We had someone write in the other day with a very good technical question about the U.S.- France Tax Treaty and investment accounts, and it reminded me that I had been meaning to write this post. This question comes up quite a bit for those of us whose adult lives have spread across (at least) two countries. You have established investment accounts in one country and then start life in another. I’ve written about some of the issues around whether and where to keep accounts here and here. But assuming you do, which investments should be where?

Like almost any question in finance, the answer is going to depend to some extent on your circumstances. Are certain accounts tax-preferred, so that you can let values grow without taxation? Are there investments you mean to hold on for a short time and some for longer?

Let the tax treaty shape your choices

As always before making financial decisions as an expat, start with your tax treaty. As a U.S. citizen/green card holder in France, you have a strange treaty with which to work. Article 24 creates a special tax credit in France for U.S. investment account income that really should not exist. Specifically, if you are a U.S. citizen/greencardholder (and even if you are also a French citizen), and you have income from U.S. investment accounts, the French tax system will let you have some or all of that free of French taxes. You do still pay U.S. taxes on it, but this French exception can have a significant impact on your finances.

If you’ve been reading closely, though, I always hedge a bit in describing this credit against French taxes—“some or all” of the income may get this treatment. This is because not everything in a U.S. investment account will qualify. Let’s look more closely at the actual language. But first, take another sip of café – this is legalese at its worst.

Ready?

Which shares and bonds get special treatment in France

In Article 24 (2)(b) of the Treaty, two exceptions from the usual French taxes are created, one for capital gains (subsection ii) and one for interest and dividend income (subsection i). There is another for options and futures, but really, is your life not complicated enough?

Those exceptions apply to the income from a stock or bond note that is:

1.     Paid out by the “U.S. government, political authority or local authority”; OR

2.     Paid out by “a person created or organized under the laws of a state of the United States or the District of Columbia” whose principal class of shares is traded “on a recognized stock exchange” as defined in Article 30; OR

3.     Paid out by a company resident in the U.S. so long as “less than 50 percent of the voting power” was held directly or indirectly by French residents during the year AND no person in your household had 10% or more of the voting power in the company for (essentially) the year before the income was paid out; OR

4.     Paid out by a company resident in the U.S. that does not get more than 25% of its gross income (directly or indirectly) from sources outside the U.S.

Note that that your income from U.S. retirement accounts (401k’s, IRA’s, 403b’s, etc…) fall under a different tax article, so we aren’t worried about those accounts here. But for the rest, we want to break these categories down into everyday language.

The explanation

Your income qualifies if the company paying you this interest/dividend/capital gain income meets any of the 4 definitions above:

The first one (U.S. government stuff) is easy. That is almost always government bonds, whether from a state, county, city or the U.S. Treasury. Awesome.

The second group is also (generally) great. It refers to companies that are  both formed and registered in the U.S. and whose shares are traded on one of the big stock exchanges. I add the “generally” because you can absolutely buy and hold shares in a non-U.S. company in your U.S. mutual fund or ETF or even just as ADR (American Depository Receipt) shares. That means that technically, you should be sorting through that massive 1099 from your investment account at the end of the year to see what is from an actual U.S. company. More on that below.

The third group applies to a company that might not be on a big stock exchange. You could still get the tax break, but the negotiators wanted to be sure that you and your friends weren’t putting your own company in the U.S. for the express purpose of avoiding taxes. 

Group four, which refers to the sources of income for the company itself, is a doozy. Let’s say you received options at work or inherited shares in a company that is not traded on the big markets. You probably know whether this meet the requirements of the third group because, well,  most U.S. companies are not 50% French owned, and you really should know if you are a 10% owner of a company.

On the other hand, you might not have a lot of information on where that company’s income came from. Technically speaking, the fourth category means that you should be reviewing that company’s internal end-of-year reports to see if at least 75% of the revenues for the year come from within the U.S. You can see how this could get painful in April.

So what should you do?

If you already have investment accounts, you will have spotted the problem. Every mutual fund and ETF holds a long list of investments, and the managers who choose them don’t really care about your tax treaty problems. So what can you do?

First, don’t stress too much about the tiny bits of income from holdings in your investment account. To date, the French tax authorities have been very reasonable with taxpayers who are trying to get this right.

Next, be careful about using ETF’s (“Exchange Traded Funds”) and mutual funds. There are quite a few out there that by definition limit themselves to U.S. public traded companies. Likewise bond or bond funds that limit themselves to federal government bonds or municipal holdings are absolutely fine.

On the other hand, a fund that is geared toward international companies or anything traded as an ADR almost certainly runs afoul of the tax exception. And most ETF’s and mutual funds will have a mix. Unless you want to take up a second job in analyzing a fund’s holding-by-holding performance throughout the year, avoid those.

Finally, check any investments you have that are not listed on the big exchanges. This could be something you personally bought into, something you inherited or more often, some shares you got from a company you worked for. If you know without a lot of research whether the company meets the criteria for the French exemption, great. If not, consider the possibility that it does not. You might even look at relinquishing those holdings.

Hold the international investments in France

So you’ve decided that those international shares are not your friends in the U.S. investment account. Don’t forget that you do have investment account options in France. And for those, European holdings are actually preferable. Check this article on the PEA, for instance.

Don’t forget the bigger picture

Taxes are an important part of finance. But for most of us, they are not the most important part. In the vast majority of cases, earning, spending and saving (in that order) are what determine our long-term financial well-being.

All the same, we recommend taking a few hours to do a good, thorough review of what you have. The taxes you pay on the occasional dividends from your brokerage account might not add up to much. But the smug feeling of knowing your paperwork is in order next tax season is not to be underestimated.