French crossborder workers with mixed incomes have been granted a further reprieve from the application of the tax treaty between France and Luxembourg, which was signed in 2018 and ratified in 2019.

This year, French crossborder workers will still be able to declare their Luxembourg income in France (for tax year 2023), after deducting social contributions and taxes paid in Luxembourg. But this will be the last time, the French Finance Ministry warned. This year, the “effective rate” method will still apply to those with mixed income (French and Luxembourg).

Regarding the new principle included in the agreement signed in 2018, the system provides for a tax credit (imputation method) in which only social contributions will be deducted from Luxembourg income declared in France as “worldwide income”. The French tax is then calculated on the total income, minus the tax already paid in Luxembourg in the form of a tax credit to neutralize the French tax burden.

To avoid “heavy” double taxation, the French resident will benefit from a tax credit equal to the amount of tax paid in Luxembourg, which will be deducted from the tax due in France.

While the French Minister of the Economy, Bruno Lemaire, has publicly stated that the treaty will have no impact, the OGBL stresses that this method is not neutral, and in 2020, when the attempt was finally abandoned, some taxpayers saw their tax burden increase by a few hundred to several thousand euros, depending on the case.

The negative impact on French crossborder workers is likely to be all the greater if the level of income from Luxembourg turns out to be well above the median income and French income is much lower. This is likely to be the case for many French crossborder workers with mixed incomes, both salary and pension, especially as one year of pension contributions in Luxembourg is equivalent to 4-5 years in France!

Where is the neutrality in all this?

With this new method of globalization desired by the French government, three situations arise:

• The higher the income on the Luxembourg side and the lower the income on the French side, the greater the tax increase.
• a smaller tax increase in the case of balanced incomes
• little or no impact if the French income is high compared to the Luxembourg income.

It is important to remember that French crossborder workers with no income in France are not affected by this new calculation method. However, Luxembourg residents with French income may be affected.

An impact study was commissioned by the French Ministry of Finance, but the results have never been published. Consequently, the exact impact is unknown.

The OGBL, which has been involved in this matter from the outset, calls for transparency and for the publication of this impact study in the name of tax justice. Finally, the OGBL calls on the French Minister of Finance to respect his commitments to ensure that the application of the new treaty is neutral for all concerned.

Article published in the “Aktuell” (3/2024)