Due to Luxembourg’s small size and high property costs, a large part of the workforce comprises cross-border workers (frontaliers). By living in a bordering country, they can benefit from higher remuneration while paying a fraction of the housing costs.
Cross-border workers in Luxembourg may reside in Germany, France or Belgium and commute daily across the border to work in Luxembourg; at the end of each workday, they travel back to their respective residence countries. According to STATEC, 44.9% of the Luxembourg workforce is made up of cross-border workers, a majority of which hail from France.
These professionals, also called frontier workers, can come and go without any restriction if they are EU/EFTA nationals, and they are under no obligation to register in Luxembourg. If they are third-country nationals, however, they must hold a valid work permit in any of the aforementioned countries, as well as a valid employment contract on which it is clearly stated that they may need to work for some days of the month in Luxembourg.
Nonetheless, many do not have these documents in order. They are therefore considered noncompliant, which could expose their end clients, recruitment agencies and management companies to considerable risk of fines and/or prosecution.
Here is an explanation of how cross-border workers in Luxembourg benefit from employment in the country but residence elsewhere—provided they have the right documentation.
Taxes for cross-border workers
Cross-border workers that work in Luxembourg with all the right paperwork have nothing to fear, whether they are employed or self-employed. Cross-border workers pay taxes in Luxembourg for the income generated in the country, but not for their worldwide income as they are non-residents. Employees are taxed at source, and self-employed individuals have to fill out a tax return by 31 March of the year following the tax year. The fiscal year in Luxembourg is the calendar year, running from 1 January to 31 December.
To avoid double taxation, agreements (DTAs) are in place between Luxembourg and these three adjacent countries. These agreements ensure that a person who comes to Luxembourg to live and work for fewer than 182 days in any given 12-month period will only pay taxes for the income in Luxembourg, and in his or her home country for worldwide income.
The worker is considered a resident and must pay taxes in Luxembourg for worldwide income once the duration is longer than the 182-day period.
Cross-border workers (who don’t have residence in Luxembourg), on the other hand, are non-residents for an indefinite period of time.
Social security for frontier workers
Employees pay their part of social security in Luxembourg just like residents, unless they are seconded by a parent company in France, Belgium or Germany. In that case, they provide their employer in Luxembourg with an A1 certificate for a maximum duration of two years. Once this period elapses, they must pay social security in Luxembourg. In reality, most cross–border workers prefer to pay the social security in Luxembourg as it costs less.
However, they are not entitled to the same benefits, notably regarding child benefits. A new law, coupled with the creation of the Future Fund (CAE, Caisse pour l’avenir des enfants), has been introduced to change that and equalise these disparities.
Self-employed professionals in Luxembourg can also provide the Social Security administration (CCSS) with an A1 certificate for a maximum duration of two years if they are paying social security in their residence country. As it is not compulsory to contribute to a pension fund in Germany for freelancers, they must do so in Luxembourg.