Double Taxation Agreement Between Luxembourg and Germany: What You Need to Know
If you`re living in Luxembourg and working for a German company, or vice versa, you might be wondering how your income is going to be taxed. Fortunately, there`s a double taxation agreement in place between the two countries that aims to prevent double taxation and ensure fairness for taxpayers.
What is a Double Taxation Agreement?
A double taxation agreement (DTA) is a treaty between two countries designed to avoid or mitigate double taxation of the same income in both countries. Such agreements usually cover income tax, but they may also cover other taxes such as capital gains tax, dividend tax, or inheritance tax.
The Luxembourg-Germany DTA was signed in 1958 and has been amended several times since then. The latest protocol was signed on 23 April 2012 and entered into force on 1 January 2014.
How Does the Agreement Work?
Under the DTA, residents of one country who earn income from the other country are subject to tax only in their country of residence, unless the income is derived from a permanent establishment (PE) in the other country. In that case, the income may be taxed in both countries, but the DTA provides for a mechanism to avoid double taxation.
For example, if you live in Luxembourg and work for a German company from your home office in Luxembourg, your income will be taxed in Luxembourg only. However, if you travel to Germany frequently and have a PE there, the income you earn in Germany might be taxed in both countries. In this case, the DTA provides for a credit mechanism, which allows you to deduct the tax paid in Germany from the tax payable in Luxembourg.
The DTA also specifies the maximum tax rates that can be imposed by each country on different types of income. For example, the maximum tax rate for interest income is 10% in both countries, while the maximum tax rate for royalties is 5% in Luxembourg and 15% in Germany.
Why is the DTA Important?
The DTA is important for taxpayers because it helps to avoid double taxation and provides a mechanism for resolving disputes between the tax authorities of the two countries. It also provides certainty and predictability for businesses and investors, as they can rely on the rules set out in the DTA when making cross-border transactions.
Moreover, the DTA promotes trade and investment between the two countries by removing tax barriers that might otherwise discourage cross-border activities. This is particularly relevant for Luxembourg, which has a highly internationalized economy and is a popular location for multinational corporations.
The double taxation agreement between Luxembourg and Germany is an important treaty that provides tax relief and certainty for individuals and businesses engaged in cross-border activities. If you`re a resident of one country earning income from the other country, it`s important to understand the rules set out in the DTA and seek professional advice if necessary.