European Union: Luxembourg Launches The Implementation Of The Public CbCR Directive

OUR INSIGHTS AT A GLANCE

• On 24 February 2023, the draft law implementing the so-called "public country-by-country reporting Directive" was presented to Parliament. The draft law amends the law of 19 December 2002 concerning the register of commerce and companies and the accounting and annual accounts of undertakings as well as the Law of 10 August 1915 on commercial companies.
• The public CbCR Directive requires certain multinationals with consolidated revenues of more than EUR 750 million to publicly disclose (mainly) the corporate income tax that they pay. Non-EU multinationals doing business in the EU through subsidiaries and branches will also have to comply with the same reporting obligations as EU multinational undertakings. The reporting will have to take place within 12 months of the date of the balance sheet for the financial year in question.
• Luxembourg, like all EU Member States, has until 22 June 2023 to transpose the Directive into national law. The new obligations introduced will apply to accounting periods starting on or after 22 June 2024. Thus, for companies with an accounting year corresponding to the calendar year, the first report on income tax information will relate to the year 2025 and will have to be published before the end of 2026.

On 24 February 2023, the draft law ("Draft Law") implementing the so-called "public country-by-country reporting Directive"¹ 1(the "public CbCR Directive" or "the Directive") was presented to Parliament. The Draft Law amends the law of 19 December 2002 concerning the register of commerce and companies and the accounting and annual accounts of undertakings as well as the Law of 10 August 1915 on commercial companies.

The public CbCR Directive requires certain multinationals with consolidated revenues of more than EUR 750 million to publicly disclose (mainly) the corporate income tax that they pay. Non-EU multinationals doing business in the EU through subsidiaries and branches will also have to comply with the same reporting obligations as EU multinational undertakings. The reporting will have to take place within twelve months of the date of the balance sheet for the financial year in question. Luxembourg, like all EU Member States, has until 22 June 2023 to transpose the Directive into national law.

We provide an overview of the most important aspects of the new reporting requirements to be introduced.

Background

The public CbCR Directive, first tabled in April 2016, was part of the European Commission action plan for a fairer corporate tax system. The idea of a public CbCR emerged shortly after "non-public" Country-by-Country Reporting (i.e. the automatic exchange of CbC reports between EU Member States) was introduced at EU level by the 4th Directive on Administrative cooperation in tax matters ("DAC4") as one of the measures of the OECD BEPS project. However, public CbCR has nothing to do with the BEPS project and it is more about enhancing public scrutiny than about introducing a new tool for corporate tax transparency.

For more than five years, the Directive proposal only evolved very slowly due to, among others, a disagreement on its legal basis and the related requirements for its adoption: should the Directive be based on article 50 of the Treaty on the Functioning of the European Union ("TFEU") and subject to the ordinary legislative procedure (which requires a qualified majority voting in the Council for its adoption) or should it be based on article 115 of the TFEU and therefore subject to the special legislative procedure applicable in tax matters (which requires unanimous approval in the Council for its adoption)? Depending on whether the Directive proposal was to be seen as an accounting directive (which would extend the scope of information to be reported and published) or as a tax directive (which would bring tax transparency up to the next level through a mandatory publication of some of the information already exchanged between the EU Member States under DAC4), either qualified majority voting or unanimity would apply. Finally, on 28 September 2021, the EU Council approved the proposal (under qualified majority, as an agreement was reached on moving forward under article 50 of the TFEU).

The idea of a public CbCR has been subject to a lot of criticism during the legislative procedure and the Directive would probably not have been adopted, should unanimity have been required. Today, with the recent introduction of measures aiming to make sure that the big players achieve a minimum of effective taxation (Pillar Two), one may wonder, and this even more than at the time the Directive was adopted, if providing the public with this tax data is worth the additional administrative burden and the risk of damaging the European undertakings concerned if the information is misinterpreted, misunderstood or if commercially confidential information is exposed.

Who will be subject to public CbCR?

The public CbCR Directive requires multinational groups with a total consolidated revenue of EUR 750 million to report if their ultimate parent company is located in the EU or is not in the EU but has EU subsidiaries or branches.

Luxembourg companies in the scope of public CbCR

The following Luxembourg companies will have to draw up, publish and make a report on income tax information accessible:

• Luxembourg ultimate parent undertakings with consolidated revenues on their balance sheet date exceeding a total of EUR 750 000 000 for each of the last two consecutive financial years, as reflected in their consolidated financial statements;
• Luxembourg standalone undertakings with revenues on their balance sheet date exceeding a total of EUR 750 000 000 for each of the last two consecutive financial years, as reflected in their annual financial statements;
• Luxembourg medium-sized and large subsidiary undertakings controlled by a non-EU ultimate parent undertaking, where the consolidated revenue on its balance sheet date exceeded a total of EUR 750 000 000 for each of the last two consecutive financial years, as reflected in its consolidated financial statements;

These Luxembourg companies will only be in the scope of public CbCR if they are in the scope of the EU Accounting Directive. As a result, only the following companies are targeted:

• Limited liability companies and similar companies (Société anonyme, "SA", Société en commandite par actions, "SCA" or Société à responsabilité limitée, "S.à r.l".); as well as
• Partnerships (Société en nom collectif, "SNC" or Société en commandite simple, "SCS") when all their direct or indirect partners who are indefinitely liable are organised in the form of limited liability companies or similar.

Luxembourg branches in scope

Luxembourg branches of non-EU undertakings will also be subject to these obligations under the following conditions:

• They are Luxembourg branches of a non-EU affiliated undertaking of a group with a non-EU ultimate parent undertaking or Luxembourg branches of a non-EU standalone undertaking, the revenue of which on its balance sheet date exceeded a total of EUR 750 000 000 for each of the last two consecutive financial years as reflected in its (consolidated) financial statements.
• The net turnover of the Luxembourg branch has exceeded the threshold of EUR 8 800 000 for each of the last two consecutive financial years.

Anti-abuse measure

As an anti-abuse measure, the Draft Law provides that Luxembourg companies or branches not subject to the reporting/publication requirements because they do not meet the above-mentioned conditions will still have to publish and make a report on income tax information accessible where such companies or branches serve no other objective than to circumvent the reporting requirements.

Exclusions/Exceptions

The following exclusions and exceptions will apply:

• Total revenue falls below EUR 750 000 000: The entities referred to above will no longer be subject to the reporting obligations if the total consolidated revenue falls below EUR 750 000 000 for each of the last two consecutive financial years.
• Presence only in Luxembourg: The reporting requirements will not apply to Luxembourg standalone undertakings or Luxembourg ultimate parent undertakings and their affiliated undertakings where such undertakings, including their branches, are established, or have their fixed places of business or permanent business activity, within the territory of Luxembourg and in no other tax jurisdiction.
• Banking sector: In order to avoid double reporting for the banking sector, a specific exclusion will apply under certain conditions to credit institutions already subject to reporting obligations under article 89 of the Accounting Directive (i.e. based on Article 38-3 of the Luxembourg amended law of 5 April 1993).
• Non-EU ultimate parent undertakings or standalone undertakings already subject to similar reporting obligations: No reporting obligation will apply to Luxembourg subsidiaries and branches of non-EU undertakings where a similar report on income tax information is drawn up by the non-EU undertaking, provided that it meets certain criteria.
• Luxembourg branches of non-EU undertakings having a EU medium-sized or large subsidiary undertaking in the group: Luxembourg branches will not be required to report if the non-EU ultimate parent company has an EU medium-sized or large subsidiary undertaking in the scope of the Directive (since, in such case, the publication obligation will lie with the EU undertaking).
• Publication seriously harms the commercial position of the companies which the information relates to: An optional provision of the Directive is implemented by the Draft Law and concerns the possibility to defer the publication of certain information for a maximum of five years where the publication would seriously harm the commercial position of the companies which the information relates to. Any omission must be clearly indicated in the report together with a duly reasoned explanation regarding the reasons therefor. Unfortunately, the commentary to the Draft Law does not provide any explanations or examples of situations where the publication would seriously harm the commercial position of the companies. It also doesn't provide any information on how the related explanations will be assessed and in which case the omission would be considered as justified. This brings some legal uncertainty and some clarification in this respect would be useful. The omitted information must be made public in a subsequent report on income tax information within a maximum period of five years from the date of the original omission. Information relating to tax jurisdictions on the list of uncooperative jurisdictions for tax purposes may never be omitted.

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Footnote

1. Directive 2021/2101 of 24 November 2021 amending Directive 2013/34/EU (the "EU Accounting Directive") as regards disclosure of income tax information by certain undertakings and branches.

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.