Severance payments from Luxembourg: Federal Finance Court decides for Germany!

Severance payments from Luxembourg: Federal Finance Court decides for Germany!

On May 30, 2025, key decisions of the Federal Finance Court (BFH) regarding the taxation of severance payments from Luxembourg were published. The Rechtslupe reports that the Federal Republic of Germany has the right to tax severance payments received by employees in the Grand Duchy of Luxembourg in accordance with Article 14 Paragraph 1 Sentence 1 DBA-Luxembourg 2012. In particular, it was clarified that the employee living in Germany is subject to unlimited income tax in the year in question and his worldwide income, which also includes payments from foreign sources, will be used for taxation.

As part of a recent decision, the Federal Finance Court determined that severance payments paid in connection with the early termination of employment contracts are viewed as income from employment in accordance with Section 19 of the Income Tax Act (EStG). This legal framework gives Germany the exclusive right to tax these severance payments, while the Luxembourg DBA 2012 does not allow exceptions for these payments.

Taxation law and severance payments

Another key finding concerns the type of severance payment. This is not granted for a specific activity, but rather as compensation for the loss of a job. Therefore, the right to taxation cannot be questioned. The Consultation Agreement Regulation (KonsVerLUXV) of July 9, 2012 and the Memorandum of Understanding to the 1958 Agreement are not applicable to the DTA-Luxembourg concluded in 2012. This was a crucial point in the judgment of the Federal Finance Court, which was made on March 20, 2025 under the file number VI R 24/22.

In addition, the Federal Finance Court has emphasized that its administrative practice does not see any unconstitutionality in the application of the mutual agreement. The principle of equality does not confer any right to the application of unlawful administrative practices, which strengthens the position of the German financial administration. The administration consistently applies the requirements that already apply and has not identified any structural enforcement deficits.

The decision also emphasizes that salaries and similar remuneration can only be taxed in the state of residence in accordance with Article 14 Paragraph 1 Sentence 1 DBA-Luxembourg 2012, unless the work is carried out in the other contracting state. The clarity in this regulation gives both taxpayers in Germany and the tax administration a clear basis for action.

For more detailed information on this topic, we refer to the documentation from the Bundesfinanzhof.