Are there new taxation rules applying to cross-border workers post-pandemic?
Yes. The special bilateral agreements signed between Luxembourg and the Belgian, French and German authorities concerning the taxation rules applying to cross-border workers in the context of the COVID-19 pandemic came to an end on 30 June 2022.
As a consequence, from 1 July 2022, the general rules on the taxation of employment income received by Belgian, French and German cross-border commuters (i.e., employees residing in France, Germany or Belgium and commuting to Luxembourg to perform employment-related activities) apply.
Which taxation rules apply to cross-border employees?
Employment income is taxable in the employee’s country of residence, unless the employment activity is performed in another country. Thus, the employment income of cross-border commuters is, in principle, taxable in Luxembourg and not in their country of residence.
Depending on the employee’s country of residence (Belgium, France or Germany), different thresholds apply below which employment income remains taxable in Luxembourg despite the activities being physically performed elsewhere (whether in the country of residence or in a third country):
- 24 days per year for Belgium (increased to 34 days once the amendment to the tax convention is in force)
- 29 days per year for France
On 7 November 2022, Luxembourg and France signed an amending protocol to the double tax treaty which increases this limit to 34 days as from 1 January 2023 (subject to ratification procedures in each country).
- 19 days per year for Germany
Will these allowances be prorated in 2022?
In principle, no. As of the end of the agreements put in place during the pandemic, cross-border commuters should have the full allowance of days for use in the second half of the year (unless all or part of it was already taken in the first half of the year, through days worked outside of Luxembourg for reasons unrelated to (measures taken to combat) the pandemic).
However, there are still differences of interpretation between Luxembourg and the neighbouring countries regarding the reduction or not of the thresholds for employees with part-time contracts and part-year activity (for 2022 and beyond).
What are the tax consequences if the threshold is exceeded?
Where the applicable threshold is exceeded, the employment income received for the days worked outside of Luxembourg becomes subject to taxation in the employee’s country of residence.
French commuters: in principle, the Luxembourg employer must levy French withholding tax on the part of the salary relating to the days worked in France. The specific registration process in France must be followed. The French budget bill 2023 foresees a change in the way French withholding tax would be levied, i.e. via an advance payment: the deduction would be made directly to the employee’s bank account (resident in France) by the French tax authorities.
Belgian and German commuters: if the thresholds are exceeded, any additional taxes should, in principle, be levied via personal tax assessment only.
What are the potential taxation risks for the Luxembourg employers?
The normalisation of widespread teleworking by cross-border commuters may present certain tax risks for Luxembourg employers, such as the risk of creating a permanent establishment or permanent representative in a commuting employee’s country of residence. Depending on the combination of certain factors (e.g., the employee’s profile), this could even cause the employer’s Luxembourg tax residency to be challenged.
Such a risk would materialise in the taxation of all or a portion of the Luxembourg employer’s profits in the cross-border employee’s country of residence. There are also certain tax compliance requirements to consider.
Is there any chance the taxation rules will evolve soon?
The EU Commissioner for Economy, Paolo Gentiloni recently indicated that the EU Commission is working with Member States and stakeholders to find long term solutions for the tax and social security repercussions in cases of cross-border teleworking.
The EU Commission is further in contact with the Organisation for Economic Cooperation and Development (OECD) for possible coordination of the taxation framework applicable to cross-border teleworkers within the EU and between OECD Member countries, which currently are not congruent.
Your contact for more details: EmpCrisis@arendt.com
(10/11/22)