Current issues

American citizens working in France must report and possibly pay taxes on their French income in both countries:

– in France, all residents are subject to income tax,

– in the United States, all American citizens are subject to income tax, including on income earned outside the US, regardless of their place of residence.

However, to avoid double taxation of foreign-source income, US law provides two remedies:

– the 911 exemption (Foreign Earn Income Exclusion - FEIE) excludes from taxation the first $104,100 of foreign income and certain housing expenses;

– the 1116 exemption (Foreign Tax Credit - FTC) allows US citizens to deduct the income tax they paid or owe in their country of residence from the tax they owe in the United States.

The result is that US citizens with French income must report the income to US tax authorities, but reporting may have no tax consequences as the US income tax, capped at $104,100, is generally lower than the French income tax.

US citizens residing in France lost the benefit of the 1116 exemption in 2019, however, when French Law No. 2016-1917 of 29 December 2016 instituting income tax withholding went into effect

Withholding at the source is not at issue, but the measures that go with it will wreak havoc. Our “blank” year is a nightmare for some Americans living in France.

Under the new regime, tax is levied on income for the year and not on income for the previous year. If the law had not provided otherwise, all taxpayers would have had to pay two years’ worth of tax in a single tax year: the tax due in respect of 2018 and the tax due in respect of 2019. In some countries that started withholding at the source before France did, staggered payments were put in place to avoid this. For example, the system introduced in the United Kingdom in 1944 “involved the temporary arrangement of two 18-month fiscal years to avoid losing one year’s taxation” (Desmettre, “Les comparaisons internationales en matière de prélèvements à la source” [International Comparisons of Tax Withholding at the Source], report submitted to the Council on Mandatory Levies (Conseil des prélèvements obligatoires, 2011).

The French legislature opted for a different solution however, finding that this one would have constituted a “double contribution to public expenses in 2019 via the income tax”. Section II A of Article 60 of the Law therefore cancelled the 2018 tax by a complex tax credit mechanism (the CIMR):

"II.-A. -In respect of non-exceptional income received or realised in 2018 that falls within the scope of the withholding mentioned in Article 204 A of the General Tax Code (as it results from this Law) , taxpayers will receive a "collection modernisation" tax credit to ensure they do not contribute to public expenses twice in 2019 by paying income tax on it".

Like other residents, US citizens residing in France were therefore exempt from French income tax on their 2018 income and liable only for the tax due on their 2019 income. This did not escape the attention of the Internal Revenue Service (IRS), which called it “a tax holiday for 2018”.

However, they are not exempt from their 2018 tax obligations to the US government. As in the past, they must report their French income to the US tax authorities and, as in the past, are subject to US tax. Thus, despite the 2018 tax holiday in France, they are liable in 2019 for US taxes on their 2018 French income.

We issued a warning on our blog in 2018 about the impact of this situation, namely that in 2019, US citizens living in France would be forced to pay both:

– US tax on French income for 2018, and

– French tax on French income for 2019.

They would therefore have to pay what the French legislature intended to avoid: a “double contribution to public expenses in 2019 via income tax” (Article 60 above).

The US tax authorities have just confirmed:

"U.S. taxpayers working and living in France who did not set aside income to pay any outstanding U.S. tax liability may experience a cash flow shortage when they file their 2018 U.S. income tax return in 2019. This will largely affect taxpayers who elected the “accrued” method on Form 1116 to claim the FTC.”

Such a situation is unacceptable. It constitutes a massive breach of the constitutional rules on which any person living in France may rely.

After thorough analysis, we have developed strong arguments that will allow us to ask the relevant court to order the French government to reimburse any US tax paid by our clients.