On 19 December 2024, the Luxembourg Parliament adopted bill of law 8396 and its amendments incorporating the OECD's Pillar 2 Administrative Guidance issued in February, July and December 2023 and June 2024 into domestic law.
Key clarifications are as follows:
- Scope: investment funds and certain real estate investment vehicles are excluded entities if they meet specific criteria, with a "deemed consolidation" test aligning to applicable accounting standards. Sovereign wealth funds managing government assets are also excluded.
- Definitions: revenue is defined as per MNE group consolidated financial statements, including ordinary and extraordinary income. Rules address differing accounting periods for constituent entities and the ultimate parent entity (UPE).
- QDMTT: updates specify rules for contested amounts, currency consistency, and exemptions during initial phases of an MNE group's activity.
- Qualifying income or loss: the treatment of technical provisions for insurance companies and the conditions for the substance-based income exclusion for operational leases are clarified.
- Investment entity transparency election: regulated mutual insurance companies may elect to treat investment entities as tax-transparent under specific regimes.
- Transition year: deferred tax expenses during the transition year are computed using a formula, with clarified rules for asset transfers and their recognition post-November 2021.
- CbCR safe harbour: transitional safe harbour rules are aligned with OECD guidance, preventing misuse through hybrid arbitrage arrangements.
- Securitisation vehicles (SVs): SVs remain within Pillar 2 but with top-up tax obligations shifted to other entities in the same jurisdiction. SVs are excluded from joint and several liability if no other entities are present locally.
- Intermediate flow-through entities: rules align the tax treatment of flow-through entities with the laws of their closest non-flow-through owner, ensuring clarity in income and tax allocation.
To read our newsflashes on the bill of law and its amendments incorporating the 2023 and 2024 Guidance:
- In addition to minor drafting changes, the parliamentary work on the bill of law also gave rise to some interesting points. In particular, the Finance Committee clarified that the Pillar 2 rules could apply to entities held by a sovereign wealth fund. These entities could therefore qualify as UPEs if the conditions to apply the Pillar 2 provisions are met.
- In addition, following a remark by the Conseil d'Etat on the determination of the functional currency for calculating the QDMTT for entities not required to file and publish their financial statements in Luxembourg, such as sociétés en commandite spéciales (SCSp), the Finance Committee indicated that SCSp are treated as fiscally transparent entities in Luxembourg. As a result, in certain situations, they may be regarded as "stateless entities" under the Pillar 2 domestic provisions, and thus not subject to the QDMTT. Further practical clarifications on the treatment of Luxembourg partnerships for Pillar 2 purposes would in our view be welcome.
Next steps
Once the law is published in the Luxembourg Official Journal, the provisions will apply to tax years starting on or after 31 December 2023.
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.
