Advising a US citizen settling in France

The situation

Our support

1. 01

   Coordinating the French and US tax obligations

   We first determined the date on which French tax residence began and mapped the household’s income and assets.

   Settling in France made the client liable to tax there on their worldwide income. At the same time, their US citizenship continued to subject them to US federal tax obligations, even while resident in France. Any double taxation therefore had to be addressed income by income, in the light of the France–US tax treaty and the foreign tax credit mechanisms.

   We coordinated, together with the US advisers:

   • the French and US income tax returns;
   • the treatment of salaries, dividends, interest and capital gains;
   • US-source retirement plans and pensions;
   • the use of foreign tax credits in each country;
   • the US obligations relating to foreign accounts and financial assets, in particular the FBAR and FATCA form no. 8938;
   • the French obligations relating to bank accounts, life insurance policies, digital-asset accounts and other investments held outside France.

   French residents must declare their foreign accounts and contracts with their annual return, using form no. 3916-3916 bis.

   Point of attention. The tax treaty limits double taxation, but it does not relieve the US citizen from filing their returns in the United States or from complying with the French reporting obligations.
2. 02

   Reviewing the investments and holding structures

   We then reviewed the existing portfolio and the investments contemplated in France.

   Some products commonly offered to French residents can raise difficulties from a US standpoint. This is notably the case for certain non-US investment funds that may fall within the PFIC regime, with specific reporting obligations, including US form no. 8621. The IRS states that a separate form may be required for each PFIC held directly or indirectly.

   We therefore analysed, before any subscription:

   • non-US funds, UCITS and ETFs;
   • French or Luxembourg life insurance and capitalisation contracts;
   • the PEA and the PER;
   • free shares, BSPCE and other incentive mechanisms;
   • investments in French companies;
   • the possible creation of a personal holding company;
   • bank accounts, securities accounts and digital assets held in France.

   We also reviewed the existing US entities, in particular LLCs, partnerships and trusts. Their tax characterisation may differ between France and the United States, which can give rise to mismatches in timing or characterisation. Our internal materials note in particular that the tax transparency recognised in the United States is not necessarily adopted in France when characterising a US entity.

   Where a French holding company was contemplated, we checked with the US advisers the reporting obligations and tax consequences that could result from its ownership by a US citizen. In a comparable matter, the family wished precisely to compare a US trust, a US holding company and a French holding company, taking into account both the family’s objectives and the US constraints.

   The creation or ownership of a French company must also be analysed in the light of the US Controlled Foreign Corporation (CFC) rules, which may trigger specific reporting obligations, in particular form 5471, as well as US taxation of certain company profits, even in the absence of any distribution to the US citizen.

   Point of attention. An investment that is advantageous in France may be reporting-heavy or tax-unfavourable in the United States. Each product must be examined in both countries before it is subscribed for.
3. 03

   Anticipating real estate, trusts and succession

   Finally, we incorporated the client’s wealth and family plans into the analysis.

   For the real estate acquisition in France, we compared direct ownership and ownership through a company, taking into account:

   • the financing of the acquisition;
   • income tax and capital gains tax;
   • the IFI (real estate wealth tax);
   • the 3% annual tax on certain properties held by entities;
   • the US characterisation of the structure;
   • the treatment applicable on a gift or on death.

   The existing US trust was subject to a specific review of its trust deed, its settlors, trustees, protectors and beneficiaries, the location of its assets and how it operates. In France, the existence of a link with French territory can trigger annual and event-based reporting obligations, as well as consequences for income tax, the IFI and transfer duties.

   We also drew up a coordinated succession strategy covering:

   • the French and US wills;
   • the civil law applicable to the succession;
   • the matrimonial regime and the protection of the spouse;
   • the beneficiaries of the retirement plans and insurance contracts;
   • the gifts already made;
   • the revocable or irrevocable trusts;
   • the transfers contemplated in favour of children resident in France or in the United States;
   • the exposure to gift and inheritance tax in both countries;
   • the application of the France–US estate and gift tax treaty.

   The treaty makes it possible to coordinate gift and inheritance tax, but the United States retains, in particular, the right to tax the gifts and successions of its citizens under its domestic law. Access to the treaty tax credits must be checked according to the parties’ residence and the nature of the assets transferred.

   In situations involving a trust, analysis is required well in advance. The matters handled by the team show in particular that the moment at which the transfer of ownership is recognised may differ between the two countries, which can create a mismatch between US gift tax and French duties.

   Point of attention. France–US planning must coordinate three dimensions: the taxation of income, the taxation of investment structures and the transmission of wealth. Dealing with each country separately can create double taxation or unexpected reporting obligations.