Employment Tax
Amendment to the Double Tax Treaty (DTT) between Luxembourg and Germany—applicable as of 1 January 2024
Summary
On 18 March 2024 the Luxembourg tax authorities issued a circular 1 providing details of its interpretation of the Protocol modifying the Double Tax Treaty (“DTT”) between Luxembourg and Germany. The principal impact of the Protocol relates to the “tolerance threshold” applicable to German cross border employees, whereby the threshold is increased from 19 to 34 days as from 1 January 2024. Another amendment relates to the “subject to tax” clause within the DTT where a detailed interpretation of the same has been provided. Finally, the way in which income related to exemptions from work and leaving indemnities should be sourced has been modified. Please find below the highlights.
1 Circulaire du directeur des contributions L.G. – Conv. D.I. no71 du 18 mars 2024
The detail
Legal background :
a Protocol was signed between the 2 countries on 6 July 2023 modifying the previous DTT. Both countries concluded a Mutual Agreement on 11 January 2024 providing details on the application/interpretation of the amended DTT. The director of the Luxembourg authorities issued a circular on 18 March 2024 outlining their view on the pragmatic application of some aspects of the modified DTT.
Increase of the tolerance threshold :
The biggest (and most welcome) change arising from the Protocol is the increase of the tolerance threshold for German cross-border workers from 19 to 34 days – meaning that a German tax resident working for a Luxembourg employer is fully taxable in Luxembourg provided that she/he works less than 35 days out of Luxembourg in a calendar year. This puts the German cross-border worker on an equal footing with the Belgian and French cross borders workers as from 1 January 2024.
Additional details on the application of this threshold were provided.
Counting of the days:
The Mutual Agreement specifies that a 30 minute tolerance threshold is applicable. Therefore, if a German cross border employee works less than 30 minutes in a country outside of Luxembourg – (e.g. an employe reading her/his emails before commuting to Luxembourg) – this would not be counted towards the 34 day threshold. As such, if the employee works 30 minutes or more outside of Luxembourg, then a full day is considered when considering if the employee has reached the threshold.
The 34 day threshold is assessed on a calendar year basis without any prorate applying for part-time work or commuting activities exercised for only a part of the year (e.g. a German resident employee beginning a Luxembourg employment on 1 August).
Days where an employee is on sick leave should no longer be considered as working time (previously allocated to the country of employment), and should now be removed from the counting of the total workdays.
Allocation of the right to tax between the 2 countries:
If the employee exceeds the 34 days based on the above rules, the right to tax the salary is shared between the countries based on the effective time worked, which it to be broken down into minutes.
Example
To illustrate the above rules, we assume the situation of a German tax resident who works from home for 60 minutes (1 hour) every day and then commutes to the office in Luxembourg where they work 420 minutes (7 hours. The employee earns EUR 80,000 (base salary) per year. In this example, the employee is deemed to have worked every day from Germany and therefore exceeds the 34 day limit. The taxation of the employment income is therefore allocated between Germany and Luxembourg.
Germany will have the right to tax 10k EUR (80K EUR x 60/480 minutes) and Luxembourg the remainder (i.e. 70K EUR).
Leaving indemnity:
The rules on the leaving indemnities / severance have been modified. The allocation of the right to tax leaving indemnities between the 2 countries is done by reference to the working time spent by the employee in the preceding 5 years. Specific allocation rules apply for indemnities paid under collective redundancy or in connection with the payment of “garden leave”.
Avoidance of double taxation – “subject to tax” provision:
The technical “subject to tax” provision has been amended and clarifications have been provided on its interpretation. In a nutshell, if a country (e.g. Luxembourg) has the right to tax income but due to the domestic legislation, does not in fact tax the income as a result of the application of lump sum deductions, tax exemptions, or losses that are carried forward, such income should nonetheless be considered as ‘effectively taxed’ in the country. This approach should avoid taxation in the other country (e.g. Germany). The Mutual Agreement does however clarify that payments which are fully tax exempted in one country, would fall to be taxable in the other country, due to the application of the ‘subject to tax’ clause. We understand that there are ongoing discussions with the Luxembourg authorities on this subject, and therefore there may be further updates / amendments / clarifications.
On-call payments:
Specific rules have also been detailed for on-call /’primes d’astreinte’ payments. Irrespective of whether an employee works during the on-call period, it is still considered as working time. On-call payments are taxable in the country where the employee is physically located while they are considered as being on-call.
Taxation of replacement income:
With respect to payments paid by the Luxembourg authorities in accordance with the social security legislation
– CNS, ADEM, CNAP, etc – (e.g. in connection with sickness, maternity leave, unemployment income, parental leave etc.) such payments are no longer categorised as employment income. The taxation of such payments falls under Article 17 of the DTT which addresses the taxation of annuities / pensions. Payments made directly by a such an authority are taxable in that country.
Other
The DTT was also amended in respect of other topics. For example, the rules related to the taxation of drivers or civil servants (resident in a country and working partly or fully in the other country) have been amended.
We expect further clarifications to issue over the coming weeks and months with regards to the application and
interpretation of the Mutual Agreement.
Contact us
For a deeper discussion on the above, please reach out to your Vialto Partners point of contact, or alternatively:
Eric Paques
Partner
Denise Chambers
Director
Tania Fernandes Morais
Senior Manager
Further information on Vialto Partners can be found here: www.vialtopartners.com
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