France has always made you dream: its art of living, its gastronomy, its wine… So you are considering moving there for your retirement. But the French tax system is just as complex as the American system, and you fear that your taxes will rise following your move.
The purpose of this article is therefore to clarify the situation and describe the methods of taxation in France of US-based pensions.
When does one become a French tax resident?
Subject to international tax treaties, you will be considered to be domiciled in France for tax purposes if you meet at least one of the following criteria:
- Your home is in France: it is your usual / permanent place of residence.
In the presence of minor children, judges can check in which country they are enrolled in school to determine their usual place of residence.
- You reside mainly in France: this is the famous “183 days” rule. Thus, if you spend more than half of the year in France, you become a French tax resident.
- You are working in France, whether or not you are an employee.
- You have in France the centre of your economic interests: it is in France that you have made your main investments, or that it is the headquarters of your professional affairs. It is in France that you derive most of your income.
As soon as you are considered to be domiciled in France for tax purposes, you are subject to an unlimited tax obligation: you must declare all your French AND worldwide income in France.
In which country will my pensions be taxed?
Will your income be taxed twice? do not panic! France and the United States have concluded a tax treaty in order to avoid double taxation situations. The procedures for taxing pensions are detailed in Article 18:
“Amounts paid under the social security legislation or similar legislation of a Contracting State to a resident of the other Contracting State or to a citizen of the United States, as well as amounts paid under a pension plan and other similar remuneration arising in either Contracting State in respect of previous employment to a resident of the other Contracting State, in the form of periodic payments or a lump sum, shall be taxable only in the former State. For the purposes of this paragraph, payments under a pension plan and other similar remuneration shall be deemed to arise in a Contracting State only when paid by a pension plan or other retirement plan established in that State.”
In other words, this means that pensions and payments recognised as such are taxable only in the “paying” country. Thus, pensions from American sources are taxable only in the United States.
Which pension schemes are recognised by France?
For the purposes of Article 18 of the Tax Convention, France recognizes*:
- Qualified plans under section 401 (a) of the Internal Revenue Code;
- Individual retirement plans (including individual retirement plans that are part of a simplified employee retirement plan that meets the conditions of section 408 (k), individual retirement accounts, individual life annuities and accounts covered by section 408 (p) ];
- The qualified plans covered by section 403 (a) and those covered by section 403 (b) are generally considered to be a pension plan established, established and recognized for tax purposes in France.
Do you have any reporting obligations in France?
Yes, as a French tax resident you are required to declare all your worldwide income. Article 24 of the same tax treaty defines the procedures for avoiding double taxation. Thus, income that is only taxable in the United States must be declared on the French tax return, but the tax in France is cancelled thanks to the charging of a tax credit equal to the amount of the corresponding French tax.
You have any questions? You need assistance to file your income tax returns in France? Do not hesitate to contact us!