Cross-Border Workers in Luxembourg: Transborder Aspects

1. Applicable law: the lex loci laboris principle

Rome I Regulation and the place-of-work connecting factor

Regulation (EC) No 593/2008 ("Rome I") determines the law applicable to international employment contracts. In the absence of an express choice by the parties, the applicable law is that of the country in which the employee habitually performs their work. For a cross-border worker whose principal activity is performed in Luxembourg, Luxembourg law applies in principle to the entire employment relationship.

Freedom of choice and public-policy limits

The parties may designate a different applicable law, but that choice cannot deprive the employee of the mandatory protective provisions of the law that would have applied in the absence of a choice (Rome I, Art. 8). In practice, clauses opting for the law of a third country cannot displace the minimum protections of the Luxembourg Labour Code where the work is actually performed in Luxembourg.

Free movement for EU nationals

Cross-border workers who are nationals of an EU Member State benefit from the free movement of workers (TFEU, Art. 45) and are subject to no work-permit requirement in Luxembourg. Third-country nationals residing in France, Belgium or Germany must, however, hold a valid work authorisation before taking up employment.

2. Social security: single affiliation and the telework framework agreement

Principle of single affiliation in the country of work

Regulation (EC) No 883/2004 establishes the principle of a single applicable legislation: an employee may only be affiliated to one social security scheme at a time. For a cross-border worker whose principal activity is performed in Luxembourg, affiliation is made with the Luxembourg Centre Commun de la Sécurité Sociale (CCSS), which collects both employer and employee contributions.

The 25% rule and the risk of a shift

Regulation 883/2004 (Art. 13) provides an exception to the place-of-work principle: if the employee performs a substantial part of their activity — set at 25% — in their country of residence, they are affiliated to the social security of that country for all their activity. Before 2023, any cross-border telework exceeding this threshold automatically triggered a shift in affiliation.

European telework framework agreement (1 July 2023)

To address the practical difficulties arising from the post-COVID rise of telework, a multilateral framework agreement was signed on 1 July 2023 between several Member States including Luxembourg, France, Belgium and Germany. It allows cross-border workers to telework up to 49.9% of their working time from their country of residence without changing their social security affiliation to the country of work, provided that the framework agreement has been activated between the two States concerned and that an exception request has been filed with the competent institutions.

3. Taxation: bilateral conventions and telework tolerance thresholds

Source principle: taxation in Luxembourg

Under the bilateral tax treaties concluded by Luxembourg, the remuneration of cross-border workers is in principle taxable in Luxembourg, the country where the activity is performed. The cross-border worker is subject to Luxembourg income tax according to the tax class determined by their personal and family situation, with the option of annual global taxation.

Telework tolerance thresholds: 34 days

The three main bilateral conventions have been amended to include a tolerance threshold of 34 working days per calendar year of telework from the country of residence, without the corresponding fraction of remuneration being taxed in that country:

Beyond these 34 days, the fraction of remuneration corresponding to days worked from the country of residence becomes taxable in that country under its own rules, which may require the employee to file tax returns in two countries.

Tax and social security: two separate counters

The tax threshold of 34 days and the social security threshold of 25% (or 49.9% under the framework agreement) are independent and must be tracked separately. A cross-border worker may be within the tax limits while having exceeded the social security threshold, or vice versa. Employers managing cross-border telework must therefore maintain two separate counters per cross-border employee.

4. Practical key warnings

Four key obligations for Luxembourg employers employing cross-border workers who telework: