After-tax.net volume 8, issue 3
Fiscal dispute on German commuters working in Luxembourg coming to an end?
After several months of hot tempered discussions between the German and Luxembourg tax authorities, on 26 May 2011 the Finance Ministers of both countries finally found an agreement on the German cross-border commuters working in Luxembourg.
The consensus on the tax treatment of wages for commuters was set up through a mutual agreement to the agreement of 23 August 1958 between the Grand Duchy of Luxembourg and the Federal Republic of Germany for the avoidance of double taxation. The mutual agreement is in force as from 27 May 2011 and is applicable to all cases which are not finally assessed at that moment.
The memorandum of agreement between Germany and Luxembourg permits a tax buffer of up to 19 working days per calendar year, in case the employee works in the country of residence or in a third country, provided that the salary income is subject to taxation in the country of activity (Luxembourg). Days below this limit are consequently tax exempt in the country of residence (Germany). However, if the employee works 20 working days or more during the calendar year in the country of residence or in a third country, the taxation of salary income pertaining to these working days falls back to the country of residence.
The distribution of wages between the country of residence and the country of activity for taxation purposes will be based on the ”agreed working days” further to the labour contract. This means that vacation days, week-end days (or alternative rest days) and public holidays are not taken into account for the computation of the prorata of income taxable in each state.
Payments in respect of maternity leave and sick leave (the so-called “unproductive” days that have made it difficult to find a consensus) are taxed in the state of activity. Consequently, these types of wage income are tax exempt in the state of residence.
However, unpaid sick days will reduce the agreed working days.
Additional rules for calculating the agreed working days and the division ratio are set by the agreement:
- Working time spent in a third country should be taxed in the country of residence
- Overtime must be considered separately
- Work on a non agreed working day with a compensation holiday (i.e. without payment of a separate cash amount) should be taken into account to compute the agreed working days
- Lump sum payments (such as anniversary payment for jubilees) for a no more than 10 years previous active service are proportionately attributable to the activity in the state of residence and in the state of activity using the above principles. For this purpose, the reason of payment will be relevant; if the lump sum payments are pensions or pension claims, the taxation right will fall back to the country of residence
- Holiday allowances and payments for unused vacation are included in the division; for holiday payments which are related to vacation of a previous year, the division ratio of the year concerned is applicable
- If effective working days differ from agreed working days because the employee transferred vacation days from one year to another, the agreed working days used to compute the division ratio must be increased/reduced accordingly, unless the number of transferred holidays is no more than 10
The agreement puts an end to a long-lasting period of uncertainty for German residents working in Luxembourg and is good news in this respect. The division ratio, the calculation of the agreed working days and the calculation of the Luxembourg wage tax will likely rise up questions for which it could be useful that the Luxembourg tax authorities issue guidelines in the near future. The guidelines available for the taxation of professional drivers can be a useful reference in this respect (mutual agreement between the Grand Duchy of Luxembourg and the Federal Republic of Germany on the tax treatment of wages for professional drivers dated 1 March 2005 and circular letter LG –Conv. DI n°51 of the Luxembourg tax authorities dated 18 April 2005). We will keep you informed of any developments in this area.