The modalities for the avoidance of double taxation applicable when French tax residents receive Luxembourg sourced income have been amended by the new tax treaty signed on 20 March 2018 and ratified on 25 February 2019.
One of the noteworthy developments is the replacement of the exemption mechanism by the tax credit equal to the French tax. For French tax residents receiving income from Luxembourg, this change concerns income from employment, compensations (salaries and pensions) from public sources, social security pensions and real estate income from Luxembourg.
From now on, the Luxembourg income of a French tax resident is thus integrated into his global income for an amount net of the compulsory social security contributions, but without deducting the Luxembourg income tax eventually paid, thus increasing the taxable basis of the taxpayer subject to a progressive rate (as compared to the former method). Indeed, previously, the Luxembourg salary taken into account was the gross salary, less social security contributions and the income tax paid in Luxembourg.
French taxation will subsequently be avoided by applying a tax credit equal to the French tax. Therefore, the effective tax rate for the taxpayer shall be higher, leading his other income subject to that rate to be taxed more heavily.
In order to limit the impact of this new provision for the Luxembourg source income for years 2020 and 2021, a communiqué dated 4 October 2021 exceptionally allows eligible taxpayers to rectify their income tax returns by means of a claim for income received during year 2020 and request the application of the former tax treaty for year 2021 due to be declared in May 2022. For the next income tax return, it will be appropriate, in our opinion, to safeguard this position by sending an express notice.