What are my tax obligations as an entrepreneur?

Luxembourg is a small country located at the heart of the Greater Region and perceived as a sort of El Dorado by many entrepreneurs. If you are starting out as an entrepreneur and are thinking of creating your business in Luxembourg, Paul Leyder, Partner at BDO, explains the tax rules you must follow, the resources needed, and the country specifics requiring consideration in order to comply.

Mr Leyder, entrepreneurs have obligations to meet, including on tax matters. What particular issues should they be aware of?

If you set up a business in Luxembourg, you must comply with many obligations. First of all, you must obtain a business permit in order to legally carry on a business, or you run the risk of criminal sanctions and the closure of your company.

As far as tax issues are concerned, you must register for VAT and comply with VAT requirements. You must also be sure to consider taxation on the income of your Luxembourg company as well as on your earnings as an entrepreneur. If you employ staff, you must be affiliated with the social security system as an employer and register with the Administration des Contributions Directes (Direct Tax Administration) to comply with employee taxation rules. The Administration des Contributions Directes is required to deduct taxation at source on the earnings of Luxembourg taxpayers.

Entrepreneurs operating via a SARL or SARL-S (limited liability company) or SA (public limited company) – which is less frequent – generally have two types of income: remuneration as a manager, which is subject to income tax and social security contributions if the manager operates out of Luxembourg, and income distributed in the form of dividends. Dividends are subject to withholding tax in Luxembourg when the distribution is made, and to income tax by the entrepreneur in their country of residence, with a corresponding tax credit for the Luxembourg withholding tax.

Luxembourg is unique in that it has a large number of cross-border workers. What are the implications of this for entrepreneurs?

For cross-border workers from neighbouring countries with an employment contract with a Luxembourg entrepreneur, special attention must be paid to where earnings are declared for taxation – this is split between the employees’ country of residence and Luxembourg as the country where the work is carried out. In principle, only remuneration for work carried out in Luxembourg is taxable in Luxembourg, whereas remuneration for work carried out abroad – in the employee’s country of residence or elsewhere – is taxable in the employee’s country of residence.

Agreements between Luxembourg and neighbouring countries provide for taxation in Luxembourg of the full earnings of employees living abroad, providing that the days worked abroad do not exceed a certain threshold.

Luxembourg is a small country and a significant portion of the labour force is non-resident. Agreements have therefore been concluded between Luxembourg and its neighbours. These provide for taxation in Luxembourg of the full earnings of employees living abroad, providing that the days worked abroad do not exceed a certain threshold. For Belgium and France, this threshold is 34 days. For Germany, the threshold is currently 19 days, but will also be raised to 34 days from 2024 as a result of an agreement between Luxembourg and Germany on 6 July 2023. Consequently, providing an employee does not exceed this number of days, Luxembourg reserves the right to tax the full salary. Otherwise, the employee is liable for taxation in their country of residence for all of the days worked outside of Luxembourg.

In some instances, the employer must also comply with certain obligations in the employee’s country of residence. For example, this is the case if a portion of the remuneration of employees resident in France becomes taxable in France. In this case, the employer must report the net income taxable in France each year. However, since 2023, the employer is no longer required to deduct taxation at source. Tax due in France will be charged by the French tax authorities from the relevant employee’s bank account. For Belgium and Germany, the employer has nothing to do as the employee is required to report the portion of their salary that is taxable in their country of residence.

So for employees working in Luxembourg and abroad, the employer must keep close track of where their employees work. The employer must also inform staff of the consequences of exceeding the thresholds for days worked outside of Luxembourg and the procedures to be followed, and ensure that the portion of earnings that is taxable in the employee’s country of residence is not taxed in Luxembourg.

Income tax is assessed exclusively on the basis of national provisions, in compliance with bilateral agreements on double taxation.

How do EU rules affect Luxembourg legislation?

With regards to income tax, EU rules have little impact, with the exception of the taxation of income under the parent-subsidiary regime and the exchange of information with other EU member states. This is because income tax is assessed exclusively on the basis of national provisions, in compliance with bilateral agreements on double taxation.

It is worth noting that for taxation on earnings, the exchange of information between EU member states has a greater impact for tax authorities than employers. However, the exchange of information between EU member states also relates to matters other than taxation on earnings and thus has a significant impact on the administrative requirements for Luxembourg companies.

With regards to social security, the situation is different. In principle, the employees of a Luxembourg employer are subject to the Luxembourg social security regime and, accordingly, both the employer and employee must pay social contributions in Luxembourg. However, based on a European regulation concerning the coordination of European social security systems, an employee of a Luxembourg employer may in some instances be subject to the social security regime of their country of residence. This is specifically the case for an employee carrying out a substantial part of their work in their country of residence.

On 5 June 2023, Luxembourg signed a new European framework agreement on teleworking, applicable since 1 July 2023.

If an employee of a Luxembourg employer is subject to social security in their country of residence, the Luxembourg employer will have a certain number of administrative formalities to complete in the employee’s country of residence. You should also note that on 5 June 2023, Luxembourg signed a new European framework agreement on teleworking, applicable since 1 July 2023. This new agreement enables employees of a Luxembourg employer to remain subject to the Luxembourg social security regime on certain conditions, providing the time spent working in their country of residence remains below 50% of their total working time.

Lastly, liability for VAT, determining the place that goods and services are provided for VAT purposes, and VAT registration requirements are governed by Luxembourg law, but the Luxembourg provisions are based on the implementation of European directives.

How can an entrepreneur ensure that they always comply with these requirements?

For entrepreneurs without prior experience of such matters, the best thing is to seek advice from Luxembourg-based professionals who can help with the various issues. For example, such experts may be able to provide human resources services (affiliation to the social security system, monitoring compliance with obligations regarding taxation on earnings and social security contributions, calculating contributions, advice on monitoring procedures for teleworking, etc.) and help with VAT and income tax obligations.

What have been the recent trends in economic, social and legal matters?

New working methods have emerged as a result of lockdowns. Employees have found working from home enjoyable. This is something to think about when looking to motivate and recruit employees.

We have also seen a reduction in the difference between earnings in Luxembourg and neighbouring countries. Earnings remain higher in Luxembourg, but less so than previously. The challenges of transport and housing also encourage workers to think more carefully about where they wish to work and live.

In some business sectors such as finance, a shortage of workers is meaning that employers are having to look further afield for the skills they require, in other EU countries or even outside of the EU. Under a specific tax regime, the impatriate regime, part of the remuneration of employees hired abroad may be exempt from income tax on certain conditions. This means that you can offer higher net earnings as an additional incentive.

What changes can we expect in the future and how can you deal with these?

No changes are forecast on the rules on taxation, other than for the exchange of information between countries, which will continue to evolve in the future.