Combined employee status and self-employment: THE LEGAL, FISCAL AND SOCIAL IMPACTS
There are many reasons to set up a business in parallel with a salaried activity. It can be a way of increasing one's income and purchasing power, or of trying to monetize an activity which was initially a simple personal hobby. The combination of activities can also be a transitional step to test and develop one's business in security: the status of employee provides financial security while one strives to grow sufficiently viable business volume to earn an income and become fully independent.
However, depending on the specific situation, the combination of salaried and complementary self-employed activities in Luxembourg (and generally speaking, between several countries) generates different impacts in terms of legal, social and fiscal aspects.
FROM THE LEGAL VIEWPOINT: A FEW PRECAUTIONS BEFORE GETTING STARTED
A combination of activities is entirely possible as long as the employee respects their obligation of loyalty to their employer. The purpose of the complementary self-employed activity must not be in competition with the activity carried out by your employer.
It must therefore be ensured that an exclusivity clause is not enforceable against the employee.
If this is the case, it is sometimes possible to discuss the plan to become self-employed. The employer may allow an exemption, although there is no obligation for them to do so. This is completely at the employer's discretion.
FROM A SOCIAL POINT OF VIEW: DETERMINATION OF AFFILIATION STATUS
If a person wishes to combine an activity as an employed person and as a self-employed person in different Member States, the determination of the State of affiliation and payment of social security contributions depends on the place where the employed activity is performed. Employed activity takes precedence over self-employment(1).
For example, a person who is employed in Luxembourg and is additionally self-employed in France will only be subject to Luxembourg legislation on social security contributions (for both contributions relating to employed and self-employed activity), which will then be paid to the CCSS (Centre Commun de la Sécurité Sociale [Joint Social Security Centre]) in Luxembourg.
However, the Joint Social Security Centre provides for two applications for exemption from social security contributions in certain cases:
Exemption for insignificant income
- If the professional income from the additional self-employment is less than or equal to one third of the annual minimum wage (about 24,853 euros), i.e. 8,284 euros per year, then the exemption (2) applies for sickness, accident and pension insurance contributions.
- Above €8,284 per year (or €690 per month), social security contributions are paid on an actual basis, unlike a person who is solely self-employed -the latter contributes on the basis of the minimum wage regardless of whether or not this volume of turnover is actually achieved.
Exemption for occasional activity
Where the additional self-employed activity does not exceed 3 months per calendar year and is not usual, then the activity is considered to be occasional (3). As such, the self-employed person will not have to pay health and pension insurance contributions. Accident insurance remains due in order to cover the exercising of the profession.
FROM THE TAX VIEWPOINT: WHERE TO PAY TAXES?
Generally speaking, income from an employed activity and income from self-employment will each be taxed in their own category. A distinction should therefore be made between their tax treatment.
Income from salaried activity
As a result, income from a salaried activity will in principle be taxed in the country where the work physically takes place, under the category of "wages and salaries".
In most cases, the country in which the employed activity is carried out is ultimately the same as the country where the employer is located. However, attention must be paid to the more complex situations which may arise, particularly in cases where the employed activity takes place simultaneously in several countries.
In this case, account should be taken of the tax legislation of each country where the employed person is working and it should be checked whether there is a convention between the State of residence and the State of benefit, which takes precedence over national law.
The declaration of income will be based on the relative share of work performed in each country.
Regulations and the degree of tolerance vary from one country to another. To give just one example: in Belgium, it is necessary to declare income earned for more than 24 days a year in the territory(4). Beyond this tolerance of 24 days per calendar year, the usual income tax rules apply depending on the country concerned.
Vigilance is required to avoid disagreements with the tax authorities.
Income from complementary self-employment
For income from complementary self-employment, the tax criterion to be taken into account is the country where the activity is carried out, regardless of the country of residence. Income is taxable only in the State where a permanent establishment is located, namely an infrastructure of production or services (however small it may be) in which the enterprise carries on all or part of its activity(5).
Thus, taking the example of a person resident in Luxembourg who performs their complementary self-employed activity from an infrastructure (for example an office) located in France, the taxes resulting from the self-employed activity will be due to the French tax authorities.
It should be noted that income from the combination of activities, i.e. from both activities (employee and complementary self-employed) must be declared in the overall income from both countries.
Example of taxation on the combination of activities
Let's take the example of a single person who is employed in Luxembourg and resident in Belgium, where they perform a complementary self-employed activity:
Adjusted taxable income from Luxembourg - employed activity
Exempt income from Belgium - self-employed activity
Adjusted overall income (employed + self-employed)
Tax credit (worldwide income) in Luxembourg
Average rate in Luxembourg
14.40%: determined on the taxable base of 30,000 euros, taking into account foreign income from professional sources and the scale in force in Luxembourg
Tax due in Luxembourg
Only calculated on Luxembourg's earned income: 30,000 X 14.40%
(1) According to Article 13(3) of EC Regulation No 883/2004 (updated in March 2017), which entered into force on 1 May 2010: a person who normally pursues an activity as an employee and an activity as a self-employed person in different Member States shall be subject to the legislation of the Member State in which they pursues an activity as an employee.
(2) art. 5, par. 2 and 3; 88, par. 2 and 3; 180, par. 2 and 3 of the Social Security Code.
(3) art. 4, par. 1 and 179 of the Social Security Code.
(4) According to AGFisc Circular No. 22/2015 (No. Ci.700.520) dd. 01/06/2015 on the mutual agreement of 16/03/2015 on the application of Article 15 of the Belgian-Luxembourg double taxation agreement concluded on 17/09/1970
(5) According to Article 5 of the OECD Model Convention which defines the notion of permanent establishment.