Not All Tax Treaties Are Created Equal: US-French Social Security & Pension Treatment
Please note: The details contained in this post have been reviewed and remain correct as at February 2020.
While many US tax treaties have the same or similar language in them, one needs to pay attention, as the devil is in the detail.
One such instance is how social security and pension distributions are treated in the US-French income tax treaty. For example, according to the Treaty (as amended by the 2004 and 2009 Protocols), payments under the social security legislation or similar legislation of a Contracting state to a resident of the other Contracting State or to a citizen of the United States shall be taxable only in the first-mentioned State. In English, social security income is taxed based on its source, a US social security payment made to a US citizen resident of France will be taxable only in the US and a French social security payment made to a US citizen resident of the US or France will only be taxable in France.
The same social security payment above, made to a US citizen resident of Switzerland would have a completely different treatment. In general, under the US-Swiss Income Tax Treaty, social security payments and other public pensions paid by a Contracting State to an individual who is a resident of the other Contracting State may be taxed in that other State. However, such payments may also be taxed in the first Contracting State according to the laws of that State (subject to a maximum 15% of the gross amount of the payment). So, a US citizen living in the US could be taxed up to 15% in Switzerland on Swiss social security payments (though Switzerland does not currently impose a tax on social security paid to non-residents of Switzerland), and Swiss citizens living in Switzerland would be taxed at 15% in the US on their US social security payments.
French pension distributions under the current US-French Income Tax Treaty (as revised by 2009 Protocol) are taxed based on a revised residency rule. If the US citizen resides in the US (or possibly France) and receives distributions from a French pension plan, that distribution is subject to tax only in France. A French resident who receives pension distributions from a US payor is subject to tax only in the US The reason that a US citizen resident in France is possibly only taxable in France on a French pension distribution is that there is some uncertainty if the treaty, as written, would be applicable due to the residency rules of the treaty. One should consult a tax professional when determining what position they are comfortable taking. However, based on the example prepared by the Joint Committee on Taxation the intention was that France would have sole right to tax French pension regardless of where the US citizen resides 1.
One must also be wary of the saving clause included in Tax Treaties. The saving clause is a clause included in all treaties which limits the use of the treaty by US citizens and residents. Due to the citizenship based tax system of the US, the saving clause is required to limit the ability of US persons to escape US tax based on the treaty. However, the saving clause is not uniform and can cover different aspects of a treaty based on the horse trading between the US and treaty country when concluding Tax Treaties and Protocols. The above social security and pension treatments are exempt from the saving clause under article 29 of the US-French Income Tax Treaty and thus open to US citizens to benefit from. However, the US-Swiss saving clause precludes a US citizen or resident from benefiting from the pension article of that treaty.
There are many differences between the various US Tax Treaties. One must make sure not to rely on past experience because, as the blog title indicates, not all treaties are created equal. Each has its own unique provisions and requires it’s own review and analysis.
1. From page 16 of Explanation of Proposed Protocol to the Income Tax Treaty Between the United States and France: Under the proposed protocol, a U.S. citizen who resides in the United States (or France) and receives distributions from a French pension plan is subject to tax on that distribution only in France. A French resident who receives pension distributions from a U.S. payor is subject to tax only in the United States.