Luxembourg: Luxembourg "Still In A Learning Phase" On Pillar 2

Since 1 January 2024, multinationals have been subject to a minimum tax of 15% on their profits. According to our team, learning the new rules is proving demanding for the relevant actors in Luxembourg, with some investment funds in particular encountering difficulties.

In late 2023, Luxembourg entered a new tax era with the transposition of the European Pillar 2 directive on 20 December. The new rules, in force since 1 January 2024, aim to ensure that multinationals pay a minimum tax rate of 15% in each jurisdiction in which they operate.

Pierre-Antoine Klethi, tax lawyer in our Luxembourg office, explains what is at stake: "Pillar 2 was the main development in 2023 and its implementation will keep us busy in 2024. The directive came with the promise of rebalancing international tax practice, but also with a host of difficulties."

On the face of it, however, Pillar 2 does not change the tax landscape in Luxembourg. Only large multinationals with a turnover of at least €750m are required to pay tax at a minimum rate of 15%, but this threshold is actually much lower than the tax rate on profits in Luxembourg (25%).

Pierre-Antoine observes that the country is not yet fully ready: "We are still in a learning phase. This is particularly true for the tax authorities, whose limited resources mean they cannot master the new rules immediately." A team dedicated to Pillar 2 has been set up within the administration, raising hopes of an improvement for taxpayers in limbo--taxpayers who nevertheless still have time (until the end of June 2026) to complete their 2024 tax returns.

"There are still quite a few [companies] who are not fully aware of the impact of Pillar 2," says the tax expert. Some investment funds, for instance: "The general feeling, which is entirely justified, is that funds are not affected in principle. But there are exceptions. Typically, a fund consolidated by the investor is not an entity excluded from Pillar 2."

Tax neutrality not guaranteed

This warning applies particularly to funds created specifically for an investor, such as a large insurance company, which could find themselves having to pay additional tax that has not been anticipated. "The idea is not to impose an additional burden because the investment is made by the fund," Klethi explains. "Philosophically, there is a tension between the fund's objective of tax neutrality and rules that do not completely guarantee this neutrality."

For the lawyer, the impact of Pillar 2 is also underestimated for transactions between large groups: "It is very important to negotiate shareholder agreements properly, to have clear clauses on the allocation of the tax burden," says Klethi. "The impact can be considerable, especially if a lead investor owns several groups with varying levels of taxation, which can lead to unexpected costs for other investors in the group. The exchange of information and the way in which taxes are allocated will therefore be key elements over the next few years."

On a more positive note, "Pillar 2 provides rules to limit the impact on taxpayers," the lawyer adds, citing the exemption (under certain conditions) of dividends and capital gains. Still, things could be tricky: "Even so, the Luxembourg and Pillar 2 rules are not perfectly aligned, a discrepancy that can lead to additional taxation under Pillar 2. We may encounter situations where the dividend or capital gain is exempt under Pillar 2 but not under Luxembourg law, and vice versa."

Another warning concerns intra-group financing transactions. "Pillar 2 provides for special 'anti-abuse' rules that are not found in Luxembourg law. In certain cases, this can potentially lead to quite substantial additional taxation."

Peter Moons, partner in the tax department of our Luxembourg office concludes: "This is all becoming very complex, and the devil is in the detail. It is imperative that companies are aware of the subtleties and act accordingly, because the rules are now applicable and the relevant players must pay attention." In the event of a missing, incomplete or inaccurate declaration, the financial penalties can reach €250,000.

This article was first published by Delano.

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