As a general rule, employment income is taxable in the employee’s country of residence, unless the employment is exercised in another country. For cross-border commuters (i.e. employees residing in France, Germany or Belgium and commuting to Luxembourg to carry out employment-related activities), this means that their employment income is taxable in Luxembourg (and not in their country of residence). Depending on the employee’s country of residence (France, Germany or Belgium), different tax thresholds will apply under which income from employment should remain taxable in Luxembourg despite activities being physically exercised elsewhere (either in the employee’s country of residence or in any third country).
Thus, taxation in the employee’s country of residence should not occur where the number of days worked outside of Luxembourg does not exceed:
- 29 days per year for France
- 19 days per year for Germany
- 24 days per year for Belgium.
Under three mutual agreements between the competent authorities in Luxembourg and France (dated 16 July 2020, 27 August 2020 and 7 December 2020) concerning cross-border workers in the context of the COVID-19 pandemic, the 29-day rule applicable to French residents working from home shall not apply to the period 14 March 2020 to 31 March 2021.
In a separate mutual agreement dated 16 July 2020 concerning the detailed rules of application of point 3 of the protocol to the tax treaty between France and Luxembourg, those authorities also stated that social security payments by the respective countries shall be taxable only in the jurisdiction from which they originate (by application of Article 17 para. 2 of the tax treaty).
Furthermore, on the basis of the mutual agreement signed on 7 December 2020, salaries, wages and other similar remuneration which an individual resident in France receives for services rendered to the Luxembourg national government, its local authorities or public bodies in respect of days worked at home in the context of the COVID-19 pandemic, shall remain taxable in Luxembourg (pursuant to Article 18 para. 1 a) of the tax treaty), if that individual is a French national who does not have Luxembourgish nationality. If a taxpayer wishes to apply this mutual agreement, then he/she undertakes to apply it consistently in both Contracting States, and to keep at the disposal of the administration a certificate from his/her employer indicating the number of days worked at his/her home (solely on the basis of the government health instructions) for which he/she received the above-mentioned income, as well as the related tax assessment notice.
For German cross-border commuters, on the basis of two consultation agreements signed on 3 April 2020 and 7 October 2020 between Germany and Luxembourg (the “Consultation Agreements”) followed by a circular letter issued on 21 October 2020, days teleworked from Germany due to the impact of COVID-19 that would otherwise have been spent in Luxembourg can receive the same tax treatment as days worked in Luxembourg. This means that the days on which employees resident in Germany telework from home may not need to be counted toward the 19-day limit. In particular, the following aspects of the Consultation Agreement should be noted:
- Employed persons wishing to use the above-mentioned fictitious treatment (i.e. fictitious allocation of teleworking days to Luxembourg while the COVID-19 situation persists) are required to maintain appropriate documentation. In addition, the employment income allocated to Luxembourg must actually be taxed in Luxembourg, meaning that it must be included in the tax base for determining the employee’s Luxembourg tax liability. Finally, the employee shall be viewed as having consented to the taxation of this employment income in Luxembourg.
- Such fictitious treatment cannot be used where, irrespective of COVID-19, home working days would have been spent in Germany or any country other than Luxembourg (e.g. where an employee already conducts their activities in Germany/from their home office as per the terms of their contract).
- The fictitious treatment also applies in identical terms to salaries, wages and other similar remuneration for government services (other than pensions) covered by Article 18 para. 1 of the double tax treaty between Germany and Luxembourg.
- Germany and Luxembourg have agreed that payments made pursuant to the rules governing short-time work in Germany (Kurzarbeitergeld) and in Luxembourg (chômage partiel) qualify as social security payments by the respective country within the meaning of Article 17 para. 2 of the double tax treaty between Germany and Luxembourg.
- The Consultation Agreements are applicable with respect to working days between 11 March 2020 and 31 December 2020. The period of application beyond 31 December 2020 will be extended automatically to the following month if neither Germany nor Luxembourg terminate it, respecting a notice period of one week before the end of each month.
For Belgian cross-border commuters, on the basis of three agreements signed on 19 May 2020, 24 August 2020 and 7 December 2020 between Belgium and Luxembourg and a circular letter issued on 21 October 2020, days teleworked from Belgium due to the impact of COVID-19 that would otherwise have been spent in Luxembourg can receive the same tax treatment as days worked in Luxembourg. This means that the days on which employees resident in Belgium telework from home may not need to be counted toward the 24-day limit. Such fictitious treatment cannot be used where, irrespective of COVID-19, home working days would have been spent in Belgium or any country other than Luxembourg. Cross-border workers who make use of this fictitious treatment are required to apply it consistently in both contracting States and to maintain appropriate documentation. In addition, the employment income allocated to Luxembourg must actually be taxed in Luxembourg, meaning that it must be included in the tax base for determining the employee’s Luxembourg tax liability. The agreement is applicable with respect to working days between 11 March 2020 and 31 March 2021.
Your contact for more details: EmpCrisis@arendt.com
(14/12/20)