ABBL

Luxembourg has a specific situation in Europe when it comes to commuters: 150,000 commuters are working in our country, 37,000 of which commute from Germany. The tax situation of those employees is very complex because of the bilateral nature of the double taxation treaties (DTTs).

DDTs do not take into account situations where three countries are involved, because the following criteria are diverging:

• the residence of the employer,
• the residence of the employee, and
• the country where the employee is sent to (for a period not exceeding 183 days).

The situation of a commuter with an employment contract in Luxembourg, who is sent back to work in her/his country of residence for a limited period of time, is however the same as if there were a triangular situation (hidden triangular situation). This is due to the fact that the OECD model agreement is implicitly based on the hypothesis that an employer is involved in the relation between the taxpayer and the tax administration(s).

Article 10 of the double taxation agreement between Germany and Luxembourg contains two important paragraphs dealing with income in the form of salary in bilateral cross-border situations: Paragraph 1 establishes the general rule as to the taxation of income from employment; namely that such income is taxed in the State where the employment is actually exercised. This is standard in all double taxation agreements in the world.

Paragraph 2 contains a general exception to the rule in paragraph 1, the famous “less than 183 days rule”. This rule is of primordial importance for employers evolving in a cross-border environment. It allows them to send an employee to another State for a period of less than 183 days, without obliging the employer to undergo complex (tax or other administrative) registration procedures in the country to which the employee is sent. For short-term postings (less than ½ a year), the country where the employee is sent thus renounces on its general right to tax the employment income, because the work is exercised on its territory.

Germany had recently unilaterally changed its interpretation of paragraph 2 and no longer wanted to recognize the fact that it had renounced – in favour of the employer and the employee - on its taxation rights for short term postings (less than 183 days). The renunciation was considered valid only for employees residing in the same country as the employer. Germany further wished to apply this new interpretation retroactively. This led to a very unfortunate double taxation situation.

After several bilateral meetings, finance ministers Luc Frieden and Wolfgang Schäuble recently agreed on a common solution, and have now signed a mutual agreement that will not only be applicable in the future, but also retroactively.

The mutual agreement allows for an exemption of 19 days per year. Concretely, this means that someone who lives in Germany and is employed in Luxembourg may work a maximum of 19 days a year in Germany or in a third country for his Luxembourg employer, without this activity being subject to taxation in Germany. The income from this activity is exclusively taxed in Luxembourg. If, however, the 19-day exemption period is exceeded, employment activity exercised in Germany or a third country will be taxed in Germany as of the 1st day, and no longer in Luxembourg.

Holidays, maternity leave or sick days do not fall in this period and are thus always taxed in Luxembourg.

In a circular letter of 14 June 2011, the German Ministry of Finance gives some more guidance to the tax authorities on the mutual agreement.

Related files: 

Grenzüberschreitende Tätigkeiten: Lohnsteuerliche Besonderheiten (Finanzamt Trier)

Mutual agreement of 26 May 2011 (original German version)

Mutual agreement of 26 May 2011 (English translation)

Protocole d'accord du 26 mai 2011 (Traduction française)

Circular letter from the German Ministry of Finance of 14 June 2011 on the mutual agreement (only available in German)