Last updated more than 5 years ago
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 Belgium, France, 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 Belgium 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, Belgian 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 Belgium-resident taxpayer must then file 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 Belgium 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 Belgium and Luxembourg, the different types of income are reported in the tax return as either exempt or non-exempt income.
The main objective of the OECD model treaty is to clarify, standardise and guarantee the tax situation of taxpayers engaged in commercial, industrial, financial or other activities in different countries by providing a uniform approach that can be applied by all countries to address the issues raised by 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 Belgium 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 Belgium.
Taxation of income from paid employment
Under the double taxation avoidance agreement between Belgium and Luxembourg, income from paid employment is taxed in the country where the taxpayer is employed. Belgian cross-border workers are therefore taxed in Luxembourg on the income from their employment in the Grand Duchy.
Under a mutual agreement between Belgium and Luxembourg, Belgian-resident cross-border workers in Luxembourg are permitted to work 24 days per year in a country other than their habitual place of employment. Concretely, this means that a Belgian-resident cross-border worker who works habitually in Luxembourg and who, over the course of a tax period, is physically present and performing work in Belgium or another third country for periods not exceeding 24 days in total will not be taxed on that portion of their salary in Belgium.
A Belgian-resident cross-border worker who is employed by a Luxembourg business may be required to prove their physical presence in Luxembourg to the Belgian tax authorities. An employee who is unable to provide such proof will be taxable in Belgium. The 'Vade mecum – physical presence within a country: evidence' explains the evidence that should be retained to enable Belgian-resident cross-border employees to prove their good faith.
By way of exception to the general principle stated above, income earned by Belgian residents from temporary employment in Luxembourg remains taxable in Belgium when the following 3 conditions are all satisfied:
- the employee is present in Luxembourg for a period or periods not exceeding a total of 183 days in the calendar year in question; and
- the employee's compensation is paid by or on behalf of an employer that is not resident in Luxembourg; and
- their compensation is not paid by a permanent establishment or a fixed base that the foreign employer has in Luxembourg.
When any 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 non-exempt income in the Grand Duchy and exempt income in Belgium.
Taxation of income from pensions or annuities
Pursuant 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 country of residence.
Luxembourg has departed from this principle in the context of the double taxation avoidance agreement entered into with Belgium. Consequently, retirement pensions paid by a Luxembourg social security institution to a Belgian-resident cross-border workers are taxed in the source country, thus in Luxembourg. These payments constitute non-exempt income in Luxembourg and exempt income in Belgium.
Taxation of income from a supplementary pension plan
Non-resident taxpayers who receive benefits paid by a supplementary pension plan in Luxembourg are not taxed in Luxembourg for such benefits. These benefits are in theory taxable in their country of residence.
However, the amendment to the Belgium-Luxembourg treaty for the prevention of double taxation provides that income received by a Belgian-resident taxpayer from a Luxembourgish supplemental pension plan is not taxable in Belgium to the extent that the contributions paid by the employer were subject to taxation in Luxembourg.
Benefits paid by a Luxembourgish supplemental pension plan constitute income that is not taxable in Luxembourg and in Belgium.
Taxation of earnings from self-employment
Under the Belgium-Luxembourg tax treaty, 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. The notion of a fixed base should be interpreted in the same manner as that of a permanent establishment where the taxpayer performs the activity.
Accordingly, income earned by a self-employed taxpayer resident in Belgium through a fixed place of business located in Luxembourg is taxed in Luxembourg. These payments constitute exempt income in Belgium and non-exempt income in Luxembourg.
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 Belgium and Luxembourg, directors' fees paid by a Luxembourg company to taxpayers resident in Belgium are taxed in Luxembourg. These directors' fees are non-exempt income in Luxembourg and exempt income in Belgium.
Taxation of rental property income
Under the tax treaty between Luxembourg and Belgium, 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 Belgium 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 Belgium.
Taxation of capital gains on real property
Under the double taxation avoidance agreement between Belgium and Luxembourg, capital gains from the sale of real property are taxed in the country where the property is located. Accordingly, the capital gains realised by a taxpayer resident in Belgium on the sale of a property located in Luxembourg are taxed in Luxembourg.
Capital gains realised on the sale of properties located in Luxembourg are exempt income in Belgium and taxable (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 Belgium, 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 Belgium on the sale of assets other than real estate, notably the sale of shares and/or securities, are taxed in Belgium.
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 Belgium, in line with the applicable legislation in that country.
Taxation of income from movable assets
Under the tax treaty between Belgium 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 15 % of the gross amount of interest (sharing of right to tax).
Dividends paid by Luxembourg companies to shareholders who are Belgian 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 Belgium, 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 taxed in Belgium, 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 should be noted 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 Belgium. The withholding tax does not apply when the Belgium-resident taxpayer opts for the exchange of information or submits to the Luxembourg paying agent a statement drawn up by the competent Belgian authority certifying that this income is from a known source.