As a U.S. taxpayer, you can be taxed on three levels:
- Federal tax
- State tax
- Local taxes that may apply to certain cities such as New York City.
The Franco-American tax treaty* applies to movable capital received. This treaty only concerns federal personal and corporate income taxes. The federated states are not bound by this convention. Certain states such as Texas do not levy income tax.
I. Taxation of interest income from bond issues
According to Article 11 of the Convention, no withholding tax is levied on the interest and it is therefore taxable only in the State of residence of the beneficial owner.
However, interest relating to securities which carry a participation clause in the profits of the debtor or of an associated enterprise, within the meaning of Article 9** of the Convention, may be taxed in the source State at a rate not exceeding 15%.
II. Taxation of dividends
Dividends are taxable in the source state and in the state of residence, but taxation in the source state is in principle limited to 15% for individuals.
So, if you are a US tax resident and you receive dividends from French sources, you will therefore be withheld at source in France, this withholding being a foreign tax credit against US federal tax (which will apply at a rate of 15 or 20%). Don’t forget that you may also be taxed by the federal state, which will not necessarily take into account the tax paid in France.
To benefit from the reduced rate in France, you must use form 5000.
III. Determination of tax owed by a resident***
- Normal gross income: income of all kinds and from all sources (mainly wages and salaries, pensions, income from land, income from movable capital, profits from independent activities of an industrial and commercial character, whether small-scale, agricultural or non-commercial).
- Deduction of gross income: normal and necessary expenditure connected with the activity, certain pension and health contributions, losses incurred in the course of a professional activity, etc. (as a general rule, an employee’s expenses are not taken into account at this level).
- Personal itemized deductions: state taxes on income, on movable and immovable property, certain health expenses, employees’ professional expenses, medical expenses, donations to charities (ceilings and conditions apply).
V. Obligations under the FACTA regulations
The Foreign Account Tax Compliance Act (FATCA) is a U.S. extraterritorial tax law passed in 2010 and effective July 1, 2014. This regulation, whose objective is to combat tax evasion, requires non-US financial institutions (banks, life insurance companies, Undertakings for Collective Investment in Transferable Securities – UCITS – etc.) to identify and declare US taxpayers to the US tax authorities (IRS- Internal Revenue Service). It should be noted, however, that Raizers, as a Platform for Participating Financing, is not a French institution within the meaning of these regulations.
FATCA requires certain taxpayers holding foreign accounts or financial assets with a total value of at least $50,000 to report information relating to such assets and accounts directly in a specific form called Form 8938. This form must be attached to their annual tax return.
* FRENCH-AMERICAN CONVENTION OF 31 AUGUST 1994 MODIFIED BY THE BENEFICIALS OF 8 DECEMBER 2004 AND 13 JANUARY 2009: https://www.impots.gouv.fr/portail/files/media/10_conventions/etats-unis/etats-unis_convention-avec-les-etats-unis-impot-sur-le-revenu-impot-sur-la-fortune_fd_1835.pdf
** Article 9: associated enterprises where :
(a) an enterprise of a Contracting State participates directly or indirectly in the management, control or capital of an enterprise of the other Contracting State, or
(b) the same persons participate directly or indirectly in the management, control or capital of an enterprise of a Contracting State and an enterprise of the other Contracting State
*** Directorate General of Public Finance, the information contained in these examples is for illustrative purposes only and is not a substitute for official documentation from the U.S. tax administration.