Cross-border workers: Luxembourg guidance clarifies “days worked” tolerance threshold

Tolerance threshold calculation

The guidance confirms that, in principle, the workdays during which the employee is physically present in their state of residence or in a third state for the purpose of work (such as teleworking, training, on a business trip, etc.) should be taken into account when calculating the 19-day (Germany), 24-day (Belgium), or 29-day (France) tolerance threshold. (For Belgium, the threshold will be increased to 34 working days once the provisions of the protocol to the 1970 Belgium-Luxembourg tax treaty signed on 31 August 2021 go into effect.)

Where an employee who is a resident of a treaty partner state carries out their activity in that state under a part-time contract and/or a part-year employment contract, it is highly important to know whether the tolerance threshold applies in full (without proration) or whether it should be reduced proportionally. In their guidance, the Luxembourg tax authorities confirm the following:

• German residents: The 19-day threshold does not have to be reduced proportionally. Note that this position is supported neither by specific comments nor by guidelines related to the Germany-Luxembourg tax treaty and its protocols.
• Belgian residents: The 24-day threshold does not have to be reduced proportionally.
  • Although this position is not supported by specific comments or guidelines related to the Belgium-Luxembourg tax treaty, its amendments, or protocols, it is important to note that Belgian tax circular AGFisc 22/2015 (Ci.700.520) dated 1 June 2015 points out clearly that the 24-day threshold has to be proportionally reduced in case of a part-time contract and/or a part-year employment contract.
  • Interestingly, the Belgian tax circular introduced the notion of marginal portions of teleworking activities performed at home in addition to the employee’s normal working day spent in Luxembourg (although it did not provide any precise definition but mentioned the example of an employee consulting professional emails from home before traveling to work, or upon returning home in the evening). These marginal portions would be so short that they would not even be considered a physical professional activity for the purpose of applying the Belgium-Luxembourg tax treaty. Note that the Luxembourg tax treaties with Germany and France are silent on this exception, although it seems defensible in practice.
• French residents: The 29-day threshold has to be proportionally reduced. This is in line with both tax circular L.G. - Conv. D.I. n° 61 of 21 October 2020 and BOFIP comments of 23 February 2021 (both in French only).

In cases where double taxation needs to be resolved through the introduction of a mutual agreement procedure initiated between the competent authorities of both concerned states, the Luxembourg tax authorities refer to their tax circular L.G. – Conv. D.I. n° 60 of 11 March 2021 (in French only), which explains how to implement mutual agreement procedures in the context of the tax treaties concluded by Luxembourg.

Burden of proof

The Luxembourg tax authorities also reminded taxpayers about the burden of proof that must be met in the tax treaty context.

While the Luxembourg income tax law is characterized by freedom of evidence, and no legal proof is favored to the exclusion of others, the burden of proof does not go as far in tax law as in civil law. However, it is up to the taxpayer to prove the facts and circumstances that they believe eliminate or reduce their tax burden (paragraphs 171, 205(1), and 164(1) of the General Tax Law).

For Belgium and France, the Luxembourg tax authorities provided some clarifications regarding the types of evidence a taxpayer must keep to benefit from the workday threshold, but nothing was agreed on this point with Germany.

To anticipate any possible double taxation of employment income, which generally triggers additional tax compliance and temporary cash-flow issues for the concerned employee, and to reach a final position on the tax treatment of employment income in a cross-border situation, it is mostly necessary to refer not only to the applicable tax treaty and related guidelines but also to the practical positions taken by the foreign tax office in charge of assessing the individual tax return of the Luxembourg cross-border worker in their state of residence.

Finally, it is important for nonresident cross-border workers to prepare well aligned cross-border personal tax files supported by the proper type of evidence.

We understand that some discussions recently took place between the Luxembourg and French governments to promote/facilitate teleworking and adjust their tax treaty accordingly. However, no official statement or practical guidelines have been issued to date. More information is expected to be provided by 2023.

If you have any questions, please get in touch with our specialized teams at Deloitte Luxembourg.

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