For American expats living in France, taxation is often a complex and stressful subject. The fear of being taxed twice—once by the US and again by France—can be overwhelming. However, thanks to the France-US tax treaty, there are key exemptions, credits, and agreements that help prevent double taxation and ensure compliance with both tax systems. Understanding how these rules work can help you manage your tax obligations efficiently while avoiding unnecessary financial burdens.
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Understanding the France-US tax treaty
The France-US tax treaty was established to define which country has the right to tax certain types of income. Because the US taxes its citizens on their worldwide income, even if they live abroad, American expats in France must file a US tax return every year in addition to their French tax return. However, the treaty includes several mechanisms to prevent double taxation and determine which country has primary taxing rights.
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Key mechanisms to avoid double taxation
Foreign tax credit (FTC)
One of the most effective ways to avoid double taxation is through the Foreign Tax Credit (FTC). If you earn income in France and pay French income taxes, the amount paid can be used as a credit against your US tax liability. This ensures that you do not pay tax on the same income twice.
- The credit applies to income tax paid to the French government.
- It can reduce or eliminate your US tax liability.
- If your French tax exceeds your US tax liability, the excess credit can often be carried forward for future years.
Foreign earned income exclusion (FEIE)
Another essential tax benefit for American expats is the Foreign Earned Income Exclusion (FEIE). This provision allows eligible US citizens to exclude a certain amount of foreign-earned income from US taxation.
- As of 2023, up to $120,000 of foreign-earned income can be excluded.
- To qualify, you must meet either:
- The Physical Presence Test (spending at least 330 days outside the US in a 12-month period).
- The Bona Fide Residence Test (being a legal resident of France for a full calendar year).
- This exclusion applies only to earned income (wages and self-employment income) and not to passive income, such as dividends or rental income.
Tax treaty exemptions for specific types of income
Certain types of income are specifically addressed in the France-US tax treaty, with guidelines on which country has taxing rights. These include:
- Pensions and Social Security Benefits: Generally, Social Security benefits are taxed only in the country where you reside. However, US pensions may still be taxable in the US, depending on the type of pension and whether a tax treaty exemption applies.
- Business Profits: If you own a business in France, profits are typically taxed in France unless you maintain a permanent establishment in the US.
- Capital Gains: The taxation of capital gains depends on factors like residency and the type of asset being sold. French residents generally pay tax on worldwide capital gains in France, but exemptions may apply under the treaty.
- Rental Income: If you own rental property in France, the income is usually taxable in France, but you must still report it on your US tax return.
Totalisation agreement (social security taxes)
The Totalisation Agreement between France and the US helps prevent double taxation on Social Security contributions. This is particularly important for those who are employed or self-employed in France.
- If you work in France, you generally contribute to France’s Sécurité Sociale instead of US Social Security.
- If you are on a short-term assignment (less than five years), you may continue paying into the US Social Security system instead of France’s system.
- Contributions made in one country may count toward eligibility for benefits in the other.
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How does Capital Gains taxation work under the treay?
Capital gains taxation depends on the type of asset and where it is located. The France-US tax treaty stipulates:
- Real Estate Gains: If you sell property in France, you will generally be taxed by France. However, the US still requires reporting of the sale, though Foreign Tax Credits may offset any US liability.
- Stocks & Securities: In most cases, capital gains from stock sales are taxed only in the country of residence. This means that if you are a resident of France, you typically only pay capital gains tax in France.
- US Real Estate: If an American expat sells property in the US, the sale is subject to US capital gains tax, even if the seller is a tax resident of France. However, under French tax law, expats may not be required to pay French tax on that gain.
Taxation of US-sourced passive income
For American expats in France, US-sourced passive income (such as dividends, interest, and royalties) is also governed by the tax treaty. Here’s how it typically works:
- Dividends: Generally taxed at a reduced 15% rate in the US for treaty residents. However, French tax authorities may also tax these dividends, so applying for Foreign Tax Credits is crucial.
- Interest Income: Many types of interest payments from US sources are only taxable in France if you are a French resident, meaning you may not owe US taxes on them.
- Royalties: These are often taxable in both the US and France, but again, Foreign Tax Credits can offset double taxation.
Additional considerations
Foreign Bank Account Reporting (FBAR) and FATCA Compliance
If you have financial accounts in France exceeding $10,000 at any time during the year, you must file a Foreign Bank Account Report (FBAR) with FinCEN. Additionally, under the Foreign Account Tax Compliance Act (FATCA), banks in France are required to report US account holders to the IRS.
Failure to comply with these reporting requirements can result in heavy fines, so it’s crucial to stay informed and file the necessary forms.
State taxes
If you previously lived in a state that requires tax filing (e.g., California, New York), you may still have state tax obligations. Some states do not recognise the Foreign Earned Income Exclusion and may continue to tax expats.
> You might be interested in this article: 3 tax benefits of owning real estate overseas
Final notes
Living in France as an American expat comes with many benefits, but navigating taxes can be challenging. Fortunately, the France-US tax treaty offers multiple ways to reduce or eliminate double taxation, including the Foreign Tax Credit, Foreign Earned Income Exclusion, and Totalisation Agreement. Understanding these mechanisms and staying compliant with both tax systems can help you make the most of your expat experience while minimising your tax burden. If you need assistance, consulting a tax professional is the best way to ensure you are fully informed and compliant.
By planning ahead and leveraging tax treaty benefits, American expats in France can enjoy their new life abroad without unnecessary financial stress.
