Scope of the FR-USA Totalization Agreement is clarified: French CSG and CRDS are creditable for US citizens

What was the issue?

If you are a US citizen, you have tax obligations in the USA. If additionally, you are filing and paying taxes in France as a French tax resident, it is possible that you may be taxed twice on the same revenue.
For the most part, France and the USA have resolved the double taxation issue: for income related taxes, you can apply for foreign tax credits; for social security taxes, the Totalization Agreement in place between both countries allows for a coordinated social security coverage.

Issues arose with the implementation of new taxes in France starting the 1990s, grouped under a common title “Prélèvements sociaux” or “Social Contributions”:

  • the CSG (Contribution Sociale Généralisée) starting 1991
  • the CRDS (Contribution au Remboursement de la Dette Sociale) starting 1996
  • the Prélèvement Solidarité starting 2012
  • the Contribution de Solidarité pour l’Autonomie starting 2013
  • the Prélèvement Social from 1997 to 2018
  • the Contribution Additionnelle RSA from 2008 to 2012

The titles of these taxes are misleading; they were put in place to diversify France’s funding sources for its social security system, but paying them does not impact an individual’s social security coverage in France.

Nevertheless, up until June 13th 2019, the IRS denied taxpayers foreign tax credits for CSG and CRDS contributions paid in France, considering that these were covered by the Totalization Agreement signed between France and the USA.

The matter was brought before the US Courts with the case of Eshel v. Commissioner. In April 2014, the US Tax Court first concluded that these taxes (all of which entered into force after the Totalization Agreement was signed in 1987), “amended or supplemented” the French Social Security Laws and where, as such, within the scope of the Totalization Agreement (142 T.C. 197 (2014)).

The petitioners appealed the decision, and in August 2016, the US Court of Appeals for the DC Circuit reversed the judgment and remanded the case to the Tax Court (831 F.3d 512 (D.C. Cir. 2016)).

On June 13th 2019, a joint status report was filed before the US Tax Court by the parties. This document indicated that the USA and France had, via diplomatic means, collaboratively determined that the CSG and CRDS were not in the scope of the 1987 Totalization Agreement.

What is the practical outcome for taxpayers?

The IRS reviewed its position: CSG and CRDS are income related taxes and can thus benefit from foreign tax credits, as they are not in the scope of the Totalization Agreement.

It is however not clear if all the other social contributions listed above can also benefit from this position reversal: both the joint status report and the IRS website refer only to the CSG and CRDS and not “Social Contributions” in general. Yet applying the same reasoning, all social contributions that do not impact social security coverage should benefit from the foreign tax credit.

Stakes can be appreciable for affected taxpayers: if the CSG rate was initially set at 1,1% of activity revenues in 1991, its application scope has since significantly increased, as has its rate, which is (as of 2019) set at 9,2%. If the CRDS rate remains at 0,5%, the Prélèvement Solidarité has increased from 2% to to 7,5% in 2019.
The global tax rate for social contributions in 2019 is 17,20%. They are one of the highest return taxes in France.

Claims for refunds are now open going back to tax year 2009. Individual tax payers will need to file 1116 and 1040X forms and indicate “French CSG/CRDS Taxes” in red at the top of 1040X files.

We can help you identify if you are eligible to claim a foreign tax credit (and if so, quantify said credit) and assist you in filing amended tax returns.
Our assistance can be provided either in coordination with your regular US tax advisor if you have one, or with the help of our US colleagues in our international tax networks.

Your contact person : Marine Perrot – Qualified French Lawyer, Paris Bar

 

Article dated October 4th, 2019 – Author : Me Marine Perrot, Attorney at the Paris Bar