Luxembourg is a microscopic country which punches well above its weight in terms of financial muscle. 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 options when working in Luxembourg?
Contractors who are non-EU nationals need a work permit to work in Luxembourg, hence a Luxembourgish employer has to sponsor their work visa. EU nationals wanting to benefit from the advanced social security system in Luxembourg may opt for employment. These include:
- Unemployment benefits
All workers are required to pay towards health coverage, unemployment benefits and pension. The levels of each of these available in Luxembourg are notably high too.
The reason why your contractors might become self-employed in Luxembourg is not a tax advantage but rather a social contribution advantage: the rates are lower than many other countries. Thus, total social contributions are equivalent to about 25% of gross income.
The most important prerequisite to register as self-employed in Luxembourg is to have a physical address in the country, be that an independent office or a room in their residence.
Contracting in Luxembourg via a Personal Services Company (PSC)
EU law does not permit discrimination against a company from another Member State. This fundamental right means that a contractor may, if they wish, use their own limited company to work through in Luxembourg. The limited company does not have to be a Luxembourg company (although it can be) it can be an existing company from another country (a UK limited company, for example).
Contractors must respect the laws in Luxembourg relating to social security, employment law, income tax, VAT and corporation tax, as well as the company and personal registrations that are required in Luxembourg when one lives or works there.
If all the laws are respected and the contractor has a sensible local salary declared in Luxembourg, that can be justified to the tax authorities as being reasonable in their circumstances for the kind of work that they undertake, then they can contract this way compliantly. The official minimum monthly salary in Luxembourg is €2,000, so contractors should draw at least €4,000 per month from their companies.
The main benefits of this solution are that it provides a high retention and is fully compliant. This is of ever growing importance in today’s world, with increasing levels of automatic information exchange between tax authorities and with a new criminal offence in the UK for facilitating tax evasion.
Luxembourg Solutions Overview
As shown in the above slides, working through a PSC in Luxembourg provides an attractive retention rate (75 – 80%) for contractors, while ensuring that they are working compliantly and meeting all work and home country reporting obligations.
Whether you are a contractor, or recruitment agency, if you would like to discuss this solution in more detail, please do not hesitate to contact me: