The assurance vie is a French financial product that allows French citizens and residents to pool their investments into a single account that contains one or more core investments. This investment vehicle is prevalent France because of the effective tax savings offered to account holders. The growth on investments contributed to an assurance vie account, popularly known as AV, are not subject to capital gains tax or income tax while the funds remain inside the account. Further, there are no distributions made until age 70. So, without further ado, let’s dive into how assurance vie taxation affects expats in France.
Who Benefits From Using an Assurance Vie?
Since the assurance vie has designated taxation rates and appreciates tax-free, this vehicle has become a popular investment strategy. Unfortunately, there are some restrictions regarding participation in this investment scheme. At this time, only French tax residents can benefit from having an assurance vie, and this includes expatriates living in France. Others will not benefit from the low taxes if they reside in another country.
In order to receive the full benefits of an assurance vie investment, distributions should not take place prior to reaching the age of 70, or some of the distribution will be subject to taxation. Early withdrawals are treated as a return of capital, while the appreciated portion of the distribution is subject to tax.
Benefits of Assurance Vie
One benefit of having an assurance vie policy is bypassing the archaic succession of estate laws. In France, the rules of droit de succession dictate the distribution of a decedent’s assets. Generally speaking, children are first in line and are favored against the spouse. These rules of succession are followed even if they contrary to the decedent’s final wishes. Decedent distributions from an assurance vie policy are not subject to the regulations of droit de succession, so they can be distributed in accordance with the decedent’s wishes. The decedent can elect any number of beneficiaries and specify the percentage each beneficiary receives. An added benefit, assurance vie distributions are not subject to taxation unless above a specified threshold.
Filing Requirements for Assurance Vie Taxation
Although the assurance vie has significant taxation and succession benefits for French citizens and residents, those who have US tax filing obligations have additional responsibilities. The literal translation for “assurance vie” is life insurance, but the IRS does not treat AVs in this manner. Rather, assurance vies are treated like shareholders in a passive foreign investment company. US citizens and US residents who own shares in this type of company have additional US tax filing requirements. Specifically, the US tax return will require completion of Form 8621, which is used to report income from foreign mutual funds, also referred to as passive foreign investment companies (PFICs). There are three methods of PFIC taxation: excess distribution, mark to market (MTM), and qualified electing fund (QEF). PFICs are also reportable even if there is no income, so long as the appropriate filing threshold is met. For example, a taxpayer with no PFIC income but whose PFICs together are worth more than $25,000 must file Form 8621 to report the PFICs.
A separate Form 8621 must be filed for each PFIC in which stock is held directly or indirectly. In the case of a chain of ownership under the five circumstances described above, unless otherwise provided, if the shareholder owns one PFIC and through that PFIC owns one or more other PFICs, the shareholder must file a Form 8621 for each PFIC in the chain. This tracking of appreciation can ultimately translate into taxable income in the US, even though the appreciation is not subject to French tax. The accounting to track the growth of the assurance vie can be onerous if the accounting periods of the assurance vie policy are contrary to the US tax calendar year.