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 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.
