How Luxembourg Compensates Neighbors for Cross-border Workers

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On a state visit to France in 2018, Luxembourg’s Prime Minister Xavier Bettel had a very clear idea about a fiscal transfer of taxes withheld from over 100,000 French cross-border workers: „I do not want to pay for a mayor’s Christmas decoration“, he told Radio RTL. He was more in favor of co-financing railway infrastructure to improve the lives of the daily commuters. (1)

In itself, his declaration was not entirely consistent. Luxembourg is kind of financing Christmas decorations in Belgium to the tune of EUR 30m for 48,000 Belgian cross-border workers paying taxes in Luxembourg. But it had also, so far, turned a cold shoulder to Germany and France. It got to a point where the European council drafted a recommendation for Luxembourg to pay a percentage of salary to the residence countries of cross-border workers. The council in particular pointed to the practice of Geneva, a Swiss canton, who pays 3.5% of gross salary to the two neighboring French departments. It amounts to EUR 260m per year and consists in what all parties consider a just contribution. (2) But Luxembourg does not see it that way. The French laconically note that the Luxembourg government refuses to look at such ideas. (7)

The Swiss official position on the other hand explains „it is obvious that a person who travels many miles each day to get from his place of residence in one state to his place of work in another state incurs infrastructure management costs that must be equitably shared between the two states.“ Furthermore, at the place of residence there are education, child care, health, sport, leisure and transportation infrastructure that are paid for by taxes, of which income tax plays an important role. (9) With my being Swiss, I got interested to learn more details.

In Switzerland, there are two different models to compensate neighboring countries

1. Taxing salaries at source and remitting a percentage of it to neighboring state (France near Geneva, Austria, Italy)
2. Let cross border workers declare and pay their taxes in their home country and receive back 4.5% of gross salary (Germany, France) or nothing at all (Liechtenstein)

to which Luxembourg adds three additional models

1. Remit EUR 30m to Belgium
2. Pay nothing to Germany
3. Earmark up to EUR 120m in 10 years for co-financed improvements to multimodal transportation (mainly railways) in France (3)

Let’s look at cashflows. Switzerland’s cross-border worker earned a median of CHF 6118 per month in 2018 (EUR 5718 in 2020). Residing in 

Residence	Number of cross-border workers into Switzerland	Earnings per annum
Haute Savoie & Ain	110,000	EUR 7.5bn
the rest of France	77,646	EUR 5.3bn
Germany	62,115	EUR 4.3bn
Italy	80,043	EUR 5.5bn
Austria	8437	EUR 0.5bn

Here is what Switzerland (CH) gets or keeps and what the home countries get to take from their cross-border workers per year

Switzerland gets/keeps	Home countries	gets/takes
EUR 640m	Haute Savoie & Ain	EUR 264m (received from Switzerland)
EUR 239m	the rest of France	up to EUR 916m (taxed in France)
EUR 191m	Germany	up to EUR 724m (taxed in Germany)
EUR 362m	Italy	EUR 241m (assuming all cross-border workers live within 20 km of the border, Italy levies no income tax)
EUR 49m	Austria	EUR 60m (received from Switzerland)

 

Let’s have a look what the situation in Luxembourg looked like in 2019. Residing in

Residence	Number of cross-border workers into Luxembourg	Earnings per annum	Luxembourg levies income tax at source
France (Lorraine)	107,312	EUR 5.2bn p.a.*	up to EUR 634m p.a.
Germany (Saarland, Rheinland-Pfalz)	48,241	EUR 2.7bn p.a.*	up to EUR 443m p.a.
Belgium (Wallonie, Ostbelgien)	47,969	EUR 2.8bn p.a.*	up to EUR 471m p.a.

*The average cross-border worker from Belgium earned EUR 58,496, from France EUR 48,091 and from Germany EUR 56,768 (4)

 

Luxembourg makes more than EUR 1bn per year by taxing the individuals‘ income at source. Here is what the home countries get for their cross-border commuters per year and what they would usually tax in their jurisdiction on such incomes

Home country	gets from Luxembourg	would tax similar salary earned in home country
France (Lorraine)	EUR max. 12m p.a. (pledged co-financing max 120m 2019-2028 on French soil)	up to EUR 965m p.a.
Germany (Saarland, Rheinland-Pfalz)	EUR 0m p.a.	up to EUR 507m p.a.
Belgium (Wallonie, Ostbelgien)	EUR 30m p.a. (remitted from Luxembourg)	up to EUR 774m p.a

Due to the double tax agreements to tax income only in the country of employment, Luxembourg’s neighboring countries are missing out big time. Income earned in Switzerland is fully taxed in Germany, Austria, France (outside Haute Savoie and Ain) and Italy (outside the 20km border zone), and the double tax treaty makes sure any Swiss tax deducted at source is taken into consideration. 

There is very little maneuvering room for communities in Belgium, Germany and France when it comes to obtaining more income taxes from their residents. They all have a residence-based taxation for the global income of their ordinary citizens but have decided to give it up in the double tax treaties with Luxembourg. The only thing they can do is to add their citizens‘ Luxembourg income to the global income and push up the tax bracket on whatever tax an individual has left to pay in the home country. OECD-inspired double tax treaties avoid taxing the same thing twice, but fail (for fairness) in cases where Luxembourg’s tax bracket is 17% and Belgium’s is 27% for the same income. I do not want to imagine the conversation between Belgian neighbors, one working in Luxembourg and one working locally. That’s why mayors knock on Xavier Bettel’s door to ask for more contributions for their communities. 

Longwy’s mayor (France) seems quite happy: „No, Luxembourg is not the hen with the golden eggs and we do not want to profit from its wealth“ he told a Luxembourg journalist in September 2020. He wants to listen to what his „partner“ needs and then have a discussion how such a co-development can be financed. So far he got EUR 2.5 for a park & ride next to the train station. (5) At the same time, Luxembourg taxes the 2’300 cross-border workers from Longwy the sum of up to EUR 13.5m. Per year. With a residence-based tax, the Longwy residents would have to pay up to EUR 20.5m tax to France. So much for loss-of-opportunity costs.

The mayor of Metz (France) wants more than a bit of railway and is teaming up with his German colleagues. Behind the scenes they communicate with Germany’s chancellor Merkel and France’s president Macron. Their proposal: the same deal as Belgium has. (6)

Luxembourg is financing transportation infrastructure in France to make it easier for French residents to commute to Luxembourg. It does not constitute any contribution for the day-to-day expenses in the communities of the cross-border workers and serves mainly to further its own interests. And it also helps to attract tourists. I do not understand why France does not push for more share of the pot. From the short discussion in the French National Assembly we can understand that other regions in France are even worse off and any financing is better than none. (7)

Any lack of cohesion, whether on national or European level, puts the other party at an advantage. When the alternative is 100’000 unemployed people in the Lorraine region, the French cock seems happy to gobble up whatever morsels Luxembourg is throwing him. On the other hand, the world’s 9th largest nuclear power station is right on the border to Luxembourg in Cattenom, France. Luxembourg’s population is very worried about the proximity of a potential disaster site, as a nuclear cloud would take only 30 minutes to reach the capital of Luxembourg. If this cannot serve as a bargaining chip, what else can? 

The pandemic has shown us that a lot of interactions and services can be digitized. Is it really necessary to travel an hour on congested roads to get to the work jurisdiction, because that’s most efficient from a tax perspective? France is considering to raise the number of tax-free days work can be done on French soil to support such „télétravail“ ideas. Maybe it can develop such a convoluted system that will trap almost everyone in a partial income taxation event in France?

There is also a link to the topic of self-employed perpetual travelers, I find noteworthy. These are people who avoid income tax by working remotely and never spending enough time in a jurisdiction to establish a tax domicile. They are facing criticism for not paying any income taxes, when in fact the result is almost the same as for Germany’s and France’s cross-border workers: Luxembourg keeps the full income tax and the workers living in Germany and France pay VAT on their consumption, pay rent or buy homes and spend money on local services. They do, however, not contribute to schools, sport, leisure and local transportation infrastructure. Exactly the same as perpetual travelers do. A residence-based tax would change this to the better. And Luxembourg would get its fair share. Which would be significantly less than today’s amounts.

Switzerland may start considering the Luxembourg model and tax all foreign-earned income at source and stop paying any contributions to France, Germany, Italy and Austria. While this is much more than the conservative Swiss People’s Party party is considering (raise taxes for cross-border workers), it might lead to more. (8) I wonder if this could be the little nudge this topic needs?

(1) https://paperjam.lu/article/news-le-luxembourg-veut-ameliorer-la-vie-des-frontaliers

(2) https://5minutes.rtl.lu/actu/luxembourg/a/1424883.html

(3) https://www.wort.lu/de/business/des-avancees-concretes-5ab1238ac1097cee25b85726

(4) https://today.rtl.lu/news/luxembourg/a/1630640.html

(5) https://www.wort.lu/fr/granderegion/longwy-doit-jouer-sa-carte-aupres-du-luxembourg-5f20240ada2cc1784e3629b6 

(6) https://www.steuerzahler-rheinland-pfalz.de/2019/09/27/soll-luxemburg-fuer-grenzgaenger-zahlen/ 

(7) https://www.assemblee-nationale.fr/dyn/opendata/RAPPANR5L15B2021.html

(8) https://www.swissinfo.ch/ger/begehrter-geldsegen_warum-steuern-der-grenzgaenger-in-der-schweiz-zu-reden-geben/44734090

(9) https://www.newsd.admin.ch/newsd/message/attachments/33171.pdf

Photo on by stanze on Flickr