EXPLANATION OF PROPOSED PROTOCOL 

TO THE ESTATE, INHERITANCE, AND GIFT TAX TREATY 

BETWEEN THE UNITED STATES AND FRANCE 

Scheduled for a Hearing 

Before the 

COMMITTEE ON FOREIGN RELATIONS 

UNITED STATES SENATE 

On February 2, 2006 

____________ 

Prepared by the Staff 

of the 

JOINT COMMITTEE ON TAXATION 

January 26, 2006 

JCX-3-06
 

i 

CONTENTS 

Page

INTRODUCTION .......................................................................................................................... 1 

I. SUMMARY........................................................................................................................... 2 

II. FRENCH INHERITANCE, GIFT, AND WEALTH TAXES............................................... 3 

III. EXPLANATION OF PROPOSED PROTOCOL.................................................................. 4 

Article I. Estates and Gifts Covered ..................................................................................... 4 

Article II. General Definitions .............................................................................................. 5

Article III. Real Property ...................................................................................................... 5 

Article IV. Business Property of a Permanent Establishment and Assets Pertaining 

 to a Fixed Base Used for the Performance of Professional Services................. 6 

Article V. Charitable Exemptions and Deductions............................................................... 6 

Article VI. Community Property and Marital Deduction ..................................................... 7 

Article VII. Exemptions and Credits .................................................................................... 8 

Article VIII. Filing of Returns and Exchange of Information ............................................ 11 

Article IX. Entry Into Force................................................................................................ 12

IV. ISSUE: EXPATRIATION TO AVOID TAX BY FORMER U.S. CITIZENS AND 

LONG-TERM RESIDENTS ............................................................................................... 13 
 

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INTRODUCTION 

This pamphlet,1

 prepared by the staff of the Joint Committee on Taxation, describes the 

proposed protocol to the treaty between the United States and France relating to estate, 

inheritance, and gift taxes (the “proposed protocol”). The proposed protocol was signed on 

December 8, 2004.2

 The proposed protocol would modify the estate, inheritance, and gift tax 

treaty between the United States and France that was signed on November 24, 1978 (the 

“treaty”). The Senate Committee on Foreign Relations has scheduled a public hearing on the 

proposed protocol on February 2, 2006. 

Part I of the pamphlet provides a summary of the proposed protocol. Part II contains a 

brief description of the relevant French tax law. Part III contains an article-by-article 

explanation of the proposed protocol. Part IV contains a discussion of an issue raised by the 

proposed protocol. 

 1

 This pamphlet may be cited as follows: Joint Committee on Taxation, Explanation of Proposed 

Protocol to the Estate, Inheritance, and Gift Tax Treaty Between the United States and France (JCX-3-

06), January 26, 2006. 

2

 For a copy of the proposed protocol, see Senate Treaty Doc. 109-7, November 4, 2005. 
 

2 

II. SUMMARY 

An estate, inheritance, and gift tax treaty currently is in force between the United States 

and France. In the case of the United States, the treaty applies to the estate, gift, and 

generation-skipping transfer taxes. These taxes apply to the transfer of property by a donor 

during life, through a decedent’s estate, or by generation-skipping transfer. Generation-skipping 

transfers involve transfers that skip a generation, as would be the case of a transfer by a donor to 

the donor’s grandchild. In the case of France, the treaty applies to the duties on gifts and on 

succession (inheritance). Generally, these French duties apply to similar transfers to those 

subject to the U.S. estate and gift taxes, but are imposed on the recipient of property, rather than 

on the transferor. 

The principal purpose of the estate, inheritance, and gift tax treaty between the United 

States and France is to reduce or eliminate double taxation in connection with estate, inheritance, 

and gift taxes. One of the general principles of the treaty is that the country in which a donor or 

decedent was domiciled may tax the estate or gifts of that individual on a worldwide basis, but 

must credit tax paid to the other country with respect to certain types of property located in such 

other country. Specifically, immovable property, certain business assets, and partnership 

interests attributable to such property are taxable in the country in which such property is 

situated. 

The proposed protocol would make several updates and other modifications to the treaty. 

Among other updates, the proposed protocol would add a “saving clause,” which would protect 

the right of the United States to apply its estate and gift tax rules to U.S. citizens, as well as to 

certain former U.S. citizens and long-term residents. 

The proposed protocol also would provide a pro rata unified credit to the estate of an 

individual domiciled in France (other than a U.S. citizen) for purposes of computing the U.S. 

estate tax due. An estate eligible for this provision would be entitled to a portion of the full, 

generally applicable credit, based on the ratio of the value of the estate’s U.S.-situated assets to 

the value of its worldwide assets. 

In addition, the proposed protocol would provide a limited U.S. estate tax marital 

deduction in cases in which the surviving spouse is not a U.S. citizen. This provision would 

apply in the case of certain small estates. The proposed protocol also would add new limits to 

the situs-based taxation of certain interspousal transfers of noncommunity property. 
 

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III. FRENCH INHERITANCE, GIFT, AND WEALTH TAXES3

France levies inheritance tax at the time of death on the worldwide assets of French 

residents, and on the French-situated assets of nonresidents. Tax rates and exemption amounts 

vary depending on the identity of the recipient. In addition, a gift tax is generally levied on the 

transfer by gift of property exceeding a threshold value amount. 

Wealth tax is imposed annually on individuals resident or owning property in France, at 

progressive rates of up to 1.8 percent of the worldwide net worth of resident individuals, or the 

French-situated net worth in the case of nonresident individuals. An exemption roughly 

equivalent to $900,000 applies. Financial assets of nonresident individuals are exempt from the 

tax. 

 3

 The information in this section relates to foreign law and is based on the Joint Committee 

staff’s review of publicly available secondary sources, including in large part “French Taxation,” a 

publication of the French Ministry of the Economy, Finance and Industry. 
 

4 

IV. EXPLANATION OF PROPOSED PROTOCOL 

Article I. Estates and Gifts Covered

The proposed protocol would add a “saving clause” to Article 1 (Estates and Gifts 

Covered) of the existing treaty. Pursuant to this saving clause, the United States would retain the 

right to tax under U.S. law the estates or gifts of: (1) U.S. citizens; (2) U.S. domiciliaries (within 

the meaning of Article 4 (Fiscal Domicile) of the treaty); and (3) former U.S. citizens or longterm residents in cases in which loss of citizenship or residency status had as one of its principal 

purposes the avoidance of U.S. tax, but only for a period of 10 years following such loss of 

status. 

The Technical Explanation states that the provision regarding former citizens and longterm residents is intended to be consistent with the U.S. expatriation tax regime set forth in Code 

sections 877, 2107, and 2501(a)(3). The Congress made substantial changes to this regime in the 

American Jobs Creation Act of 2004 (“AJCA”), which was signed into law on October 22, 2004. 

Under the regime prior to its amendment by AJCA, if a former U.S. citizen or long-term 

resident relinquished U.S. citizenship or terminated U.S. residency with a principal purpose of 

avoiding U.S. taxes, the individual was subject to a special set of income, estate, and gift tax 

rules for the 10-year period following such loss of status. Under present and prior law, these 

rules mainly have the effect of expanding the scope of income and wealth transfers that are 

subject to taxation by the United States, such that the individual is subject to U.S. tax on a 

somewhat broader basis than other nonresident aliens, but still on a narrower basis than a current 

U.S. citizen or resident. Under prior law, for purposes of determining the applicability of the 

regime, an individual who relinquished citizenship or terminated residency was treated as having 

done so with a principal purpose of tax avoidance if the individual’s average Federal income tax 

liability or net worth exceeded certain monetary thresholds, but certain categories of individuals 

(e.g., dual residents) could avoid this presumption by requesting a ruling from the IRS that they 

did not have such a principal purpose, based on the relevant facts and circumstances. 

AJCA eliminated these subjective determinations of tax-avoidance purpose and replaced 

them with objective rules. Under the regime as amended by AJCA, a former citizen or former 

long-term resident is subject to the special income, estate, and gift tax rules for expatriates unless 

the individual: (1) establishes that his or her average annual net income tax liability for the five 

preceding years does not exceed $124,000 (adjusted for inflation after 2004) and his or her net 

worth is less than $2 million, or alternatively satisfies limited, objective exceptions for dual 

citizens and minors who have had no substantial contact with the United States; and (2) certifies 

under penalties of perjury that he or she has complied with all Federal tax obligations for the 

preceding five years and provides such evidence of compliance as the Treasury Secretary may 

require. Thus, as a result of AJCA, the application of the expatriation tax regime no longer turns 

on determinations of whether a person had a principal purpose of tax avoidance, as it often did 

prior to AJCA. 

The Technical Explanation notes that under the proposed protocol, the determination of 

whether there was a principal purpose of tax avoidance with respect to former citizens or longterm residents of the United States is made under the laws of the United States. The Technical 
 

5 

Explanation further states that this language would include “the irrebuttable presumptions based 

on average annual net income tax liability and net worth under section 877,” and that the new 

objective tests “represent the administrative means by which the United States determines 

whether a taxpayer has a tax avoidance purpose.” Thus, although the proposed protocol employs 

the now-obsolete concept of a tax-avoidance purpose, the Technical Explanation states that this 

language should be understood as fully preserving U.S. taxing jurisdiction under the expatriation 

tax rules in their current form. 

The proposed protocol provides exceptions to the saving clause that preserve certain 

obligations of the United States under the treaty (as amended by the proposed protocol), 

specifically the benefits conferred by the United States under Article 10 (Charitable Exemptions 

and Deductions); paragraph 2 of Article 11 (Community Property and Marital Deduction), 

relating to the marital exclusion for interspousal transfers of certain types of noncommunity 

property; paragraphs 2 and 8 of Article 12 (Exemptions and Credits), mainly requiring the 

United States to credit taxes paid to France on either a domiciliary or a situs basis; Article 13 

(Time Limitations on Claims for Credit or Refund); and Article 14 (Mutual Agreement 

Procedure). The benefits of paragraph 3 of Article 11 (Community Property and Marital 

Deduction), relating to a limited estate tax marital deduction for property passing to a spouse 

who is not a U.S. citizen, also are not subject to the saving clause, except with respect to former 

U.S. citizens and long-term residents subject to the proposed protocol’s expatriation provision. 

The benefits of Article 17 (Diplomatic and Consular Officials) are not subject to the saving 

clause with respect to transfers by individuals who have neither U.S. citizenship nor immigrant 

status in the United States. 

Article II. General Definitions

The proposed protocol would replace paragraph 2 of Article 3 (General Definitions) of 

the treaty and provide that any term not otherwise defined in the treaty shall, unless the context 

otherwise requires or the competent authorities agree to a common meaning, have the meaning 

which it has under the law of the treaty country for the purposes of the taxes of which the treaty 

applies. The proposed protocol also would provide that any meaning under the tax laws of such 

treaty country will prevail over a meaning given under other laws of that country. 

Article III. Real Property

The proposed protocol would replace Article 5 (Immovable (Real) Property) of the treaty. 

Like the existing treaty, the proposed protocol would provide that real property may be taxed by 

the treaty country in which the property is situated. The Technical Explanation notes that this is 

a primary taxing right, but not an exclusive one. Thus, for example, the proposed protocol would 

allow the United States to tax the transfer of French-situs real property by a U.S. domiciliary, as 

long as the United States allows a credit for the French tax. This provision also applies to real 

property of an enterprise and real property used for the performance of independent personal 

services, regardless of where the enterprise is located or where the independent personal services 

are performed. 

As under the existing treaty, the proposed protocol would provide that the term “real 

property” is defined under the law of the treaty country in which the property is situated 
 

6 

(although in no event can mortgages or other debt-claims secured by real property be regarded as 

real property). The proposed protocol also would include in the definition of “real property”: 

property accessory to real property; livestock and equipment used in agriculture and forestry; 

rights to which the provisions of general law respecting landed property apply; usufruct of real 

property; and rights to variable or fixed payments as consideration for the working of, or the 

right to work, mineral deposits, sources, and other natural resources. Ships and aircraft would 

not be regarded as real property. 

The proposed protocol also would include in the definition of “real property” shares, 

participations, and other rights in a company or legal person the assets of which consist, directly 

or indirectly, at least 50 percent of real property situated in one of the treaty countries, or of 

rights pertaining to such property. These shares, participations and other rights would be deemed 

situated in the treaty country in which the real property is situated. The Technical Explanation 

explains that this provision is intended to prevent taxpayers from avoiding taxation in the treaty 

country in which real property is situated by holding the property indirectly. 

Article IV. Business Property of a Permanent Establishment and Assets Pertaining to a 

Fixed Base Used for the Performance of Professional Services

Under Article 6 (Business Property of a Permanent Establishment and Assets Pertaining 

to a Fixed Base Used for the Performance of Professional Services) of the current treaty, assets 

forming part of the business property of a permanent establishment of an enterprise generally 

may be taxed by the treaty country in which the permanent establishment is situated. A 

“permanent establishment” for this purpose is a fixed place of business through which the 

business of an enterprise is wholly or partly carried on. For these purposes, a member of a 

partnership (or other association that is not a corporation) engaged in industrial or commercial 

activity through a fixed place of business is deemed to be so engaged to the extent of such 

member’s interest therein. The proposed protocol would replace the phrase “other association 

that is not a corporation” with “other similar pass-through entity.” The Technical Explanation 

states that this revision was made to take into account changes made in 1996 to the U.S. entity 

classification regulations. The proposed protocol would make clear that an individual member of 

any type of pass-through entity which is engaged in industrial or commercial activity through a 

fixed place of business will be deemed to be so engaged to the extent of such member’s interest 

therein. 

Article V. Charitable Exemptions and Deductions

Under Article 10 (Charitable Exemptions and Deductions) of the current treaty, a transfer 

to a legal entity created or organized in one treaty country is exempt from tax, or fully deductible 

from the gross value liable to tax, in the other treaty country, if the transfer would be eligible for 

such treatment if the entity had been created or organized in the other treaty country. This rule 

applies only if the legal entity to which property is transferred: (1) has tax-exempt status in the 

country in which it is created or organized by reason of which transfers to it are exempt or fully 

deductible from the taxes covered by the treaty; (2) is organized and operated exclusively for 

religious, charitable, scientific, literary, or educational purposes; and (3) receives a substantial 

part of its support from contributions from the public or from government funds. 
 

7 

The proposed protocol would amend Article 10 of the treaty to add “cultural” to the list 

of enumerated purposes for which the legal entity can be organized and operated. 

Article VI. Community Property and Marital Deduction

The proposed protocol amends Article 11 (Community Property and Marital Deduction) 

of the treaty. The proposed protocol would require the United States to exclude from the U.S. 

taxable base certain interspousal transfers of noncommunity property from domiciliaries of 

France to a spouse who is not a U.S. citizen. Specifically, under the proposed protocol, 

noncommunity property that may be taxed by the United States solely on the basis of situs (i.e., 

under Article 5 (Real Property), Article 6 (Business Property of a Permanent Establishment and 

Assets Pertaining to a Fixed Based Used for the Performance of Professional Services), or 

Article 7 (Tangible Movable Property)) may be included in the taxable base of the United States 

only to the extent that the value of such property, taking into account any applicable deductions, 

exceeds 50 percent of the value of all of the property taxable by the United States. Thus, 

noncommunity property potentially taxable in the United States under the aforementioned 

provisions of the treaty transferred from a French domiciliary to a spouse who is not a U.S. 

citizen may be taxed by the United States only to the extent that it exceeds 50 percent of the net 

value of all property which may be taxed by the United States. This exclusion does not apply to 

the estate of, or gifts made by, a U.S. citizen domiciled in France or a former citizen or long-term 

resident of the United States whose loss of such status had as one of its principal purposes the 

avoidance of tax (as defined under U.S. internal law), for a period of 10 years following such 

loss. 

The proposed protocol also allows a marital deduction in connection with transfers of 

“qualifying property” satisfying all of the following conditions: (1) the decedent must have been, 

at the time of death, domiciled in either France or the United States, or a citizen of the United 

States; (2) the surviving spouse must have been, at the time of the decedent’s death, domiciled in 

either France or the United States; (3) if both the decedent and the surviving spouse were 

domiciled in the United States at the time of the decedent’s death, at least one of them must have 

been a citizen of France; and (4) the executor of the decedent’s estate must elect the benefits of 

this marital deduction provision and waive irrevocably the benefits of any estate tax marital 

deduction that otherwise would be allowed under U.S. internal law (on a Federal estate tax return 

filed by the deadline for making a qualified domestic trust election under Code section 

2056A(d)). In the case of an estate with respect to which the Federal estate tax return is filed on 

or before the date on which the proposed protocol enters into force, the election and waiver 

described above must be made on a return filed to claim a refund pursuant to the special 

retroactive effective date applicable to such estates (discussed below with respect to Article IX of 

the proposed protocol). 

“Qualifying property” is property passing to the surviving spouse (within the meaning of 

U.S. internal law), which would have qualified for the estate tax marital deduction under U.S. 

internal law if the surviving spouse had been a U.S. citizen and all applicable elections had been 

properly made. As the Technical Explanation notes, because one of the requirements of the 

marital deduction under U.S. internal law is that the property be included in determining the 

value of the gross estate, property will not qualify for the marital deduction under the proposed 

protocol to the extent that the property is excluded from the decedent’s gross estate by reason of 
 

8 

other provisions of the treaty, such as the 50-percent rule for situs-based taxation of certain 

transfers of noncommunity property described above. 

The amount of the marital deduction allowed under the proposed protocol is equal to the 

lesser of the value of the qualifying property or the “applicable exclusion amount” (within the 

meaning of U.S. internal law, determined without regard to any gift previously made by the 

decedent). The “applicable exclusion amount” is determined under Code section 2010. For 

decedents dying in 2006, 2007, or 2008, the applicable exclusion amount for estate tax purposes 

is $2 million. The applicable exclusion amount increases to $3.5 million for estates of decedents 

dying in 2009. Estates of decedents dying during 2010 are not subject to the estate tax. The 

estate tax then returns into force with respect to estates of decedents dying in 2011 or later, with 

an applicable exclusion amount of $1 million. 

The Technical Explanation notes that, in certain cases, the proposed protocol’s marital 

deduction provision may affect the U.S. estate taxation of a trust that would meet the 

requirements for a qualified terminable interest property (“QTIP”) election (for example, a trust 

with a life income interest for the surviving spouse and a remainder interest for other family 

members) or a qualified domestic trust (“QDOT”) election. If, in lieu of making the QTIP 

election or the QDOT election, the decedent’s executor makes the election described above 

under the proposed protocol, the provisions of Code sections 2044 (regarding inclusion in the 

estate of the second spouse of certain property for which the marital deduction was previously 

allowed), 2056A (regarding qualified domestic trusts), and 2519 (regarding dispositions of 

certain life estates) would not apply. To obtain this treatment, however, the executor is required 

to waive the benefit of any marital deduction otherwise allowable under the Code with respect to 

the trust. 

Article VII. Exemptions and Credits

In general

The proposed protocol replaces Article 12 (Exemptions and Credits) of the existing 

treaty. As under the current treaty, the proposed protocol would require each treaty country to 

impose its tax, and to allow exemptions, deductions, credits, and other allowances, in accordance 

with its own internal laws, except as otherwise provided in the treaty. 

Like the current treaty, the proposed protocol provides specific rules for relieving double 

taxation. In cases in which France imposes tax on the basis of the domicile (as determined under 

Article 4 (Fiscal Domicile)) of the decedent or donor, France may tax the entire property 

comprising the estate or the gift, but must allow “a deduction from that tax” (i.e., a credit) for 

any U.S. tax imposed in accordance with the treaty on the transfer of property in relation to the 

same event (e.g., in accordance with Article 5 (Real Property), Article 6 (Business Property of a 

Permanent Establishment and Assets Pertaining to a Fixed Based Used for the Performance of 

Professional Services), Article 7 (Tangible Movable Property), or the saving clause of paragraph 

4 of Article 1 (Estates and Gifts Covered)). This credit, however, shall not exceed that part of 

the French tax, as computed before any deduction is made, which is attributable to the property 

in respect of which the credit is to be allowed. 
 

9 

The Technical Explanation explains that, under French law, the rates of the inheritance 

and gift tax are determined on the basis of the proximity of relationship between the deceased or 

the donor and the beneficiary or the donee. In general, graduated rates are imposed in cases in 

which there is a close proximity of relationship, and flat rates are imposed in cases in which there 

is no such close proximity. Where the amount of the French tax is computed by applying 

graduated rates, France must allow a deduction for any U.S. tax imposed in accordance with the 

treaty, up to the amount computed by multiplying the taxable net value of the property in respect 

of which the deduction is to be allowed by the ratio of the French tax actually payable on the 

total property taxable in accordance with French law to the net value of that total property. In 

other words, the upper limit on the deduction that France must allow is computed by multiplying 

the amount of the property also subject to U.S. tax by the average rate of French tax actually 

payable on all the property comprising the estate or the gift. Where the amount of the French tax 

is computed by applying a flat rate, however, the upper limit on the deduction that France must 

allow is computed by multiplying the amount of the property also subject to U.S. tax by the rate 

actually applicable to the property in respect of which the deduction is to be allowed. 

The taxes for which France must allow a deduction, as described above, include the U.S. 

Federal estate and gift tax, except where such taxes are imposed solely pursuant to the saving 

clause. In addition, in a case in which the United States imposes tax on the basis of situs, France 

is obligated to allow a deduction for such tax only if the decedent (at the time of his death) or the 

donor (at the time of the gift) was a United States citizen and the tax is actually paid. 

Under the proposed protocol, where both treaty countries impose tax with respect to 

property which is taxable by France in accordance with Articles 5, 6, or 7, the United States must 

allow a credit equal to the amount of the tax imposed by France with respect to such property. If 

a decedent or donor was a citizen of the United States at the time of death or the making of a gift, 

and such person is considered under the treaty as having been domiciled in France, the United 

States must allow a credit equal to the amount of the tax imposed by France, net of any 

deduction from tax allowed under the treaty. In addition, if the United States includes property 

in a decedent’s estate solely because he was a former citizen or long-term resident of the United 

States whose loss of such status (within 10 years of the date of death) had as one of its principal 

purposes the avoidance of tax, the United States must allow a credit equal to the amount of the 

tax imposed by France in respect of all such property. The total amount of credits allowed by the 

United States cannot exceed that portion of the U.S. tax which is attributable to such property. 

The part of the tax deemed to be so attributable is to be determined in accordance with the 

principles of Code section 2014(b)(2) of the Code and section 20.2014-3 of the estate tax 

regulations. 

Pro rata unified credit

U.S. internal law

Under U.S. internal law, the estate of a nonresident alien is subject to U.S. estate tax only 

on its U.S.-situs assets and is entitled to a unified credit of $13,000 (for a $60,000 exclusion 

equivalent amount). The estate of a U.S. citizen or U.S. resident is subject to U.S. estate tax on 

its entire worldwide assets and is entitled to a unified credit in an amount determined under Code 

section 2010. For decedents dying in 2006, 2007, or 2008, the unified credit is $780,800 (for a 
 

10 

$2 million exclusion equivalent amount), increasing to $1,455,800 for estates of decedents dying 

in 2009 (for a $3.5 million exclusion equivalent amount). As noted earlier, estates of decedents 

dying during 2010 are not subject to the estate tax, but then this one-year repeal of the estate tax 

terminates, and the unified credit is $345,800 for estates of decedents dying in 2011 or later years 

(for a $1 million exclusion equivalent amount). A lower unified credit is provided for the estate 

of a nonresident alien because it is assumed that such estates generally will hold fewer U.S.-situs 

assets as a percentage of the estate’s total assets, and thus will have a lower U.S. estate tax 

liability. 

Proposed protocol modification of internal law

The proposed protocol grants a pro rata unified credit to the estate of a decedent (other 

than a U.S. citizen) domiciled in France for purposes of computing the U.S. estate tax. 

Provisions similar to this and the marital deduction against U.S. estate tax in respect of certain 

transfers to a surviving spouse (discussed above) were included in the U.S.-Canada income tax 

treaty and the U.S.-Germany estate tax treaty, approved by the Senate in 1995 and 2000, 

respectively. 

Subject to certain limitations, the pro rata unified credit provision increases the credit 

allowed to the estate of a non-U.S. citizen domiciled in France to an amount between $13,000 

and the unified credit available to a U.S. citizen, to take into account the extent to which the 

assets of the estate are situated in the United States. In no event will the amount of the unified 

credit allowed to the estate of a non-U.S. citizen decedent domiciled in France be less than the 

$13,000 allowed under U.S. internal law to the estate of a nonresident alien (subject to the 

adjustment for prior gift tax unified credits, discussed below). 

Subject to the adjustment for any gift tax unified credit previously allowed against gift 

tax liability, the pro rata unified credit is determined by multiplying the unified credit available 

to a U.S. citizen under Code section 2010 for the year in which the decedent dies (e.g., $780,800 

in 2006) by a fraction, the numerator of which is the value of the part of the gross estate situated 

in the United States and the denominator of which is the value of the entire gross estate wherever 

situated. Thus, if a non-U.S. citizen domiciled in France dies in 2006, and half of the entire 

gross estate (by value) is situated in the United States, the estate would be entitled to a pro rata 

unified credit of $390,400 against any U.S. estate tax otherwise owed. For purposes of this 

computation, assets are treated as situated in the United States only if the United States is 

allowed to tax them under the treaty. 

The amount of the unified credit otherwise allowable is reduced by the amount of any 

unified credit previously allowed against U.S. gift tax imposed on any gift by the decedent. The 

Technical Explanation notes that, under U.S. internal law, the only circumstance under which 

any unified credit would have been previously allowed is where the decedent made gifts subject 

to the U.S. gift tax while a U.S. citizen or resident. Entitlement to the pro rata unified credit also 

is contingent upon the provision of all information necessary for the verification and 

computation of the credit (e.g., information establishing both the value of the worldwide estate 

and the value of the U.S. portion of the estate). The Technical Explanation notes that 

substantiation requirements also apply with respect to other provisions of the proposed protocol 

and the treaty, but explains that it was considered advisable to emphasize the substantiation 
 

11 

requirements in connection with this provision, because the computation of the pro rata unified 

credit involves certain information not otherwise relevant for U.S. estate tax purposes. 

Other deduction and credit issues

Under the proposed protocol, in determining the French gift or inheritance tax with 

respect to transfers by a donor or decedent who, at the time of making the gift or at death, was a 

citizen of the U.S. or was domiciled in the U.S., the same deductions and credits must be allowed 

as would be allowed if the individual were domiciled in France. In addition, in determining the 

French gift or inheritance tax with respect to transfers by a donor or decedent who, at the time of 

making the gift or at death, was domiciled in France to an individual who is a U.S. citizen or is 

domiciled in the U.S., the same deductions and credits must be allowed as would be allowed if 

the individual were domiciled in France. 

Credits or deductions for tax imposed by a treaty country allowable under the treaty are 

in lieu of, and not in addition to, any credits or deductions for such taxes allowed by the internal 

laws of the other treaty country and must be computed according to and subject to the limitations 

of the law of such other treaty country, as may be amended from time to time without changing 

the general principle thereof. 

A treaty country is not prohibited from imposing tax in a case in which property is 

taxable under the treaty only in the other treaty country, but the taxpayer in fact does not pay the 

tax to the other treaty country (other than as a result of a specific exemption, deduction, 

exclusion, credit, or allowance). 

In cases in which the treaty prevents property from being taxed by one treaty country, 

that country may nevertheless take into account such exempt property that would otherwise be 

taxable under its internal law in calculating the amount of tax on the property that may be taxed 

by that country under the treaty. In other words, exempt property may be included in the tax 

base for purposes of determining the tax rate applicable to non-exempt property under a 

progressive rate schedule. 

The provisions of the treaty may not result in an increase in the amount of the tax 

imposed by either treaty country under its domestic laws. A reduction in the credit allowed 

against a treaty country’s tax for tax paid to the other treaty country, which reduction results 

from the application of the treaty, is not for these purposes to be construed as an increase in tax. 

The Technical Explanation notes that this provision prevents taxpayers from arguing that an 

estate would have received a higher foreign tax credit without the treaty, because it would have 

paid more French taxes, and thus should be allowed the higher foreign tax credit even though the 

treaty reduced the estate’s French tax. 

Article VIII. Filing of Returns and Exchange of Information

The proposed protocol makes a minor amendment to Article 15 (Filing of Returns and 

Exchange of Information) of the treaty. Under this article, the competent authority of each treaty 

country is required to exchange certain information with the competent authority of the other 

treaty country. Any information furnished under this provision must be treated as secret by the 

recipient country. Under the language of the proposed protocol, this information may be 
 

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disclosed only to persons “involved in the assessment, collection, enforcement, or prosecution in 

respect of the taxes which are the subject of [the treaty]” (emphasis added). The language of the 

existing treaty refers to persons “concerned with” such activities, which some may construe as 

inappropriately broad. 

Article IX. Entry Into Force

The proposed protocol generally would enter into force upon the exchange of instruments 

of ratification and would have effect with respect to deaths occurring and gifts made after that 

date. 

A special retroactive effective date applies with respect to the provisions of the proposed 

protocol relating to the pro rata unified credit and the limited U.S. estate tax marital deduction. 

The proposed protocol provides that these provisions would have effect with respect to deaths 

occurring and gifts made after November 10, 1988,4 notwithstanding any limitation imposed 

under internal law on the assessment, reassessment, or refund with respect to a person’s or 

estate’s return, and provided that any return or claim for refund asserting the benefits of the 

proposed protocol is filed before the date that is one year after the first day of the second month 

following the date on which on which the proposed protocol enters into force, or within the 

otherwise applicable period for filing such claims under internal law. 

Additionally, the saving clause applies to any such claim for refund. Where an estate, 

prior to entry into force of the proposed protocol, was allowed a marital deduction for a transfer 

to a qualified domestic trust under Code section 2056A(d), such estate may elect to treat the 

qualified domestic trust as if it had never been established in order to claim the benefits of 

paragraph 3 of Article 11 or paragraph 3 of Article 12, as long as it does so within the time for 

filing a claim for refund referred to above. Where such an election is made, the property is 

treated as having been transferred to the surviving spouse at the time of the decedent’s death for 

all purposes of the treaty. 

 4

 November 10, 1988, is the effective date of the Technical and Miscellaneous Revenue Act of 

1988 (“TAMRA”). In TAMRA, the Congress enacted several significant estate and gift tax changes 

affecting alien individuals, including the general disallowance of the marital deduction with respect to 

transfers to non-U.S. citizen spouses and the repeal of prior law’s special tax rates and credits applicable 

to the estates of nonresident aliens. 
 

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V. ISSUE: EXPATRIATION TO AVOID TAX BY FORMER U.S. CITIZENS 

AND LONG-TERM RESIDENTS 

There is a potential conflict between the special expatriation tax regime of U.S. internal 

law and the proposed protocol. The saving clause that the proposed protocol would add to the 

treaty uses the obsolete “principal purposes of tax avoidance” formulation in determining 

whether the special tax regime may apply to individuals who expatriate, even though the 

subjective determinations of tax-avoidance purpose under prior law were recently eliminated and 

replaced with objective rules for determining the applicability of the special tax regime. 

Under the regime prior to its amendment by AJCA, if a former U.S. citizen or long-term 

resident relinquished U.S. citizenship or terminated U.S. residency with a principal purpose of 

avoiding U.S. taxes, the individual was subject to a special set of income, estate, and gift tax 

rules for the 10-year period following such loss of status. Under present and prior law, these 

rules mainly have the effect of expanding the scope of income and wealth transfers that are 

subject to taxation by the United States, such that the individual is subject to U.S. tax on a 

somewhat broader basis than other nonresident aliens, but still on a narrower basis than a current 

U.S. citizen or resident. Under prior law, for purposes of determining the applicability of the 

regime, an individual who relinquished citizenship or terminated residency was treated as having 

done so with a principal purpose of tax avoidance if the individual’s average Federal income tax 

liability or net worth exceeded certain monetary thresholds, but certain categories of individuals 

(e.g., dual residents) could avoid this presumption by requesting a ruling from the IRS that they 

did not have such a principal purpose, based on the relevant facts and circumstances. 

AJCA eliminated these subjective determinations of tax-avoidance purpose and replaced 

them with objective rules. Under the regime as amended by AJCA, a former citizen or former 

long-term resident is subject to the special income, estate, and gift tax rules for expatriates unless 

the individual: (1) establishes that his or her average annual net income tax liability for the five 

preceding years does not exceed $124,000 (adjusted for inflation after 2004) and his or her net 

worth is less than $2 million, or alternatively satisfies limited, objective exceptions for dual 

citizens and minors who have had no substantial contact with the United States; and (2) certifies 

under penalties of perjury that he or she has complied with all Federal tax obligations for the 

preceding five years and provides such evidence of compliance as the Treasury Secretary may 

require. Thus, as a result of AJCA, the application of the expatriation tax regime no longer turns 

on determinations of whether a person had a principal purpose of tax avoidance, as it often did 

prior to AJCA. 

The Technical Explanation notes that under the proposed protocol, the determination of 

whether there was a principal purpose of tax avoidance with respect to former citizens or longterm residents of the United States is made under the laws of the United States. The Technical 

Explanation further states that this language would include “the irrebuttable presumptions based 

on average annual net income tax liability and net worth under section 877,” and that the new 

objective tests “represent the administrative means by which the United States determines 

whether a taxpayer has a tax avoidance purpose.” Thus, although the proposed protocol employs 

the now-obsolete concept of a tax-avoidance purpose, the Technical Explanation maintains that 

this language should be understood as fully preserving U.S. taxing jurisdiction under the 

expatriation tax rules in their current form. 
 

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The Committee may wish to satisfy itself that the language included in the proposed 

protocol allows the United States to exercise its full taxing jurisdiction with respect to former 

citizens and long-term residents. The Committee also may wish to inquire as to why the 

language of the proposed protocol was not updated to eliminate potential conflicts with section 

877, as revised by AJCA.