France is, understandably, a popular work and retirement destination for American expats, particularly as income and estate tax treaties between the U.S. and France offer unique benefits to Americans living in France. Investing and financial planning considerations, however, can present complex challenges for American expats who are then subject to two tax jurisdictions. With the proper guidance a future French resident can prepare for these issues and spend more of their time indulging in the joie de vivre of living in France.
Investing as a French resident presents more challenges than investing as a U.S. resident.
U.S. citizens and green card holders are always subject to U.S. tax reporting and taxation regardless of their country of residence. U.S. tax rules make it tax-inefficient – or put another way, punitive – for a U.S. person to hold non-U.S. funds, such as EU-registered funds, in their portfolio. Additionally, U.S. tax reporting of these foreign funds is time-consuming and costly, resulting in higher tax preparation fees.
U.S. citizens and green card holders who are EU residents face a different obstacle when it comes to building a diversified portfolio of U.S. funds, an EU regulation know as MIFID II, which prevents EU residents from buying non-EU-registered funds.
What to do? Fortunately, as a U.S.-based investment advisory firm, Creative Planning may buy U.S. ETFs on behalf of our EU-based U.S. citizen clients.
Learn more about Creative Planning International and the wealth management services we provide for American expats.
Americans working in France will likely face a higher total tax burden than if they lived in the U.S. while Americans retiring in France may not.
France generally has higher tax rates than the U.S. for each type of tax, including income tax, capital gains tax, gift tax, inheritance tax, and wealth tax. While U.S. tax reporting is always a requirement for U.S. citizens, an American working in France is likely to be a net French taxpayer with their French tax liability higher than their U.S. tax liability. For Americans working in France, it would thus be beneficial to reduce their taxable French income, possibly by deducting contributions made to a U.S. IRA. To learn more, watch this short video about contributing to IRAs and Roth IRAs as an American living abroad.
Under Article 18 of the U.S./French Income Tax Treaty, distributions from U.S. retirement accounts made to a French resident are only taxable in the U.S. Notably, Roth IRAs are considered U.S. retirement accounts and specifically covered by the treaty, preserving their tax-free nature in France. This is, however, not the case in most income tax treaties between the U.S. and other countries.
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.
Certain investments that provide tax benefits for other French residents are not appropriate for Americans living in France.
Many French residents utilize private pensions and savings vehicles, such as assurance vie, for their French tax benefits. Unfortunately, these are not good options for U.S. taxable persons as they do not receive the same favorable tax treatment from the IRS. These investments can, in fact, bring additional reporting requirements and be subject to higher tax rates, such as the case with non-U.S.-registered mutual funds known as Passive Foreign Investment Companies (PFICs).
French inheritance and gift tax is a concern for U.S. expats.
Americans living in France are generally subject to the same French inheritance and gift tax rates and exemption amounts as other French residents. However, there is a unique benefit under the U.S./France Estate Tax Treaty for inheritances received from the U.S.
Estates of U.S. domiciliaries are not subject to French inheritance or gift tax. This means if a French resident inherits from a U.S. citizen decedent (and the decedent is not also a French citizen), no French inheritance tax liability will arise from non-French assets such as U.S. property or U.S. brokerage accounts. This does not mean that inheritances will avoid French taxation forever. For example, assets that come into the heir’s possession may be subject to French gift tax at the time the heir makes a gift and will also be subject to inheritance tax on the heir’s death if the heir remains in France.
U.S. trusts do not shelter assets and income from French taxation.
France has a legal system based on civil law and does not allow for the creation of trusts, which are permitted in common law countries such as the U.S. and the UK. Settlors or beneficiaries of U.S. trusts who are residents in France may find that reporting a trust and its income in France can be complicated and costly. Furthermore, gifting into and inheriting from trusts do not have the same implications in France as in the U.S. In many cases, such action can increase the French tax burden.
While it remains possible to use a U.S. trust to avoid U.S. probate or maintain control of assets without increasing the total French tax liability, trusts should be structured and funded only after consultation with French tax advisors, and planning is usually best done before becoming a French resident. French tax treatment of a U.S. trust will depend on the structure of the trust and the country or countries of residence of the settlor and beneficiaries. For an introduction to estate planning and other cross-border topics, read our guide to international estate planning.
France is a top destination for many prospective American expats. Before you make the move, request a meeting with a Wealth Manager from Creative Planning International to discuss your situation.
