Understanding the specific provisions of Luxembourg tax law applying to taxpayers resident in Germany
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Unlike other neighbouring countries, Luxembourg does not have a special tax regime for cross-border workers and the general rule of taxation at source applies. Accordingly, income earned by cross-border workers employed in Luxembourg is taxed in the country where they are employed, i.e. the Grand Duchy.
However, taxpayers who do not reside in Luxembourg are generally taxed on the entirety of their worldwide income in their country of residence. In order to prevent the income of non-residents cross-border workers in Luxembourg from being taxed both in the country where they are employed and in their country of residence, the Grand Duchy has entered into double taxation avoidance agreements, in particular with neighbouring countries, such as France, Belgium and Germany. In most cases, these bilateral tax treaties were negotiated on the basis of the model treaty drawn up by the Organisation for Economic Co-operation and Development (hereinafter, the 'OECD model treaty').
Bilateral tax treaties are designed to avoid the risk of double taxation and confer the right to tax particular types of income to either the source country or the residence country. They also contain provisions aimed at eliminating double taxation, namely by way of the exemption method or the deduction method.
Thus, as part of their reporting obligations, cross-border workers employed in Luxembourg or receiving a pension or rental income from Luxembourg must identify the country entitled to tax their income.
Who is concerned
All taxpayers resident in Germany who receive income originating in Luxembourg and/or another country and who file tax returns in Luxembourg and/or in their residence country.
How to proceed
Treatment as a resident taxpayer
Under certain conditions, German cross-border taxpayers employed in Luxembourg may opt to be treated, for tax purposes, as a taxpayer resident in Luxembourg by filling in the appropriate boxes on page 3 of the 'model 100' tax return form. The taxpayer resident in Germany must then fill in a tax return form declaring all of their household’s income, earned both in the residence country and abroad. Foreign income is exempt from tax under the rules laid down by the double taxation avoidance agreement entered into between Germany and Luxembourg. However, this income is taken into account to determine the average tax rate applicable to income taxed in Luxembourg.
Double taxation avoidance agreement
Pursuant to the provisions of the double taxation avoidance agreement entered into by Luxembourg with Germany, the different types of income are reported in the tax return as either exempt (not subject to tax) or non-exempt (subject to tax) income.
The main objective of the OECD model treaty is to clarify, unify and guarantee the tax situation of taxpayers engaged in commercial, industrial, financial or other activities in different countries by ensuring that all countries implement standardised solutions for cases of double taxation. The OECD model treaty indicates whether the source country or the residence country has the right to tax different types of income. For certain types of income, the treaty confers the exclusive right to tax to one of the countries, while for others the right to tax is shared by both countries (e.g. for dividends and interest).
To a large extent, Luxembourg has relied on the OECD model treaty when entering into or updating bilateral tax treaties. In general, the double taxation treaty between Germany and Luxembourg does not deviate from the principles of the OECD model treaty.
Taxation of income from paid employment
Under the double taxation avoidance agreement between Germany and Luxembourg, income from paid employment is taxed in the country where the taxpayer is employed. German cross-border workers employed in Luxembourg are therefore taxed in Luxembourg on the income from their employment in the Grand Duchy. On the other hand, compensation for days worked outside Luxembourg (in Germany or in a third country) is taxed in Germany (except in the cases listed below).
Exceptions to the principles of salary taxation
Days worked outside Luxembourg (fewer than 20 days per calendar year)
Compensation for days worked outside Luxembourg by residents of Germany working for their Luxembourg employer are still taxable in Luxembourg (including days worked abroad in the form of business trips, seminars, training, conferences, etc.) if those days worked outside Luxembourg represent fewer than 20 days per calendar year (tolerance threshold).
Weekends, public holidays and leave—generally speaking, all days when employees are not obliged to work in accordance with their employment contracts—are not taken into account when calculating this threshold.
A fraction of a day worked outside Luxembourg counts as a whole day for the calculation of the tolerance threshold.
If the number of days worked outside Luxembourg reaches 20 days, all compensation linked to the days worked by the employee outside Luxembourg becomes taxable in Germany.
Accordingly, salary taxable in Luxembourg and Germany is as follows:
- Example of calculation of days worked under contract:
- calendar year: 365 days;
- less weekends: 104 days;
- less paid leave: 25 days;
- less public holidays: 10 days;
- total number of days worked under contract: 226 days
- Example of distribution of salary between Luxembourg and Germany:
Out of 226 days worked under contract, the cross-border taxpayer resident in Germany worked 190 days in Luxembourg and 36 days in Germany or a third country. Their annual salary is EUR 99,892 (including benefits in kind).
- salary per working day: EUR 99.892 / 226 = EUR 442;
- salary taxable in Luxembourg: EUR 442 x 190 = EUR 83,980;
- salary taxable in Germany: EUR 442 x 36 = EUR 15,912;
In addition, sickness benefits are always taxable in Luxembourg.
This provision is part of an amicable agreement under the Convention of 23 August 1958 (as amended) between the Grand Duchy of Luxembourg and the Federal Republic of Germany which became effective on 27 May 2011. It applies to taxes payable that have not yet been definitively established and to situations subject to amicable arrangements.
Posted workers
Income earned by German residents from temporary employment as posted workers in Luxembourg is still taxed in Germany when all of the following 3 conditions are satisfied:
- the employee stays in Luxembourg for a period or periods not exceeding a total of 183 days in the calendar year in question;
and - their compensation is paid by an employer that is a foreign employer (if the employer is established in Luxembourg, income earned from employment in Luxembourg is taxed in Luxembourg);
and - their compensation is not paid by a permanent establishment or a fixed base that the foreign employer has in Luxembourg.
If one of these conditions is not satisfied, the compensation is taxed in Luxembourg for the entire duration of the assignment in proportion to the number of days worked.
Taxation of employee severance pay
In the event of departure, severance pay given by a Luxembourg employer to an employee who is resident in Germany is generally taxable in Luxembourg and tax-exempt in Germany.
As a result, the benefits paid following the bilateral termination of an employment contract are taxable in Luxembourg if the worker was employed exclusively in Luxembourg.
On the other hand, if the employee did not work exclusively in Luxembourg in the calendar year preceding the termination, the right to tax the severance pay is shared between Germany and Luxembourg. In Luxembourg, the taxable amount of the severance pay is therefore determined in proportion to the professional income received in the calendar year preceding the termination. The balance is taxable in Germany.
Example:
In 2012, an employee worked 190 days (84 %) in Luxembourg and 36 days (16 %) outside Luxembourg (in Germany or a third country) out of a total of 226 days worked. The employment contract was terminated by bilateral agreement in March 2013. 84 % of the severance pay under the contract is taxed in Luxembourg and 16 % in Germany.
Compensation (for notice periods and dismissals) paid for a dismissal or under a redundancy plan is exempt in Germany, provided that such income was taxed in Luxembourg. However, amounts that are tax-exempt in accordance with Article 115 (9) and (10) ITA remain exempt in Germany.
On the other hand, compensation that can be likened to a pension ("Versorgungscharakter") are taxable in Germany.
This provision is part of an amicable agreement under the Convention of 23 August 1958 (as amended) between the Grand Duchy of Luxembourg and the Federal Republic of Germany which became effective on 8 September 2011. It applies to taxes payable that have not yet been definitively established and to situations subject to amicable arrangements.
Taxation of professional drivers, train drivers and accompanying staff
Compensation paid by Luxembourg employers to professional drivers, train drivers and accompanying staff residing in Germany is taxable in Luxembourg if they work exclusively in Luxembourg. Compensation for days worked outside Luxembourg (in Germany or in a third country) is taxable in Germany. However, compensation for days worked in several countries (Luxembourg, Germany or a third country) is taxable equally between the countries in question, with the third country's share going to the country of residence.
As an exception to the principles set out above, compensation for days worked outside Luxembourg (in Germany or in a third country) for professional drivers, train drivers and accompanying staff residing in Germany and working for a Luxembourg employer are still taxable in Luxembourg if fewer than 20 days per calendar year are worked outside Luxembourg.
In addition, sickness benefits are taxable in the country where the employee is enrolled with the social security regime.
This provision is part of an amicable agreement under the Convention of 23 August 1958 (as amended) between the Grand Duchy of Luxembourg and the Federal Republic of Germany which became effective on 8 September 2011. It applies to taxes payable that have not yet been definitively established and to situations subject to amicable arrangements.
Taxation of income from pensions or annuities
Under the tax treaty between Luxembourg and Germany, pensions and other similar remuneration paid in consideration of past employment are taxed in the country from which the pension or similar remuneration is paid.
Accordingly, retirement pensions paid by a Luxembourg social security institution to a cross-border worker from Germany are taxable in Luxembourg.
Taxation of income from a supplementary pension plan
The tax treaty between Germany and Luxembourg gives the recipient’s residence country the right to tax income from a supplementary pension plan. Accordingly, pensions and annuities paid to a taxpayer resident in Germany by a Luxembourg employer under a supplementary pension plan set up in Luxembourg are taxed in Germany, in accordance with the applicable legislation of that country.
This raises the problem of the double taxation of cross-border workers resident in Germany at the time of the payment of supplementary retirement benefits, since the tax on contributions made to the plan at the standard rate of 20 % is doubled by the taxation upon payments received, in accordance with the applicable legislation in Germany.
Benefits from a Luxembourg supplementary pension scheme do not constitute income taxable in Luxembourg and are taxable in Germany according to applicable legislation.
Taxation of earnings from self-employment
Under the tax treaty between Luxembourg and Germany, the right to tax earnings from self-employment is conferred on the country of residence of the self-employed worker, unless they work through a fixed business base located in Luxembourg.
Accordingly, income earned by a taxpayer resident in Germany from a self-employed business operated through a fixed business base located in Luxembourg is taxable in Luxembourg. This income is taxable in Luxembourg and tax-exempt in Germany.
Directors' fees originating in Luxembourg that a non-resident taxpayer receives as a director, auditor or for serving in a similar position are taxable in Luxembourg under the category of 'earnings from self-employment'. Under the tax treaty between Luxembourg and Germany, directors' fees awarded to taxpayers resident in Germany by a Luxembourg company are taxed in Luxembourg. These directors' fees are taxable income in Luxembourg and tax-exempt income in Germany.
Taxation of rental property income
Under the tax treaty between Luxembourg and Germany, the right to tax rental property income is conferred on the country where the property is located. Income from the rental of property located in Luxembourg and received by a taxpayer resident in Germany is therefore taxable in the Grand Duchy.
Income from rental property located in Luxembourg is taxable income (non-exempt) in Luxembourg and exempt in Germany.
Taxation of capital gains on real property
Under the double taxation avoidance agreement between Luxembourg and Germany, capital gains from the sale of real property are taxed in the country where the property is located. Accordingly, the capital gain realised by a taxpayer resident in Germany from the sale of real property situated in Luxembourg is taxable in Luxembourg.
Capital gains realised on the sale of properties located in Luxembourg are exempt income in Germany and non-exempt income in Luxembourg.
Taxation of capital gains on the sale of assets other than real estate
Under the tax treaty between Luxembourg and Germany, capital gains realised on the sale of shares, bonds and other securities that are not part of the assets of a permanent establishment are taxed in the beneficiary's country of residence.
Accordingly, capital gains realised by a taxpayer resident in Germany on the sale of assets other than real estate, notably the sale of shares and/or securities, are taxable in Germany.
Capital gains realised on the sale of these assets are not taxable in Luxembourg—they are considered as exempt income in Luxembourg when the taxpayer opts to be treated, for tax purposes, as a Luxembourg resident—but instead in Germany, in accordance with the applicable legislation.
Taxation of income from movable assets
Under the tax treaty between Luxembourg and Germany, dividends and interest are taxable in the beneficiary's residence country; the source country can withhold tax at a rate of no more than 15 % of the gross amount of dividends and 15 % of the gross amount of interest (sharing right to tax).
Dividends paid by Luxembourg companies to shareholders who are German residents are subject to a withholding tax of 15 % in Luxembourg, calculated on the gross amount of the sums allocated. The dividends are also taxable in Germany, in accordance with the applicable legislation, and are considered as tax-exempt income in Luxembourg when the taxpayer opts to be treated as a Luxembourg resident for tax purposes.
Interest payments originating in Luxembourg are taxable in Germany, in accordance with the applicable legislation, and are considered as exempt income in Luxembourg when the taxpayer opts to be treated as a Luxembourg resident for tax purposes (for more information, see our information page "Declaring Luxembourg interest payments").
It is worth noting that, in line with the EU Savings Directive, Luxembourg paying agents are required to deduct a 35 % withholding tax from certain types of interest paid to taxpayers resident in Germany. The withholding tax does not apply when the taxpayer resident in Germany opts for exchange of information, or submits to the Luxembourg paying agent a statement issued by the competent German authority certifying that their income is from a known source.
Online services and forms
Who to contact
Luxembourg Inland Revenue
-
Luxembourg Inland Revenue (ACD)
- Address:
- 33, rue de Gasperich L-5826 Hesperange Luxembourg
Please click on the link above to find the competent department.
Luxembourg Inland Revenue
-
Luxembourg Inland Revenue (ACD)
- Address:
- 33, rue de Gasperich L-5826 Hesperange Luxembourg
Please click on the link above to find the competent department.
