Taxes

Double taxation system in Luxembourg

Avoid the hassle of being taxed twice, especially if you're from outside Luxembourg or have multiple residencies. Our article is here to guide you through the process, explaining how taxes are calculated and highlighting special conditions for individuals from countries that have tax treaties with Luxembourg. We'll break down the essentials, ensuring you understand how to navigate these rules and potentially save on taxes.

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Luxembourg has a double taxation system which ensures that income earned in the country is not taxed twice. Double taxation occurs when the same income is taxed in two different countries. To avoid this, Luxembourg has signed double taxation treaties with more than 80 countries worldwide.

Agreements have been concluded with the following countries:

Albania, Andorra, Armenia, Austria, Azerbaijan,
Bahrain, Barbados, Belgium, Brazil, Bulgaria, Brunei,
Canada, China, Cyprus, the Czech Republic, Croatia,
Denmark,
Estonia,
Finland, France,
Germany, Guernsey, Georgia, Greece,
Hong Kong, Hungary,
Israel, Ireland, Iceland, India, Indonesia, Italy, the Isle of Man,
Jersey, Japan,
Kazakhstan, Kuwait,
Lao Democratic Republic, Latvia, Liechtenstein, Lithuania,
Mauritius, Malaysia, Morocco, Mexico, Moldova, Monaco, Mongolia,
Northern Macedonia, the Netherlands, Norway,
Panama, Poland, Portugal,
Qatar,
the Republic of Korea, Romania, Russian Federation,
San Marino, Saudi Arabia, Senegal, Seychelles, Singapore, Slovakia, Sierra Leone, Slovenia, South Africa, Spain, Sri Lanka, Sweden, Switzerland,
Tajikistan, Thailand, Trinidad and Tobago, Tunisia, Turkey,
the United Kingdom, UAE, Ukraine, Uruguay, Uzbekistan, USA,
Vietnam.

How the Luxembourg double taxation agreement works

If a Luxembourg resident receives income from a foreign source, the income will be taxed in the country where it was received. But, if the income is also subject to tax in Luxembourg, an individual may claim a tax deduction on foreign taxes, up to the amount of Luxembourg tax that would have been payable on that income.

Alternatively, if a non-resident of Luxembourg receives income in the country, it will be taxed in Luxembourg. However, non-residents in some cases may claim a tax deduction in their country from taxes paid in Luxembourg up to the amount of tax payable on that income in their country.

In addition, even if a certain income is not taxable in one of the states, double taxation agreements generally allow the state that does not have the right to tax to nevertheless consider the exempt income to determine the tax rate to be applied to the non-exempt income.

This will be much clear with an example.

Let's take the case of a Luxembourg resident who has an income of 40,000 euros in Luxembourg and another 30,000 euros in France. In this case, the French state has the right to tax the 30,000 earned in France while the Luxembourg state will only tax the 40,000 earned in Luxembourg. In this way double taxation is avoided, however, the Luxembourg state has the right to consider the 30,000 earned in France to determine the tax rate to be charged. The calculation for the tax in Luxembourg will be as follows:

Bracket	Tax rates	Amount taxed	Tax (euros)	Comment
0 - 11,265	0.00%	–	–	Taxed in France
11,266 - 13,137	8.56%	–	–	Taxed in France
13,138 - 15,009	9.63%	–	–	Taxed in France
15,010 - 16,881	10.70%	–	–	Taxed in France
16,882 - 18,753	11.77%	–	–	Taxed in France
18,754 - 20,625	12.84%	–	–	Taxed in France
20,626 - 22,569	14.98%	–	–	Taxed in France
22,570 - 24,513	17.12%	–	–	Taxed in France
24,514 - 26,457	19.26%	–	–	Taxed in France
26,458 - 28,401	21.40%	–	–	Taxed in France
28,402 - 30,345	23.54%	345 euros	376.40	The taxation starts at 30,000
30,346 - 32,289	25.68%	1,944 euros	499.22	Taxed in Luxembourg
32,290 - 34,233	27.82%	1,944 euros	540.82	Taxed in Luxembourg
34,234 - 36,177	29.96%	1,944 euros	582.42	Taxed in Luxembourg
36,178 - 38,121	32.10%	1,944 euros	624.02	Taxed in Luxembourg
38,122 - 40,065	34.24%	1,944 euros	665.63	Taxed in Luxembourg
40,066 - 42,009	36.38%	1,944 euros	707.23	Taxed in Luxembourg
42,010 - 43,953	38.52%	1,944 euros	748.83	Taxed in Luxembourg
43,954 - 45,897	40.66%	1,944 euros	790.43	Taxed in Luxembourg
45,898 - 100,002	41.73%	24,103 euros	10,058.18	Taxed in Luxembourg
Total		40,000	15,593

So, the total tax for 40,000 euros of income will be 15,593 euros. With no double taxation, the fact of considering the income earned in France for the calculation of the Luxembourg tax rate makes the total taxes much higher. The 15,593 euros of tax is considerably more than the 5,763 euros the example person would have had to pay in taxes in Luxembourg if the 30,000 euros earned in France had not been considered.

It is also important to note that double taxation agreements may vary from country to country, so specific rules and provisions will depend on the agreement between the two countries. It is important to consult a tax professional for guidance in each situation.

We will take an overview of double taxation agreements with some other, but you can get more detailed information on the government site dedicated to international tax treaties.

Germany and Luxembourg: double tax treaty

It was first signed on August 23, 1958, and it was replaced with a newer version on April 23, 2012. The new treaty adheres to the internationally recognized OECD model and includes changes to the withholding tax rates for dividends and royalties. The new treaty also introduces a real estate-rich companies’ clause that imposes taxation on gains from shares derived from immovable property situated in a contracting state.

The treaty exempts income derived from the other contracting state from taxation in the state of residency, but Germany will apply the exemption method only if the income is effectively taxed in Luxembourg.

The newest version of the double tax treaty between Germany and Luxembourg aligns with international tax standards and seeks to prevent tax evasion and abuse.

It covers various areas of taxation, including withholding taxes, dividends, interest, and royalties, as well as addresses income from immovable property, income from employment, business profits, and income from independent personal services.

Some key points of this treaty are the following:

A mutual agreement process and an arbitration procedure to avoid double taxation and double non-taxation.
Luxembourg companies conducting "active" business within the meaning of the German CFC rules are exempt from German tax on dividends and in all other cases.
Additionally, under this new treaty, dividend withholding tax rates are reduced to 5% for participations of 10% or more, while the interest and royalty withholding tax rates remain unchanged.

Generally speaking, the double taxation treaty between Luxembourg and Germany is intended to facilitate cross-border trade and investment between the two countries, by ensuring that income received in one country is not taxed twice.

France and Luxembourg: double tax treaty

The double tax treaty was signed on March 20, 2018, and it is currently in force. The last time the agreement was amended was on October 10, 2019, when the ministers of finance of both countries signed an amendment to the agreement.

The treaty covers various areas of taxation, including dividends, interest, and royalties. The amendment signed in 2019 mainly addressed the elimination of double taxation for cross-border workers. Before the amendment, some French cross-border workers were subject to double taxation, which means they had to pay tax in both Luxembourg and France.

The amendment introduced a new method of eliminating double taxation by granting a tax credit equal to the French tax on Luxembourgish income in France. This method eliminates the risk of double taxation and is equivalent to the method that existed before the 2018 agreement. Additionally, the amendment also modified the rules for eliminating double taxation on foreign-source rental income for French residents.

For French cross-border workers, the 2019 amendment is a great advance as it in France on their Luxembourgish income.

Overall, the double tax treaty agreement between Luxembourg and France is beneficial to both countries' taxpayers as it provides clarity and reduces the risk of double taxation. The amendment signed in 2019 addressed a specific issue faced by cross-border workers and provides them with tax relief.

You can get more detailed information about this treaty on the Legilux website.

Spain and Luxembourg: double tax treaty

The double tax treaty agreement between Luxembourg and Spain was signed on June 3, 1986, and came into force on May 19, 1987. This treaty aims to prevent double taxation of income and capital gains arising in one country and received by residents of the other country.

The treaty was amended on November 10, 2009, through a protocol that updates the exchange of information provisions in line with the latest international standards. This amendment came into force on 16 July 2010.

This amendment is of great importance for the development of international activities in the financial market of Luxembourg, particularly for its investment fund industry.

The amendment included the exchange of information on request in specific cases according to the OECD standard. This resulted in Luxembourg being removed from Spain's list of tax havens. This agreement was particularly significant for Luxembourg since the G20 decided to apply the OECD standard of exchange of information on request in April 2009.

You can get detailed information about this treaty on the dedicated page of the Luxembourg tax website.

UK and Luxembourg: double tax treaty

On June 7, 2022, a new Convention and a Protocol were signed in London between the Grand Duchy of Luxembourg and the United Kingdom of Great Britain and Northern Ireland.

This Convention aims to eliminate double taxation concerning taxes on income and capital while preventing fiscal evasion and avoidance. As of now, there have been no amendments made to the treaty since its signing.

The treaty covers various areas of double taxation with the UK, including income tax, capital gains tax, and corporation tax. Dividends, interest, and royalties are also covered.

You can get detailed information about the double taxation treaty between Luxembourg and the United Kingdom on the dedicated page of the Luxembourg tax website.

As for any unique features of the treaty, it is worth noting that it contains provisions for the exchange of information between the tax authorities of both countries. This exchange is aimed at promoting transparency in tax matters.

Canada and Luxembourg: double tax treaty

The treaty was signed on September 10, 1999, for the avoidance of double taxation and the prevention of fiscal evasion concerning taxes on income and capital and entered into force on October 17, 2000. The last amendment was signed on May 8, 2012, and got into force on December 10, 2013.

The treaty covers a wide range of areas of taxation, including dividends, interest, royalties, capital gains, and business profits. The amendment aims to avoid double taxation and prevent tax fraud regarding income and wealth taxes.

You can check the full text of the current treaty for more detailed information on the dedicated page of the Luxembourg tax website.

Regarding the amendment, it establishes that competent authorities of the contracting states exchange relevant information to apply the provisions of the Convention, as well as for the administration or application of internal tax legislation. The amendment sets strict guidelines on the confidentiality of the information and the purposes for which it can be used.

This amendment is a step forward in ensuring tax transparency and cooperation between the two countries, which must help to promote investment and economic growth. You can get more information on the Canada-related site.

Overall, the double tax treaty agreement between Luxembourg and Canada is a comprehensive agreement that helps to facilitate cross-border trade and investment by providing clarity on the taxation of income earned in both countries. The treaty is a testament to the strong relationship between the two countries and their commitment to cooperation in tax matters.

Who to contact for tax questions in Luxembourg

The Administration des contributions directes (ACD) in Luxembourg is responsible for overseeing and managing direct taxation, including déclarations, calculation, and crédit d'impôt (tax credit). If you have questions or need assistance related to tax matters in Luxembourg, it's recommended to contact this authority.