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Tax relief for U.S. citizens residing in France

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Tax relief for U.S. citizens residing in FranceThe IRS has updated guidance on IRS.gov to offer retroactive relief from certain French social taxes paid by U.S. taxpayers residing in France.

The IRS previously announced in a June 13 status report on the Tax Court case Eshel v. Commissioner (No. 8055-12) that U.S. citizens resident in France may claim tax credits for Generalized Social Contributions (CSG) and Contributions for the Repayment of Social Debt (CRDS) made to France. The new guidance reiterates that the IRS will not challenge foreign tax credits claimed for CSG and CRDS payments and further provides that taxpayers may claim a refund for such payments made over the past 10 years.

Both the CSG and CRDS are government-mandated contributions that residents of France must pay based on a percentage of their taxable income and gains. Prior to Eshel, foreign tax credits for CSG and CRDS were disallowed on the basis that these were social security contributions rather than French income taxes paid. Thus, U.S. citizens residing in France could not apply them against their U.S. tax debt.

Eshel case The taxpayers in Eshel were both American and French residents residing in France. In 2012, they received a deficiency notice from the IRS regarding their 2008 and 2009 tax returns. In response, they filed a claim against the IRS arguing that CSG and CRDS are not social contributions but are income taxes, which can be applied against the their U.S. income tax debt. The court explored whether these contributions were in fact social security taxes covered under Totalization Agreement between the United States and France or whether these were French taxes relievable under the U.S.-France double-taxation treaty. The issue on appeal before the D.C. Circuit was whether or not the CSG and CRDS enacted into law after that Totalization Agreement was adopted, “amend or supplement” the French social security laws covered by the agreement, and thus fall within the scope of the agreement.

On remand, the Tax Court reviewed the positions previously taken in similar cases and, on appeal, it was declared that insufficient consideration was given to the text and the official views of the United States and French government. After much litigation, the taxpayers’ claim was discussed between U.S. and French diplomats to determine how to interpret relevant income tax law. The IRS announced the findings in court, conceding that the taxpayers did not file deficient taxes and were entitled to a refund for taxes improperly collected by the IRS.

Next steps The announcement marks a positive development for all U.S. citizens residing in France who have not been able to apply CSG and CRDS credits against their income taxes and may now be entitled to a tax refund. The refund claim must be filed within 10 years of the day after the due date of the return (not including extensions) for the year in which the CSG and CRDS payments relate.

For individual taxpayers, additional foreign tax credit may be beneficial in reducing residual Federal tax due in prior years and may increase amounts carried forward.

Multinational U.S. companies or businesses with tax-equalized employees working in France currently or historically, should benefit from tax cost savings. The CSG and CRDS remitted on behalf the employees while they were working and living in France may be recovered through amended tax filings and equalization settlements. In scenarios where these payments were included as taxable compensation to employees, the credits might be limited depending on the nature and sourcing of the compensation. Additionally, per the company policy, payments grossed up for income, social and unemployment taxes, should be reviewed to identify opportunities to recover the incremental tax costs. The IRS clarified in a revised statement on July 19, 2019, that employers cannot seek refunds related to CSG and CRDS withheld or paid on behalf of employees and that amended individual federal tax filings are the only allowable means to claim a credit.

Taxpayers impacted by the adoption of the pay-as-you-earn salary withholding from January 2019 should pay particular attention to this change as they may be in the best position to benefit from additional foreign tax credits on their 2018 and 2019 U.S. return.

For more information, contact:
Richard Tonge
Principal
Human Capital Services
T +1 212 542 9750

Linette Barclay
Managing Director
Human Capital Services
T +1 404 475 0204
Josh Jagust
Senior Manager
Human Capital Services
T +1 312 602 8331
John Neely
Senior Manager
Human Capital Services
T +1 404 704 0121

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