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    France – End is Near for Workers’ Income Subject to Exemption with Progression under Treaty with Luxembourg

    GMS Flash Alert 2024-094 | April 18, 2024

    The new France-Luxembourg tax treaty1 changed the method for eliminating double taxation for French residents with certain types of Luxembourg-source income such as employment income, public-sector remuneration, social security pensions, and Luxembourg property income.  The previous method, exemption with progression, has been replaced with a deemed credit system, in line with other tax treaties that France has signed more recently.

    However, the authorities indicated that French residents with Luxembourg-source income will be able to continue to apply the method for avoiding double taxation contained in the previous tax treaty when calculating their 2023 income tax (so-called “tolerance”).  

    WHY THIS MATTERS

    Switching from one method to the other has an impact on the tax rate applied to other income received in France.  This generally results in a tax increase compared with the previous situation.  Continuance of the existing rule (what is called “tolerance”) was justified by the desire to give taxpayers time to adapt.  However, in a press release, the French government indicated that this will be the last extension of the tolerance measure, and that for income received in 2024, the new method will apply in full.2  Employers will need to consider this in their current and future budget projections.   

    An Exceptional and Temporary Measure

    An exceptional and temporary measure was introduced to allow taxpayers to request the application of the stipulations of the former tax treaty in respect of income received in 2020, 2021, and 2022, and thus benefit from the exemption-with-progression method.  In an update to their published guidance on this tolerance3, the French tax authorities have extended the tolerance to income earned in 2023.

    At the same time, an addendum to the 2018 tax treaty increases the threshold for employees living in France who cross the border with Luxembourg to work: they will be able to work up to 34 days outside Luxembourg without giving rise to taxation in France.  (For prior coverage, see GMS Flash Alert 2023-024, 31 January 2023.)  Below this threshold and if there is no other source of income, French taxpayers will escape the negative impact of the change in methodology for eliminating double taxation.  The addendum is currently undergoing its ratification process in France.

    KPMG AVOCATS INSIGHTS

    Employers and employees concerned about how employees’ income in a cross-border scenario may be taxed under the terms of the treaty and, especially for those with other sources of income who are benefitting from the tolerance to apply the exemption-with-progression method, what the ending of that measure which had been in place for the past few years means for them, should contact their qualified tax professional or a member of the Global Mobility Services team with KPMG in France (see the Contacts section).

    Our People

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    Alain Loehr

    Partner

    KPMG in France

    ann-atchade
    Ann Atchade

    Partner

    KPMG in France

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    GMS Flash Alert is a Global Mobility Services publication of the KPMG LLP Washington National Tax practice. The KPMG name and logo are trademarks used under license by the independent member firms of the KPMG global organization. KPMG International Limited is a private English company limited by guarantee and does not provide services to clients. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

    © 2024 FIDAL, a French socit dexercice libral forme anonyme directoire et conseil de surveillance. FIDAL is an independent legal entity that is separate from KPMG International and its member firms. All rights reserved.

    KPMG International Cooperative (“KPMG International”) is a Swiss entity.  Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm.

    The information contained in this newsletter was submitted by the KPMG International member firm in France.

    GMS Flash Alert is a Global Mobility Services publication of the KPMG LLP Washington National Tax practice. The KPMG name and logo are trademarks used under license by the independent member firms of the KPMG global organization. KPMG International Limited is a private English company limited by guarantee and does not provide services to clients. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

    © 2024 KPMG Avocats a French simplified joint stock company formed by persons carrying on a professional activity (société d’exercice libéral par actions simplifiée) member of the KPMG global organisation of independent member firms affiliated with KPMG International Limited, a Private English company limited by guarantee. Tous droits réservés. 

    The information contained in this newsletter was submitted by the KPMG International member firm in France.

    GMS Flash Alert is a Global Mobility Services publication of the KPMG LLP Washington National Tax practice. The KPMG name and logo are trademarks used under license by the independent member firms of the KPMG global organization. KPMG International Limited is a private English company limited by guarantee and does not provide services to clients. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

    © 2024 KPMG Avocats a French simplified joint stock company formed by persons carrying on a professional activity (société d’exercice libéral par actions simplifiée) member of the KPMG global organisation of independent member firms affiliated with KPMG International Limited, a Private English company limited by guarantee. Tous droits réservés.