Abolition of wage tax release for mobile employees - 14/02/2013
In our After-tax.net of 3 January 2013, we highlighted the most important 2013 tax measures relating to tax rates, social security and tax deductions. In this edition, we will elaborate on another administrative measure foreseen by the grand-ducal regulation of 21 December 2012, namely the abolition of the wage tax release procedure.
Withholding tax obligation
According to article 136 of the Luxembourg Income Tax Law (ITL), the remuneration of a salaried occupation is subject to income tax withholding at source. The withholding tax is to be calculated according to the rules laid down in the law and to be operated, declared and paid under the responsibility of the employer.
Withholding tax release
In situations whereby the remuneration granted by a Luxembourg employer should not be taxable in Luxembourg, either according to applicable tax treaties or to Luxembourg domestic legislation, a wage tax release had to be requested2 from the tax authorities.
In practice, this is namely the case if a Luxembourg employee is assigned abroad, becomes fully taxable in the host country as a result of the assignment but remains paid by the Luxembourg entity. In such situation, in general, the income can be exempt from taxation in Luxembourg based on the applicable double tax treaty.
In case the competent tax authorities agreed with the submitted request for a wage tax release, they provided the individual or company with an official confirmation. Based on this release, no withholding tax needed to be operated by the Luxembourg employer.
Not requesting the wage tax release could, especially upon a wage tax audit, result in questions and penalties for the employer considering his responsibility to apply withholding taxes.
Abolition of wage tax release as of 1 January 2013
Further to the grand-ducal regulation of 21 December 2012, the aforementioned provisions relating to the wage tax release procedure have been abolished as of 1st January 2013. In practice this means that the employer with personnel taxable abroad will no longer be required to obtain a formal wage tax release.
The analysis of the new grand-ducal regulation, together with the clarifications received by the tax authorities, result in the following attention points for employers to consider:
- it is the employer’s responsibility to correctly assess the situation and to determine whether the remuneration paid should be subject to wage withholding tax in Luxembourg or should be tax exempt according to applicable tax treaties or Luxembourg domestic legislation.
- if the employer assesses that the remuneration should not be subject to wage withholding tax, he has to mention on the payroll that the employee does not have to submit a tax card. This is linked to the fact that one has no longer to request for a wage tax release in case there is no withholding tax obligation.
- it is recommended that the employer keeps a record of the legal grounds for the wage withholding tax exemption (e.g. analysis of applicable double tax treaty).
- it is also recommended that the employer keeps a copy of evidence with regards to the taxation of the remuneration outside of Luxembourg (e.g. foreign tax return).
Although the official wage tax release process has been abolished and one has no longer to initiate an official request for a withholding tax release, it remains the employer’s responsibility to correctly assess the situation and to keep necessary information and documents to sustain any withholding tax exemption.
We therefore recommend that companies review specific files on a case by case basis in order to verify whether the income can be exempted from a wage withholding tax obligation or not. We can advise and assist with this review as well as with the gathering of useful information and documentation.