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The main provisions of the tax treaty between France and the United States regarding direct taxes

Published on October 21, 2014
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RENTAL INCOME: article 6 of the treaty

Rules

This income is taxable in France if the real property is located in France.

It falls under the category of either "revenus fonciers" (rental of unfurnished real property), or "bénéfices industriels et commerciaux" (rental of furnished real property).

US residents and citizens must also report this income in the United States. The tax paid in France will be deducted as a foreign tax credit from the US taxes.

Method of taxation of rental income in France

  • Regime "réel"

If your rental income received in the year is over 15 000 € or by option, if this is at your advantage. (Caution : this option is irrevocable for 3 years).

Such income must be reported before June 30 (for the US residents) of the following year on Form # 2042 and in case of "revenus fonciers" on attachment Form # 2044.

On form 2044, fill in your detailed income and deduct your actual expenses (insurance, loan interests, repairs, renovation or maintenance work, property tax "taxe foncière").

Indicate the resultat in part 4 of form 2042 (line 4BA if its a profit).

  • A simplified tax treatment (micro-foncier)

This tax treament applies when the gross rental income (expenses not deducted) received by the household is lower or equal to 15 000 €. In this particular case, the taxpayer has to report his yearly gross rental income on ligne BE, page 3 of form 2042. He does not have to file the form # 2044. The net taxable rental income is automatically computed by application, on the gross reported income, of a 30% standard deduction, representing the expenses.

  • Method of taxation of commercial and industrial income in France

Rental income from furnished property are considered as industrial and commercial income (BIC).

The tax regime applicable to such income when they are taxable should be taxed under the conditions of ordinary law (micro-BIC, auto-entrepreneur, régime simplifié ou régime réel normal).

On form 2042 C PRO, part 5, fill in your gross income on line 5ND (half in 5ND and half in 5OD if you own the property jointly with your spouse). You’ll get a 50 % deduction, representing your expenses.

Professional dwelling renters (in particular, those that can justify annual revenue related to this activity above 23 000 euros) must hold a commercial accounting and comply with all reporting requirements and accounting of regular business.

- For the taxpayers who are not residents of France, the tax cannot be lower than 20% of the net income except if they can justify that the average rate of the French income tax, calculated on all income from French and foreign sources, would be lower than 20% if these individuals were resident of France. The average rate could then be retained (article 197 A of the French Tax Code).

DIVIDENDS: article 10 of the treaty

- Dividends paid by a French company to an individual resident of the United States, are subject to a 15% withholding tax in France.

To benefit from this 15% reduced withholding rate , the US residents must first provide the paying agent with a certificate of residence for the application of tax treaties forms 5000-EN and 5001-EN This form must be accompanied by a certificate provided by the US tax authorities (form 6166) or be validated by a US financial institution.

In order to obtain the US form 6166, the taxpayer must file the US form 8802 available on the IRS web site www.irs.gov.

The residents and citizens of the United States must report on their US income tax returns the gross amount of dividends. The withholding tax applied in France constitutes a tax credit deductible from the US income tax.

INTEREST INCOME: article 11 of the treaty

Some investments are compensated by interest payment (bonds, Government loans, cash vouchers...). When they are paid to a resident of the United States, they are not taxed in France but subject to the US income tax.

Individuals that are not resident of France for tax purposes are not allowed to hold she investment accounts: Livret d’épargen Populaire (LEP), Livret de développement durable, Livret Jeune ou de Plan d’Epargne en Actions (PEA).

ROYALTIES : article 12 of the treaty

Royalties are only taxable in the country of residence of the beneficiary.

CAPITAL GAINS : article 13 of the treaty

Capital gains realized on the sale of real estate are taxable in the country where the property is located. It is also subject to taxes in the country of residency.

Capital gains realized by a US resident on the sale of real estate located in France, are subject to a 33.33% withholding tax in France. They are also taxable in the United States but the income tax will be reduced by a tax credit equal to the tax withheld in France.

Capital gains realized by an individual on the sale of movable property (e.g. investment portfolios) are usually taxed in the country of residency.

Thus, a capital gain realized on the sale of French stocks by a US resident is taxable in the United States.

DEPENDENT PROFESSIONAL SERVICES :article 15 of the treaty

An employee, who is not a US citizen, residing in France is taxable only in France unless he performs his professional activities in the United States.

He remains taxable in France if he stays less than 183 days in the United States and if his wages are not paid or supported by a company or a US permanent establishment.

PENSIONS : article 18 of the treaty

All French source pensions are only taxable in France and at the State level. They are not taxed at the federal level.

All US source pensions are only taxable in the United States.

Method of taxation in France:

When they are taxable in France, pensions paid to a US resident or citizen are subject to a withholding tax.

It is computed on the total of all pensions after the deduction of the deduction of 10% (limited to a 3.660 Euros ceiling for each tax household).

The withholding rates are as follows :

Bracket subject to withholding
RateIncome 2013 (Year)Income 2013 (Trimestre)Income 2013 (Month)Income 2013 (Week)Income 2013 (Day)
0 % Under 14 245 € Under 3 561 € Under 1 187 € Under 274 € Under 46 €
12 % Between 14 245 and 41 327 € Between 3 561 and 10 332 € Between 1 187 and 3 444 € Between 274 and 795 € Between 46 and 132 €
20 % Above 41 327 € Above 10 332 € Above 3 444 € Above 795 € Above 132 €
Bracket subject to withholding
RateIncome 2014 (Year)Income 2014 (Trimestre)Income 2014 (Month)Income 2014 (Week)Income 2014 (Day)
0 % Under 14 359 € Under 3 590 € Under 1 197 € Under 276 € Under 46 €
12 % Between14 359 and 41 658 € Between 3 590 and 10 415 € Between 1 197 and 3 472 € Between 276 and 801 € Between 46 and 134 €
20 % Above 41 658 € Above 10 415 € Above 3 472 € Above 801 € Above 134 €

The limits referred to in the table above must be assessed by summing all pensions received by members of the same tax household.

The 12% withholding tax is final, whereas the exceeding bracket must be taxed at a progressive rate in combination with, if necessary, the other French source incomes. Nevertheless, this income, as well as the withholding tax applied, must be reported on the annual income tax return.

The fraction of pensions received greater than 41 327 euros must be taken into account in calculating the income tax. In return, the withholding tax rate of 20% operated on such pension is creditable against the amount of income tax.

PUBLIC COMPENSATIONS :article 19 of the treaty

An employee of the French public administration, who is not a US citizen or a green card holder is taxable only in France, even when the services are rendered in the United States. This applies also to foreign employee of the French public administration.

Since January 1st 2010, a green card holder or a dual citizen (French and American) who receives a French public remuneration is taxable only in the United States.

Method of taxation in France :

An employee of the French public administration residing in the United States and taxable in France must file a French tax return no 2042 before June 30 of the following year. The tax is calculated according to the French tax scale.

Method of taxation in the United States

The French public remuneration taxable in the United States is not subject to withholding tax in the United States. Therefore, the recipient must pay the income tax in four installments (April 15, June 15, September 15 and January 15) during the year of payment of the wages. Calculations (estimated tax) based on the gross amount, are carried out using the US form 1040 ES.

A tax return no 1040 must be filed before April 15 of the next year for regularization.

TEACHERS AND RESEARCHERS : article 20 of the treaty

A French resident, who is not a US citizen or resident, who comes to the United States to teach or engage in research at a US university or other recognized educational or research institution is taxable only in France for a period not exceeding two years after the date of his arrival in the United States. He is still required to file a federal tax return no 1040 NR and a form 8233 to request the exemption of his income pursuant to the treaty.

STUDENTS AND TRAINEES : article 21 of the treaty

A French resident, who is not a US citizen or resident, who comes to the United States to study at a University or other recognized educational institution, to secure training, or to study or do research as a recipient of a grant from a non profit organization under the conditions provided in article 21 of the treaty is not taxable in the United States on :
- gifts received from France;
- grants, allowances or awards from a non-profit organization;
- income from personal services rendered in the United States not exceeding $5000.

In addition, a resident of France who is temporarily in the United States , as an employee of a resident of France, to acquire a professional experience or to study in a University, is exempt on his income from personal services rendered in the United States not exceeding $8000.

A tax return no 1040 NR has to be filed as well as form 8833 to request the exemptions provided by the treaty.

The benefits granted by articles 20 and 21 cannot exceed five years.

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