Understanding the specific provisions of Luxembourg tax law applying to taxpayers resident in France
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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 France who receive income originating in Luxembourg and/or another country and who file income tax returns in Luxembourg and/or in their country of residence.
How to proceed
Treatment as a resident taxpayer
Under certain conditions, French 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 France must then fill in a tax return 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 in the double taxation avoidance agreement entered into between France 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 between France and Luxembourg, the different types of income are reported in the income tax return as either exempt or non-exempt 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 is entitled 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. However, some clauses of the double taxation avoidance agreement entered into between France and Luxembourg depart from the principles of the OECD model treaty. In these cases, the principle set out in the OECD model treaty is mentioned, followed by the provisions of the current agreement with France.
Taxation of income from paid employment
Under the double taxation avoidance agreement between France and Luxembourg, income from paid employment is taxed in the country where the taxpayer is employed. French cross-border workers are therefore taxed in Luxembourg on the income from their employment in the Grand Duchy.
By way of an exception to the general principle stated above, income earned by French residents from temporary employment in Luxembourg is still taxed in France when the following 2 conditions are both satisfied:
- the employee carries out a temporary assignment in Luxembourg for a period no longer than 183 days;
and - the employee’s compensation continues to be borne and paid by their French employer (thus their compensation is not paid or borne by a Luxembourg entity).
When either of these conditions is not satisfied, the compensation is taxed in Luxembourg for the entire duration of the assignment.
Income from paid employment in Luxembourg is considered as non-exempt income in Luxembourg and as exempt income in France.
Taxation of income from pensions or annuities
According to the principles set out in the OECD model treaty, pensions and other similar remuneration paid in consideration of past employment are taxed in the recipient’s residence country.
Luxembourg has departed from this principle in the context of the double taxation avoidance agreement entered into with France. Consequently, retirement pensions paid by a Luxembourg social security institution to former cross-border workers resident in France are taxed in the source country, thus in Luxembourg. These payments constitute non-exempt income in Luxembourg and exempt income in France.
Taxation of income from a supplementary pension plan
Under the tax treaty between France and Luxembourg, income from a supplementary pension plan is taxed in the recipient’s residence country. Accordingly, pensions and annuities paid to a taxpayer resident in France under a supplementary pension plan set up by a Luxembourg employer are taxed in France, in line with the applicable legislation in that country.
This raises the problem of the double taxation of former cross-border workers resident in France at the time of the payment of supplementary retirement benefits, since the tax in Luxembourg on contributions made to the plan at the standard rate of 20 % is doubled by the taxation payments received, in line with the applicable legislation in France.
Income from a supplementary pension plan set up by a Luxembourg employer is thus considered as exempt income in Luxembourg and may be taxed in France, in line with the applicable legislation in that country.
Taxation of earnings from self-employment
Under the tax treaty between France and Luxembourg, earnings from self-employment are taxed in the country where the activity is pursued, provided that the self-employed individual has a fixed base of operations in that country. The notion of a fixed base of operations corresponds to the concept of a permanent establishment in which the taxpayer carries on business.
Accordingly, income earned by a self-employed taxpayer resident in France through a fixed place of business located in Luxembourg is taxed in Luxembourg. This income constitutes non-exempt income in Luxembourg and exempt income in France.
Directors' fees originating in Luxembourg that a non-resident taxpayer receives for serving as a director, auditor or in a similar position are taxed in Luxembourg under the category of 'Earnings from self-employment'. Under the tax treaty between France and Luxembourg, directors' fees paid by a Luxembourg company to taxpayers resident in France are taxed in Luxembourg. These directors' fees are non-exempt income in Luxembourg and exempt income in France.
Taxation of rental property income
Under the tax treaty between Luxembourg and France, 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 France is therefore taxed in the Grand Duchy.
Income from the rental of property located in Luxembourg is taxable (non-exempt) income in Luxembourg and exempt income in France.
Taxation of capital gains on real property
Under the double taxation avoidance agreement between France and Luxembourg, 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 France on the sale of a property located in Luxembourg is taxed in Luxembourg.
Capital gains realised on the sale of properties situated in Luxembourg are exempt income in France and non-exempt income in Luxembourg.
Taxation of capital gains on the sale of assets other than real estate
Under the tax treaty between France and Luxembourg, capital gains on disposals of assets, speculative gains and liquidation surpluses are taxed in the recipient’s residence country. Accordingly, capital gains realised by a taxpayer resident in France on the sale of assets other than real estate, notably the sale of shares and/or securities, are taxed in France.
Capital gains realised on the sale of these assets are not taxed 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 France, in line with the applicable legislation in that country.
Taxation of income from movable assets
Under the tax treaty between France and Luxembourg, dividends and interest are taxed in the recipient’s residence country; the source country can withhold tax at a rate of no more than 15 % of the gross amount of dividends and 10 % of the gross amount of interest (sharing of right to tax).
Dividends paid by Luxembourg companies to natural persons resident in France or Luxembourg are taxable and subject to a withholding tax corresponding to 15 % of the gross amount, in line with applicable Luxembourg legislation. Dividends are also taxed in France, in line with the applicable legislation in that country. This income may also be taken into account in case of taxation by tax base, at least for the determination of the tax rate.
Interest payments originating in Luxembourg are taxed in France, in line with the applicable legislation, and are considered as exempt income in Luxembourg when the taxpayer opts to be treated as a Luxembourg resident (for more information, see the pages: 'Identifying and declaring interest paid by a Luxembourg bank' and 'Identifying and declaring interest paid by a foreign bank').
It is worth noting that, under 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 France. The withholding tax does not apply when the taxpayer resident in France opts for the exchange of information or submits to the Luxembourg paying agent a statement drawn up by the competent French authority certifying that this income is from a known source.
Online services and forms
Who to contact
-
Luxembourg Inland Revenue (ACD)
- Address:
- 33, rue de Gasperich L-5826 Hesperange Luxembourg
Please click on the link above to find the competent department.
Related procedures and links
Procedures
Related procedures
Links
Further information
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Organisation for Economic Co-operation and Development
Website
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Income taxes abroad
on Your Europe
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Mémento fiscal - Résumé des impôts directs perçus
sur le site de l’Administration des contributions directes (ACD)
