Due to the development of teleworking in the context of the COVID-19 pandemic, the question of taxation and social security affiliation of cross-border workers has been debated. In response to the COVID-19 pandemic, the Luxembourg Government agreed in early 2020 on exceptional and temporary measures with the Belgian, French and German Governments regarding the tax and social security situation of Belgian, French and German cross-border workers normally working in Luxembourg and working remotely from their home place (the “Agreements”).
The Agreements have partly come to an end on 1 July 2022. What are the consequences for employers?
Social security of cross-border workers
As a matter of principle, European Regulation 883/2004 provides that employees employed in Luxembourg and residing outside Luxembourg remain affiliated to the Luxembourg social security scheme provided that they do not work more than 25% of their annual working time in their country of residence.
As an exception to the above rule, the Agreements enabled cross-border workers working from their home place more than 25% of their time to remain affiliated to the Luxembourg social security system during the COVID-19 Pandemic.
The Agreements on social security were supposed to come to an end on 30 June 2022. The Administrative Commission for the Coordination of Social Security in the European Union however decided to apply a transitional period of 6 months starting on 1 July 2022 and ending on 31 December 2022.
As a consequence, cross-border workers will be able to continue to work remotely and remain affiliated to the Luxembourg social security system, even if the 25% threshold is exceeded.
Taxation of cross-border workers
Bilateral tax agreements already existed before the COVID-19 pandemic between Luxembourg on the one side, and Germany, Belgium and France on the other side. These bilateral tax agreements provide that taxation of employees normally employed in Luxembourg and working remotely from their home place is maintained at 100% in Luxembourg if the following thresholds are not exceeded:
- Germany: maximum 19 teleworking days per year;
- France: maximum 29 teleworking days per year;
- Belgium: maximum 34 teleworking days per year.
The Agreements negotiated in the context of the COVID-19 pandemic enabled cross-border workers who exceed the above thresholds because of the number of days working from their homeplace in Germany, France or Belgium, to remain subject to tax in Luxembourg.
However, the Agreements concerning the taxation rules applying to cross-border workers came to an end on 30 June 2022.
As a consequence, starting 1 July 2022, the salary in relation to all the days worked outside Luxembourg will be taxable in the employee's country of residence if the above thresholds are exceeded.
Aside from the fact that the employees concerned will have to pay taxes on their employment income in their country of residence, remote working by cross-border workers may also result in tax risks for Luxembourg employers. In particular, the employer could be considered to have a permanent establishment in the employee’s country of residence, and hence have to pay taxes in this country.
Beyond the practical feasibility to enforce the above rules, both employers and employees are advised to keep a list of the number of working days spent by the employees, for whatever reason, outside of Luxembourg.