401(k), IRA, Social Security, life insurance: your retirement between France and the United States

What the treaty says, pension by pension

• The principle (article 18, paragraph 1). Amounts paid under the social security legislation of one state to a resident of the other state or to a US citizen, and amounts paid by a pension plan in respect of past employment to a resident of the other state, whether periodic or as a lump sum, are taxable only in the first state. A pension arises in a state when it is paid by a pension or retirement plan established in that state.
• 401(k) and IRA received in France. The French tax authority has stated that amounts from US retirement plans, paid in a single sum or periodically, are taxable only in the United States, and that the list of schemes in paragraph 2 of article 18 has no bearing on that rule (ministerial answer Le Gleut, French Senate Official Journal of 27 August 2020, no. 13777). A lump-sum 401(k) withdrawal is therefore not taxed in France as investment income.
• Roth IRA and Roth 401(k). The question put to the Government in 2020 specifically concerned these plans, whose distributions meeting the statutory conditions are not included in US gross income (Internal Revenue Code, section 408A). The ministerial answer covers amounts from US retirement plans without distinction. The Conseil d'État has also held that the credit equal to the French tax does not depend on actual taxation in the United States (CE, 29 June 2011, no. 320263, a case on salaries). The firm's reading, to be documented case by case: a qualified Roth distribution paid to a French resident should bear no French tax, but counts for the rate.
• Social Security. A Social Security pension paid to a French resident is taxable only in the United States. It is nonetheless taken into account in computing French tax, with a tax credit, and the fact that the retiree is not a US citizen makes no difference (Versailles Administrative Court, 9 March 2010, no. 07-291).
• French pensions received in the United States. For a US resident, the mandatory basic and supplementary pensions, employer supplementary pension schemes and tax-favoured retirement savings arrangements are taxable only in France. Article 29, paragraph 3, a, prevents the United States from using its saving clause for these pensions: they cannot tax them, even for a US citizen (ministerial answer Lefebvre, French National Assembly Official Journal of 4 April 2017, no. 51383).
• Taken into account for the rate (article 24). Income taxable only in the United States is taken into account in computing the French tax of a French resident, who is entitled to a credit equal to the corresponding French tax. That amount is computed by applying to the net US-source income the average rate of tax due on total net income. In practice, the US pension is reported on form no. 2047, then on the income tax return both in the pension boxes (1AL to 1DL) and in box 8TK.
• CSG and CRDS. For France, the CSG and CRDS are taxes covered by the treaty, and the Internal Revenue Service recognised this in an official publication of 19 July 2019 (BOI-INT-CVB-USA-10). The article 24 credit equals the corresponding French tax, which, on the firm's reading, also neutralises these two contributions on a pension that article 18 allocates exclusively to the United States. No written doctrine says so for pensions: the point is documented case by case. Any social contributions of a non-tax nature are examined separately.

Four decisions on US pensions and the tax credit

Article 18 settles which state taxes; article 24 organises the credit. The courts have clarified the second, and the boundary of the first.

• The credit without US tax paid. The article 24 credit, equal to the French tax, is not conditional on the income actually being taxed in the United States; this is the reasoning behind the firm's position on the Roth (CE, 29 June 2011, no. 320263).
• Computing the credit. The credit is computed on net US-source income, reduced by a proportionate share of the deductible charges of global income; the authorities' simplified method, based on gross income, gave a slightly higher credit and is not the method of the text, so the assessments are reinstated (CE, 26 July 2011, no. 308968).
• A UN pension is not a US pension. A pension paid by the United Nations Joint Staff Pension Fund to a French resident is not of US source merely because the organisation's headquarters are in the United States; article 18 does not protect it and it remains taxable in France (CAA Marseille, 16 June 2020, no. 19MA01434).
• The 401(a) plan treated as a French scheme, for contributions only. Treating US qualified plans as equivalent to a French scheme works for the deductibility of contributions; it does not relieve a US pension fund from proving the disinterested management required for the withholding exemption on French dividends (CAA Versailles, 28 January 2020, no. 18VE03035).

Life insurance, PEA and French funds: who taxes what

• Life insurance of a French national who moved to the United States. According to the French tax authority, life insurance income falls under article 11 on interest: it is taxable only in the beneficiary's state of residence, hence in the United States for a US resident (ministerial answers Lefebvre, French National Assembly Official Journal of 30 June 2015, no. 76274, and of 4 April 2017, no. 99515). France can therefore no longer tax the income included in your surrenders, which in practice must be asserted with the insurer. Taxation in the United States is a matter of US law alone, and state income taxes are not covered by the treaty.
• Life insurance of a US person resident in France. France taxes the policy under its usual rules. In the United States, a contract that does not meet the US definition of life insurance has its income on the contract, determined under a statutory formula, treated each year as ordinary income for that year, even without a surrender (Internal Revenue Code, section 7702(g)). The two taxes then do not fall in the same year, which complicates the use of credits.
• French funds and PFICs. For a US person, a foreign corporation with at least 75% passive gross income, or at least 50% of its assets producing passive income, is a passive foreign investment company (Internal Revenue Code, section 1297), subject to a burdensome US regime. A SICAV or another French fund may, depending on its classification under US law, fall under this regime. The precise treatment is for your US adviser; for the firm, the point is not to build in France a savings structure that does not fit.
• PEA of a US person. After five years, income and gains in a PEA are exempt from French income tax, social levies remaining due. The United States does not recognise the PEA exemption: income and gains are analysed there under the rules applicable to the assets held in the plan, with no French income tax to credit, and funds held in the PEA may fall under the PFIC regime. Shares held directly raise fewer difficulties.
• Life annuities. For a US citizen resident in France, life annuities arising in the United States qualify for the credit equal to the French tax (article 24, paragraph 1, b, v), provided the person proves that US federal tax obligations have been met.