What is a French PEA and how do they work for American Expats?
In case you have not already heard, it’s more than a little difficult for American living abroad to invest savings. You can check the article here to understand why that is. Most of the list of is available for Americans comes down to some very safe, low-interest savings accounts. But the PEA is an exception. So what is it and why might you want to open one?
The PEA (Plan d’épargne en actions) is a type of financial account, rather than an investment. Think of it as a specially designed container in which you can buy, sell and hold any number of investments. In this case you are going to use it to hold shares in stocks. We will get into choosing those stocks in another post, but for now let’s talk about the benefits of using PEA’s instead of standard investment or brokerage accounts (in french these are les compte-titres ordinaire).
Features of the PEA
Thanks to French legislation, the investments you buy in your PEA are sheltered from income taxes on any dividends or capital gains. That means that, much like a Roth IRA in the United States, you can reinvest those gains over the years and end up with a much bigger account balance. As with the Roth there are certain conditions:
The tax sheltering feature only applies to income tax and not to social contributions — the “prélèvements sociaux,” which include the CSG, CRDS and Prélèvement de Solidarité. The French bank or financial institution where you hold your account will make these social contribution payments directly on your behalf.
The tax exemption applies as soon as you open the account, but you need to leave the money in your account for at least 5 years to take advantage of the tax break.
If you take any money out of the account before the 5 year period is up (and can’t take advantage of one of the special exceptions) you will be forced to close the account, which could mean incurring a significant capital gains tax bill.
You can withdraw funds from a PEA without closing the account if you are fired, laid-off, or if you or your spouse become disabled. The funds withdrawn early for these purposes are not exempt from income tax, but you would be able to leave the rest of the account intact.
There is a limit on how much you can contribute to a PEA—150,000 € or 300,000 € for a married couple using a standard PEE. But if you choose a PEA for small and midsized companies (PEA PME-ETI), you can invest up to 225,000 € (or 450,000 € for a two-partner a household).
You can own both types of PEA at once, but they can’t total more than 225,000 €, or 450,000 € for two holders. Happily, the gains and dividends accrued in the account will not count againt this limit. And you can keep companies in your PEA PME-ETI that have grown out of the “mid-sized” criteria since you bought them.
The PEA also works reasonably well in inheritance planning. At the death of the account holder, the account is included in the estate. But no income tax is due on the capital gains at death and the beneficiaries can choose to keep the securities.
So how does an American use a PEA?
For obvious reasons, you only want to invest in a PEA if you plan to leave those funds alone for more than 5 years. As an American, you also want to make sure you are staying in France for the foreseeable future. You are allowed to keep a PEA open after you move back to the U.S. from France, but leaving money behind in France would create tax headaches for most U.S.-retournees, something we already have enough of.
Crucially, you want to be careful about what you buy in your PEA. The PEA accounts come in two flavors (there is also an insurance version, which we will avoid here). The standard PEA account lets you invest in any European-listed stocks, while the PEA PMI-ETI requires that your portfolio in small and mid-sized European companies. Both allow you to buy shares of UCITS’s, SICAV’s, ETF’s or other funds, but as an American, you do not want to do this (again, read here for an explanation). You can, however, buy shares in privately-held companies so long as they are not merely holding companies for other businesses. This opens up some interesting options for investing in small business, but be careful of the limits to the tax break on these and the extra challenges of tracking investment performance and selling shares.
A piece of your bigger financial picture
If you are planning to stay in France for more than 5 years and you’ve already put aside all the money you need for living costs, imminent projects and short-term expenses, the PEA is quite likely your next step in financial planning. These plans are designed to encourage investment in European business, but they do an excellent job of growing your savings for retirement or for projects and expenses that are more than 5 years out.
So, a PEA can be a great gateway into investing if you don’t already own investment accounts. And if you are already invested in a retirement account or a brokerage account in the U.S., this European option is an excellent place to balance those out.
French brokerage houses and banks all have informational material on PEA and PEA PME-ETI accounts. The French market regulator, AMF, also provides a guide to PEA accounts here: https://www.amf-france.org/fr/espace-epargnants/comprendre-les-produits-financiers/supports-dinvestissement/pea-tout-savoir-sur-le-plan-depargne-en-actions.