Frontier workers’ salaries under German tax authority’s scrutiny

The taxation of German frontier workers is under debate in Luxembourg for a few months.

The Trier tax office has indeed clearly communicated its intention to strictly apply the tax rules deriving from the double tax treaty between Luxembourg and Germany… dated 1958. It is not a matter of new rules but only the firm and resolute intention to apply the existing ones.

Controls have been intensified by sending precise questionnaires. So, a certain number of German frontier workers have been taxed in Germany on a part of their salary.

As a reminder, a German resident who is employed by a Luxembourg company is taxable on his/her salary in Luxembourg provided that he/she performs his/her professional activity in Luxembourg. However, he/she is taxable in Germany for all the days he/she has been working in Germany (he/she spends for example one day per week in the offices of the parent company) or in a third country (for example recurrent business trips to the United States). In other words, a German resident can benefit from the Luxembourg taxation only on the days he/she is physically present in Luxembourg.

In practice, when a German resident partly exercises his/her professional activity outside Luxembourg (in Germany or elsewhere), Luxembourg withholding tax should be limited to the days of activity performed in Luxembourg, and thus the days of activity performed outside Luxembourg should be tax exempted. In most cases (1) , the employee is then taxable in Germany on the part of the salary exempt in Luxembourg through his/her German tax return.

It is important to recall that the Luxembourg employer must correctly calculate the Luxembourg withholding tax at source (according to the actual time spent in Luxembourg), however, he/she is not obliged to deduct and pay taxes in Germany. It is indeed only an obligation for which the employee is personally responsible.

Being well aware of the fact that these rules have not always been applied in the past, the German tax office is open to dialogue on an individual basis. Luxembourg employees/employers that are concerned would have to take the necessary actions to regularize the situations that should be.

The different presentations made by the Trier tax office are available on the following link:
http://www.finanzamt-trier.de/information/index_information.html

The Luxembourg authorities concerned are negotiating with Germany in order to reach a mutual position concerning the application of the treaty.

Other frontier countries are also active in this tax area and, for several years now, take actions by all appropriate means to identify the situations where the double tax treaty is not properly applied.

The Advisory Team is at your disposal to discuss any specific situation you might encounter.