As a financial and high-tech centre in Europe, Luxembourg has many skilled workers that could be a fit for your company. With fairly low taxes and high pay rates, the small country also attracts a high number of foreign nationals. Many of these will work in Luxembourg and then live in adjacent European countries.
Once you have recruited a worker (local or ex-pat), the next step is to decide how to hire them. Some workers will want the benefits and security of full employment, but that may not be the best for your company initially. If you are a startup or unsure how much work you can offer, you may want to hire the worker as a contractor. It is a more flexible option, with far lower costs than hiring a full-time employee.
Here are some of the benefits of hiring contractors:
- There are no long-term financial/HR commitments by the company
- It is cost-effective when compared to paying employee benefits and entitlements
- Contracting is a B2B relationship, outside of typical labour laws
- It is a good way to give a recruit a ‘probationary’ period before hiring
- They can be hired for short projects or on a repeat basis
- It is more flexible to scale up or down, or if different skill sets are needed as the company grows
When you contrast this with the compliance and financial burden of hiring employees in a foreign country, contractors look like a reasonable choice.
How to hire and pay remote contractors in Luxembourg
If you decide to hire your recruit as a contractor, there are still several considerations when setting up the contract and payment method. These are your options for hiring and paying a contractor in Luxembourg:
Hire and pay them as a freelancer
Many contractors will work as self-employed freelancers, and this may be especially true for ex-pats who are EU citizens. There are no barriers for EU citizens to work in Luxembourg and they may work for multiple remote or local clients.
If you hire the contractor as a freelancer, you will want to create clear performance and payment milestones to avoid any misunderstanding. If there is a dispute, there won’t be a third party to turn to for resolution.
Pay them through their limited company
Established contractors may have their own limited company, as it does allow the contractor various tax advantages. In that case, you would contract directly with the limited company, which is a fully registered business in Luxembourg.
Hiring contractors with a limited company does offer more certainty that they have a stable business presence and experience contracting. The limited company essentially ‘leases’ the contractor to perform the services, and are directly accountable for all contract terms.
Use an umbrella company in Luxembourg
A final option for contractors is to use an umbrella company in Luxembourg. The umbrella company is a third-party intermediary that facilitates payments and ensures contractor performance. This is a real advantage for both you and the contractor when setting up an international work contract.
The umbrella company will issue payment to the contractor once your company confirms project completion. If there were ever a disagreement, the umbrella company is in an ideal position to mediate a solution. It is also in a position to sponsor work permits for ex-pats who need one.
Compliance risks when hiring remote workers in Luxembourg
As you begin to engage with remote workers in Luxembourg, you might think there are no other compliance or legal concerns. In general, this is true as you are simply purchasing services from abroad. However, there are two compliance risk areas to be aware of.
Misclassification risk: Employee vs Contractor
The first has to do with your decision to hire the worker as a contractor. Although that is a valid work structure, there are labour laws that define contractors versus employees. If you hired the worker as a contractor to avoid employment costs and commitment, you cannot then treat them like an employee.
The criteria for employee classification often revolve around control of their time and work methods. You should also avoid paying a fixed salary or employee-like benefits. If at some point the worker was dissatisfied as a contractor, they could file a misclassification claim.
To retain the worker, you would have to employ them and pay penalties and back social contributions. Using an umbrella company can offset this risk as the contractor receives payment from them directly after taxes are withheld.
Permanent establishment risk in Luxembourg
The less likely compliance risk is that of permanent establishment (PE). When PE is triggered, a company must pay corporate tax on local revenue in Luxembourg. This would only occur if, for example, you hire a sales contractor to regularly conclude contracts with local customers. Otherwise, typical remote roles such as IT support, marketing and accounting would not be enough to meet the PE criteria of business activity.
How Contractor Taxation helps you hire remote workers in Luxembourg
Contractor Taxation has a global network of umbrella companies, including in Luxembourg, who are ready to hire the contractor and administer all the tasks related to taxes, payments and contributions. As a company looking to hire local contractors, you can recommend to the new hire that an umbrella company be used to assist with the relationship. There is a fee, but it could be shared as there are benefits for you both.
Most contractors will be open to this, as it reduces the risk of non-payment with a new client, and relieves them of the administrative burden of self-employment. This gives the contractor an ally and an advocate to interface with the client, and ensure the contract proceeds smoothly.
Please contact us if you are interested in hiring a local or ex-pat worker in Luxembourg for your company as a contractor.
