According to Article 14 paragraph 1 of the double tax treaty concluded between France and Luxembourg on 20 March 2018, the income from employment derived by a resident of a contracting state in respect of an employment shall be taxable only in that state unless the employment is exercised in the other contracting state.
However, the point 3 of the Protocol provides that a tax resident of a contracting state employed by a company located in the other contracting state can perform his/her activity in his/her country of residence, or in a third country, for a maximum of 29 workdays without triggering taxation in his country of residence.
This measure of tolerance mainly concerns the cross-border workers living in one country and working, on a usual basis in the other country (being hired by an employer of this country), while working sometimes (for instance) from home in their country of residence. Although it concerns both French and Luxembourg residents, it mainly concerns French residents employed in Luxembourg.
How to compute the 29-day threshold?
The threshold is assessed on a calendar year basis (i.e. from 1 January to 31 December), meaning that if an employee is under a part-time contract or did not perform his activity during a full calendar year, the 29 days must be decreased pro-rata and allocated accordingly. In that case, the amount of days should be rounded at the lower full day.
Any full or partial workday on which the taxpayer is physically present in his country of residence (and/or in a third country) to work - including professional trainings - should be taken into consideration as one full day in the 29 days count.
The Circular, like the agreement, lists the following type of workdays exclude from the 29-day threshold:
- Annual holidays;
- Weekly rest days and public holidays;
- Sickness days;
- Case of “force majeure” occurring outside the will of the parties
Both French and Luxembourg tax authorities considered the sanitary crisis due to COVID-19 as a case of “force majeure”. Consequently, the days worked in the country of residence from 14 March until 31 December 2020 (subject to future possible extensions) are excluded from the 29 days count.
How the exceeding days should be taxed?
In case the 29 threshold is exceeded, Article 14 paragraph 1 of the double tax treaty fully applies and the employment income related to these days become taxable in the country of residence from the first day.
However, in case the employee works half a day in his country of residence, even if it counts for one full day to compute the threshold, the employee will be taxed in his country of residence only on the effective time spent in his country of residence (or third country), which could be less than 29 days.
The Circular also specifies some taxation rules applicable to income received in case of sickness or maternity, income from overtime, severance pay and income received during a notice period associated with an exemption from work.
Who bears the burden of proof?
In case of requests from the tax authorities, it's up to the taxpayer to demonstrate that he did not exceed 29 workdays outside his employer’s country based on any proving documentation such as:
- Employment contract, certificate from the employer;
- Badging records;
- Attending list to meetings;
- Transport tickets (train, flights, etc.)
- Hotels, rental car invoices;
- Restaurants, fuel, material invoices from the state of activity.
For any questions, please contact your trusted advisor at Tiberghien Luxembourg or contact any of the authors of this publication.
Maxime Grosjean - Senior Associate (email@example.com)
Madeline Morel - Associate (firstname.lastname@example.org)