The France-Luxembourg treaty of 20 March 2018
France-Luxembourg tax treaty: how the right to tax is allocated by category of income, and how double taxation is eliminated.
Contents
The situation
Luxembourg income which, declared in the same way from one year to the next, produces a different French tax. A pension taxed in a State you did not expect. A dividend whose withholding is no longer the one you knew.
In most cases nothing has changed in the taxpayer’s position: what changed is the instrument that applies.
What the rules say
| Category of income | State that taxes, in principle |
|---|---|
| Employment income | the State where the work is carried out, subject to the cross-border worker rules |
| Property income | the State where the property is located |
| Dividends, interest, royalties | shared between the source State, through a capped withholding, and the State of residence |
| Business profits | the State of residence, unless there is a permanent establishment in the other State |
| Pensions | according to the treaty article applicable to the category of pension concerned |
| Elimination of double taxation, French side | credit of the Luxembourg tax against the French tax, capped at the latter |
That last point is what differs from the previous treaty, and it is the one to check before drawing any conclusion about the real cost of Luxembourg income.
What the firm does with those rules
The work begins with characterisation: the treaty does not apply to income in general, it applies to a defined category, and the category determines which State has the right to tax.
It then means recomputing. A position built under the old treaty must be revisited under the new one, in particular for property income and pensions, where the change of method has the greatest effect.
Finally it means securing positions that depend on a threshold or a condition, and obtaining a written position from the authorities where the text allows two readings.
Frequently asked questions
Since when does this treaty apply?
It was signed on 20 March 2018 and applies to income for tax periods beginning after its entry into force. Earlier years remain governed by the previous instrument.
What changed most?
The method of eliminating double taxation on the French side, and the treatment of certain categories of income. Two identical files can therefore give two different results depending on the year.
Does the treaty cover inheritance tax?
No. Inheritance and gift tax treaties are separate instruments.
And for cross-border workers?
The cross-border rules and the teleworking threshold are dealt with by a protocol. See cross-border workers in Luxembourg.
This article sets out a general framework and is no substitute for a review of your file: every situation has its own dates, figures and documents.