Statement on the consultation agreement dated January 11, 2024 with respect to thedouble tax treaty between Germany and Luxembourg

Ladies and Gentlemen,

the consultation agreement on the double tax treaty between the Federal Republic of Germany and the Grand Duchy of Luxembourg dated January 11, 2024 raises urgent legal questions that could have a significant impact on cross-border issues. One point that has also been discussed in the media in recent days is the so-called “subject to tax” clause: To the extent that Luxembourg “does not actually tax” income, Germany is allowed to carry out “subsequent taxation” under this clause.

The consequences of this clause become apparent, for example, when employees are paid overtime remuneration: As overtime remuneration is fully tax-exempt in Luxembourg, Germany may tax it – even if it was paid for work physically performed in Luxembourg. This means that an income tax return may have to be submitted in Germany even if only minor tax-free income is earned from Luxembourg.

In addition to this problem, which has already been discussed in the media, we identified additional areas of concern:

• Insufficient definition of the term “actually taxed”: Neither the consultation agreement nor the existing case law or commentary literature provide a consistent definition of what is meant by “actually taxed”.
• Contradictory or missing detailed definitions: Wage supplements for Sunday, public holiday or night work and overtime pay are treated differently with regard to subsequent taxation, although they are both tax-free in Luxembourg. Furthermore, there is also the question of how to deal with the other salary components that are tax deductible in Luxembourg (interest subsidy, meal vouchers, etc.), as the consultation agreement is silent on this.
• Application to all open cases: The wording of the consultation agreement indicates that the above-mentioned “subject to tax” clause is to apply in all open cases, i.e. also for past assessment periods.
• Advantageousness and administrability of the clause: The clause leads to considerable bureaucratic costs and increased workload on the part of border crossers and border tax offices. In its current form, the clause seems to be neither legally enforceable nor sufficiently comprehensible.

We have forwarded our opinion, an interpretation of the previous clause from our point of view as well as recommendations for a simplification of the regulation – should the clause nevertheless be upheld – to the responsible political decision-makers on both sides of the border. We are happy to stand up for you!

Should you have any questions on the topics mentioned or require assistance in assessing your tax situation, we will be pleased to help you.