When implementing a telework policy, most of the restrictions to flexibility arise in connection with the situation of cross-border employees, which account for about 50% of the total headcount of Luxembourg companies. The Covid-19 pandemic accelerated the change of habits and practices of Luxembourgish companies across industries (i.e. banking, insurance, asset and wealth management, alternative investments, non-financial services, etc.). The temporary suspension of the application of the tax and social security rules facilitated these changes. Potential future evolutions in the tax and social security landscape may significantly improve the situation and ease the possibilities to allow telework for Luxembourg non-resident employees.

One year after its first Survey on Telework focusing on the Luxembourg market practice, PwC Luxembourg recently launched a second survey to collect information on companies’ approach to telework, aiming at evaluating how the practice has evolved since the pandemic and analysing the current telework framework.

The results demonstrate a significant increase in the implementation of telework policies. Only 14% of the respondents did not implement a formal telework policy or do not intend to do so, while only 36% had a policy in place before the pandemic. This trend highlights a real willingness of companies to adapt how they are organised to the new work trend and employees’ needs. The survey also demonstrates that most companies having launched a telework policy did consider the legal, tax and social security framework surrounding telework in a cross-border environment in the design of their policies.

Cross-border complexity

Many policies make a clear distinction between Luxembourg resident and non-resident employees when setting limits to telework, with more than 50% of the respondents deciding to cap telework at a lower threshold for cross-border employees than for Luxembourg residents. Since 30 June 2022, ad hoc tax agreements with neighboring countries, providing for the neutralisation of workdays performed at home for wage tax purposes, came to an end. It is therefore crucial that companies closely monitor work performed abroad by cross-border employees and have a sound framework in place regarding these situations. Even more importantly, the social security aspects (with the well-known 25% limit, above which an individual may need to be registered with social security in the country of residence,) is a crucial aspect to consider. The survey shows that the majority of respondents (64%) are capping telework possibilities for non-resident employees to the thresholds above which taxation of the employment income will be triggered abroad. 33% of respondents allow employees to go up to the social security limit (ie. approximately 1 day per week). As the 25% limit is not applicable to Luxembourg resident employees and no tax consequences should arise, 75% of respondents indicate that they are generally entitled to perform up to 2 or 3 days per week from home.

The limits to telework resulting from the current tax and social security rules are being discussed between Luxembourg and neighboring countries as well as at EU level. With respect to Belgium, an addendum to the tax treaty was signed one year ago, raising the threshold from 24 to 34 days. However, the addendum will only come into force once ratified by Belgium, noting that the addendum provides that the 34-day threshold should apply retroactively to the year 2022 once the addendum is ratified. In addition, the recent French draft Finance Bill foresees the abolishment of the obligation for foreign employees to run a withholding tax on behalf of French authorities when the French resident employees exceed the 29-day threshold triggering taxation of non-Luxembourg workdays in France. This would be a huge relief for Luxembourg companies willing to provide more flexibility to employees but that are not able to cope with the complexity of running wage withholding tax mechanisms abroad.

On the social security side, the EU Administrative Commission for the Coordination of Social Security Systems recently released guidance on the interpretation of the EU Regulation on social security. The guidance extends the social security tolerance until 31 December 2022 and clearly goes into more flexibility in the understanding of the rules when it comes to telework, but it remains to be seen how local social security authorities will position themselves. 

It can therefore be expected that tax and social security rules will evolve in the short to medium term towards a more suitable framework for telework across borders. However, other risk areas such as the creation of a taxable presence abroad due to the performance of work by Luxembourg employees abroad (so-called “permanent establishment”) should also be considered carefully.

Interested in knowing more? Feel free to reach out to author Julien Treffort Partner, Personal Tax, PwC Luxembourg or the PwC   if you would like to watch the webcast recording on this topic.