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The french taxation of american pensions

12 Oct 2021

taxation us pensions in france

It is well known: Americans love France! And many of them want to settle in our beautiful country at the end of their professional life. If you desire to settle in France for you retirement, you may be ware of how french taxation on american pensions works. In addition, there are also many French citizens who have spent all or part of their career in the United States and are wondering how to tax their income once they retire.

The different types of American retirement plans

The American retirement system is very different from the French system. As in France, there is a “public” pension paid by the American Social Security, but it generally consists of a very modest income, and it is necessary to resort to private pension plans or company plans to benefit from a larger income when the time comes.
Here is a brief overview of the most commonly encountered retirement plans:

401K plans

This is one of the most common retirement plans in the United States. This savings product, often initiated by employers (who may also contribute to it), is a defined contribution plan: the benefits to be received at retirement are not known and will depend on the profits and losses realized from the investment of the capital. The contributions paid are not taxed (deducted from pre-tax salary), but the benefits to be received at retirement will be taxable. To limit the tax benefit, contributions to a 401K are capped at $19,500 (2021 limit).

Individual Retirement Arrangements (IRA)

This is an individual retirement plan that can be taken out by any individual provided they have a taxable income (a certain level of income may be required depending on the plan). This plan is therefore not only reserved for employees. It is also a “pre-tax” plan, which means that the contributions made are tax-advantaged. The contribution limit is $6,000 in 2021. Benefits received at retirement age will be taxable.

Roth IRAs

The Roth IRA works differently than the previous two plans: contributions to the savings vehicle are after-tax, but in return, the income to be received at retirement will not be subject to tax (conditional unlocking). In 2021, the annual contribution limit is $6,000. Access to the Roth IRA is limited: single individuals earning more than $140,000 per year and married couples earning more than $208,000 are not eligible to contribute to a Roth IRA.
In the U.S., the tax treatment of benefits received from these different plans varies according to their characteristics, but what about in France?

How th french taxation on American pensions works ?

Individuals domiciled in France for tax purposes must report all of their French and worldwide income annually, subject to the application of international tax treaty provisions. With respect to retirement income, Article 18 of the tax treaty signed between *France and the United States provides:

 

” 1. Amounts paid under the social security or similar laws of a Contracting State to a resident of the other Contracting State or to a citizen of the United States, and amounts paid under a pension plan and other similar remuneration arising in one of the Contracting States in respect of prior employment to a resident of the other Contracting State, whether in the form of periodic payments or in a lump sum, shall be taxable only in the first-mentioned State. For the purposes of applying the provisions of this paragraph, pension and other similar remuneration shall be deemed to arise in a Contracting State only when paid out of a pension or other retirement plan established in that State.”

 

In other words, the treaty establishes that pensions are taxable only in the source state of the income. As a result, U.S.-source retirement benefits received by an individual domiciled in France for tax purposes remain taxable in the United States.

 

In order to clarify the application of this provision, it is further stated that: “[… (i) with respect to France, it is understood that the social security or similar laws of the United States, 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 requirements of section 408(k), individual retirement accounts, individual life annuities, and section 408(p) accounts), qualified section 403(a) plans, and section 403(b) plans, shall generally be considered to be a pension plan established and recognized for tax purposes in France; [. ..]

 

french taxation on american retirement pensions

Thus, 401K plans and IRA plans are affected by these provisions. However, the “Roth” type plans (Roth IRA and Roth 401K), these so-called “after-tax” plans, are not included in the list. In order to obtain clarification on how the corresponding benefits are taxed in France, a French deputy, Mr. Ronan Le Gleut, requested clarification before the Senate. The answer of the Ministry of Economy and Finance was published on 27/08/2020 in the Official Journal of the Senate:

“Amounts from U.S. pension plans, whether paid in one lump sum or periodically, are taxable only in the United States pursuant to paragraph 1 of Article 18 of the Convention of August 31, 1994. This rule is not affected by the list of pension plans in paragraph 2 of the same article. The treaty also authorizes France to take these amounts into account in calculating income tax, in order to maintain the progressive nature of the household’s other income, provided that it grants a tax credit equal to the amount of French taxation corresponding to this income.

Thus, on the French side of the Atlantic, it is considered that the list in 2. Of Article 18 of the tax treaty is non-exhaustive and that all retirement plans recognized as such in the United States, regardless of their characteristics, are only taxable in the United States.

 

The end of the Department’s response is interesting, however: the Department reminds us that regardless of the fact that they are not taxable in France, U.S. source retirement benefits must still be reported on the French return in order to calculate the effective tax rate. Retirement pensions must therefore be correctly declared in France and double taxation on this income will be avoided thanks to a tax credit equal to the French tax.

 

* Franco-American Convention of August 31, 1994 amended by the amendments of December 8, 2004 and January 13, 2009

 

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expert comptable lyon

Sandy Dalmas
Expert-Comptable – Chartered-Accountant

Sandy has more than 10 years of experience at  Roche & Cie.
Specialist of Non-residents’ taxation, real estate and related activities.
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Cabinet Roche & Cie, Chartered Accountants in France
Specialist in Real-Estate and non-residents’ taxation