How Luxembourg Compensates Neighbors for Cross-border Workers

Arti­kel wurde zuerst in LinkedIn auf Englisch publi­ziert. Bitte Über­set­zungs-Funk­tion wählen für deut­schen Text.

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