Double Taxation in the US–France Context
Double taxation arises when two countries both assert taxing rights over the same income. The US–France treaty addresses double taxation through two complementary mechanisms: allocation of taxing rights (so that not all income is subject to both countries’ taxes) and relief for residual double taxation where the allocation rules still produce overlap.
For US citizens, the allocation rules matter less than for non-citizens because the saving clause preserves US taxation regardless of the treaty’s allocation. The foreign tax credit is the primary, and in most cases the only, relief mechanism available to US citizens in France.
Article 24: Relief from Double Taxation
France’s Obligation: The Exemption Method
For French residents receiving US-source income, France relieves double taxation primarily through an exemption method: income taxable in the US under the treaty is exempt from French income tax, but may be taken into account to determine the effective rate applicable to the taxpayer’s other income (the taux effectif mechanism). For income types where the US shares or has exclusive taxing rights under the treaty, France provides a credit for US taxes paid.
The US Obligation: The Foreign Tax Credit Method
The United States relieves double taxation exclusively through the foreign tax credit method. Article 24 confirms that the US allows a credit for French income taxes paid, subject to the provisions and limitations of US domestic law.
The treaty does not override IRC section 904. Basket limitations, the ordering rules, carryforward and carryback periods, and the high-tax kickout all apply as under domestic law. Article 24 states that credits are available “in accordance with the provisions and subject to the limitations of the law of the United States (as it may be amended from time to time without changing the general principle hereof).”
This phrasing means that legislative changes to the FTC rules under the Internal Revenue Code apply even if they produce a less favorable outcome than the treaty text standing alone might suggest. Congress retains the ability to modify FTC rules without amending the treaty.
The Re-Sourcing Rule: Article 24(1)(b)
The re-sourcing rule is the most technically significant aspect of Article 24 for US citizens.
The problem it solves: A US citizen resident in France earns US-source income (for example, dividends from a US company). That income is also included in the French tax base because the individual is a French resident. Under standard FTC rules, a US tax credit for French taxes on US-source income is limited because the FTC basket for foreign taxes is capped at US tax attributable to foreign-source income. US-source income taxed by France cannot generate a French tax credit because it is not foreign-source income in the US’s view.
The solution: Article 24(1)(b) provides that, to the extent income taxable in France by reason of French residence is included in the US tax base solely by reason of citizenship (not because it would otherwise be US-source), that income is re-sourced as French-source for FTC purposes. The re-sourced income can then generate a French tax credit in the passive income basket or the general basket, as applicable.
This rule prevents a US citizen from bearing both French income tax (on the same income taxed as residence-state income) and full US income tax with no offsetting FTC. Without the re-sourcing rule, the citizenship premium (the extra US tax owed solely because of citizenship) would be unrelieved.
French Tax Credit on the US Return: Form 1116
French income taxes paid or accrued are creditable on Form 1116. The key rules under domestic law:
Covered taxes: Impôt sur le revenu, impôt sur les sociétés, and taxes of a substantially similar character qualify as creditable foreign taxes under IRC section 901.
Baskets: Creditable foreign taxes are allocated to income baskets (general limitation, passive, foreign branch, etc.). French taxes on wages and self-employment income generally fall in the general limitation basket. French taxes on dividends, interest, and capital gains may fall in the passive basket or the general basket depending on the nature of the income.
High-tax kickout: If the foreign effective tax rate on passive income exceeds the US statutory rate, the income is “kicked out” of the passive basket into the general basket. This rule affects the FTC calculation for high-tax French passive income.
Carryforward and carryback: Unused FTCs in a given basket may be carried back one year or forward ten years.
Creditability of French Social Charges
French social charges (CSG, CRDS, prélèvement de solidarité) are imposed at a combined rate on investment income and earned income in France. Their creditability as foreign income taxes on the US return is a significant and contested question.
The treaty position: Social charges are not covered taxes under Article 2 of the treaty. The treaty takes no position on their creditability.
The domestic law question: Under IRC section 901, a foreign tax is creditable if it is a compulsory payment to a foreign government imposed substantially in lieu of or as a supplement to an income tax.
The DC Circuit ruling: In Eshel v. Commissioner, 831 F.3d 397 (D.C. Cir. 2016), the court held that CSG and CRDS are not income taxes within the meaning of IRC section 901. The charges were therefore not creditable under that ruling.
The 2019 resolution: The IRS ended its challenge to the creditability of CSG and CRDS in 2019. The current IRS practice treats these charges as creditable foreign income taxes under IRC section 901. US persons paying French social charges on investment or employment income may claim them as foreign tax credits on Form 1116. This position should be confirmed against current IRS guidance if further administrative or legislative developments occur.
Mismatch Scenarios
Even with the FTC, certain scenarios produce residual double taxation:
Timing mismatches: France and the US may recognize the same income in different tax years. FTC carryforward rules provide some relief but do not eliminate the mismatch entirely.
Character mismatches: An item characterized as ordinary income in France may be treated as capital gain in the US, placing the French tax in a different FTC basket or subject to different rate comparisons.
Currency gain/loss: US taxes are computed in US dollars. A gain or loss in euros produces a different dollar amount depending on the exchange rate at acquisition and disposition. Currency effects can create situations where French and US taxes are each calculated on different notional amounts.
Social charges: French prélèvements sociaux on income may not be creditable, producing true double taxation on the social charge component.
PFIC income: The US PFIC regime computes income under rules that have no French equivalent. French taxes on fund income may not align with the US PFIC excess distribution computation, producing double taxation on the mismatch.
Treaty Override and Its Limits on Double Tax Relief
Congress can override treaty provisions by enacting later-in-time legislation. Several regimes that significantly affect US–France cross-border taxation operate as treaty overrides:
PFIC rules (IRC sections 1291–1298): The treaty’s dividend and capital gains provisions do not prevent PFIC taxation. Double taxation arising from PFIC excess distributions generally cannot be eliminated through the treaty.
FATCA (IRC sections 1471–1474): FATCA imposes withholding and reporting obligations independently of the treaty. France and the US concluded an intergovernmental agreement implementing FATCA.
GILTI and Subpart F (IRC sections 951, 951A): The treaty does not prevent the US from including in a US shareholder’s income the GILTI or Subpart F income of a French CFC. The high-tax exclusion under section 954(b)(4) and section 951A(c)(2)(A)(i)(II) may apply to reduce GILTI inclusions if French taxes on the CFC’s income are sufficiently high.
Legal Framework
Article 24 was renumbered and conforming changes were made by the 2009 Protocol. The substantive re-sourcing rule in Article 24(1)(b) was part of the original 1994 treaty and was not amended. The Technical Explanation for the 1994 Convention provides detailed guidance on how the re-sourcing rule operates and the categories of income it covers.
The MAP and arbitration provisions of Article 26 supplement Article 24 for cases where double taxation arises from a dispute between the competent authorities about the treaty’s application. The three-year filing window for MAP and the two-year threshold for mandatory arbitration (introduced by the 2009 Protocol) provide procedural pathways for resolving such disputes.
Form 1116 is the operative filing mechanism for the FTC. The form requires detailed allocation of income and taxes among baskets and includes the re-sourcing calculation as a separate line item.
Frequently Asked Questions
What is the primary mechanism for avoiding double taxation under the US–France treaty?
The foreign tax credit under Article 24 and Form 1116. French income taxes paid by a US citizen or resident are credited against US tax liability on the same income. The treaty confirms the availability of the FTC and includes a re-sourcing rule for US citizens that enhances the FTC’s effectiveness.
What is the re-sourcing rule under Article 24(1)(b)?
For US citizens who are French residents, income that would otherwise be sourced in the US but is included in French taxable income is re-sourced as French-source income. This re-sourcing enables a French tax credit against the additional US tax imposed solely by reason of US citizenship, preventing a stacking of foreign tax burdens.
Are French social charges (CSG, CRDS) creditable on the US return?
Yes, based on current IRS practice. The DC Circuit ruled in Eshel v. Commissioner (2016) that CSG and CRDS were not creditable under IRC section 901. The IRS ended its challenge to creditability in 2019. Current practice treats CSG and CRDS as creditable foreign income taxes claimable on Form 1116. Social charges are not covered taxes under the treaty; their creditability is a domestic law question under IRC section 901, not a treaty question.
Does the treaty override IRC section 904 basket limitations on the foreign tax credit?
No. Article 24 confirms the FTC subject to the limitations of US domestic law, as it may be amended from time to time. IRC section 904 basket limitations, the high-tax kickout, and ordering rules all apply. The treaty does not create a more favorable FTC calculation than domestic law.
What is a treaty override, and how does it affect double tax relief?
A treaty override occurs when Congress enacts legislation that supersedes a treaty provision. The PFIC rules, FATCA, and GILTI are treaty overrides: they apply to US persons with French connections regardless of the treaty. Double taxation arising from these regimes cannot be resolved through the treaty’s double tax relief provisions.
Can the mutual agreement procedure resolve double taxation disputes?
Yes. Article 26 provides for MAP: a taxpayer who believes they are being taxed contrary to the treaty may present the case to the competent authority of either state. The competent authorities endeavor to reach a mutual agreement within three years of the triggering action. If unresolved after two years, the 2009 Protocol requires submission to binding arbitration.