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Additional credits for US citizens residing in France

The IRS previously announced in a 13 June status report on the tax court case Eshel v. Commissioner (No. 8055-12) that US citizens who are residents in France may claim tax credits for Generalised 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 ten 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, US citizens residing in France could not apply them against their US tax debt.

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 US income tax debt.

The court explored whether these contributions were in fact social security taxes covered under the 'Totalisation Agreement' between the United States and France or whether these were French taxes relievable under the US-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 Totalisation 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 US 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.

The announcement marks a positive development for all US 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 ten 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 US companies or businesses with tax-equalised 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. 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 US return.

If you have any questions with regards to these changes please contact Richard Tonge, Grant Thornton US.

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