A foreigner domiciled in the U.S. is subject to U.S. estate taxes on the fair market value of worldwide assets at date of death. This includes all real or personal, tangible or intangible property wherever situated. For 2020, the estate of a foreigner domiciled in the United States is allowed an exemption of $11,580,000 before the imposition of estate tax. In addition, an unlimited marital deduction is allowed to the estate for property passing to a U.S. citizen surviving spouse.
In an effort to avoid double transfer taxation, France and the United states entered a transfer tax treaty. The treaty applies to the United States Federal gift tax and the Federal estate tax, including the tax on generation-skipping transfers as well as to the French duty on gifts and the duty levied on succession.
Under the treaty, the nation in which the individual is deemed to have been domiciled at death, taxes the worldwide assets of the estate. The nation in which the individual is not deemed to have been domiciled at death taxes certain property located within that nation. The treaty provides that the worldwide taxing nation provides an credit for the amount of the tax collected by the non-domicile nation.
The treaty is triggered in the following instances:
1. Estates of decedents whose domicile at death was in France.
2. Estates of decedents that are taxable by the United States by reason of the decedent's domicile therein or citizenship thereof at death.
3. Gifts of donors whose domicile at the time of making a gift was in France.
4. Gifts which are subject to the taxing jurisdiction of the United States by reason of the donor's domicile therein or citizenship thereof at the time of making of a gift.
Determination of Domicile
The treaty follows the modern approach to estate taxation, whereby the determination of a decedent’s domicile rather than the situs of the decedent’s property is the principal criterion for determining the allocation of taxes and the distribution of tax credits.
The treaty sets forth a series of rules used to determine which of the two nations the individual was domiciled in at the time of death. First, France and the United States will each apply its own domestic law to determine if the individual was domiciled there. Under United States law a person is considered to be domiciled in the U.S. for transfer tax purposes if he or she lives in the U.S. and has no present intention of leaving.
In instances where both countries have determined under their respective law that the individual was domiciled in their nation at death, the individual will be deemed to be domiciled in the country of their citizenship provided that the they meet one of the following requirements:
(i) They had a clear intention to retain domicile in the nation of their citizenship and were domiciled in the other nation in the aggregate less than 5 years during the 7-year period ending with the year of his death or the making of a gift; or
(ii) They were domiciled in the nation in which they do not have citizenship in the aggregate less than 5 years during the 7-year period ending with the year of his death or the making of a gift, provided that he/she was living there for work or as the spouse or other dependent of a person living there for work; or
(iii) They were domiciled in the nation in which they did not have citizenship in the aggregate less than 7 years during the 10-year period ending with the year of death or the making of a gift, provided that he/she was in that nation by reason of a renewal of an assignment/employment or as the spouse or other dependent of a person present in that nation for such a purpose.
Where an individual would be determined to be domiciled in both France and the United States and the individual is not subject to the above citizenship rules (i.e. the individual is a citizen of neither or citizen of both France and the United States), then the following are applied to determine domicile:
(i) They will be deemed to be domiciled in the country in which they maintained a permanent home;
(ii) If the individual maintained a permanent home in both or neither countries, they will be deemed to be domiciled where their personal relations were closest;
(iii) If the degree of personal relations cannot be determined, they will be deemed to be domiciled where they had a habitual abode;
(iv) Where a habitual abode was maintained in both countries, France and the United States will confer to determine which nation the individual was domiciled in.
As can be seen from the lengthy tie-breaker rules of the treaty, an individual will ultimately be considered to be a domiciliary of France or the United States, not both. Where the individual is found to be a domiciliary of France at the time of death, then France will tax the worldwide estate of the decedent. Where the individual is determined to be a domiciliary of the United States at the time of death, the United States will likewise tax the worldwide estate.
The nation that is not the domicile of the decedent will tax estate assets located within its borders, subject to the following rules:
Real Property Located within the Nation
Real property may be taxed by the nation in which the real property is located.[1] Real property also includes investments in a business with 50% or more of its assets held as real property within the country.
Business Property Located within the Nation
Business assets used in a fixed place of business (through which the business of an enterprise is wholly or partly carried on) may be taxed by the state in which the permanent establishment exists. A permanent establishment includes: a seat of management; branch; office; factory; workshop; warehouse; mine, quarry, and does not include business assets used merely to store goods, display goods, process, advertise, or that is maintained for purchasing.
Moveable Property Located within the Nation
Tangible movable property other than currency may be taxed by the state in which it is situated provided it has not been taxed by the other nation as business property. Tangible movable property which is in transit is considered situated at the place of destination. Tangible moveable property for normal personal or family use may be taxed only by the nation in which the individual was domiciled.
Stocks, Cash, Other Intangible Property
Shares or stock in a corporation, debt obligations, other intangible property, and currency may be taxed by a nation only if the decedent or donor was a citizen of or was domiciled in that nation at the time of death or the making of a gift, and is taxable by that nation under its laws.
Debt
To the extent debts are deductible according to the internal law of the nation they are deducted from the gross value of the property which may be taxed by that nation, in the proportion that such gross value bears to the gross value of the entire property wherever situated. This means that disproportionate debt to asset value within the nation will be disregarded, and the asset will be reduced by the proportionate debt of the worldwide estate.
Charitable Exemptions and Deductions
The treaty also provides that France and the United States will not impose taxation on gifts to charitable entities where the transaction would not be taxed had the entity been created in their respective nation, and where the entity:
· Holds tax-exempt status
· Is organized and operated exclusively for religious, charitable, scientific, literary, educational or cultural purposes
· Receives a substantial part of its support from contributions from the public or governmental funds.
Credits
Under the treaty, each state imposes its tax, and allows exemptions, deductions, credits, and other allowances, in accordance with its laws.[2] Then an exemption or credit can be sought from the nation in which the individual was determined to have been domiciled at death. The amount of the credit is equal to the tax paid to the nation in which the individual was not deemed to have been domiciled. For instance, where an individual owns property in France but is determined to have been domiciled in the United States at the time of death, the estate can apply for a credit reducing United States estate tax by the amount of tax imposed by France. The exact amount of the credit is subject to adjustment as set forth in the treaty.
[1]“This is a primary, but not exclusive, taxing right. Nothing in the Convention, for example, precludes the United States from taxing the transfer of French situs real property by an individual domiciled, for purposes of the Convention, in the United States, provided the United States allows a credit for the French tax.” Department of The Treasury Technical Explanation of The Protocol, at page 3.
[2] “Contracting State may nevertheless take into account such exempted property that is otherwise taxable under its internal law in calculating the amount of tax on the property that may be taxed in that Contracting State pursuant to the Convention. In other words, such exempted property may be included in the tax base for purposes of determining the applicable marginal rate of tax.” Department of The Treasury Technical Explanation of The Protocol, at page 12.
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