United States: Treaty allows for foreign tax credit against net investment income tax

By neub9
4 Min Read


The Court of Federal Claims in Christensen v. United States ruled that a husband and wife could credit French income taxes against their US net investment income tax. This ruling has immediate implications for taxpayers subject to the 3.8% net investment income tax.

Taxpayers in treaty jurisdictions who pay the net investment income tax should review their treaty positions and assess their ability to claim foreign tax credits under an applicable treaty for past and future years.


  1. Facts
  2. Applicable law
  3. The court’s holding

Matthew and Katherine Kaess Christensen, US citizens living in France, claimed a credit against their net investment income tax under Article 24(b) of the US-France Income Tax Treaty. They reported this treaty-based position on IRS Form 8833 and provided disclosure on IRS Form 8275. The IRS initially denied the credit, leading the Christensens to file a successful litigation at the Court of Federal Claims.

The net investment income tax, enacted by Congress in 2010, applies a 3.8% tax on individuals, trusts, and estates with high income. It is commonly known as the unearned Medicare contribution tax or NIIT, found in Section 1411 of the Code, not allowing the use of foreign tax credits under Sections 27 and 901.

Taxpayers can offset US income tax with foreign income taxes paid or accrued using Sections 27 and 901, but these provisions apply only to US taxes in Chapter 1 of the Code.

Article 24(2)(a) of the Treaty states that, subject to US law, the US will allow a credit to US citizens and residents for French income taxes paid.

Article 24(2)(b) states that the US will allow a credit to a US citizen resident of France for the French income tax paid, without including the “provisions and limitations” language found in Article 24(2)(a).

Christensen is just one of several cases that have dealt with the use of foreign tax credits against the net investment income tax and the Treaty. The Tax Court’s decision in Toulouse v. Commissioner did not allow the taxpayer to credit French and Italian income taxes against the US net investment income tax, but the Court in Christensen went further to hold that Article 24(2)(b) does allow such a credit, independent of the Code.

The government argued that the Treaty did not provide an independent credit and did not override the Code’s foreign tax credit provisions rooted in Chapter 1. However, the court did not give great deference to the government’s interpretation, as it lacked evidence that its interpretation represented shared expectations of the United States and France regarding the creditability question.

The court concluded, in line with Toulouse, that Article 24(2)(a) of the Treaty does not allow a foreign tax credit against the net investment income, but it did hold that Article 24(2)(b) of the Treaty does allow such a credit independent of the Code.

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