How to Report French "Assurance Vie" Gains in the U.S.

[FrenchBaguette]

Dear Community,

I am a French citizen living in the U.S. and I own a French investment product called an "assurance vie." This is a specific type of account in France, and I’m not sure how it should be classified under U.S. tax regulations.

In this account, I hold funds in euros that generate interest. These interests are credited both monthly and at the end of the year.

In France, the gains would be taxed in two stages:

1. Social taxes (17.2%) are applied when the gains accrue. This does not apply as I do not live in France anymore.
2. Income taxes (12%) are applied when the money is withdrawn. This would apply.

My question is: how should I report these gains in the U.S.? Should they be declared as income when they accrue? If so, does this mean that I’ll be taxed in the U.S. when the gains accrue and then again in France when they’re withdrawn, leading to a combined tax rate  (12 % income taxes from France + income taxes in US on the gain) ?

I would greatly appreciate your guidance on how to handle this situation properly.

Thank you for your help!

Best regards,
Thomas

[FrenchBaguette]

Maybe my questions were not clear, just giving a short recap below:

• I hold a French "assurance vie" account, which generates gains (interest) in euros, credited monthly and annually.
• The money put here is guaranteed and there is a minimal rate guaranteed for each year - it usually ends up to be more (around 2/3%). So it is a very low risk and common investment in France.
• Since I no longer live in France, the social taxes (17.2% of each accrued interest) don’t apply to me anymore, but income taxes (12% of interest when money is withdrawn from the insurance vie account) would still apply in France when I withdraw the money.

My main questions are:

• Do I need to report the gains as income in the U.S. when they accrue, even if I don’t withdraw the money (I did not withdraw the money)?
• If so, would I face double taxation (U.S. taxes on gains as they accrue + French income taxes when withdrawn)?

Thanks for your help

[Opus 17]

I need to bring in an international tax expert @pk

My general understanding is as follows:

First as a baseline, if you are living in the US and either have a green card, dual citizenship, or pass the substantial presence test, you must file a US tax return that reports all your world-wide income.  If you are also required to file a return in another country, you can sometimes claim a credit or deduction for foreign taxes paid on the same income (if there is a tax treaty between the two countries.)

Now, regarding benefit accounts, and IF there is a tax treaty between US and the foreign country, there are special rules related to US Social Security, and foreign benefit payments that are deemed similar to US Social Security (government social benefits, or government mandated private investments that act like government benefits.)  The general rule is that if you receive these types of government social benefits from another country, you have two options. 

1. Follow the tax treaty.  Your foreign government benefit is taxed in the foreign country according to their laws (including their laws for ex-pats) and then you leave the foreign benefit off your US tax return. 

2. Ignore the tax treaty, and report the income as taxable in the US. 

Whether you pick 1 or 2 depends on the different tax rates, and how easy it is to avoid any foreign taxes you might have to pay in the foreign country.  If you can't avoid those taxes either way because of how they enforce their tax laws, you are probably better off with #1.

I don;t know if the specific account you are talking about meets those rules.   Hopefully our expert will know more. @pk

[pk]

@FrenchBaguette , generally agreeing with my colleague @Opus 17  on the subject of  foreign pensions/ social security etc.,  Assurance Vie  presents   ( an investment vehicle  wrapped by a life insurance, like a ULIP) a different issue.  Even though  its distributions  are  generally post  retirement age, is  France tax advantaged  like US 401(k)s, from IRS perspective it is treated as a PFIC  ( Passive Foreign Investment Company).  Thus  you would have to recognize  the investment/saving through filing a form 8621 -- unless of course  you can fall into  one of the exceptions -- e.g. your investment is  < US$25,000.  The PFIC regime is quite painful and needs to be followed up every year  ( i.e. report every year ).  My strong suggestion would be  to  ---   (a)  seek  tax attorney/ professional help -- someone who is familiar with PFIC regime;  (b)  use Mark-to-Market to recognize  and pay taxes  on yearly earnings  ( deemed distributions ) --- note this "deemed  excess distribution may require to be allocated over the whole holding period;    and (c) if your long term goal is to stay in the USA, divest --I say this  because in addition to  US tax issues  there is also, as I understand from literature/ commentary, the tax benefits in France at distribution are available ONLY to residents of France.

There are ways around  this regime but  these  are quite iffy, IMHO.

My knowledge of  PFIC is limited and I generally rely on  text of sections 1297 and 1298 plus refs there ion.  I have not looked into  tax court case law.

Is there more I can do for you ? 

[FrenchBaguette]

Thank you @pk, I think it is already a great help you provided me.

I understand that it could be taxed as a PFIC unless there are some exceptions.

Maybe it could also be considered as a foreign bank financial account in which case the interest would be taxed yearly in US (and then taxed in France if I go back to France).

I think at the end, you are right, and I should consider meeting with a tax professional.

Best regards and thanks for the information

[pk]

@FrenchBaguette  there is zero chance that the  account would be a bank  or financial account  -- there is quite a bit if info on the  web pages of  tax lawyers dealing with expats  and these generally suggest that   this French entity is considered a PFIC.  I just have not found any case law challenging this IRS position.  The penalties  for mishandling this is quite onerous and therefore please  seek help from tax professional / attorney whom is familiar with PFICs -- not just international taxation.

Sorry I could not bring you any good news on this.  Generally  US tax laws discourage  US persons being involved in PFICs.

[FrenchBaguette]

@pk , I read here that an account "assurance vie" can be treated as a foreign bank account (last messages).

https://ttlc.intuit.com/community/taxes/discussion/we-are-telling-me-form-8621-is-mandatory-for-assu... 

and here

https://ttlc.intuit.com/community/tax-credits-deductions/discussion/do-you-consider-assurance-vie-as...