An amendment to the tax treaty between Luxembourg and Belgium will have repercussions for Luxembourg's many cross-border workers.

Cross-border and foreign workers are essential to Luxembourg's economy

Luxembourg is a small nation, landlocked between Germany, France and Belgium and its economy depends on foreign and cross-border workers for more than 30 percent of its labour force.

A recent amendment to the tax treaty between Luxembourg and Belgium will have repercussions for the many Belgian cross-border workers commuting to and from this small, landlocked nation. Some of the new provisions are tougher than before, while other new provisions make it easier and simpler.

The amendment signed on 11 September 2002 brought some changes to the tax treaty of 17 September 1970 between Luxembourg and Belgium. The changes came into effect on 1 January 2005.

Tougher on taxation of employment income

Some of the new provisions are tougher than before, for instance, those regarding the taxation of employment income (article 15, section 2 of the tax treaty). Up till now, a Belgium resident taxpayer employed in Luxembourg had to work in Luxembourg for a period not exceeding 183 days during the civil year in order to remain taxable in Belgium. The new version of article 15 section 2, referring to any 12 month period for the application of the 183 day rule, will increase the incidence of taxation in Luxembourg.

International truck drivers have it easier

In contrast, some other new provisions make it easier and simpler than before, for instance, those in relation to the taxation of international truck drivers. The drivers are now taxed in the state where the management of the concerned enterprise is based. Therefore, Belgian tax resident truck drivers who are employed by a road transportation firm located in Luxembourg are taxed in Luxembourg no matter where they carry out their activities (article 15 section 3 of the treaty).

Some instances of double taxation eradicated

Some provisions finally eradicate instances of double taxation between Luxembourg and Belgium, for instance, those in connection with Belgian tax resident retirees earning benefits from a pension scheme set up by a former Luxembourg employer. After the enforcement of the amendment, the benefits are no longer taxed in Belgium, provided that the contributions paid by the employer have already been subject to taxation on entry into Luxembourg, basically to the lump sum of taxation at 20 percent (article 18, section 3). Reciprocally, assets and redemption values of pensions paid for prior to employment, to a resident of Luxembourg, and that originate in Belgium shall be taxable in Belgium (article 18 section 4).
 
Germany and Luxembourg comply on the taxation of international truck drivers
 
Luxembourg signed a memorandum of understanding with the German authorities in March 2005 regarding the taxation of truck drivers. The aim of this agreement is to determine common rules of taxation of the workdays spent in one, the other or a third country, in order to avoid any double-taxation or a double-exemption situation. The rules have been applicable since the start of 2005.

Developments between Turkey and Luxembourg

By means of international treaties, Turkey is expanding its relations with Luxembourg at a time when it is presiding over the Council of the European Union until 30 June 2005.

The social security agreement signed between Luxembourg and Turkey on 20 November 2003 was ratified by Turkey by decree published on 8 January 2005.

The tax treaty signed on 9 June 2003 between Luxembourg and Turkey will be applicable from 1 January 2006.

June 2005

Joelle Lyaudet is a Director in the IAS practice in Luxembourg.  She can be reached at jlyaudet@deloitte.lu or Tel: +352 451 452 582.

Subject: Taxation in Luxembourg, tax, working across borders, international truck drivers