While Luxembourg is a small country geographically, it is an important financial centre in the EU, with many contracting opportunities in technology and the oil and gas industries. The rates of pay are relatively high and taxes are low, but the cost of living motivates some EU contractors to live in neighbouring Germany, Belgium or France, and commute to Luxembourg daily.
If you are looking for clients in Luxembourg, you need to understand the tax and social security system and the differences between payment and contracting methods. This guide will go over all the essentials, and if you need more guidance, our in-country experts are available.
Do I need a visa to be a contractor in Luxembourg?
If you are an EU national you don’t need a work visa in Luxembourg. However, if you’re staying much longer, you will need a residence permit. Non-EU citizens (including the UK post-Brexit) will need to secure a work permit with a valid sponsor in Luxembourg.
How do I get paid as a contractor in Luxembourg?
Your method of contracting and getting paid will affect your tax rates, business compliance, and client relationships.
Work as a self-employed freelancer
If you are used to working as a self-employed, you can continue to do so in Luxembourg. It will require setting up a way to verify performance with your client so they are confident paying you. That is simple if you are working ‘in-house’ for the client, but requires some trust to be built if you are working remotely.
You will handle all of your tax withholding and filing, social contributions and registration with the local ‘commune’.
Set up your own limited company
Working through your own limited company is also possible, and a good method if you are serving multiple clients. Your limited company contracts with each client, and you perform the work similar to a self-employed contractor. Having a limited company may inspire more client confidence if you are new to Luxembourg, even if it’s a foreign registered company.
There are additional corporate and business taxes to be paid in Luxembourg on your company’s earnings. However, your salary is taxed at individual rates as either a self-employed or an employee of the company.
Work with an umbrella company
Freelancers who are new to Luxembourg can also elect to work with an umbrella company, that will act as a third-party intermediary to the contract with your client. They will accept the client’s payment on your behalf, withhold taxes and social contributions, and then forward your net pay. The umbrella company can also sponsor work visas for non-EU contractors.
Using an umbrella company does help facilitate new client relationships, and is of benefit to both parties as it removes all uncertainty in payment or performance.
How do taxes work for contractors in Luxembourg?
The first EUR 11,265 of earnings per year is tax-free. After that, there are 23 different tax brackets ranging from 8%-42% depending on your level of net income. The tax rates are the same for both employees and self-employed contractors, with no special ex-pat tax regime.
You will also be paying a ‘communal business tax’ for self-employed, and a 15% corporate tax for limited companies on earnings up to EUR 175,000. There is also a solidarity tax of 7% and a municipal business tax of 6.75% if working in Luxembourg City, both applicable to limited companies.
Self-employed contractors will also need VAT registration and will pay 17% if the annual turnover is EUR 17,000 or more. This amount is typically passed on to the client when setting contract rates, so it should not decrease retained earnings.
Social contributions are deducted before taxes are applied to earnings, so that does lessen the tax burden, along with other deductions for expenses.
Tax residency rule in Luxembourg
Luxembourg uses the 183-day rule, where stays beyond that result in tax residency. Tax residents pay taxes on worldwide income, and you might have to look to a tax treaty to avoid double taxation at home if you have other income sources. Limited companies may also be liable for tax in the country where they are registered, in addition to those in Luxembourg.
How to file taxes in Luxembourg
- Taxes must be filed by March 31 of the year following the tax year, but you may be required to make quarterly advance tax payments during the tax year.
- You will register with the Luxembourg tax office, and declare your business category. They could either commercial activities, skilled craft trades, or specific professions.
- Every February the taxpayer will receive an invitation to download the tax return forms and complete them online or send them by mail.
- Income tax is calculated on the return by applying the progressive rate to taxable income after expenses.
What are the social security contributions in Luxembourg?
Social contributions average about 25% and all self-employed must register with the social security system. You will need to contribute unless you can provide an A1 self-employment certificate that you are covered at home under a mutual treaty. The contribution rate is less than many EU countries which can reach up to 50%. Also, the benefits are generous, so you will need to consider the best choice from that angle.
How do I stay compliant while contracting in Luxembourg?
The main compliance concerns for international contractors in Luxembourg include
- Making correct tax payments
- Meeting immigration requirements
- Paying social contributions.
Each of these can apply to ex-pat contractors in Luxembourg, and depend on several criteria that may be difficult to learn if you are new to the country.
The easiest way to remain compliant given all the variables is to use an umbrella company as your local partner in Luxembourg. They are already well-versed in the rules for self-employed contractors and can help you get started with the contract. They can also facilitate all of the compliance-related steps on your behalf.
Using an umbrella company is the best way to avoid any misclassification issues or violating any self-employment rules. Aside from compliance, here are the other benefits of using an umbrella company:
- Handles all client payments, tax withholding, and any social contributions
- Issues you a payslip each month, to a local or foreign account
- Can sponsor work permits for non-EU citizens
- Helps set up the contract with the client
- Moderates any disputes with your client
- Advises on access to totalization and double taxation treaties
Contractor Taxation has experienced umbrella companies in Luxembourg that are ready to help you right away before you leave home. Please contact us for more information on how an umbrella company can be your essential partner in international contracting.