France and Luxembourg signed a Double Tax Treaty (“DTT”) in March 2018 for the avoidance of double taxation and the prevention of tax evasion and fraud. The DTT will apply as from 1 January 2020.
One of the most significant features of the DTT is the use by France of the credit method to eliminate double taxation on employment income of cross-border workers. For a French tax resident the use of the credit method means that, as a first step, France calculates French income tax on the Luxembourg-source employment income and, as a second step, it would grant a credit for any Luxembourg tax paid on the same income against French tax.
On October 10, 2019, the Minister of Finance, Pierre Gramegna, and the French Minister of the Economy and Finance, Bruno Le Maire, signed in Luxembourg, an protocol to amend the DTT.
Pursuant to protocol, France would be returning to the previously applied method of avoidance of double taxation on employment income, which is the exemption method. This means that cross-border workers will not be liable to pay taxes on their Luxembourg-source employment income in France.