New tax rules in Luxembourg impacting cross-border workers and PEPPs

This article provides guidelines on the taxation of cross-border workers during the Covid-19 pandemic and an update on PEPP as defined in the latest budget laws in Luxembourg.

Luxembourg implements online income tax returns for individuals

From 7 February 2022, residents and non-residents in Luxembourg receiving employment income, pension income or rental income will be able to file their income tax return for the tax year 2021 online, providing their previous year’s tax returns were filed.

Extension of the mutual agreement between Luxembourg and Germany for cross-border workers until 31 March 2022

Following an update on 6 December 2021, the mutual agreement between Germany and Luxembourg regarding the taxation of employment income of cross-border workers based on the double tax treaty between the two countries during the Covid-19 pandemic has been extended until 31 March 2022 (from 31 December 2021).

The Luxembourg government approves the protocol of the double tax treaty agreed with Belgium

On 3 December 2021, the Luxembourg government approved an amendment to the double tax treaty signed on 31 August 2021 between Belgium and Luxembourg, covering income tax and wealth tax. The protocol has been signed in order to reduce the taxation of cross-border workers.

France and Luxembourg extend the mutual agreement for cross-border workers until 31 March 2022

The mutual agreement concluded between France and Luxembourg in relation to the extension of the non-consideration for Luxembourg tax purposes of up to 29 home working days due to Covid-19, amended via protocol in 2019, is extended until 31 March 2022.  There are in excess of 100,000 French workers ordinarily working and taxable in Luxembourg, for whom this extension is likely to be helpful.  Furthermore, if the agreement is not terminated by either party at least 1 week before its expiry, it will be automatically extended until 30 June 2022

This agreement, signed on 6 December 2021 by France and on 13 December 2021 by Luxembourg, extends the specific agreement concluded on 16 July 2020, which states that the Covid-19 pandemic is a force majeure, based on Article 1(c) of the treaty signed on 22 July 2020.

The general agreement indicates different measures implementing the 29-day threshold fixed by paragraph 3 of the protocol of the double tax treaty between France and Luxembourg for income tax and wealth tax of cross-border workers.

European individual pension schemes (“PEPP”)

• Reimbursement of PEPP

Reimbursements of PEPP accounts will be taxed as miscellaneous income. This income will be taxable at half of the individual tax rate if the following conditions are met:

• the contributions were for a minimum period of 10 years; and
• the reimbursement will be available between the ages of 60 and 75.

The same rule applies to reimbursements arising from the death of a beneficiary, disability, or serious illness. In addition, the taxpayers may, if the above conditions are met, have the possibility to withdraw part of the accumulated capital at half of the individual tax rate. The other reimbursements will be taxed at the standard individual tax rate.

• Transfer on a PEPP account and pension income

Transfers made by an individual on a PEPP account recognised in Luxembourg or another European Member State will be tax deductible up to a maximum of €3,200. A lump sum deduction of €480 is also applicable to these contributions. For taxpayers that are not liable in Luxembourg for the entire year, the tax deduction is computed on a pro-rata basis.

Taxpayers have the ability to opt for a contract PEPP that provides a report of the pension income for a minimum period of 10 years, payable between the ages of 60 and 75. The savings can be paid via capital, rents, annual withdrawal, or a combination of the options. The anticipated payment of the pension is possible, subject to authorisation, in case of disability or serious illness that reduces the ability to work by 50%.

The capital and redemption value received for pensions are not tax-exempt.

• Contributions to other pension schemes

Taxpayers have the ability to opt for contributions to other pension schemes that provide a report of the pension income for a minimum period of 10 years, payable between the ages of 60 and 75. The savings can be paid via capital, rents, annual withdrawal, or a combination of these options. The anticipated payment of the pension is possible, subject to authorisation, in case of disability or serious illness that reduces the ability to work by 50%.

The maximum deductible amount for private pension contributions will amount to €3,200.