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Luxembourg: Income threshold for non-residents to gain residency benefits to be put to the test

23 March 2017

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Pierre Jean Estagerie Vincent Reynvoet

A decision issued by the Court of Justice of the European Union (CJEU) on February 9 2017 ("X" case) indicates that the rules for a non-resident working in Luxembourg to be treated as a tax resident could be subject to change.

Under Luxembourg law, non-resident individuals who are taxable in Luxembourg on at least 90% of their worldwide income can elect to be treated as residents for tax purposes. If such an election is made, the non-resident will be entitled to all of the same deductions in calculating taxable income as residents.

The 90% rule was introduced into the Luxembourg tax code following the CJEU's (European Court of Justice, as it was called at the time) 1995 decision in the Schumacker case. In that case, the court held that where a non-resident taxpayer is unable to claim deductions for personal and family circumstances in the member state where he/she is resident because the individual did not receive any income in that country, the member state where the individual is employed should allow the individual to take such circumstances into account and take an appropriate deduction. Article 157 of Luxembourg's tax code provides that, to ensure the EU principle of the free movement of persons within the EU, qualifying non-residents can claim tax offsets in their state of employment in the same way as residents of that state.

The 90% threshold may become a secondary or additional factor to consider when non-residents are seeking to be treated as Luxembourg residents for tax purposes, as a result of the CJEU's decision in the X case.

Background of the X case

The taxpayer in X case earned most of his salary income in two countries (Netherlands and Switzerland) other than the country in which he was resident (Spain). He did not earn any income in Spain. In the absence of sufficient income earned in the residence state, the taxpayer was unable to make any adjustments in his tax declaration. In other words, he was unable to take advantage of deductible expenses in his state of residence because he had no taxable income there. The Dutch and Swiss income were taxed in those two countries under the relevant tax treaties. However, the Netherlands tax authorities disallowed the deduction of the negative income in the Netherlands. The taxpayer disagreed, arguing that the Netherlands should allow a deduction.

Based on a reading of the X decision, it appears that the existence of multiple states of employment will not necessarily change the criteria on which the Schumacher doctrine is based, because the decisive factor in Schumacher was that it was not possible to take the personal and family circumstances of the taxpayer into account in the state of residence. The court held that those circumstances should be taken into account in the state of employment, even where there are more than one states of employment to the extent the income from each of those states is sufficient.

A significant difference between the X case and Schumacker is that the X case involves multiple countries of employment, whereas Schumacker involved only one country of employment.

The necessary response to this situation would be that the state of employment would have to offer the taxpayer an opportunity to enjoy tax advantages, such as deducting expenses relating to accommodation from the portion of income earned in that country.

EU-wide impact

As a result of the CJEU's decision in X, Luxembourg (and other EU member states) may have to allow non-residents that derive income from employment or self-employment in the country to claim deductions that may represent a (much) smaller proportion of worldwide income than the 90% threshold in existing legislation.

Pierre Jean Estagerie (pjestagerie@deloitte.lu) and Vincent Reynvoet (vreynvoet@deloitte.lu)
Deloitte Luxembourg
Tel: +352 45145 4940
Website: www2.deloitte.com/lu/en/services/tax.html 






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