As an American expat living in France – should you keep your investments in France or in the U.S.? Amy Witherbee of Sanderling Expat Advisors says it’s a question that affects many expats from America and shares her advice…
It’s highly likely that as an American expat in France, you’ll have established investment accounts in the US before starting your life in France – so which investments should be where? There’s no one answer to suit all, everyone has their own set of circumstances and requirements. You might want to hold on to some investments for the long term, or for the short term. Maybe certain accounts are tax-preferred, and you want to let values grow without taxation? Everyone has different circumstances and different requierements, but some things are the same for all. There are rules, regulations and requirements galore.
Start with letting the US-France tax treaty direct your choices.
How does the US-France Tax treaty work for US expats?
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/green card holder (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, free of French taxes. You still have to pay U.S. taxes on it, but this French exception can have a significant impact on your finances.
The key here is “some, or all” since not everything in a U.S. investment account will qualify. And it’s complicated. Try to work it out using government websites and you’ll get mired in a ton of jargon and legalese so here’s the simple version.
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?
Exceptions apply to the income from a stock or bond note that is:
- Paid out by the “U.S. government, political authority or local authority”; OR
- 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
- 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
- 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.
How it works
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.
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. Why generally? Well, 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 the 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 refers to the sources of income for the company itself. For instance, if you received options at work or inherited shares in a company that is not traded on the big markets. You probably know if this meet the requirements of the third group because most U.S. companies are not 50% French owned, and you will 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.
Check your investments
Knowing that you need this information from your investments accounts, you will soon discover that every mutual fund and ETF holds a long list of investments, and that 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 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
If you decide that those international shares are not best in the U.S. investment account, you should consider your investment account options in France. And for those, European holdings are actually preferable. Check this article on the PEA, for instance.
How to get help with your US tax reporting requirements
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. And help is at hand. At Sanderling Expat, we’ve assisted many US expats to review their investments, make the right choices for what, when and where. And we help create the correct paperwork for US tax reporting – so that the important things can be enjoyed.
Find out more and get in touch with Sanderling Expat Advisors at sanderling.com
