Home-Office – a great thing to do (unless you are a Luxembourg employer)

In Uncategorized by Michael Probst

At the end of May 2016, one of the bigger German newspapers considered home-office to make employees happier and more productive. (http://www.welt.de/gesundheit/psychologie/article155325775/Zu-Hause-arbeiten-macht-gluecklich-und-produktiv.html)

A Luxembourg employer allowing his employees to work from home, has to bear in mind that there is a relatively high chance that the one or the other of these employees will be working in one of the neighboring countries. Given the specific situation of Luxembourg, a cross-border tax situation is triggered consequently. If such issues are generated, the employer risks to become unhappy and to lose productivity, with extra work for his administrative staff and his payroll service providers and tax advisers will become happy due to a significant increase of fees for them.

Why? Well, it is all about taxes and social security, combined with the high level of cross-border employment in Luxembourg.

Starting with tax issues, it needs to be emphasized that, for any cross-border employee, the individual tax situation should be analyzed on the basis of the applicable tax treaties. Normally, it will be employees residing in Belgium, France or Germany who work for a Luxembourg employer.

The taxation of the underlying employment income is generally subject to tax in the country of residence. However, employment income will be taxed in Luxembourg, if the underlying activity is effectively exercised in Luxembourg.

This implies, that days which are not worked in Luxembourg (business travel, trainings abroad, construction work, workdays at home, etc.) are subject to tax in the country of residence of the employee.

A simplification rule today exists with Belgium and Germany, where a limited number of days spent abroad (business travel, missions, trainings, etc.) will not trigger the taxation of the underlying income in the home country of the employee (i.e. Germany below 20 days, Belgium below 25 days). If the number of days indicated are exceeded, the entire time spent outside of Luxembourg (not only in the home country!) will trigger taxation in the home country.

Today one of the bigger challenges is the rather complex follow-up, tracking and information storage in respect of days spent outside of Luxembourg. The payment of taxes due in the home country (normally liable: the employee), may be burdensome and the refund of withheld taxes not due in Luxembourg, can take some time, requiring pre-financing of the home country taxes.

Please bear in mind, that the taxation in the home country implies an exemption in Luxembourg, which may be recognized in a reduction of Luxembourg payroll taxes.

Contrary to taxes, social security contributions will be payable in one country only. Therefore, the question arises, whether the contributions are payable in Luxembourg or the home country of the employee. The answer to this question lies in the EU Directive. Indeed, for a dependent occupation, the social security contributions are payable in the country of the employer, unless more than 25% of the working time is spent in the home country.

For normal simple business travel or trainings abroad, this rules will not have a significant influence.

However, once the 25% hurdle is hit, the administrative burden will be significantly higher. The employer will be obliged to register with the social security administration(s) of the employee’s home country. A full payroll administration will be required.

It needs to be borne in mind that social security contributions are the responsibility of the employer and he always remains liable for these contributions.

Considering the relatively low level of social security contributions in Luxembourg compared to the neighboring countries, and the relatively simple administration thereof (one central administration managing the contributions), one will quickly identify many reasons, to avoid any situation, obliging the employer to register for social security in the home country of the employee concerned.

While for tax purposes the administration can get complex rather quickly (e.g. any business travel activity outside Luxembourg may trigger a taxation in the home country independent of the country of destination – home country or any third country), a change of the applicable social security system requires a relatively important portion of time spent in the home country. The latter, however, only risks to be the case for home office activities.

The above is just a quick summary with basic information. Further indications may be required and need to be considered. The responsibilities of the employee and the employer have not been further detailed, but can trigger further issues.

A conclusion is hard to make and will depend on the underlying activity of the employer and his employees. It will be a big (not great) thing to do, at least from an administrative side of things.

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