We revert back to you following your queries about the French treatment of US pensions.
After his retirement, your client will receive a US pension and distributions from US retirement plans (401k and an IRA plans). Since your client is considering moving to France for his retirement, you need to determine whether his retirement income will be subject to the French tax.
As noted, pensions are covered by Article 18 of the U.S. – France double tax treaty signed in 1978, amended by the protocol signed in 2004.
The revised Article 18 provides that pensions and payments made under the social security legislation of a contracting State or under a retirement plan are taxable exclusively in the State of source. These provisions are properly observed by the French tax authorities. Indeed, the French administration has expressly taken its view in response to various questions submitted by French MPs and confirmed that US pensions received from a French resident are not taxable in France, based on the provisions of the DTT.
The point of the US retirement plans (401 K and IRAs) has been recently discussed in the French Parliament, in last August, when a question has been submitted from a Member of Parliament to the Minister of Finance, and the French government has confirmed that the amounts distributed from these plans qualify as retirement income and are covered by the provisions of Article 18 of the DTT.
The question was the following:
“ Mr. Ronan Le Gleut drew the attention of the Secretary of State to the Minister of Economy and Finance to the tax treatment of pension plans for French expatriates in the United States upon their definitive return to France at the end of their professional career.
Given the low level of pay-as-you-go pensions in their host countries, many French expatriates take out funded pension plans as part of their professional activities, enabling them to build up retirement savings.
Amounts paid under the social security legislation of a Contracting State and amounts paid by a Contracting State under a pension plan in respect of previous employment to a resident of the other Contracting State may be taxed under Article 18 of the tax treaties only in the first-mentioned State. This is the principle of no double taxation.
This principle applies to plans qualified by Section 401 (a) of the Internal Revenue Code; Individual Retirement Plans (IRAs); qualified plans covered by Section 403 (a) and those covered by Section 403 (b).
He pointed out that both Roth IRA and Roth 401K plans are popular and relatively recent in the United States and that many French people abroad benefit from them. Contributions in both the Roth 401K and Roth IRA are not deductible from income during career and are therefore not taxable during retirement in the United States. However, the Direction Générale des Finances Publique (DGFIP) may consider the Roth account outflows to be taxable for French citizens returning to France.
As this point is not mentioned in the tax treaty, the Board of Directors is therefore asking whether the Government would be willing to negotiate an amendment to the tax treaty with the United States.”
Please find below the answer of the French Minister of Finance (published in the French Official Journal of 27/08/2020, page 3712).
“Amounts from U.S. retirement plans, whether paid in a lump sum or on a periodic basis, are taxable only in the United States pursuant to paragraph 1 of Article 18 of the August 31, 1994 Convention. The list of pension plans in paragraph 2 of the same Article does not affect this rule. The treaty also allows France to take these amounts into account in the calculation of income tax, in order to maintain the progressivity on other household income, provided that it grants a tax credit equal to the amount of French taxation corresponding to this income.”
Therefore, it can be concluded that that the US retirement income received by your client (social security payments and distributions from 401k and an IRA plans) will not be taxable in France based on the provisions of the DTT.
