French-American families often start building up savings for their children at an early age. The natural instinct is to choose the vehicle offering the most favourable tax treatment in the family’s country of residence. The real question, however, is whether that advantage survives once the rules of the other country are applied.

Four questions to consider

Before opening an account, families should determine who will fund it, who will be regarded as its legal and tax owner in each country, which assets it will hold, and where the child is likely to live when the funds are used.

These factors may affect the taxation of income and gains, the consequences of transferring wealth to the child and the applicable reporting requirements.

French investment vehicles

Life insurance remains one of the most flexible French investment vehicles. As long as no withdrawal is made, the gains are not subject to French income tax. After eight years, gains included in withdrawals benefit from an annual allowance of EUR 4,600 for a single person or EUR 9,200 for a couple filing jointly. For premiums paid since 27 September 2017, the income tax rate may be reduced to 7.5%, subject to certain limits.

A junior PEA works differently. It may be opened by an adult child who remains part of their parents’ French tax household, subject to a contribution limit of EUR 20,000. After five years, gains withdrawn from the plan are exempt from French income tax but remain subject to social contributions.

However, these French tax advantages are not automatically recognised in the United States. For a child who is a US person, a PEA may be treated in the same way as an ordinary taxable investment account.

The investments held within the vehicle also need careful consideration. Non-US investment funds, including French and European mutual funds, may fall within the US passive foreign investment company, or PFIC, rules. These rules can result in unfavourable taxation and substantial reporting obligations. The choice of investments may therefore be just as important as the choice of vehicle.

US investment vehicles

The same caution is required for a 529 plan, a Coverdell ESA or a Trump Account where the child lives in France or may move there in the future.

In the United States, 529 plans and Coverdell ESAs allow families to fund certain education expenses within a tax-advantaged framework. A Trump Account is a new type of individual retirement account available for eligible children.

The US tax treatment is not, however, automatically recognised in France. The first step is to determine how the arrangement should be classified under French law: as a financial account, an insurance or capitalisation contract, a trust, or another type of arrangement.

That classification will determine how income and gains are taxed in France and which reporting obligations apply.

Do not overlook reporting obligations

A French tax resident may be required to report foreign accounts and foreign insurance or capitalisation contracts on Form 3916-3916 bis, filed with the annual French income tax return. A separate declaration may be required for each account or contract.

Failure to report a foreign account may result in a penalty of EUR 1,500 per account and per year. The penalty may rise to EUR 10,000 where the account is held in certain jurisdictions that do not have an appropriate administrative assistance agreement with France. Additional penalties may apply where income or assets have also been omitted.

Plan before making the first contribution

These questions should be addressed before the account is opened and the investments are selected. A vehicle that is tax-efficient in one country may lose its benefits, trigger taxation earlier than expected or create significant reporting obligations in the other.

For a French-American family, the right choice is not necessarily the vehicle offering the greatest immediate tax advantage. It is the one that remains suitable throughout the investment period, including if the child or the parents later move from one country to the other.

This article provides general information that is current as of its publication date. It does not constitute advice tailored to any particular circumstances.

This article is also published on the firm’s website: donoe.fr.