France-US Tax Treaty: Avoiding Double Taxation

Quick answer. The France-US tax treaty, signed in Paris on 31 August 1994 and in force since 30 December 1995, prevents double taxation through three levers: the concept of permanent establishment (articles 5 and 7), reduced withholding taxes on dividends (15 percent, or 5 percent above 10 percent ownership) and a tax credit mechanism (article 24).

A director receiving dividends from a US subsidiary, a freelancer invoicing a New York client, a French resident holding a US securities portfolio: all face the same practical question. Will I pay tax twice, once in the United States and once in France? The answer rarely turns on common sense, and almost always on the wording of the treaty. Here is how it works, what it actually settles, and the pitfalls we see recur in transatlantic files.

The treaty of 31 August 1994, supplemented by the 2004 and 2009 protocols, covers income and wealth taxes. It allocates the right to tax between the two States, then provides the mechanism that cancels any residual double taxation. It creates no tax and removes no reporting obligation: a US national must still report income to the IRS, even when resident in France.

The guiding principle is simple. For each category of income, the treaty designates the State that may tax, sometimes both with a cap, then the State of residence cancels the duplication. To read this text properly, the analytical grid is the same as for any reading of a bilateral tax treaty: identify residence, the nature of the income, then the applicable article.

Our view. Most of the disputes we encounter are not about the rate, but about the characterisation of the income and tax residence. Once those two points are fixed, applying the treaty becomes mechanical.

The profits of an enterprise of one State are taxable in the other State only if they are attributable to a permanent establishment located there (articles 5 and 7 of the treaty). This is the cardinal rule for any transatlantic activity.

A permanent establishment is a fixed place of business through which the enterprise carries on its activity: place of management, branch, office, factory, workshop. Without a permanent establishment in the United States, a French company making sales there is in principle not taxable on its profits in that country. The reverse applies to a US company active in France.

The issue is not theoretical. A foreign company building a lasting commercial presence in France may trigger a permanent establishment risk in France without realising it, leading to French taxation and local accounting obligations.

The underestimated risk. A salaried sales representative who regularly signs contracts in the company's name, or permanent servers and logistics, may constitute a permanent establishment even though no subsidiary has been set up. The question should be settled before any structuring project, whether setting up a US company (LLC or C-Corp) or opening a branch.

The treaty caps the withholding taxes each State may levy on flows paid to a resident of the other State. Here are the reference rates from the treaty text.

These rates are caps: they apply only to the withholding levied at source, not to the final taxation in the State of residence. Specific regimes may further reduce dividend withholding for qualifying holdings; this precise point must be checked case by case against the treaty text and the BOFiP guidelines.

For a dividend paid by a French subsidiary to a foreign parent company, the default withholding tax stems from article 119 bis 2 of the French General Tax Code, before applying the treaty cap. On the French side, these two levels, domestic law then treaty, must be combined.

Trade-off. For an intra-group dividend flow, two routes coexist: the treaty cap at 5 percent in case of significant ownership, or, where a European relay company is involved, a different regime. The choice should be reasoned with corporate tax support, as substance and beneficial ownership condition the benefit.

Article 24 of the treaty organises the elimination of double taxation. For a resident of France receiving US-source income taxable in the United States, France grants a tax credit. Depending on the type of income, this credit takes two forms.

1. A credit equal to the French tax on the income: the income is in practice exempt in France, but kept to compute the rate applicable to other income (exemption with progression rule).
2. A credit equal to the US tax actually paid: the income is taxed in France, and the US tax is offset against the French tax, within the limit of the French tax on that income.

In practice, the resident of France reports US-source income on form 2047, then carries the amounts over to the 2042 return. The tax credit mechanism follows the general logic of the foreign tax credit common to most treaties signed by France.

In practice. Keep proof of US taxation (US forms, evidence of payment). In a tax audit, this documentation is what supports the tax credit claimed in France.

Client questions often mix two situations that do not follow the same rates. This distinction is essential.

Applying the 25 percent corporate rate to a dividend received by an individual is a classic mistake: an individual falls under the income tax scale or the flat-rate levy, not corporate tax. Conversely, a US resident must deal with the saving clause, detailed below.

The treaty includes a saving clause. US nationals, including those resident in France, remain taxable in the United States on their US-source income, under citizenship-based taxation. France then eliminates double taxation through the tax credit.

Since an IRS ruling dated 19 July 2019, the CSG and CRDS are recognised as taxes giving rise to a foreign tax credit on the US side. This point was the subject of extensive litigation and remains important data for Americans living in France.

Common case. A binational director recently asked us for help after receiving dividends from his French structure: he feared a double levy between France and the US. The work consisted of documenting the income, applying the article 24 mechanism and coordinating his French return with his IRS obligation, rather than seeking a miracle rate. On this type of file, French CPA support for foreign companies serves precisely as a coordination point between the two administrations.

• The treaty never removes the US reporting obligation of US persons: IRS return and, where applicable, foreign account reporting.
• The French tax credit is capped at the French tax on the income: it does not refund a higher US tax.
• The characterisation of income (dividend, interest, royalty, business profit) governs the applicable article and rate: a wrong characterisation distorts the whole analysis.
• Tax residence must be established under article 4 B of the CGI and the treaty before any rate is applied.
• Withholding thresholds and rates must be checked against the text in force and the BOFiP, as the protocols amended certain rules.

1. Determine the tax residence of each person or company concerned, under the treaty.
2. Check the permanent establishment situation for any business activity (articles 5 and 7).
3. Characterise each income item (dividend, interest, royalty, profit, salary) and identify the applicable article.
4. Identify the State of source and the State of residence for each flow.
5. Apply the treaty withholding rate and keep proof of foreign taxation.
6. Compute the article 24 tax credit and report it on form 2047, then the 2042 return.
7. For US persons, coordinate with the US reporting obligation.

This framework applies to an individual as to a director, and varies depending on whether you hold securities, a US company or a French structure managed from abroad. A foreign company active in France may also need to appoint a tax representative for a foreign company depending on its situation.