“Congratulations to lawyers Stuart Horwich & James Lieber for their work and success in achieving this result for Americans abroad.”

A Quick Synopsis

U.S. citizens considering retiring abroad on their U.S. pensions, investment income and Social Security should explore the special benefits of becoming a resident of France (and I don't mean just the wine) … https://t.co/JvLMXlCK9T pic.twitter.com/XECemSynPH

— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) February 6, 2023

Because of the specific provisions of the France/U.S. tax treaty, U.S. citizens who are resident in France are eligible to use French income tax paid as a tax credit against the 3.8% Obamacare surtax. Depending on the terms of the tax treaty in their country of residence, it is possible that U.S. citizens residing in other countries may be able to use taxes in their country of residence as a tax credit against the 3.8% Obamacare surtax.

As described below, I expect that to be able to use foreign taxes paid as a credit against the 3.8% Net Investment Income Tax, the “Double Taxation” article in the relevant tax treaty must include a specific provision for “U.S. citizens residing in the country of residence”. (Canada comes to mind. But, I will have to some more research …)

Note that it is very possible that this decision will be appealed. The US government will be unhappy with this decision.

For more detail and analysis, keep reading. This post in organized into the following parts:

Part A – Introduction – Background
Part B – Before moving to another country, pay special attention to the tax treaty between the US and that country!
Part C – MATTHEW AND KATHERINE KAESS CHRISTENSEN V. UNITED STATES – Why does the US/France tax treaty work for them?
Part D – Not all tax treaties are the same! What kind of tax treaty provision create the eligibility to use foreign tax credits to offset the Obamacare surtax?
Part E – It’s great that I am entitled to a foreign tax credit. But, how is the tax credit to be calculated?
Part F – The Question: I live in country X. May I use foreign tax credits to offset the Obamacare surtax?
Part G – Dang! Can I get a refund? It appears that refunds ARE available to those who improperly were charged the Obamacare surtax!
Appendix – ARTICLE 24 Of the 1994 France/US Tax Treaty with the later protocols taken into account

Part A – Introduction – Background

As discussed in “Bonjour Part 1“, the special tax benefits available to U.S. citizens living in France continue!

More “Change you can believe in”

All U.S. citizens abroad are subject to the Obamacare surtax which is a tax to finance health care for resident Americans. The tax is mandated by IRC 1411 which is found in Chapter 2A. It is a surtax on investment income (interest, dividends and capital gains). Notably Americans abroad do not and cannot benefit from Obamacare. The result of the Christensen decision is that residents of certain countries (France yes) are able to use foreign tax credits to offset the Obamacare tax and residents of other countries (Korea no) not. This is another example of the lunacy, unfairness and arbitrariness of U.S. citizenship taxation. That said, the same lunacy, unfairness and arbitrariness is what makes the situation so uniquely American.

Part B – Before moving to another country, pay special attention to the tax treaty between the US and that country!

U.S. citizens with large amounts of investment income, who wish to move from the United States and retain U.S. citizenship, should consider whether they are moving to a “preferred country” where a tax credit on investment income is available to avoid double taxation.

Hint … “Bonjour”. Don’t worry you don’t have to move to Korea to own a Hyundai. In fact you can buy one in France!

Part C – MATTHEW AND KATHERINE KAESS CHRISTENSEN V. UNITED STATES – Why does the US/France tax treaty work for them?

On October 23, 2023 Judge Horn reissued her opinion in MATTHEW AND KATHERINE KAESS CHRISTENSEN V. UNITED STATES. (The opinion was originally issued on September 13, 2023.) The case ruled that the Christensens, U.S. citizens living in France, were entitled to use French taxes paid on investment income, as a tax credit against the U.S. tax imposed under the Obamacare 3.8% surtax found in IRC 1411. Significantly the ruling was specific to the US/France tax treaty. Depending on the terms of their tax treaty, U.S. citizens residing in other countries may be eligible for this benefit.

(This decision (although perhaps with broader application) is specific to the terms of the U.S./France tax treaty. Those wishing to fully understand this decision are encouraged to read an earlier post where I described the unusual foreign tax credit provisions in the U.S. France tax treaty.)

A direct link to the decision is here:

https://ecf.cofc.uscourts.gov/cgi-bin/show_public_doc?2020cv0935-66-0

A pdf of the decision is available here:

Christensen show_public_doc

Part D – Not all tax treaties are the same! What kind of tax treaty provision create the eligibility to use foreign tax credits to offset the Obamacare surtax?

The general provision – France/US tax treaty paragraph 2(a):

All U.S. tax treaties contain a general provision to mitigate the effects of double taxation. The following general provision (without more), which applies to ALL U.S. citizens/residents regardless of their country of residence, allows for the tax credit only to the extent that the credit is allowed under U.S. domestic law. This general provision typically reads:

1. (a) In accordance with the provisions and subject to the limitations of the law of the United States (as it may be amended from time to time without changing the general principle hereof), the United States shall allow to a citizen or a resident of the United States as a credit against the United States income tax:

Under this general provision, if the Internal Revenue Code doesn’t allow for the tax credit, the individual is not entitled to the tax credit. The Christensen’s were NOT allowed the tax credit under this general provision.

As confirmed by the court (on page 86):

For these reasons, the court concludes that paragraph 2(a) of Article 24 of the 1994 Treaty, as amended, subjects its allowance of foreign tax credits to the “provisions” and “limitations” of the I.R.C. relating to foreign tax credits, including the restrictions of I.R.C. §§ 27 and 901(a) that foreign tax credits apply only against “the tax imposed by this chapter,” Chapter 1 of the I.R.C. See I.R.C. §§ 27, 901(a). The statute at I.R.C. §§ 27 and 901(a) foreclose the availability of foreign credits against the net investment income tax, which is imposed by I.R.C. § 1411, in Chapter 2A of the I.R.C. under paragraph 2(a) of Article 24 of the 1994 Treaty, as amended. The enactment of the net investment income tax subsequent to the 1994 Treaty, as amended, in I.R.C. § 1411, was established subject to the restriction of foreign tax credits to Chapter 1 of the I.R.C. and does not “chang[e] the general principle” of the 1994 Treaty, as amended, (alteration added), which is consistent with the plain text of paragraph 2(a) of Article 24 of the 1994 Treaty, as amended. Accordingly, the court holds that paragraph 2(a) of Article 24 of the 1994 Treaty, as amended, does not provide a foreign tax credit against the net investment income tax imposed by I.R.C. § 1411.

A separate treaty provision for U.S. citizens resident in the treaty partner country – France/US tax treaty paragraph 2(b):

This provision can be identified with language similar to:

(b) In the case of an individual who is both a resident of France and a citizen of the United States:

Some U.S. tax treaties include specific provisions to benefit U.S. citizens who are tax residents of the treaty partner country. These provisions create (under certain circumstances) a tax credit for U.S. citizens which is separate to and independent of the general provision described above. Credits available under this separate provision are created by the tax treaty and are therefore not dependent on U.S. domestic law. The U.S./France tax treaty includes such a provision. These provisions are very complicated, difficult to read and difficult to understand. When reading the treaty you would look for a specific provision that applies to U.S. citizens who are residents of the treaty parter country. An example is the following paragraph in the 1994 France/US tax treaty:

(b) In the case of an individual who is both a resident of France and a citizen of the United States:

This is the language that may create a tax credit under the treaty that is NOT dependent on the terms of the U.S. Internal Revenue Code. The treaty created a foreign tax credit that exists independently of the Internal Revenue Code. It was this provision that the Christensens successfully relied upon in order to use French taxes paid as a credit against the U.S. Obamacare surtax. As confirmed by the court (page 87):

Therefore, by the plain text of paragraph 2(b) of Article 24 of the 1994 Treaty, as amended, and by defendant’s description, paragraph 2(b) of Article 24 of the 1994 Treaty, as amended, provides for a treaty-based foreign tax credit against United States income tax commensurate with French income tax paid.

As relevant to the case brought by plaintiffs, the difference between paragraph 2(a) of Article 24 of the 1994 Treaty, as amended, and paragraph 2(b) of Article 24 of the 1994 Treaty, as amended, is that while paragraph 2(a) expressly conditions the availability of a foreign tax credit on the “provisions” and “limitations” of the United States tax laws, paragraph 2(b) does not contain such “provisions” and “limitations” language. As discussed above, the “provisions” and “limitations” language of paragraph 2(a) of Article 24 of the 1994 Treaty, as amended, is the reason that the restrictions of I.R.C. §§ 27 and 901(a) to apply foreign tax credits only against taxes imposed by Chapter 1 of the I.R.C., prohibits foreign tax credits pursuant to paragraph 2(a) of Article 24 of the 1994 Treaty, as amended, against the net investment income tax imposed by I.R.C. § 1411, which is in Chapter 2A of the I.R.C. Because paragraph 2(b) of Article 24 of the 1994 Treaty, as amended, lacks such restraining language incorporating the restriction of I.R.C. §§ 27 and 901(a) to apply foreign tax credits only against taxes imposed by Chapter 1 of the I.R.C., a potential conflict exists between the text of paragraph 2(b) and the I.R.C., unless the treaty or statutory provisions can be interpreted to avoid or resolve such potential conflict. If paragraph 2(b) of Article 24 of the 1994 Treaty, as amended, and I.R.C. §§ 27 and 901(a) can be interpreted to allow a foreign tax credit against the net investment income imposed by I.R.C. § 1411, plaintiffs would succeed in establishing legal entitlement to a foreign tax credit in the above captioned case.

In summary, there is a distinction between foreign tax credits created by statute and foreign tax credits created by treaty

Part E – It’s great that I am entitled to a foreign tax credit. But, how is the tax credit to be calculated?

To say that a foreign tax credit is available, is different from calculating the amount of the foreign tax credit. Being mindful of this issue, the Judge concludes the decision with:

CONCLUSION

Having resolved the legal question regarding the availability of foreign tax credits against the net investment income tax under the 1994 Treaty, as amended, there remains an outstanding matter which the parties agree prevents the court from entering judgment in this case at this time. The parties have not agreed on how to resolve the applicability and calculation of the three-bite rule to plaintiffs’ tax refund in this case. Consistent with the foregoing analysis, plaintiffs’ motion for partial summary judgment is GRANTED IN PART AND DENIED IN PART, and defendant’s cross-motion for partial summary judgment is GRANTED IN PART AND DENIED IN PART. For the reasons stated above, the court concludes that paragraph 2(a) of Article 24 of the 1994 Treaty, as amended, does not provide a foreign tax credit against the net investment income tax for the French income taxes paid by plaintiffs. The court also concludes, however, that paragraph 2(b) of Article 24 of the 1994 Treaty, as amended, can provide a foreign tax credit against the net investment income tax imposed by I.R.C. § 1411 for the French income taxes paid by plaintiffs. Further proceedings regarding the three-bite rule calculation will be scheduled in a separate Order.

IT IS SO ORDERED.

s/Marian Blank Horn
MARIAN BLANK HORN
Judge

Yes, the wheels of justice grind slowly.

Part F – The Question: I live in country X. May I use foreign tax credits to offset the Obamacare surtax?

It depends on the tax treaty. I would expect tax professionals around the world to assess the impact of the Christensen decision on U.S. citizens resident in their country. I suspect that the answer depends largely on the age of the treaty. For example, for residents of Norway and Tunisa the answer is a clear NO. For residents of Canada, I suspect that the answer “may” be YES (I will write a separate post for Canadians).

Generally to be able to use foreign taxes paid as a credit against the 3.8% Net Investment Income Tax, I believe that “Double Taxation” article must include a specific provision for “U.S. citizens residing in the country of residence”.

Part G – Dang! Can I get a refund? It appears that refunds ARE available to those who improperly were charged the Obamacare surtax!

As noted in the decision on page 90:

The distinction between statutory and treaty based foreign tax credits is supported by another provision of the I.R.C., at I.R.C. § 6511, which concerns the period of limitations for claims by taxpayers of refunds or credits. Subparagraph (d)(3) of I.R.C. § 6511 is titled “Special rules relating to foreign tax credit,” and provides:

If the claim for credit or refund relates to an overpayment attributable to any taxes paid or accrued to any foreign country or to any possession of the United States for which credit is allowed against the tax imposed by subtitle A in accordance with the provisions of section 901 or the provisions of any treaty to which the United States is a party, in lieu of the 3-year period of limitation prescribed in subsection (a), the period shall be 10 years from the date prescribed by law for filing the return for the year in which such taxes were actually paid or accrued.

Appendix – ARTICLE 24 Of the 1994 France/US Tax Treaty with the later protocols taken into account

ARTICLE 24

Relief From Double Taxation

1. (a) In accordance with the provisions and subject to the limitations of the law of the United States (as it may be amended from time to time without changing the general principle hereof), the United States shall allow to a citizen or a resident of the United States as a credit against the United States income tax:

(i) the French income tax paid by or on behalf of such citizen or resident;

(b) In the case of an individual who is both a resident of France and a citizen of the United States:

(i) the United States shall allow as a credit against the United States income tax the French income tax paid after the credit referred to in subparagraph (a) (iii) of paragraph 2. However, the credit so allowed against United States income tax shall not reduce that portion of the United States income tax that is creditable against French income tax in accordance with subparagraph (a) (iii) of paragraph 2;
(ii) income referred to in paragraph 2 and income that, but for the citizenship of the taxpayer, would be exempt from United States income tax under the Convention, shall be considered income from sources within France to the extent necessary to give effect to the provisions of subparagraph (b) (i). The provisions of this subparagraph (b) (ii) shall apply only to the extent that an item of income is included in gross income for purposes of determining French tax. No
provision of this subparagraph (b) relating to source of income shall apply in determining credits against United States income tax for foreign taxes other than French income tax as defined in subparagraph (e) ; and
(c) In the case of an individual who is both a resident and citizen of the United States and a national of France, the provisions of paragraph 2 of Article 29 (Miscellaneous Provisions) shall apply to remuneration and pensions described in
paragraph 1 or 2 of Article 19 (Public Remuneration) , but such remuneration and pensions shall be treated by the United States as income from sources within France.
(d) If, for any taxable period, a partnership of which an individual member is a resident of France so elects, for United States tax purposes, any income which solely by reason of paragraph 4 of Article 14 is not exempt from French tax under this Article shall be considered income from sources within France. The amount of such income shall reduce (but not below zero) the amount of partnership earned income from sources outside the United States that would otherwise be allocated to partners who are not residents of France. For this purpose, the reduction shall apply first to income from sources within France and then to other income from sources outside the United States. If the individual member of the partnership is both a resident of France and a citizen of the United States, this provision shall not result in a reduction of United States tax below that which the taxpayer would have incurred without the benefit of deductions or exclusions available solely by reason of his presence or residence outside the United States.
(e) For the purposes of this Article, the term “French income tax” means the taxes referred to in subparagraph (b) (i) or (ii) of paragraph 1 of Article 2 (Taxes Covered), and any identical or substantially similar taxes that are imposed after the date of signature of the Convention in addition to, or in place of, the existing taxes.

2. In the case of France, double taxation shall be avoided in the following manner.
(a) Income arising in the United States that may be taxed or shall be taxable only in the United States in accordance with the provision of this Convention shall be taken into account for the computation of the French tax where the beneficiary of such income is a resident of France and where such income is not exempted from company tax according to French domestic law. In that case, the United States tax shall not be deductible from such income, but the beneficiary shall be entitled to a tax credit against the French tax. Such credit shall be equal:
(i) in the case of income other than that referred to in subparagraphs (ii) and (iii), to the amount of French tax attributable to such income;
(ii) in the case of income referred to in Article 14 (Independent Personal Services), to the amount of French tax attributable to such income; however, in the case referred to in paragraph 4 of Article 14 (Independent Personal Services), such credit shall not give rise to an exemption that exceeds the limit specified in that paragraph;
(iii) in the case of income referred to in Article 10 (Dividends), Article 11 (Interest), Article 12 (Royalties), paragraph 1 of Article 13 (Capital Gains), Article 16 (Directors’ Fees), and Article 17 (Artistes and Sportsmen), to the
amount of tax paid in the United States in accordance with the provisions of the Convention; however, such credit shall not exceed the amount of French tax attributable to such income.