A lot has changed in terms of taxation in both Germany and Luxembourg in 2025. As the changes in Germany are particularly extensive, this article is divided into two parts: one for Germany and one for Luxembourg.
Disclaimer: This overview is no substitute for professional legal or tax advice, but it will make you smarter.

Tax changes for German cross-border commuters in 2025 - Part 1: Luxembourg

1. Changes for all cross-border commuters

1.1 Adjustment to inflation

Income tax will be adjusted by 2.5 index levels. In short: more net from gross. 🎉

1.2 Tax credit for single parents and maintenance payments

Good news for single parents: The tax credit increases to a maximum of EUR 3,504. Important: Don't forget to apply in your tax return!

Parents can now deduct up to EUR 5,424 per child for their maintenance payments to children who live with the other parent.

In the case of separated parents with an alternating model: please calculate carefully who should claim the tax-free allowance and who should claim the extraordinary expenses.

1.3 Electronic submission of tax declarations in Luxembourg

Luxembourg is going digital - at least as far as tax returns are concerned.

So far hardly possible for cross-border commuters, but something is happening: wage tax data for employees and pensioners as well as minor children will be available electronically in the future in order to pre-fill the tax return. Data from government sources and third parties will also be integrated over the next five years. The catch: digital progress is initially aimed at people with the simplest of circumstances, and only very few cross-border commuters: only 19,700 people are initially covered.

The tax forms for 2024 will not be available until 7 April 2025.

So, patience is required for cross-border commuters.

 

2. Changes for employees

2.1 Adjustment to inflation and rising energy costs

Good news for employees on minimum wage: no more income tax. Plus, the CO2 tax credit increases by EUR 24.

2.2 Tax credit for overtime from 2024

Working overtime pays off in Luxembourg - at least up to EUR 700, which you can claim as a tax credit. You must apply for this in your tax return. This is even possible for the 2024 tax year!

2.3 Tax exemptions for bonuses and their disadvantages

Luxembourg is offering tax exemptions on special salary components to attract more employees. But beware: German cross-border commuters could be taxed in Germany. This is because a percentage exemption instead of a fixed allowance can lead to taxation in Germany according to current practice, see the experience with the prime participative. This could act as a deterrent rather than an attraction. Nevertheless, we present the special salary components so that you also know which salary components you should reject.

• 50% tax-exempt annual bonus

Annual bonuses can be paid out 50% tax-free, provided certain conditions are met. These conditions are now being relaxed: from 2025, the bonus can amount to up to 30% of the gross annual salary. All bonuses together can amount to up to 7.5% of the company's positive annual result before bonuses.

• 50% tax exemption for impat premiums

Impatriates (impats for short) can receive a 50% tax exemption on impat premiums from 2025, limited to an annual salary of EUR 400,000. Various conditions must be met, including residence or habitual abode in Luxembourg and a minimum salary of EUR 75,000. For German taxpayers who take up employment in Luxembourg during the year and move there, the regulation is not very attractive: the tax-exempt portion is taxed in Germany in the year of the change of residence.

• 75% tax exemption for young employees

Employees under the age of 30 can receive a bonus for their first permanent employment contract, 75% of which is tax-exempt under certain conditions. The bonus is up to EUR 5,000 and depends on the salary, which must be between EUR 50,000 and EUR 100,000.

• 25% tax exemption for housing premium

Under certain conditions, employers can pay young employees a housing bonus, 25% of which is tax-exempt. The premium amounts to a maximum of EUR 1,000 per month and is aimed at under-30s. The premium may not be higher than the basic rent. The maximum gross salary excluding the premium may not exceed 30 times the qualifying minimum wage.

 

3. Conclusion

German cross-border commuters benefit from:

• Lower tax rates
• Higher deductions for children of separated parents
• The tax credit for overtime
• The CO2 credit
• Higher CISSM

 

Tax changes for German cross-border commuters in 2025 - Part 2: Germany

Below you will find an overview of the most important changes for cross-border commuters in Germany. We had to concentrate on the main points here, as the complete tax changes would require an article of around 50 pages.

1.      Changes for all cross-border commuters

1.1 Higher basic tax-free allowance 2025

The basic tax-free allowance in 2025 will be EUR 12,096 for single taxpayers and EUR 24,192 for taxpayers who are assessed jointly. Sounds dry, but means more money in your pocket!

1.2 Reduction of cold progression

In order to prevent taxpayers from having to pay more tax in 2025 if their income increases up to the rate of inflation and thus having less net purchasing power despite higher income (= effect of cold progression), the benchmark values of the tax rate will be increased in line with the expected rate of inflation. In 2025, there will be a 2.6 % shift in the benchmark values to avoid cold progression. So: less tax frustration, more shopping pleasure!

1.3.   2025 solidarity contribution

You will have to pay solidarity surcharge in 2025 if the income tax assessed in 2025 is more than EUR 19,950 (single person) or EUR 39,900 (married couple assessed jointly).

1.4 Household-related services / tradesmen

If you apply for a tax reduction for household-related services or tradesmen's services in a private household, you need an invoice and must not pay it in cash. From 2025, payment must also be made to the account of the service provider. So: Cash payments or bank transfer to a third party? No, thank you!

1.5 Tightening up: Donations to foreign donation recipients

From 1 January 2025, donations to foreign (e.g. Luxembourg) donation recipients will only be deductible as special expenses if the donation recipient issues a ‘donation receipt in accordance with German law’. This may only be issued if the recipient is included in the German register of recipients of donations in accordance with Section 60b AO. So: It is best to write to the Luxembourg NGOs so that they can be registered. Here is the link to the registration.

 

1.6.   Joy of children = joy of taxes?

1.6.1 Child benefit / child allowance

From 1 January 2025, the monthly child benefit will be EUR 5 more than in 2024, i.e. EUR 255 per child per month. From 2025, the child allowance will be EUR 3,336 per parent and the allowance for childcare, education and training will be EUR 1,464.

1.6.2 Childcare costs

Parents benefit from a special expense deduction for childcare costs up to the child's 14th birthday. Until the end of 2024, only 66% of childcare costs could be deducted, up to a maximum of EUR 4,000 per child per year. In 2025, the special expenses deduction will increase to 80% of childcare costs, up to a maximum of EUR 4,800 per child per year.

1.7 Maintenance payments

If parents provide financial support for a child for whom they are no longer entitled to child benefit, they can claim an extraordinary expense of up to EUR 12,000 in 2025. of up to EUR 12,096 for tax purposes.

The same applies if children support a parent financially.

What is new in 2025 is that cash payments can only be deducted if the payment is made by bank transfer to the account of the maintenance recipient. Cash payments and payments to third parties are a big no-no taboo in tax law!

 

2. Changes for employees

2.1 Overtime and Prime Participative

In recent months, employees have learnt that Luxembourg overtime pay and the prime participation bonus have been taxed in Germany.

The first court proceedings are underway.

Anyone affected can lodge an objection and apply for the proceedings to be suspended. It should also be checked whether the Luxembourg long-term care insurance, the 2.8% health insurance on the overtime / participation premium and the 8% pension insurance on the participation premium have been deducted by the tax office.

2.2 Voluntary payment into a statutory or private pension scheme

Contributions to statutory or private pension schemes (Rürup) can be claimed as special expenses to save tax. Cross-border commuters who are affected by the ‘overtime taxation’ or ‘taxation of the Prime Participative’ are currently considering making special payments into the CCSS. In addition to other aspects such as general deductibility, there are also maximum amounts to consider: EUR 29,344 for single taxpayers and EUR 58,688 for jointly assessed taxpayers (statutory plus voluntary contribution).

 

3 Changes for pensioners

3.1 Benefits from a Luxembourg occupational pension scheme

If a cross-border commuter receives payments from a Luxembourg occupational pension scheme (e.g. LaLux, Baloise, etc.), these payments are usually made up of contributions from (i) the employer and (ii) the employee. From 2025, the employee's contributions will be subject to taxation in Germany. Much is unclear here in detail and will probably be clarified in further court proceedings:

Does this also apply to contributions paid in up to 31 December 2024? Does this also apply if employer contributions were also paid in alongside employee contributions?
If so, is there a breach of the ban on retroactivity?
How can countermeasures be taken?

ALEBA will be organising an event specifically on the subject of pensions in March - this will go into this point in detail. Until then, consideration may be given to suspending voluntary payments for the time being.

3.2 Higher tax-deductible household savings 2025

If a cross-border commuter has to move into a nursing home due to a need for care, disability or illness, they can claim an extraordinary burden for the costs they bear themselves. However, if you give up your own home, a household saving will be deducted from the care home costs you bear yourself. This amounts to EUR 12,096 per annum in 2025.

 

4.      Conclusion

The tax landscape is constantly changing, and 2025 will bring many innovations for German cross-border commuters. You may benefit from:

Higher basic tax-free allowances
Reduction of cold progression
Improvements in child benefit, child allowances, childcare and maintenance

However, this is offset by further taxation, such as overtime, prime participation, company pension schemes, etc.

 

This article was written by Mrs Miriam Keusen, lawyer and tax consultant.