Luxembourgish companies and cross-border telecommuting

With the advent of Covid-19, telecommuting has spread, and the unique situation of Luxembourg and its many cross-border workers has accelerated this trend. The exceptional regime put in place during the Covid-19 pandemic, which temporarily suspended certain tax and social rules, has ended. As a result, the regular practice of telecommuting for employees or self-employed individuals residing in neighboring countries - France, Germany, Belgium - requires compliance with specific rules regarding labor law, taxation, and social security.

Whether you are an employer seeking information on the rules for granting telecommuting to your cross-border employees or an independent individual residing in a neighboring country with a business established in Luxembourg, here is an overview of the rules to consider, which vary depending on your status.

1. In terms of labor law (applicable to employees only)

Telecommuting is now legally recognized as a "form of organization or performance of work, generally using information and communication technologies, so that work that would normally have been done on the employer's premises is carried out outside of these premises." It is considered occasional when performed to deal with unforeseen events or represents less than ten percent on average of the teleworker's normal annual working time. Telecommuting is considered regular in other cases.

Telecommuting is always voluntary: the employee and employer jointly choose the formula to be implemented. For occasional telecommuting, it is sufficient for the employer to provide the employee with written confirmation of the right to telecommute occasionally. Regular telecommuting, on the other hand, requires the establishment of a written agreement between the employer and the employee defining the conditions of telecommuting (location, hours and days, possible compensation, monthly lump sum for covering connection/communication costs, modalities of returning to the traditional work formula, etc.). The employer must also provide the necessary work equipment and cover the costs directly incurred by telecommuting, especially those related to communications. This coverage can take the form of a monthly lump sum, to be agreed upon in a written agreement between the employer and
the employee.

The employer must ensure compliance with data protection rules and inform/train the telecommuting employee in this regard. The telecommuting employee should be able to request technical support.

Of course, the principle of equal treatment among all employees, whether telecommuting or not, must be respected (especially in terms of the right to training, career development, organization of working time, result criteria, workload, overtime, right to disconnect, etc.). The employer must also take measures to prevent the isolation of the telecommuting employee (access to company information, meetings with colleagues, etc.).

2. In terms of taxation

A fundamental principle of taxation is the taxation of income in the country from which the work is performed. This means that work performed from the country of residence should, in principle, be taxed there, with the particularity of agreed-upon tolerance thresholds between Luxembourg and its neighboring countries.

For employees

Bilateral agreements with the three neighboring countries provide for annual tolerance thresholds that, if not exceeded, allow cross-border telecommuting without tax consequences. From 2024 onwards, this threshold is the same for neighboring countries and amounts to 34 days for Germany, Belgium, and France. The days to be counted include all periods of work performed outside of Luxembourg (telecommuting, conferences, professional activities, training, business travel, etc.).

As long as this tolerance threshold is not exceeded, the taxation of the employee's income takes place uniquely in Luxembourg. This means that a cross-border employee can telecommute for up to 34 days without affecting the taxation of their salary, which remains fully taxed in Luxembourg. If the threshold is exceeded (= working for more than 34 days outside of Luxembourg), the taxation must be shared with the country of residence, proportional to the time worked outside of Luxembourg. This implies that the portion of income related to days worked outside Luxembourg is, on the one hand, exempt from Luxembourg tax and, on the other hand, declared and taxed in the country of residence. Salary statements of employees must be adapted accordingly. Some countries (such as France) require additional registration formalities for both the employer and the employee with the French authorities.

For self-employed individuals established in Luxembourg

The self-employed individual who invoices for services is a considered a business and is therefore not subject to the tax rules and thresholds mentioned above that apply to employment income. The income of the self-employed individual constitutes the profits of a business: these profits are taxable in a state only if the activity is carried out through a permanent establishment (= a fixed business installation through which a business conducts all or part of its activity) located in that state and only to the extent that these profits are attributable to that permanent establishment. A self-employed individual established in Luxembourg is therefore generally taxed in Luxembourg since their business is established there, but could be taxed in their country of residence if they work in such a way that it can be inferred that their presence constitutes a permanent establishment (based on the duration of presence in the territory, or also on the turnover generated on this territory: the analysis is conducted based on a set of indicators). Be cautious, therefore, about the telecommuting of the entrepreneur, which could be interpreted as the presence of a permanent establishment in their country of residence and thus impact their taxation.

3. In terms of social security

Within the European Union, the principle of unity applies in terms of social security. This means that a person can contribute to social security in only one EU country at a time, even if they have professional activities in several countries. The competent authority in terms of social security of the relevant country must consolidate the rights of the person concerned.

In the case of an employee employed in Luxembourg

In principle, they are affiliated with Luxembourgish social security. However, if 25% or more of their working time is spent in their country of residence, their affiliation and payment of contributions will be in the country of residence and no longer in Luxembourg.

The framework agreement established within the European Union and signed by Germany, Belgium, France, and Luxembourg allows an exception to this rule and enables an employee to work up to 49.9% of their working time in their country of residence while remaining affiliated with Luxembourgish social security. To apply the framework agreement, the following conditions must be met:

• The telecommuting performed must constitute at least 25% and less than 50% of the total working time of the employee;
• The regular telecommuting must be carried out exclusively in the state of residence of the employee;
• The telecommuter must remain connected to the employer's work environment to perform their tasks (normal and usual connection to the employer's infrastructure);
• The employee must not engage in another occasional salaried or non-salaried activity in the country of residence or another Member State.

The application of the framework agreement is an option that must be voluntarily implemented by the employer and the employee (no obligation).

Whether telecommuting is carried out under the framework agreement or not, the employer must carry out administrative procedures with the Common Social Security Center (CCSS) to inform about any telecommuting situation for employees not residing in Luxembourg. Some countries also require additional records, such as Belgium, for example.

In case the telecommuting thresholds are exceeded (25% or 50% of working time, depending on whether the framework agreement is applied or not), the affiliation and payment of social security contributions for the employee will no longer take place in Luxembourg but in the country of residence. This implies, among other things, for the employer to register in the employee's country of residence to be able to pay the social security contributions directly to the competent authority: the cost of social security in the country of residence will then apply (and may be higher than that of Luxembourgish social security for both the employer and the employee!), and the accounting and salary statements of the employee will also need to be adjusted. The employee will lose the benefit of Luxembourgish social benefits since they will be subject to the system of their country of residence.

In the case of the self-employed individual established in Luxembourg

In principle, they are affiliated with social security in Luxembourg if their business is established in Luxembourg and they work in Luxembourg. However, if 25% or more of their activity/income is in the country of residence, affiliation and payment of contributions will be in the country of residence and no longer in Luxembourg. The
framework agreement does not apply to self-employed individuals.

In conclusion, telecommuting rules must be carefully analyzed in each situation to anticipate all the consequences, which will need to be considered simultaneously in terms of labor law, taxation, and social security. For example, a cross-border employee who could telecommute up to 49.9% of their working time in their country of residence under the framework agreement without consequences on their social security, which would remain in Luxembourg, would still suffer consequences on the fiscal side (exceeding the 34-day threshold).

For any questions regarding the administrative aspects of the telecommuting, the House of Entrepreneurship is at your disposal, even though the individual application of these rules to your situation will require a legal/tax specialist in the field.