Tax Treaty Case Law around the Globe 2015

S. 43Luxembourg: The Effect of a Tax Treaty Tie-breaker for Dual Residents

Werner Haslehner

I. S. 44Introduction

Luxembourg applies mandatory joint income taxation for married couples if both spouses reside in Luxembourg, resulting in the calculation of the marginal tax rate for a couple’s income based on half of their combined income (couple’s splitting). If resident taxpayers have foreign exempt income, such income is taken into account for the purpose of determining the applicable tax rate, although it is removed from the tax base, in accordance with the proviso safeguarding progression in Article 23A(3). Under these circumstances, it can be important for a dual-resident taxpayer to be considered non-resident in Luxembourg for the purposes of Article 3 LIR to avoid an increase in the tax burden on his spouse regardless of whether his income is included in the tax base or exempt by virtue of the tie-breaker rule giving the exclusive taxing right to another country.

Against this background, case 33872C, which was decided by Luxembourg’s Cour administrative (supreme administrative court) on 18 December 2014, concerned two questions of treaty law: first, whether the taxpayer in question was a res...