Taxation of German frontier workers: mutual agreement signed on 26 May 2011

In our newsletter of March, we informed you about the taxation issue for the German frontier workers in Luxembourg, the German tax authorities having decided to strictly apply the tax rules deriving from the double tax treaty of 1958.

As a reminder, a German resident who works for a Luxembourg company is taxable in Luxembourg provided that he/she performs his/her professional activity in Luxemburg. On the other hand, he/she is taxable in Germany for all the days he is working in Germany or in a third country (business trips outside Luxembourg). In other words, it means that a German resident can benefit from the Luxembourg taxation only on the days he/she is physically present in Luxembourg. In Practice, it means that the employer must restrain the withholding tax to the days of activity performed in Luxembourg. In such a case, the days of activity performed out of Luxembourg must be tax exempted.

The application of this principle raised several practical questions (how to track the working days outside Luxembourg?, does the exemption apply on full salary package - including benefits in kind, performance bonus, 13th month, benefits deriving from a stock option plan?,…).

After many discussions, the German and Luxembourg Finance Ministers reached a mutual agreement on 26 May 2011 regarding the practical implementation of the Treaty.

The mutual agreement notably introduces a tolerance threshold of less than 20 working days per calendar year.
It means that a German resident may work up to a maximum of 19 days per calendar year in his/her country of residence and/or in a third country without becoming taxable in Germany.
In order to calculate this threshold, the normal working days (including the work meetings in the head office/another entity of the group or with clients) as well as the training in the large sense of the word (internal trainings, seminars, conferences, etc).
If this threshold is exceeded, the employee will be taxable in Germany for all the working days performed outside Luxembourg.

The mutual agreement also focuses on the distribution method of the salary between Luxembourg and Germany. In our opinion, a tax circular will be needed to clarify their interpretation.

The mutual agreement entered into force on 27 May 2011. It applies to all cases where income tax is not finally established as well as the cases currently subject to a mutual agreement procedure between the German and the Luxembourg tax authorities.

The Advisory team stays available to discuss about the specific situations you might encounter