You think you know you know where you fit into the whole tax system as an expat? Think again. Laura Foulds is here to sort you out!
Who is a non-resident?
A Luxembourg non-resident does not meet the conditions for residency (see week 2)
As a default position, non-residents are taxed on their Luxembourg sourced income only and, since worldwide income is not reported, they are only able to claim limited deductions : primarily social security paid on Luxembourg sourced income.
Joint vs separate filing
From 1 January 2018, the default position for non-resident married couples is each person is treated as an individual filer with Tax Class 1 applied.
Joint taxation, where both spouses are considered as residents and Tax Class 2 can be applied, is only available upon election if certain conditions are met (see below). If a joint filing election is made the taxpayers are treated as if they were Luxembourg residents, are required to report worldwide income and are entitled to the same deductions available to resident taxpayers.
For any taxpayers requesting joint taxation, filing a tax return is mandatory.
Conditions for joint filing
For the taxpayer with income from Luxembourg, they can elect for joint filing if:-
90% of their worldwide income arises from Luxembourg or
their non-Luxembourg income is below €13,000.
Once the joint election has been made, the spouses have the option for their tax to be calculated on the individual/joint/hybrid options available to resident taxpayers.
Practical aspects of joint filing
The joint filing request can be made in advance, via the tax card. In this case, an estimated average tax rate is applied via the payroll and the final taxes are reconciled via the tax return. If election is not made via the tax card, it can be done on the tax return which must be filed by 31 March following the tax year.
Care should be taken in determining whether joint taxation is the optimal filing position. Working days should be carefully tracked and taxpayers should note that, if their situation changes during the year, they may revert to Tax Class 1/single filing and could owe significant taxes at the year end.