Contractor’s guide to contracting in Luxembourg

Luxembourg is a microscopic country which punches well above its weight in terms of financial muscle so it’s unsurprising UK contractors are asking about contracting there -- Europe’s eighth tiniest nation, writes Nikolas Papageorgiou, country manager for Europe at Access Financial.

Luxembourg for contractors: in a nutshell

The capital, Luxembourg City, is an important financial centre and is the European headquarters for major global tech companies, including eBay and Skype. This is partly due to it being a low tax economy, which also means that a high percentage of the workforce are engaged as contractors.

Due to the tiny size of the country and to the high costs involved in renting/ buying property, most of the workers are cross-border (‘frontaliers’). This enables them to benefit from higher remuneration, while paying a fraction of the housing costs of residents. In practice, many contractors reside in Germany, France or Belgium and commute daily to Luxembourg City for work.

Contractors who are EU/EFTA nationals, can come and go without any restriction, nor any obligation to register in Luxembourg. Otherwise, they must hold a valid work permit in an EU/EFTA country and a valid employment contract, on which it is clearly stated that they might need to work for some days of the month in Luxembourg.

What are the benefits of working in Luxembourg as a contractor?

The top four benefits contractors most often cite to us about working in Luxembourg are:

  1. Relatively high pay and low taxes
  2. The quality of social security support and coverage
  3. Great quality of life
  4. Security due to the low crime rate

What about worker take-home pay in Luxembourg?

The maximum salary retention available to you depends on the way you work in Luxembourg. If you choose a local employment solution, you will retain around 56-62%. If you are self-employed you will retain 61-68% and if you operate through your own limited company, you can expect 65-75%.

What are the levels of taxation in Luxembourg?

Taxation in Luxembourg is on a progressive scale. Married couples pay less tax in general. For example, an individual having a gross salary of €4,500 (£3,905) a month will pay a tax of €334 (£290) a month when married, as opposed to a tax of €915 (£795) a month when single. For household earnings of €8,300 a month, one will pay a tax of €1,574.6 a month when married, as opposed to a tax of €2,501.3 a month when single (according to the 2018 tax rates).

What are Luxembourg’s social security requirements?

Luxembourg is known for the quality of its social security. All contractors are required to pay towards health coverage, unemployment benefits and pension. The levels of each of these available in Luxembourg are notably high, too.

How do I register locally in Luxembourg?

Within three days of your arrival in Luxembourg you must register at the nearest commune (town hall).

Do I need a permanent local living address in Luxembourg?

As an employee in Luxembourg you can choose to live in the country itself or you can also live in the border countries, France, Germany or Belgium. If you are self-employed, you may still live in the aforementioned countries, however, you will need to register a physical office in Luxembourg. Hence, if you choose self-employment, you might want to live in Luxembourg from the beginning and use a separate room of your residence as an office.

What’s covered and not covered in Luxembourg’s claiming expenses process?

As an employee in Luxembourg, you will find commuting expenses are tax-deductible, in addition to life insurance contributions (if you use a Luxembourgish provider), and also interest paid on bank loans in Luxembourg.

If you are self-employed or working through your own limited company, then your expenses relating to the conduct of your business in Luxembourg, which are proven by receipts, may be tax-deductible. As a rule of thumb, 30% of your gross income can be claimed as expenses, dependent on approval from the tax authorities.

Can I just use my Personal Service Company (PSC) for a contract in Luxembourg?

Absolutely. Working in Luxembourg through your limited company is ideal if net retention is important to you, and if you wish to be fully compliant with all local laws.

But compliancy depends on your registration with the commune on arrival. Then, for our contractors at least, it’s simply a case of providing your permanent address, as well as whether you plan to work on an employed or self-employed basis.

Will I pay UK taxes depending on my duration in Luxembourg?

If you stay in Luxembourg less than 183 days in any given year, then you are going to pay taxes in Luxembourg -- just on the income that you earn in Luxembourg. If you stay longer than 183 days, then you will be liable to pay taxes on your worldwide income, in Luxembourg.

What is the best solution for my circumstances?

As we’ve outlined before, the solution which is best for you and your needs will depend on your individual circumstances. It will depend on the nature of your business and the working model you prefer. If you already operate through a limited company registered in an EU country, then using your PSC in Luxembourg is relatively simple and the most tax-efficient way of working.

How does employment in Luxembourg work for non-EU nationals?

To retain a residence and work permit in Luxembourg, you will need to be qualified to at least (bachelor’s) degree level. You must also have a clean criminal record and earn a gross monthly salary of €4,500 a month or more.

Luxembourg Solutions Chart

  Employment Self-employment Personal Services Company (PSC)
Eligibility All nationals EU nationals or ‘third country’ nationals with a valid work permit and a base in Luxembourg EU nationals
Taxes Payable in Luxembourg Payable in Luxembourg Payable in Luxembourg and any EU country where the PSC is registered
Social Security Charges

Luxembourg employed social charges:

Employer – 13.12%

Employee – 12.45%

Luxembourg self-employed social security of 25% unless you hold a self-employed A1/Certificate of coverage under a social security treaty. Social security will be paid in Luxembourg unless an A1 is held. The A1 may be from where you are normally resident or where your employer is based.
Income taxed on Contract value less employer and employee social charges. Contract value less expenses and self-employed social charges. Local salary (employer and employee charges are tax deductible). Dividends are taxed where the contractor is tax resident at withdrawal.
Social benefits Unemployment benefits, health insurance and pensions, depending on period of stay and salary earned. Health insurance and pensions, depending on period of stay and earnings. Unemployment benefits, health insurance and pensions, depending on period of stay and salary earned.

The future

Luxembourg has one of the highest standards of living in the world, coupled with high pay and relatively low taxes. This makes it one of the most appealing destinations for foreign workers in Europe. Around 40% of workers in Luxembourg are foreign nationals, so multilingualism is a way of life for locals and English is widely spoken.

For contractors with a background in finance and IT, work opportunities abound. Luxembourg’s location makes it very easy to travel to France, Germany or Belgium and other European destinations are easily accessible by air, rail or road. With Brexit potentially making Luxembourg a more appealing location for international businesses, opportunities for skilled workers are set to increase, likely making this small country a big destination for Britons with a penchant for contracting overseas.

Wednesday 15th May 2019
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Written by Simon Moore

Simon writes impartial news and engaging features for the contractor industry, covering, IR35, the loan charge and general tax and legislation.
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