the introduction to the 1994 treaty is the paragraph:

The new Convention preserves the special French tax benefits for U.S. citizens residing in France and for French residents who are partners of U.S. partnerships.

https://www.irs.gov/pub/irs-trty/france.pdf

(Note also that the 1994 Treaty has been revised by various protocols in 2004 and 2009.)

Much of what follows is rather technical. Therefore, I will begin with a summary of the main points gleaned from an analysis of the U.S. France Tax Treaty. What are those “special French tax benefits for U.S. citizens residing in France”?

The “special French tax benefits for U.S. citizens residing in France” include:

I. Benefits Available To U.S. Citizens Who Are Tax Residents Of France

Article 24 Of U.S./France The Treaty: US citizens who meet the the treaty test of “residency in France” are excluded from paying French tax on U.S. investment income (interest, dividends, royalties, capital gains). This is a courtesy that the French government extends to U.S. citizens (resident in France) with respect to certain U.S. source income from: dividends, interest, capital gains and royalties. (Note that this is NOT an “exclusion” of U.S. investment income from the calculation of French taxable income. Rather it is a tax credit that France offers which ensures that U.S. citizens resident in France will not pay French tax on that U.S. source investment income. This means that the same U.S. source investment income may have significance for other purposes. But, still this is a very good deal!)

Article 24 is designed to prevent double taxation. Interestingly it includes both:

– general rules for preventing double taxation without regard to U.S. citizenship taxation (U.S. citizens living in France); and

– special rules for U.S. citizens living in France.

Article 24 (the double taxation article) of the U.S. France tax treaty is among the most complicated I have seen. It has an interesting history that dates back to a time when France really was a “tax haven” for Americans abroad. The relevant provisions of Article 24 apply to “U.S. citizens who are resident in France”. The generous result (which no other treaty allows) is caused by the interaction of both the U.S. and French tax treatment of U.S. citizens living in France.

The way it works is that:

(i) The United States “resources” a certain amount of U.S. investment income to France (pretends that U.S. source income is actually French source income) and then allows a U.S. tax credit for French tax paid (paragraph (b) of section 1 of Article 24). The United States treaty provision includes:

1 (b) In the case of an individual who is both a resident of France and a citizen of the United States:
(i) the United States shall allow as a credit against the United States income tax the French income tax paid after the credit referred to in subparagraph (a) (iii) of paragraph 2. However, the credit so allowed against United States income tax shall not reduce that portion of the United States income tax that is creditable against French income tax in accordance with subparagraph (a) (iii) of paragraph 2; …

(ii) France provides an additional credit exempting U.S. investment income from French taxation as found in paragraph (b) of section 2 of Article 24. The French provision includes:

2 (b) In the case where the beneficial owner of the income arising in the United States is an individual who is both a resident of France and a citizen of the United States, the credit provided in paragraph 2 (a) (i) shall also be granted in the case of:
(i) income consisting of dividends paid by a company that is a resident of the United States, interest arising in the United States, as described in paragraph 5 of Article 11 (Interest), or royalties arising in the United States, as described in paragraph 6 of Article 12 (Royalties), that is derived and beneficially owned by such individual and that is paid by:

As a recent article from Creative Planning about financial planning for U.S. expats in France notes:

The U.S./French Income Tax Treaty is beneficial for Americans living in France.

Article 24 of the U.S./French Income Tax Treaty provides a substantial tax benefit for U.S. citizens in France by granting a French tax credit equal to any French tax liability on U.S. investment income, effectively excluding U.S. investment income and gains from French taxation.

Technically this is a result that follows from a combination of (1) “resourcing” certain U.S. source investment income to France and (2) the incredible generosity of France providing a tax credit against French tax owing on certain U.S. investment income.

Benefits to U.S. “Retirees Abroad”

Note that this would be true even if the United States ended citizenship taxation and transitioned to a form of residency-based taxation (like the rest of the world). The benefits of Article 24 of the Treaty are triggered by (1) being a “U.S. citizen and (2) residing in France”. Therefore, I see no (immediate reason why a change in U.S. tax residency rules would necessitate a change to the Treaty).

Benefits to France/US Dual Citizens

Although this post is written from the perspective of a U.S. citizen wishing to retire in France, ANY U.S. citizen living in France (Hello, Accidental Americans) could benefit from the treaty provision!

*Appendix A below includes an example of how this works from the Treasury Technical interpretation of the treaty.

**Appendix B below includes the full text of Article 24

II. Benefits Available To Residents Of France Or The U.S. Who Receive Pension Benefits Sourced In the Other Country

Article 18 of the U.S./France Treaty: Both Social Security and Pension payments paid from one country to residents of the other country or to U.S. citizens may be taxed ONLY by the country where the payment originated. In other words the Treaty guarantees that the payments are subject to tax in only one country (meaning no double taxation)!

Paragraph 1 of Article 18 was amended by Article VI of the 2009 protocol to read:

1. Payments under the social security legislation or similar legislation of a Contracting State to a resident of the other Contracting State or to a citizen of the United States, and pension distributions and other similar remuneration arising in one of the Contracting States in consideration of past employment paid to a resident of the other Contracting State, whether paid periodically or in a lump sum, shall be taxable only in the first-mentioned State. For purposes of this paragraph, pension distributions and other similar remuneration shall be deemed to arise in a Contracting State only if paid by a pension or other retirement arrangement established in that State.

The 2009 “Technical Interpretation” includes:

Article VI

Article VI of the Protocol revises paragraph 1 of Article 18 (Pensions) of the Convention. Paragraph 1 of Article 18 of the existing Convention provides for exclusive source country taxation of social security benefits, distributions from pensions and other similar remuneration arising in one Contracting State in consideration of past employment paid to a resident of the other Contracting State. The Protocol revision clarifies that, notwithstanding the saving clause of paragraph 2 of Article 29 (Miscellaneous Provisions) of the Convention, and pursuant to the provisions of paragraph 3 of Article 29, France has the exclusive jurisdiction to tax payments under its social security or similar legislation to a resident of France who is a citizen of the United States.

III. Article 29 of the Treaty – The “Saving Clause”: The benefits of both Article 24 and paragraph 1 of Article 18 are exempted from the “saving clause” which currently reads:

2. Notwithstanding any provision of the Convention except the provisions of paragraph 3, the United States may tax its residents, as determined under Article 4 (Resident), and its citizens as if the Convention had not come into effect.

3. The provisions of paragraph 2 shall not affect: (a) the benefits conferred under paragraph 2 of Article 9 (Associated Enterprises), under paragraph 3 (a) of Article 13 (Capital Gains), under paragraph 1 of Article 18 (Pensions), and under Articles 24 (Relief From Double Taxation), 25 (Non-Discrimination), and 26 (Mutual Agreement Procedure); and

(b) the benefits conferred under paragraph 2 of Article 18 (Pensions), and under Articles 19 (Public Remuneration), 20 (Teachers and Researchers), 21 (Students and Trainees), and 31 (Diplomatic and Consular Officers), upon individuals who are neither citizens of, nor have immigrant status in, the United States.

Believe it or not, U.S. citizenship is (for certain kinds of U.S. source income) a defence against French taxation! Strange, but true.!! U.S. citizens residing in France, living off U.S. source income and who are considering renunciation should take note!

Interestingly, the treaty provisions would also benefit (1) French residents wishing to retire in the United States with respect to their French pension income and (2) U.S./French dual citizens living in France with respect to U.S. source investment income.

John Richardson – Follow me on Twitter @Expatriationlaw

*Appendix A – Here is the example in the Technical Interpretation – page 40:

The following simplified example illustrates how subparagraph 1(b) works. The U.S. tax on a dividend paid by a U.S. corporation to a portfolio investor resident in France is limited by Article 10 (Dividends) of the Convention to 15 percent. The United States, therefore, will impose a tax of 15 on a dividend of 100, and France will allow a tax credit of 15. Suppose that the French individual income tax due is 22 percent. In that case, the net tax payable to France will be 7. However, assume that this individual is a U.S. citizen and, therefore, liable to U.S. tax of 22 percent. In the absence of a special relief provision, the individuals total tax would be 35: 28 to the United States, with no foreign tax credit because the dividend is from U.S. sources, and 7 to France. Under subparagraph 1(b), the 7 of French tax is credited against the 28 of U.S. tax, reducing the combined burden to 28, the higher of the two taxes. In this example, in order to credit the French tax of 7 at a U.S. rate of 28, 25 of the dividend would be treated as from French sources so that the 7 of French tax could be claimed as a foreign tax credit (7/28 x 100). Additional examples of the calculation of this additional credit are provided in IRS Publication 901 on U.S. tax treaties.

https://www.irs.gov/pub/irs-trty/francetech.pdf

**Appendix B – The text of Article 24 of The U.S. France Tax Treaty (incorporating the 2004 and 2009 protocols)

Note: I have included the ARTICLE 24 in its entirety. The text with lines drawn through it is tax that was amended by the protocols. Paragraph 1 prescribes how the U.S. agrees to avoid double taxation and Paragraph 2 prescribes how France will avoid double taxation. Notice that each of Paragraphs 1 and 2 contain a “general provision” in (a) and a “provision for U.S. citizens resident in France” in (b). Text which is in italics is my personal commentary and is NOT part of the treaty.

ARTICLE 24

Relief From Double Taxation

JR Commentary: 1. (a) describes the general obligations of the United States.

1. (a) In accordance with the provisions and subject to the limitations of the law of the United States (as it may be amended from time to time without changing the general principle hereof), the United States shall allow to a citizen or a resident of the United States as a credit against the United States income tax:

(i) the French income tax paid by or on behalf of such citizen or resident; and

(ii) in the case of a United States company owning at least 10 percent of the voting power of a company that is a resident of France and from which the United States company receives dividends, the French income tax paid by or on behalf of the distributing corporation with respect to the profits out of which the dividends are paid.

JR Commentary: 1. (b) describes the obligations of the United States with respect to U.S. citizens resident in France.

(b) In the case of an individual who is both a resident of France and a citizen of the United States:

(i) the United States shall allow as a credit against the United States income tax the French income tax paid after the credit referred to in subparagraph
(a) (iii) of paragraph 2. However, the credit so allowed against United States income tax shall not reduce that portion of the United States income tax that is creditable against French income tax in accordance with subparagraph (a) (iii) of paragraph 2;

(ii) income referred to in paragraph 2 and income that, but for the citizenship of the taxpayer, would be exempt from United States income tax under the Convention, shall be considered income from sources within France to the extent necessary to give effect to the provisions of subparagraph (b) (i). The provisions of this subparagraph (b) (ii) shall apply only to the extent that an item of income is included in gross income for purposes of determining French tax. No provision of this subparagraph (b) relating to source of income shall apply in determining credits against United States income tax for foreign taxes other than French income tax as defined in subparagraph (e) ; and
(c) In the case of an individual who is both a resident and citizen of the United States and a national of France, the provisions of paragraph 2 of Article 29 (Miscellaneous Provisions) shall apply to remuneration and pensions described in paragraph 1 or 2 of Article 19 (Public Remuneration), but such remuneration and pensions shall be treated by the United States as income from sources within France.
(c) In the case of an individual who is both a resident and citizen of the United States and a national of France, the provisions of paragraph 2 of Article 29 (Miscellaneous Provisions) shall apply to remuneration described in paragraph 1 of Article 19 (Public Remuneration), but such remuneration shall be treated by the United States as income from sources within France.
(d) If, for any taxable period, a partnership of which an individual member is a resident of France so elects, for United States tax purposes, any income which solely by reason of paragraph 4 of Article 14 is not exempt from French tax under this Article shall be considered income from sources within France. The amount of such income shall reduce (but not below zero) the amount of partnership earned income from sources outside the United States that would otherwise be allocated to partners who are not residents of France. For this purpose, the reduction shall apply first to income from sources within France and then to other income from sources outside the United States. If the individual member of the partnership is both a resident of France and a citizen of the United States, this provision shall not result in a reduction of United States tax below that which the taxpayer would have incurred without the benefit of deductions or exclusions available solely by reason of his presence or residence outside the United States.
(e) For the purposes of this Article, the term “French income tax” means the taxes referred to in subparagraph (b) (i) or (ii) of paragraph 1 of Article 2 (Taxes Covered), and any identical or substantially similar taxes that are imposed after the date of signature of the Convention in addition to, or in place of, the existing taxes.

JR Commentary: 2. (a) describes the general obligations of France.

2. In the case of France, double taxation shall be avoided in the following manner.

(a) Income arising in the United States that may be taxed or shall be taxable only in the United States in accordance with the provision of this Convention shall be taken into account for the computation of the French tax where the beneficiary of such income is a resident of France and where such income is not exempted from company tax according to French domestic law. In that case, the United States tax shall not be deductible from such income, but the beneficiary shall be entitled to a tax credit against the French tax. Such credit shall be equal:

(i) in the case of income other than that referred to in subparagraphs (ii) and (iii), to the amount of French tax attributable to such income;
(ii) in the case of income referred to in Article 14 (Independent Personal Services), to the amount of French tax attributable to such income; however, in the case referred to in paragraph 4 of Article 14 (Independent Personal Services), such credit shall not give rise to an exemption that exceeds the limit specified in that paragraph;
(iii) in the case of income referred to in Article 10 (Dividends), Article 11 (Interest), Article 12 (Royalties), paragraph 1 of Article 13 (Capital Gains), Article 16 (Directors’ Fees), and Article 17 (Artistes and Sportsmen), to the amount of tax paid in the United States in accordance with the provisions of the Convention; however, such credit shall not exceed the amount of French tax attributable to such income.

JR Commentary: 2. (b) describes the obligations of France with respect to U.S. citizens resident in France.

(b) In the case where the beneficial owner of the income arising in the United States is an individual who is both a resident of France and a citizen of the United States, the credit provided in paragraph 2 (a) (i) shall also be granted in the case of:

(i) income consisting of dividends paid by a company that is a resident of the United States, interest arising in the United States, as described in paragraph 5 of Article 11 (Interest), or royalties arising in the United States, as described in
paragraph 6 of Article 12 (Royalties), that is derived and beneficially owned by such individual and that is paid by:
(aa) the United States or any political subdivision or local authority thereof; or
(bb) a person created or organized under the laws of a state of the United States or the District of Columbia, the principal class of shares of or interests in which is substantially and regularly traded on a recognized stock exchange as defined in subparagraph (e) of paragraph 6 of Article 30 (Limitation on Benefits of the Convention) or
(cc) a company that is a resident of the United States, provided that less than 10 percent of the outstanding shares of the voting power in such company was owned (directly or indirectly) by the resident of France at all times during the part of such company’s taxable period preceding the date of payment of the income to the owner of the income and during the prior
taxable period (if any) of such company, and provided that less than 50 percent of such voting power was owned (either directly or indirectly) by residents of France during the same period; or
(dd) a resident of the United States, not more than 25 percent of the gross income of which for the prior taxable period (if any) consisted directly or indirectly of income derived from sources outside the United States;

(ii) capital gains derived from the alienation of capital assets generating income described in subparagraph (i); however, such alienation shall be taken into account for the determination of the threshold of taxation applicable in France to
capital gains on movable property;

(iii) profits or gains derived from transactions on a public United States options or futures market;
(iv) income dealt with in subparagraph (a) of paragraph 1 of Article 18 (Pensions) to the extent attributable to services performed by the beneficiary of such income while his principal place of employment was in the United States;
(v) (iv) income that would be exempt from United States tax under Articles 20
(Teachers and Researchers) or 21 (Students and Trainees) if the individual were not a citizen of the United States; and
(vi) (v) U.S. source alimony and annuities. The provisions of this subparagraph (b) shall apply only if the citizen of the United States who is a resident of France demonstrates that he has complied with his United States income tax obligations, and subject to receipt by the French tax administration of such certification as may be prescribed by the competent authority of France, or upon request to the French tax administration for refund of tax withheld together with the presentation of any certification required by the competent authority of France.
(c) A resident of France who owns capital that may be taxed in the United States according to the provisions of paragraph 1, 2, or 3 of Article 23 (Capital) may also be taxed in France in respect of such capital. The French tax shall be computed by allowing a tax credit equal to the amount of tax paid in the United States on such capital. That tax credit shall not exceed the amount of the French tax attributable to such capital.
(d) (i) For purposes of this paragraph, the term “resident of France” includes a “société de personnes,” a “groupement d’intérêt économique” (economic interest group), or a “groupement européen d’intérêt économique” (European economic interest group} that is constituted in France and has its place of effective management in France.
(ii) The term “amount of French tax attributable to such income” as used in subparagraph (a) means:
(aa) where the tax on such income is computed by applying a proportional rate, the amount of the net income concerned multiplied by the rate which actually applies to that income;
(bb) where the tax on such income is computed by applying a progressive scale, the amount of the net income concerned multiplied by the rate resulting from the ratio of the French income tax actually payable on the total net income in accordance with French law to the amount of that total net income.
(iii) The term “amount of tax paid in the United States” as used in subparagraph (a) means the amount of the United States income tax effectively and definitively borne in respect of the items of income concerned, in accordance with the provisions of the Convention, by the beneficial owner thereof who is a resident of France. But this term shall not include the amount of tax that the United States may levy under the provisions of paragraph 2 of Article 29 (Miscellaneous Provisions).

(iv) The interpretation of subparagraphs (ii) and (iii) shall apply, by analogy, to the terms “amount of the French tax attributable to such capital” and “amount of tax paid in the United States,” as used in subparagraph (c).
(e) (i) Where French domestic law allows companies that are residents of France to determine their taxable profits on consolidation basis, including the profits or losses of subsidiaries that are residents of the United States or of permanent establishments situated in the United States, the provisions of the Convention shall not prevent the application of that law.
(ii) Where in accordance with its domestic law, France, in determining the taxable profits of residents, permits the deduction of the losses of subsidiaries that are residents of the United States or of permanent establishments situated in the United States and includes the profits of those subsidiaries or of those permanent establishments up to the amount of the losses so deducted, the provisions of the Convention shall not prevent the application of that law.
(iii) Nothing in the Convention shall prevent France from applying the provisions of Article 209B of its tax code (code général des impôts) or any substantially similar provisions which may amend or replace the provisions of that Article.

3 thoughts on “Bonjour: Different US Tax Treaties Provide Different US Taxation For Different Groups Of Americans Abroad

  1. Robert LEVITT

    While the tenor of this article is accurate, it does leave out an important aspect, which is that U.S. investment income is actually taxed in France as part of the PUMA system of health care. levittcapital.fr/our-insights/french-health-insurance-for-american-retirees-in-france/

    Reply
  2. Carol

    I wanted to set up an organisation to sponsor pregnant Americans to give birth in Canada. I was laughed out if court, so to speak. Decades later certain people wish they had listened to me.

    Reply
  3. Kris

    If I only had 40k in dividends and interest as income and paid 0 tax after filing US taxes… How much of that would be taxed as investment? and I’m assuming no tax credit from US since I paid 0 taxes?

    Reply

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