Luxembourg income 2021: French tax residents can still benefit from the old tax treaty with Luxembourg
In a press release sent to the press this Friday, October 1, the Government announces that residents of France receiving certain 2021 Luxembourg-source income exceptionally request, for the taxation of their 2020 and 2021 income, the application of the stipulations of the former tax convention on the elimination of double taxation.
New tax treaty with Luxembourg
The new tax treaty with Luxembourg modifies the method of eliminating double taxation for residents of France receiving income from Luxembourg sources. This modification concerns employment income, but also remunerations (salaries and pensions) from public sources, social security pensions and property income from Luxembourg source. The new agreement, negotiated in 2016 and 2017, signed in 2018 and amended in 2019, applied for the first time to income received in 2020.
End of the exemption method
The old convention avoided the double taxation of this Luxembourg-source income by the so-called exemption method, consisting in withdrawing from France any right to tax it. This method, liable to lead to situations of unjustified double accusation, is no longer part of French conventional practice and has been modified in accordance with the standards of the Organization for Economic Cooperation and Development (OECD), by the so-called conventional method of imputation, consisting in resolving double taxation by applying a tax credit.
A tax credit
The new agreement with Luxembourg thus provides, for this income, in particular wages, that France grants a tax credit equal to French tax. This amounts to neutralizing any tax calculated in France on this income and thus prevents the same income from being taxed twice. This method is the one provided for in a large number of our conventions in force, for example with the United Kingdom, Germany, Switzerland, Italy and Spain.
Equivalent fiscal pressure?
While the principle of taxing this income in Luxembourg, at the rate provided for by Luxembourg law, remains the method, switching from one to the other may have an impact on the tax rate applied to other income received in France. The method used in the old convention indeed limited the progressivity of the tax applied to taxable income in France: on this point, the new convention ensures that the French source income of households which also receive Luxembourg source income is taxed at the same rate as those of households which, with equivalent income, benefit only from French source income. The application of the new convention may therefore lead to tax increases compared to the previous situation. In order to accurately assess the extent of this for taxpayers, the government is carrying out an additional assessment of the impact, for frontiers, of the change in the method of eliminating double taxation provided for by the tax treaty.
Exception for 2021
Pending the results of this assessment, which will be presented to Parliament, households likely to exceptionally request, with regard to the elimination of double taxation, the application of the provisions of the old convention for the targeted income received. in 2020 and 2021. A communication will be issued in the coming days to specify the methods for recalculating the 2020 income tax for households receiving both French-source income and Luxembourg-source income affected by this change in method . This communication will specify the steps to be taken with the tax administration, favoring dematerialized procedures and in particular the online correction service to avoid any unnecessary travel.