Tax And Social Security For Cross-Border Commuters/Home-Workers

Luxembourg has more than 190,000 cross-border commuters, most of whom live in Belgium, France, or Germany. Amazingly, since Brexit there have been more and more commuters from the UK too.

Given the traffic and travel issues arising alongside this trend, there have recently been more calls for flexible work arrangements. Working from home could be one such arrangement, though it comes with implications on income tax and social security—affecting both employee and employer.1

Income tax

Luxembourg has signed tax treaties with (among other countries) all of its neighbours and the UK, which enable it to tax income gotten from an employer in Luxembourg. However, the country of residence may also tax an employees' worldwide income, which would lead to double taxation2—were it not for the tax treaties.

Luxembourg's treaties with Belgium and Germany have a special provision whereby the full employment income is taxed in Luxembourg only if the number of days worked outside of Luxembourg doesn't exceed a certain limit. For Belgium this limit is 24 days per year; for Germany it's 19. In the recently signed tax treaty with France (not yet in force), this threshold is 29 days per year.

If the number of workdays outside Luxembourg exceeds the threshold, then only the employment income related to the workdays in Luxembourg may be taxed in Luxembourg. A day worked at home, i.e. in the country of residence, counts as a workday outside of Luxembourg. Business trips outside Luxembourg count as non-Luxembourg workdays too. Thus, for employees, the physical location where the work is performed counts. (Different rules apply for non-executive directors and the self-employed).

The country of residence will only grant relief from double taxation for income taxable in Luxembourg. If only part of the employment income may be taxed in Luxembourg, you should make sure that you do not pay Luxembourg tax on the part that is not taxable in Luxembourg. If your employer withholds tax on the full income, you can claim a refund through your tax return, though this can take up to five years to process.

It is also possible to adjust the withholdings through payroll for workdays not taxable in Luxembourg. Ideally, such an adjustment would be done each month based on the actual days worked. However, for residents of Belgium and Germany it might only become clear in December whether they exceed the threshold. Thus, depending on the number of non-Luxembourg days worked, employers...