France/US Pension Income & Social Security Tax Treaty

France/US Pension Income

France/US Pension Income & Social Security Tax Treaty Rules: The United States and France first entered into a bilateral income tax treaty nearly 55-years ago (1967) — and it has been updated and revised multiple times since then — with the most recent version of the US/France Tax Treaty being 2009. The purpose of the US/France Tax Treaty is to help Taxpayers determine what their tax liability is for certain sources of taxable income involving parties to the treaty. While the treaty is not the final word on how items of income will be taxed — it does help Taxpayers better understand how either the US Government and/or France will tax certain sources of income; what the IRS reporting requirements are — and whether or not the saving clause will further impact the outcome. Let’s review the basics of the US France Tax Treaty – and which income is taxable:

United States-Republic of France Income Tax Basics

In general, the default position is that a Taxpayer who is a US Person such as a US Citizen, Lawful Permanent Resident, or Foreign National who meets Substantial Presence Test is taxed on their worldwide income. This would also include income that is being generated in France, and may be tax-free or exempt under the tax rules of France — unless an exception, exclusion or limitation applies.

Saving Clause in France US Tax Treaty

As we work through the treaty, one important thing to keep in mind is the saving clause. The saving clause (essentially) provides that, despite any information provided in the treaty — both countries reserve the right to tax certain citizens and residents as they would otherwise tax them under the general tax principles of their respective countries.

What does the Saving Clause Say?

• “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.

• For this purpose, the term “citizen” shall include a former citizen or long-term resident whose loss of such status had as one of its principal purposes the avoidance of tax (as defined under the laws of the United States), but only for a period of ten years following such loss.” (updated in 2004 protocol)

Saving Clause Limitations in the France/US Tax Treaty 

Despite any limitation created by the saving clause, certain portions of the tax treaty are immune from the saving clause — which means the tax treaty will stand despite the Savings Clause.

The provisions of paragraph (4) shall not affect:

• The provisions of paragraph 2 shall not affect:

  • • • (a) the benefits conferred under

        • • Paragraph 2 of Article 9 (Associated 8 Enterprises),

          • Paragraph 3 (a) of Article 13 (Capital Gains

          • Paragraph 1 of Article 18 (Pensions),

          • 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),

          • 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.” 

Pension Article 18 of France/US Tax Treaty 

One of the most important aspects of tax treaty law is how pension income is taxed. This is especially true, so that retirees can plan for their golden years.

Looking at the saving clause, there is a more broad (a) limited carve-out as follows:

Article 18 (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.” (2009 Protocol)

What does this Mean?

 This article refers to Pensions and Social Security —

Social Security

When the payments refer to payments that are Social Security — and payments are being made to a resident of the other state or to a citizen of the United States – it is only taxable in the first state (in other words, the state that made the payments). It further clarifies that in this situation in which a US citizen resides in France, and receives Social Security or similar payments from France — France is the only country that gets to tax the income (despite US worldwide income rules).

Pension

When the payments refer to pension, it refers to pension distributions that arise in one state as a result of past employment paid to the resident of the other state — it is only taxable in the first state (in other words, the state that made the payments). But, it is limited to Social Security and pension distributions that were established in that state. In other words, the taxpayer cannot use some crafty “Malta treaty planning” or the light to include a third-party triangular scenario to avoid tax.

Paragraph 2 of Article 18 (Pensions)

This is limited in scope for temporary residents who do not have immigrant status and who are not US Citizens.

Article 19 Public Remuneration

1. 1. 1. • (a) Remuneration, other than a pension, paid by a Contracting State, a political subdivision (in the case of the United States) or local authority thereof; or an agency or instrumentality of that State, subdivision, or authority to an individual in respect of services rendered to that State, subdivision, authority, agency, or instrumentality shall be taxable only in that State.

           (b) However, such remuneration shall be taxable only in the other Contracting State if the services are rendered in that State and the individual is a resident of and a national of that State and not at the same time a national of the first-mentioned State.

         • The provisions of Articles 14 (Independent Personal Services), 15 (Dependent Personal Services), 16 (Directors’ Fees), and 17 (Artistes and Sportsmen) shall apply to remuneration paid in respect of services rendered in connection with a business carried on by a Contracting State, a political subdivision (in the case of the United States) or local authority thereof, or an agency or instrumentality of that State, subdivision, or authority.” (2004 Protocol)

What does this Mean?

It means that in general, government compensation (other than pension) is going to be exempt from tax in the other jurisdiction. And there are some limitations in the situation in which, for example, the Taxpayer resides in France, performs the services in France, is a payee and national of France — and is not a national of the United States.

*Original Article 19, Paragraph 2 was deleted, and the technical explanation provides the following:

• • • The Protocol deletes paragraph 2, which deals with the taxation of pensions paid in respect of government services described in paragraph 1. The provisions of new Article 18 now govern the treatment of such pensions.”

**Paragraph 1 of Article 18 was also expanded again in the 2009 protocol.

Reporting Forms for France Pension

The following is a summary of five (5) common international tax forms.

FBAR (FinCEN 114)

The FBAR is used to report “Foreign Financial Accounts.” This includes investments funds, and certain foreign life insurance policies.

The threshold requirements are relatively simple. On any day of the year, if you aggregated (totaled) the maximum balances of all of your foreign accounts, does the total amount exceed $10,000 (USD)?

If it does, then you most likely have to file the form. The most important thing to remember is you do not need to have more than $10,000 in each account; rather, it is an annual aggregate total of the maximum balances of all the accounts.

Form 8938

This form is used to report “Specified Foreign Financial Assets.”

There are four main thresholds for individuals is as follows:

• Single or Filing Separate (in the U.S.): $50,000/$75,000
• Married with a Joint Returns (In the U.S): $100,000/$150,000
• Single or Filing Separate (Outside the U.S.): $200,000/$300,000
• Married with a Joint Returns (Outside the U.S.): $400,000/$600,000

Form 3520

Form 3520 is filed when a person receives a Gift, Inheritance or Trust Distribution from a foreign person, business or trust. There are three (3) main different thresholds:

• Gift from a Foreign Person: More than $100,000.
• Gift from a Foreign Business: More than $16,076.
• Foreign Trust: Various threshold requirements involving foreign Trusts

Form 5471

Form 5471 is filed in any year that you have ownership interest in a foreign corporation, and meet one of the threshold requirements for filling (Categories 1-5). These are general thresholds:

• Category 1: U.S. shareholders of specified foreign corporations (SFCs) subject to the provisions of section 965.
• Category 2: Officer or Director of a foreign corporation, with a U.S. Shareholder of at least 10% ownership.
• Category 3: A person acquires stock (or additional stock) that bumps them up to 10% Shareholder.
• Category 4: Control of a foreign corporation for at least 30 days during the accounting period.
• Category 5: 10% ownership of a Controlled Foreign Corporation (CFC).

Form 8621

Form 8621 requires a complex analysis, beyond the scope of this article. It is required by any person with a PFIC (Passive Foreign Investment Company).  The analysis gets infinitely more complicated if a person has excess distributions. The failure to file the return may result in the statute of limitations remaining open indefinitely.

*There are some exceptions, exclusions, and limitations to filing.

Received a Gift or Inheritance From France?

If you are a U.S. Person and receive a gift from a Foreign Person, Foreign Business or Foreign Trust, you may have to file a Form 3520. The failure to file these forms may lead to IRS Fines and Penalties (see below).

Which Banks in France Report U.S. Account Holders?

There are thousands Foreign Financial Institutions within France that report US account holder information to the IRS. The list can be found here: FFI List:.

What is important to note, is that the list is not limited to just bank accounts. Rather, when it comes to FATCA or FBAR reporting, it may involve a much broader spectrum of assets and accounts, including:

• Bank Accounts
• Investment Accounts
• Retirement Accounts
• Direct Stock Ownership
• ETF and Mutual Fund Accounts
• Pension Accounts
• Life Insurance or Life Assurance Policies

Totalization Agreement & the United States/France

The purpose of a Totalization Agreement is to help individuals avoid double taxation on Social Security (aka U.S. individuals living abroad and who might be subject to both US and foreign Social Security tax [especially self-employed individuals] from having to pay Social Security taxes to both countries).

As provided by the IRS:

• • • An agreement, effective July 1, 1988, between the United States and France improves Social Security protection for people who work or have worked in both countries.  It helps many people who, without the agreement, would not be eligible for monthly retirement, disability or survivors benefits under the Social Security system of one or both countries.  It also helps people who would otherwise have to pay Social Security taxes to both countries on the same earnings.

    • The agreement covers Social Security taxes (including the U.S. Medicare portion) and retirement, disability and survivors insurance benefits.  It does not cover benefits under the U.S. Medicare program or the Supplemental Security Income (SSI) program.

    • This document covers highlights of the agreement and explains how it may help you while you work and when you apply for benefits.

The United States has entered into 26 Totalization Agreements, including France (as of 1988).

United States-Republic of France Tax Treaty is Complex

In conclusion, The US and France tax treaty is a great source of information to help better understand how certain income may be taxed by either country depending on the source of income, the type of income and the residence of the taxpayer. The tax outcome may be changed depending on whether or not the savings clause impacts how tax rules will be applied for certain types of income.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure on matters involving the United States-France Tax Treaty.

Contact our firm for assistance.