Luxembourg: Analysis Of The Last Provisions Introduced By The Government In The Law Transposing Pillar Two

OUR INSIGHTS AT A GLANCE

• On 4 August 2023, the Luxembourg government released the text of the draft law transposing the Council Directive (EU) 2022/2523 of 14 December 2022 on ensuring a global minimum level of taxation for multinational enterprise groups and large-scale domestic groups in the Union. This Directive implements the Global Anti-Base Erosion rules, also called "Pillar Two", agreed upon by the OECD.
• On 13 November 2023, the Luxembourg parliament published amendments proposed by the government to the draft Law.
• These amendments provide for additional guidance and clarification, as well as additional complementary rules in line with OECD guidance on Pillar Two but unfortunately, do not address all the clarification needed.
• On 20 December 2023, the law including all amendments proposed by the government was passed.
• In compliance with the Directive, most of the provisions of the new law are expected to come into effect for fiscal years beginning on or after 31 December 2023, while others will come into effect for fiscal years beginning on or after 31 December 2024.
• In this article, we desribe selected amendments proposed by the government

On 13 November 2023, the Luxembourg parliament published proposed amendments by the government to the law (the "Law") transposing the Council Directive (EU) 2022/2523 of 14 December 2022 on ensuring a global minimum level of taxation for multinational enterprise ("MNE") groups and largescale domestic groups in the Union (the "Directive"). This Directive implements the Global Anti-Base Erosion ("GloBE") rules, also called "Pillar Two", agreed upon by the OECD/G20 Inclusive Framework on BEPS in the Statement to Address the Tax Challenges Arising from the Digitalisation of the Economy and the Detailed Implementation Plan, on 8 October 2021¹ .

The Law initially, presented to Parliament on 4 August 2023 as a draft, was largely in line with the Directive. However, additional guidance and clarification, as well as additional complementary rules (in line with OECD guidance), were still required to address important Luxembourg-specific points² . The amendments proposed by the government aimed at addressing these points but unfortunately, do not address all the clarification needed.

On 12 December 2023, the Council of State provided its opinion on the draft law as amended and raised two formal oppositions. On 20 December 2023, the law including all amendments proposed by the government was passed.

In this article, we go through selected amendments proposed by the government. To know more about the initial draft law, please read our previous article on this topic.

In line with Recital 24 of the Directive, the Law acknowledges the GloBE rules published by the OECD on 20 December 2021 (the "OECD Model Rules") and related administrative guidance as sources of illustration and interpretation, even where such guidance was issued after the Directive. However, initially, the draft law only considered "a number of guidelines and solutions identified at OECD level after the date of adoption of Directive". In this respect, explicit reference was, for example, made to OECD guidance published on 14 March 2022, 15 December 2022 and 2 February 2023 only.

Consequently, the 13 July 2023 OECD guidance were not explicitly mentioned in the initial draft law. In addition, part of the 2 February 2023 OECD guidance had not been taken into consideration either in practice.

The draft law was thus amended with the aim to reflect these additional OECD guidance and to equip the Luxembourg Pillar Two rules with more flexibility, safe harbours and transitional rules to mitigate unnecessary adverse consequences for Luxembourg taxpayers.

This was key for Luxembourg as the OECD guidance notably include important safe harbour rules through which alternative calculation rules make it possible to determine in a simplified manner the amount of top-up tax due in respect of constituent entities located in jurisdictions meeting the conditions to benefit from these safe harbour regimes.

Scope and carve-outs of the Draft Law

• Annual group turnover of at least EUR 750 million

The new rules will apply to "constituent entities³" located in Luxembourg belonging to MNEs or large-scale domestic groups with a combined annual turnover equal to or above EUR 750 million in at least two of the four fiscal years preceding the tested fiscal year, as per the consolidated financial statements of the group parent entity. A "group" is defined by the Law as a group of entities linked by virtue of their ownership or control structure and included in the consolidated financial statements of the ultimate parent entity (extending also to entities that are excluded from consolidation based on size, materiality or on the grounds that the entity is held for sale). A group could also be a main entity and one or more permanent establishments, provided that such group is not part of another group based on the above consolidation threshold. 

Entities that do not prepare consolidated accounts on a line-by-line basis may nevertheless be considered to form a group with their subsidiaries and therefore be in the scope of Pillar Two (e.g. if they are not required to prepare accounts at all or they do not prepare accounts under an acceptable accounting standard).

Previous OECD guidance already clarified that certain investment entities (e.g. under IFRS 10) that are exempt from line-by-line consolidation and that are merely required to fair value their investments (including where majority stakes are held in subsidiary companies) do not fall within the deemed consolidation rule, i.e. such entities do not qualify as parent entities of a group.

The Law and the related parliamentary documents unfortunately remain silent on this particular topic. In order to have legal certainty and in light of the large number of Luxembourg investment fund vehicles concerned, it would have been particularly wise to clarify whether Luxembourgspecific exemptions from consolidation vehicles companies or for most investment funds based on the respective special laws such as for reserved alternative investment funds, specialised investment funds or companies in risk capital ("SICAR") are consolidation exemptions comparable to the IFRS 10 investment entity exception.

New qualified domestic top-up tax (QDMTT)

The Law provides for the introduction of three new taxes in Luxembourg law. The first two are based on the application of two interdependent rules, namely the income inclusion rule ("IIR⁴") and the undertaxed payments rule ("UTPR⁵"). Under the IIR, the minimum tax is paid at the level of the parent entity in proportion to its ownership interests in entities that have low-taxed income. The UTPR is designed to operate as a backstop to the IIR. A qualified domestic top-up tax ("QDMTT⁶") will also be implemented, allowing Luxembourg to tax Luxembourgish low-taxed entities and prevent the application of the IIR and UTPR rules by other jurisdictions with respect to these entities⁷.

To view the full article click here

Footnotes

1. For more details about the GloBE Rules at OECD and European Union levels, read one of our previous articles.

2. For more details about the the Draft Law and the issues it raised, read our previous article.

3. A "constituent entity" as defined by the Draft Law means an entity or permanent establishment that is part of an MNE group or a large-scale domestic group.

4. Règle d'inclusion du revenu ("RIR") as per the wording used in the Draft Law drafted in French.

5. Règles des bénéfices insuffisament imposés ("RBII") as per the wording used in the Draft Law drafted in French.

6. Impot national complémentaire qualifié as per the wording used in the Draft Law drafted in French.

7. For more details about the IIR and the UTPR, read our previous article.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.