Signed in 1978 and amended in 2004, the France-US estate and gift tax treaty sets aside, for movable property, the most expansive rules of both countries. It is rarely read, and families still pay taxes that a single article would have removed.
An American father living in Boston wants to give one million dollars to his daughter, who has lived in Paris for eight years. His French adviser applies French law: a donee domiciled in France for at least six of the last ten years is taxed on everything she receives, wherever the donor lives. His American adviser applies American law: the father's lifetime exemption covers the gift. Each is right under his own law, and both miss the text that actually governs the case. Under the France-US estate and gift tax treaty, France cannot tax this gift at all.
The convention of 24 November 1978, in force since 1980 and amended by a protocol of 8 December 2004, is one of the few French estate tax treaties that also covers lifetime gifts, and one of the most protective for families living between the two countries. This article reads it through the situations in which it changes the result, and through its limits, which matter just as much.
I. Scope and domicile
A. Estates and lifetime gifts, on both sides
The treaty applies to the estates and gifts of persons domiciled in France, and to those of persons subject to American tax because they are domiciled in the United States or are American citizens (art. 1). On the American side it covers the federal estate tax, the federal gift tax and the generation-skipping transfer tax; on the French side, inheritance and gift duties (art. 2). That it covers gifts is what makes it so useful: most planning opportunities arise during lifetime, not at death.
B. Domicile: each State's law first, then the tie-breakers
Each State first determines domicile under its own law (art. 4, para. 1). Only when both claim the same person do the classic tie-breakers apply, in order: permanent home, center of vital interests, habitual abode, citizenship, and failing all of these, agreement between the two administrations (art. 4, para. 2).
The treaty then adds a rule for expatriates, which is often misread. A person who is a citizen of only one of the two States, and who would be considered domiciled in both under their respective laws, is deemed domiciled only in the State of citizenship if he clearly intended to keep his domicile there and has been domiciled in the other State for less than five years in total during the seven years preceding the death or gift (art. 4, para. 3, a). For a person who moved for an employment assignment, or as the spouse or dependant of such a person, the threshold is five years out of seven, or seven out of ten in case of a renewed assignment (art. 4, para. 3, b). The rule only comes into play when both States actually claim the person as a domiciliary; it does not create a French domicile that French law no longer recognizes.
II. Who may tax what
A. What the State of situs may tax
Three categories of property may be taxed by the State where they are located, whatever the domicile of the person who transmits them. Real property (art. 5), which since 2004 includes shares of companies whose assets consist of at least 50% of real property, deemed located where that real property is. The assets of a permanent establishment and of a fixed base used for a profession (art. 6). And tangible movable property other than currency (art. 7), except the personal effects of an expatriate covered by the five-out-of-seven rule, which remain taxable only in his State of domicile.
B. Everything else: the State of citizenship or domicile of the person who transmits
Article 8 is the heart of the treaty. Subject to the three previous categories, property, including shares in companies, claims, other intangible property and currency, is taxable by a State only if the deceased or the donor was a citizen of that State or domiciled there at the time of the transfer, and only if that State's law taxes it. Portfolios, bank accounts, receivables and cash, which make up most family wealth, are therefore governed neither by their location nor by the heir's domicile, but by the citizenship and domicile of the person who transmits them.
C. How double taxation is removed
When the deceased or donor is domiciled in France, France taxes the entire estate or gift and deducts the American tax on the property the United States may tax under the treaty, up to the share of French tax attributable to that property at the average French rate (art. 12, para. 2, a). The United States, for its part, grants a credit for French tax on property France may tax as State of situs (art. 12, para. 2, b). The 2004 protocol added three significant mechanisms: a pro rata unified credit for the estate of a non-American domiciled in France (art. 12, para. 3), a limited marital deduction for a surviving spouse who is not American (art. 11, para. 3), and a rule that applies French allowances as if the person transmitting or receiving were domiciled in France (art. 12, para. 4). The treaty also contains a provision that couples often overlook: for French tax purposes, property acquired during marriage by a person who is American or domiciled in the United States, and passing to the spouse, is treated as community property, unless the spouses expressly chose another regime (art. 11, para. 1).
III. Where the treaty changes the result
A. The French resident with an American portfolio
Under American domestic law, shares of American companies held by a non-resident are American assets, taxable at death above an exemption of only 60,000 dollars. A French resident, not American, holding two million dollars of American shares through an American broker would thus expose his heirs to a heavy federal estate tax. Article 8 removes it: these shares may be taxed only by the State of domicile or citizenship of the deceased, France. The United States may not tax them, and France taxes the estate under its own rules.
One exception is regularly overlooked. Shares of American real estate investment trusts and of companies whose assets consist mainly of real property are treated as real property under Article 5 and remain taxable in the United States. For these holdings, the American estate tax applies, mitigated by the pro rata unified credit of the 2004 protocol, which is calculated precisely on the American assets the treaty allows the United States to tax. A portfolio of ordinary American shares is protected; a portfolio concentrated in real estate funds is not.
B. The American parent and the child in France
French law taxes everything received by a heir or donee domiciled in France for at least six of the last ten years, whatever the donor's domicile, as well as French securities whatever the residence of the person transmitting them (CGI, art. 750 ter). Article 8 sets both rules aside for movable property. When the donor or deceased is an American domiciled in the United States, and not a French citizen, France may tax only real property in France, the assets of a French permanent establishment and tangible property located in France. A sum of money given to a child in Paris, an American portfolio, or even shares of a French company that is not a real estate company, escape French duties. This is why the Boston father's gift is outside French taxation, and covered on the American side by his lifetime exemption. The condition is strict: if he also holds French nationality, France recovers its right to tax under the same article.
C. Long-term expatriates claimed by both States
The expatriate rule protects a narrower group than is often thought. A French executive posted to New York for a few years with the intention of returning is generally not domiciled in the United States for American estate tax purposes, which requires living there with the intention of remaining indefinitely: he is taxable in the United States only on his American assets, with or without the treaty. The rule becomes decisive when both States genuinely claim the person, for instance an expatriate who is treated as domiciled in the United States under American law while French law still considers him domiciled in France. Within the five-year or, for renewed assignments, seven-year limit, the treaty then attributes the domicile to France alone, and the United States may tax only his American real property, permanent establishment assets and tangible property.
IV. The limits
A. American citizens remain taxed by the United States
Since the 2004 protocol, the United States may tax under its own law the estate or gift of an American citizen, of a person domiciled in the United States within the meaning of the treaty, and, for ten years, of a former citizen or long-term resident whose expatriation had tax avoidance among its principal purposes (art. 1, para. 4). The treaty therefore never shelters an American citizen from American tax; it organizes credits between the two systems. For an American domiciled in France, France deducts the American tax actually paid on American real property, permanent establishment assets and tangible property, up to the corresponding share of French tax. A more favorable rule applies if it is established that the American obligations relating to the death or gift have been fulfilled: the American tax is then deemed equal to that share of French tax, which amounts to an exemption in France (art. 12, para. 2, a, iii). Compliance does not condition the credit; it conditions the exemption. We developed this theme in our analysis of the streamlined procedure and our article on renunciation.
B. Tax that escapes, rates, and reporting
Three provisions prevent abuse. If property taxable in only one State escapes tax there for a reason other than a specific exemption, allowance, exclusion, credit or deduction, the other State may tax it (art. 12, para. 6). A State that may not tax property may still take it into account to determine the tax on the rest (art. 12, para. 7). And the treaty leaves the reporting obligations of both States, and their sanctions, untouched (art. 15, para. 1): the French donee of an American parent remains bound by French reporting rules even when no duty is owed.
C. A treaty that can be terminated
Either State may terminate the treaty by a note sent between 1 January and 30 June, effective at the end of the calendar year; and if a change in tax law substantially alters its effects, with effect no earlier than six months after the note (art. 20). A planning strategy built on Article 8 therefore rests on a solid text, in force for more than forty years and confirmed in 2004, but not an eternal one. Significant transfers are better completed while the text applies than postponed.
D. Our position
For families living between France and the United States, the 1978 treaty is the first text to read, not a technical appendix. It removes the American estate tax on the ordinary portfolios of French residents, French duties on movable transfers from Americans domiciled in the United States, and the American claim on long-term expatriates whom both States regard as domiciliaries. Three checks are indispensable in every file: citizenship, because dual nationality reopens the right to tax; domicile, assessed first under each State's law and only then under the treaty; and the nature of the assets, because real property, including real estate companies and REITs, falls outside Article 8.
Conclusion
The France-US estate and gift tax treaty allocates taxing rights in a way that is easy to state and powerful in effect: real property, permanent establishment assets and tangible property go to the State where they are located; everything else, portfolios, accounts, receivables and cash, goes to the State of citizenship or domicile of the person who transmits. Combined with the 2004 additions, the pro rata credit and the marital deduction, it removes taxes that domestic law would otherwise impose on both sides.
Its limits are equally precise: the saving clause for American citizens, the exception for real estate companies, the expatriate rule that only applies when both States claim the person, the rule against untaxed property, and reporting obligations that survive. Read with these limits, it remains one of the few legitimate shelters available to families between the two countries, and it benefits only those who read it before they transmit.
Frequently asked questions
I live in France and hold American shares with a US broker. Will my heirs pay American estate tax?
Not on ordinary American shares, if you are neither an American citizen nor domiciled in the United States. American domestic law taxes the American shares of non-residents above 60,000 dollars, but Article 8 of the 1978 treaty reserves shares, claims and cash to the State of domicile or citizenship of the deceased, here France. The exception concerns American real estate investment trusts and companies whose assets consist mainly of real property, which the treaty treats as real property: they remain taxable in the United States, with the pro rata credit of the 2004 protocol.
My American father, who lives in the United States, wants to give me money. I have lived in France for ten years. Will I pay French gift tax?
In principle no, if your father is not a French citizen. French law taxes gifts received by a donee domiciled in France for six of the last ten years, but Article 8 of the treaty allows France to tax movable property, including money and securities, only when the donor is a French citizen or domiciled in France. Real property in France or tangible property located in France would remain taxable. French reporting obligations continue to apply even when no duty is owed.
I am French and have been posted to New York for three years. Am I exposed to American estate tax on all my assets?
In general no, but usually not because of the treaty. American estate tax law treats a person as domiciled in the United States only if he lives there with the intention of remaining indefinitely; an employee posted for a limited period who intends to return is generally taxable only on his American assets. The treaty's expatriate rule becomes decisive only when both States regard you as domiciled: in that case, below five years out of seven, it attributes your domicile to France alone.
Does the treaty protect an American citizen living in France?
Not from American tax. Since 2004, the United States may tax the estates and gifts of its citizens under its own law, and the treaty only organizes credits. France deducts the American tax paid on American real property, business assets and tangible property, up to the corresponding share of French tax; if the American obligations relating to the death or gift have been fulfilled, that American tax is deemed equal to the French tax on those assets, which amounts to an exemption in France. For an American in France, compliance turns a credit into an exemption.
