Capital Gains and the Treaty
Capital gains occupy a distinct position in the US–France treaty. Unlike interest and royalties, which are allocated exclusively to the residence state, capital gains are allocated primarily to the situs state for real property and to the residence state for other property. This split reflects the longstanding international norm that real property, being immovable and fixed, is appropriately taxed where it is located.
For US citizens, the saving clause means both countries’ capital gains taxes apply to most transactions. The foreign tax credit is the mechanism for preventing double taxation, though timing and character differences between the French and US systems can produce residual double tax in specific scenarios.
Article 13: Allocation of Capital Gains
Real Property Gains (Paragraphs 1 and 2)
Gains from the alienation of real property situated in a contracting state may be taxed in that state. This is a shared taxing rights rule: the situs state retains the right to tax, but the residence state does not necessarily yield.
“Real property situated in France” includes:
- Land and buildings (immovable property as defined in Article 6)
- Shares in a company the assets of which consist at least 50% of French real property, or which derive at least 50% of their value from French real property
- Interests in French partnerships or trusts attributable to French real property
The 50% real property rule for shares captures property companies and certain investment vehicles. A US shareholder of a French SCI (société civile immobilière) that holds French real estate falls within this rule if the SCI’s assets are at least 50% French real property.
For US real property sold by French residents, the corresponding rule under IRC section 897 (the Foreign Investment in Real Property Tax Act) applies on the US side.
Business Property Gains (Paragraph 3)
Gains from alienation of movable property forming part of the business property of a permanent establishment in France may be taxed in France. This includes gains on machinery, equipment, business intangibles, and other assets attributable to a French PE. Only the gains attributable to the PE are taxable in France.
An exception in Article 13(3)(a): gains from alienation of ships, aircraft, or related movable property used in international traffic are taxable only in the residence state. This exception survives the saving clause under Article 29(3)(a).
Royalty-Type Contingent Gains (Paragraph 5)
Gains from the alienation of royalty-type rights (those described in Article 12(2)(b)) where the proceeds are contingent on productivity, use, or further alienation are taxable only in accordance with Article 12. Zero withholding applies.
General Rule: Other Property (Paragraph 6)
Gains from the alienation of property not addressed by paragraphs 1–5 are taxable only in the residence state. This general rule covers:
- Capital gains on publicly traded French stocks held directly (not through a property company)
- Portfolio securities and bonds
- Other movable property not connected to a PE
France does not have the right to tax capital gains on French equity investments sold by US residents, provided the investee company does not derive more than 50% of its value from French real property.
French Real Property: Double Taxation in Practice
The French Capital Gains Tax
France taxes capital gains on real property (plus-value immobilière) at a flat rate on net gain, after an abatement schedule that reduces the taxable gain based on the holding period. Gains are potentially reduced to zero for very long holding periods. Non-resident vendors of French property are subject to the same capital gains rules as French residents, with some differences in the applicable rates and mandatory withholding at the point of sale.
French social charges (prélèvements sociaux at the prevailing rate) also apply to capital gains on French property. These charges are not covered by the treaty.
The US Capital Gains Tax
The saving clause means a US citizen owes US capital gains tax on the sale of French property. The character of the gain (long-term or short-term) is determined under US rules based on the holding period. The gain is measured in US dollars, using the acquisition cost in dollars and the sales proceeds in dollars at the applicable exchange rate.
The FTC is available on Form 1116 for French capital gains tax paid. However, because of the different timing of when the French gain and US gain are recognized (they should be the same event, but currency fluctuation affects the dollar amounts), and because French social charges may not be creditable, residual double taxation is possible.
Principal Residence: French and US Rules
French domestic law exempts the gain on the sale of a principal residence from French capital gains tax (plus-value sur la résidence principale). A French resident who has maintained a property as their main residence and sells it generally owes no French capital gains tax.
For US purposes, IRC section 121 provides an exclusion of up to $250,000 ($500,000 for married couples filing jointly) on gains from the sale of a principal residence, subject to ownership and use tests. A US citizen who satisfies both the French exemption and the section 121 exclusion may owe no capital gains tax in either country. Where gains exceed the section 121 exclusion, residual US tax applies, and the FTC is available for any French tax paid.
Shares with Real Estate Backing
The 50% real property threshold in Article 13(1)–(2) requires an asset-composition analysis for French corporate shares. If a US person holds shares in a French company and the company’s assets are at least 50% French real property (by value), France retains the right to tax gains on those shares.
This rule applies to:
- French SCIs (sociétés civiles immobilières) used as property-holding vehicles
- French holding companies whose assets consist primarily of real estate
- Shares in unlisted entities with significant real estate portfolios
Listed French real estate companies (SIICs, SPPICAVs) are often covered by this rule. Their shares may be taxable in France under Article 13 on disposition, though the treaty’s treatment of SIIC dividend distributions (Article 10(5)) is a separate question.
Legal Framework
Article 13 of the 1994 treaty was amended by the 2009 Protocol only to update the cross-reference to Article 12 in paragraph 5 (following the replacement of Article 12 by the 2009 Protocol). The substantive capital gains allocation rules are from the original 1994 treaty.
The situs-state rule for real property gains follows the OECD Model Convention position and is standard across US income tax treaties. The 50% real property threshold for shares is also standard in modern US treaties.
Article 23 of the treaty (Capital) separately addresses France’s right to tax capital represented by shares in a French company where a US person holds a substantial interest (25% or more of corporate earnings). This provision is relevant to the French wealth tax (IFI) analysis and should be distinguished from the Article 13 capital gains rules.
The IFI wealth tax replaced the ISF in 2018 and has a narrower scope (real estate assets only). The DGFiP treats the IFI as a covered wealth tax for treaty purposes. The five-year exclusion for new French residents also applies under the IFI: a person who transfers tax domicile to France after having been domiciled outside France for the preceding five calendar years is taxed only on French-located property, through the fifth year following arrival. After that period, worldwide real estate assets are in scope for French residents, subject to any treaty provisions allocating taxing rights.
Frequently Asked Questions
Can France tax the gain when a US citizen sells a French property?
Yes. Under Article 13(1), gains from the sale of real property situated in France may be taxed in France. France exercises this right under its domestic capital gains rules (plus-value immobilière). The US also taxes the gain under the saving clause, making this a dual-taxation scenario mitigated by the foreign tax credit.
Are gains from selling French shares taxable only in the seller’s residence state?
Generally yes, under Article 13(6). Gains from selling shares that do not derive more than 50% of their value from French real property are taxable only in the seller’s residence state. France does not have the right to tax capital gains on most French equity investments sold by US residents.
What is the 50% real property rule for shares?
Under Article 13(1) and (2), France can tax gains on shares in a company if the company’s assets consist at least 50% of French real property, or at least 50% of the company’s value derives from French real property. This rule prevents the use of share structures to avoid situs-state taxation on effective real property gains.
Does the treaty apply to gains from selling a principal residence in France?
Yes, the treaty’s Article 13 framework applies. France may tax the gain under Article 13(1). French domestic law provides a principal residence exemption that eliminates French capital gains tax on the sale of a main residence. For US purposes, the saving clause means US tax applies, subject to the IRC section 121 exclusion if the conditions are met and the FTC for any French tax paid.
Does the saving clause apply to capital gains for US citizens?
Yes. The saving clause (Article 29) preserves US taxation of US citizens on worldwide capital gains regardless of the treaty. A US citizen who sells French real property owes US capital gains tax in addition to French capital gains tax. The foreign tax credit on Form 1116 offsets French tax paid against US liability.
Are gains from French business property of a US PE taxable in France?
Yes. Under Article 13(3), gains from alienation of movable property forming part of the business property of a permanent establishment in France may be taxed in France. This includes gains on equipment, inventory, and intangibles attributable to a French PE.