France-resident director or shareholder of a Luxembourg company: who taxes what

A French resident who manages or owns a Luxembourg company can draw three types of income from it: a salary, directors’ fees, dividends.

These three flows do not follow the same rules. They fall under different treaty articles, are taxed in different States, and are reported differently. Treating them as one is the most common mistake, and the one that surfaces latest, when the French authorities ask for what was never declared.

This article puts each flow back in its place.

I. Three flows, three regimes

The first thing to establish is therefore not the amount but the nature of the income. A director who combines a corporate office with an employment contract receives two distinct types of income, falling under two different articles.

II. Salary: article 14 and the 34-day rule

Employment income is taxable in the State where the employment is actually exercised. For an employed director of a Luxembourg company working in Luxembourg, the salary is therefore taxable there.

The tolerance introduced by the protocol of 7 November 2022 applies: as long as days worked outside Luxembourg do not exceed 34 per tax period, the entire salary remains taxable in Luxembourg. Beyond that, taxing rights are split in proportion to the days actually worked outside Luxembourg.

That threshold and how it works are set out in our article on remote working for French cross-border workers, which applies to an employed director like any other employee.

III. Directors’ fees: article 15 and the 20 % withholding

Directors’ fees, meaning remuneration granted for the corporate office alone, fall under article 15 of the treaty. They are taxable in Luxembourg, the State of the paying company, regardless of where the office is exercised.

That is an important difference from salary: the place of work is irrelevant. A director who has never set foot in Luxembourg still has their fees taxed there.

Under Luxembourg domestic law, fees paid to a non-resident bear a withholding tax of 20 % of the gross amount granted, with no deductions. The rate rises to 25 % where the company bears the tax, since the withholding is then computed on the amount actually made available.

That withholding is in principle a final tax where the non-resident’s Luxembourg income consists exclusively of directors’ fees whose gross amount does not exceed 100,000 euros per tax year. Above that threshold, or where there is other Luxembourg income, taxation is by assessment, and therefore by return. The recipient may in any event always ask to be taxed by assessment.

A point directors often discover too late: directors’ fees are not deductible for the paying company. Unlike salary, they therefore do not reduce the Luxembourg taxable result. And it is the company that is personally liable for declaring and paying over the withholding.

The classification trap is this: remuneration paid for day-to-day management is not a director’s fee, it is a salary, and it falls under article 14. A director holding both functions must therefore split the two, and that split must be consistent with the articles of association and the shareholders’ resolutions.

IV. Dividends: article 10

Dividends are in principle taxable in the State of residence of the beneficiary, France for our director. The source State nevertheless keeps a right to withhold, capped by the treaty.

• General rule: 15 % of the gross amount.
• No withholding where the beneficial owner is a company holding directly at least 5 % of the capital of the distributing company throughout 365 days, that period including the day of payment.

The distinction is decisive: the exemption targets a company, not an individual. An individual shareholder resident in France therefore bears the 15 % withholding in Luxembourg, then declares the dividend in France.

V. On the French side: tax credit, not exemption

This is the least understood change, and the one that produces the most incorrect returns. Under the former treaty, certain income taxed in Luxembourg was exempt in France. Since the protocol of 10 October 2019, in force from 1 January 2020, France eliminates double taxation through a tax credit, under article 22.

The mechanism distinguishes two cases, and the distinction changes the outcome.

• Income taxable exclusively in Luxembourg: the tax credit equals the French tax computed on that income, which effectively cancels the French charge.
• Income taxable in both States: the credit equals the Luxembourg tax actually paid, capped at the corresponding French tax.

Two practical consequences. First, declaring nothing in France on the ground that the income is already taxed in Luxembourg is a mistake, even where the final tax is nil: the filing obligation survives the absence of tax. Second, the Luxembourg income, by entering the French base, can raise the rate applicable to the household’s other income.

VI. The mistakes that cost

• Failing to declare in France income taxed in Luxembourg.
• Calling day-to-day management pay a director’s fee, or the reverse, without the articles and shareholders’ resolutions confirming it.
• Forgetting the 34-day counter for the salary element, and discovering it at year end.
• Assuming the dividend withholding exemption applies to an individual: it is reserved for companies.
• Forgetting that directors’ fees are not deductible for the company, and reasoning as if they were salary.
• Confusing tax with social security: affiliation follows separate European rules, with their own thresholds.

Conclusion

There is no single answer to the question of where you are taxed. There are three, one per flow, and none follows from the others.

The method is always the same: classify the income first, then identify the applicable article, then check the filing treatment in both countries. A perfectly lawful structure can still produce an incorrect tax position if any one of those three steps is skipped.

At Ease Advisory we handle both sides: the firm is established in Luxembourg and its practice has covered both France and Luxembourg for thirteen years. Do you receive salary, directors’ fees or dividends from a Luxembourg company while living in France? Let us talk before the next return.

Need support on this? Discover our tax & compliance service in Luxembourg or contact Ease Advisory.