On 13 November 2023,the Luxembourg government published amendments to Bill of law no. 8292 implementing EU Council Directive on ensuring a global minimum level of taxation for multinational enterprise groups and large-scale domestic groups in the Union (Pillar 2 Directive).

On 13 November 2023,the Luxembourg government published amendments (Amendments) to Bill of law no. 8292_ (Bill) implementing 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 (Pillar 2 Directive).

To read our newsflash on Luxembourg's initial Bill on the implementation of the Pillar 2 Directive, click here_

The main features of the Amendments are summarised below.

  • Purpose of the Amendments: the Amendments incorporate a number of clarifications and additional technical provisions drawn from the OECD GloBE administrative guidance of February and July 2023_ (February 2023 guidance and July 2023 guidance) into the provisions of the Bill.
  • Qualified Domestic Minimum Top-up Tax (QDMTT)
    • Investment entities and insurance investment entities will be excluded from the QDMTT provisions.
    • The net qualifying income or loss of the Luxembourg constituent entities of an MNE group will be based on the acceptable financial accounting standard applied in Luxembourg (LUX GAAP or IFRS), if all constituent entities located in Luxembourg apply this standard and the financial statements are based on the same fiscal year as the Group's financial statements. Otherwise, the accounting standard used to prepare the consolidated financial statements of the UPE will be considered.
  • QDMTT safe harbour: the Amendments implement the July 2023 guidance on the QDMTT safe harbour, which helps to determine whether a foreign domestic minimum top-up tax (DMTT) can qualify for the application of the QDMTT safe harbour. If it applies, the Luxembourg constituent entities of an MNE group may opt to not calculate the amount of top-up tax for the group entities located in the relevant jurisdiction. In this case, only the local QDMTT will be computed and due in the relevant jurisdiction. A foreign DMTT will qualify if it meets the conditions developed by the OECD Inclusive Framework in its July guidance (i.e. it meets the QDMTT accounting standard, the consistency standard with the GloBE rules, and the administrative standard) and is able to pass the test in the context of the OECD Inclusive Framework peer review.
  • Qualified refundable tax credits: the Amendments provide for the possibility of issuing a Grand Ducal regulation that aligns the treatment of transferable and marketable tax credits (which is a concept covered in the July 2023 guidance) with the treatment of qualified refundable tax credits, for the purposes of calculating the amount of qualifying income or loss and the amount of adjusted covered taxes.
  • Calculation of net qualifying income or loss: the Amendments include new provisions, the purpose of which is to take into consideration certain elements of the February 2023 guidance. Some particular highlights are outlined below:
  • Where the accounting qualification of a financial instrument differs between the issuing and the holding constituent entities, the qualification adopted by the issuing constituent entity will be retained.
  • Equity investment inclusion election: it will be possible to include in the net qualifying income or loss of constituent entities located in the same jurisdiction gains, profits and losses derived from a participation. However, this does not include a "qualified participation", which is a concept introduced in the Bill and basically concerns interest held in certain tax-transparent entities that are not consolidated on a line-by-line basis. The purpose of this election is to neutralise the impact of a loss that would be deductible under local tax rules, but not under the Pillar 2 rules, which results in the ETR being underestimated in the jurisdiction. This option is only available in certain circumstances, (i) where the participation owner is taxable on a mark-to-market basis, (ii) the interest is held in a tax-transparent entity and accounted for under the equity method or (iii) in the case of gains or losses derived from the sale of a participation save for any amounts benefiting a deduction or an exemption.
  • It will also be possible to elect for:
    • the exclusion of gains and losses derived from hedge agreements which are linked to a participation other than a portfolio shareholding (i.e., a portfolio shareholding entitles a holder to less than 10% of the profits, capital or reserves, or voting rights of an entity), and
    • the inclusion of dividends received from a portfolio shareholding, without distinguishing between portfolio shareholdings held for more than one year and those held for less than one year at the date of distribution.
  • Adjusted covered taxes: the Amendments provide for additional provisions related to deferred taxes. In particular, if an additional amount of top-up tax is due where in a jurisdiction there is no net qualifying income and a constituent entity has a deferred tax asset arising from a permanent difference (e.g., where the constituent entity has a loss attributable to an amount that is not deductible under the Pillar 2 rules), it will now be possible to opt for the additional amount of top-up tax to be treated as an amount of excess negative tax to be carried forward to subsequent tax years for which a net qualifying income is recorded.
  • Total differed tax adjustment amount: the Amendments clarify that in line with the February 2023 guidance, both deferred taxes indicated in the financial statements of a constituent entity and those indicated only in the consolidated financial statements of the MNE group (if they can be traced back to the constituent entity) can be taken into account to determine the amount of adjusted covered taxes. This provision will also be applicable in the context of calculating the Luxembourg QDMTT.
  • Substance-based income exclusion: the Amendments clarify, in line with the July 2023 guidance, the treatment of eligible employees and eligible tangible assets which, during the relevant period, are not located for the whole of that period in the jurisdiction in which that relevant constituent entity is located.
  • Permanent safe harbours: the Amendments provide a framework for permanent safe harbours. In particular, once selected by a reporting entity, the annual top-up tax for the jurisdiction will be reduced to zero if one of three tests (current profit test, de minimis test, and effective tax rate test) is satisfied on a jurisdictional basis. The simplified calculation methods to be applied for the verification of the tests will be defined by the OECD Inclusive Framework.
  • UTPR safe harbour: the Amendments introduce an optional UTPR safe harbour in line with the July 2023 guidance, which will be available during a transition period (tax years starting prior to 1 January 2026 and ending prior to 31 December 2026). With this option, the UTPR calculated for the UPE jurisdiction will be deemed to be zero during the transition period, if the UPE jurisdiction has a nominal corporate tax rate of at least 20%.
  • Election to apply a taxable distribution method: the Amendments adapt the current text to take into consideration the February 2023 guidance. The election, which is already open for participations held in investment entities, will also be applicable to participations held in insurance investment entities.

Conclusion and next steps

The Amendments to the Bill are to be welcomed insofar as they largely meet market expectations, in particular with regard to the fund and insurance industry, which will benefit from the QDMTT exemption for investment entities and insurance investment entities. Furthermore, it demonstrates once again Luxembourg's willingness to take into account the solutions identified by the OECD Inclusive Framework, which will also be seen in the interpretation and application of the amendments.

The amended Bill will follow the usual legislative process through Parliament. If passed before year end, the Bill will generally apply to tax years starting on or after 31 December 2023. The provisions on UTPR will generally apply to tax years starting on or after 31 December 2024.

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.