On 12 June 2024, the Luxembourg Chamber of Deputies published draft legislation amending the Law of 22 December 2023 implementing the EU Council Directive 2022/2523 on ensuring a global minimum level of taxation (15%) for multinational enterprise (MNE) groups and large-scale domestic groups within the EU. The draft legislation aims to integrate clarifications and additional technical provisions resulting from the OECD administrative guidance of 2023. The modifications proposed are intended to be effective as from fiscal years commencing on or after 31 December 2023.
The draft legislation amending the Law of 22 December 2023 (together “the Pillar Two law”) proposes the following main changes:
- The draft legislation proposes to amend article 2(3), letters b) and c) to exclude from the scope of the Pillar Two law entities that: (i) are owned by an investment fund or real estate investment vehicle, which is not an ultimate parent entity (as required by the current law), solely because they do not prepare consolidated financial statements based on an acceptable financial accounting standard (e.g., IFRS 10), and (ii) meet certain ownership and activity criteria. However, in accordance with article 2(1) of the Pillar Two law, such excluded entities would still be considered when verifying whether the annual turnover of the group is equal to or greater than the threshold of EUR 750,000,000.
- Additional clarifications have been added for the exclusion of certain sovereign wealth funds and entities with activities that are ancillary to a nonprofit organization from the scope of the Pillar Two law.
- “Turnover” would mean the revenue as reflected in the income statement of the consolidated financial statements of the MNE group or the large-scale domestic group, which would include the aggregate amount of the: (i) revenues derived from the supply or production of goods, provision of services, or other activities that constitute the ordinary operations of the MNE group or the large-scale domestic group, before deduction of operating expenses, (ii) net realized or unrealized gains on investments, and (iii) income or gains separately presented as extraordinary or nonrecurring income.
- In order to avoid methodological differences in the event of a discrepancy between accounting periods within the same group, the determinations would generally be based on the method used in the consolidated financial statements of the ultimate parent entity to address accounting period discrepancies. This would be the case when the accounting year of a constituent entity differs from the accounting year of the ultimate parent entity. However, when a constituent entity is not consolidated on a line by line basis into the accounts of the ultimate parent entity (e.g., for size or materiality reasons) or in case of a joint venture as defined by the Pillar Two law, the determinations would have to be performed based on the accounting year of the constituent entity or the joint venture for which the year end is included in the accounting year of the ultimate parent entity.
- In the case of a fiscal year of a constituent entity differing from the one of the ultimate parent entity (e.g., when local rules prescribe a specific year end), the determination of the covered taxes would be based on the method used in the consolidated financial statements of the ultimate parent entity to determine its net accounting result.
- In principle, the amount of foreign qualifying minimum top-up tax (QDMTT) reduces the top-up tax to be collected under the income inclusion rule (IIR) for a given low tax jurisdiction. However, the draft bill inserts the following nuance. The amount of foreign QDMTT does not include amounts in respect of the foreign QDMTT which, on the basis of arguments based on constitutional standards or other higher legal standards, or on the basis of a specific agreement entered into between the tax administration of the jurisdiction and the MNE group or the large-scale domestic group limiting the tax burden of the group’s constituent entities in this jurisdiction, are challenged by the MNE group or the large-scale domestic group as part of legal or administrative proceedings, or have been determined by the tax authorities of that jurisdiction as not payable or due. In those cases, the foreign QDMTT should not benefit from the QDMTT safe harbor either.
- Actuarial liabilities (disregarding management fees) related to excluded dividend or excluded equity gain or loss, which arise from investments made by an insurance company on behalf of its clients, would not be recognized as expenses in computing the insurance company's profit or loss. It should be noted that the concept of "management fees" would correspond to commissions, fees, and any other type of remuneration made by the insurance company in connection with the investments made on behalf of its clients.
- The draft legislation clarifies that equalization provisions accounted for by a reinsurance company would benefit from the exception to the five-year recapture mechanism for deferred tax liabilities.
- To avoid misinterpretation, the proposed wording of the equity investment inclusion election adheres to the wording contained in the OECD February 2023 administrative guidance and explicitly covers impairment. As a result, it would imply that current and deferred tax assets arising from net items recognized due to this election should be included when determining the covered taxes.
- The commentaries of the draft bill clarify that deferred tax assets deriving from transactions excluded from the computation of the GloBE income during the transition period that are included in the GloBE income or loss by application of the equity investment inclusion election would not be excluded when they have been reflected or disclosed in the financial accounts of the constituent entities in a jurisdiction for the transition year.
- In applying substance-based exclusion rules, an eligible tangible asset includes the right to use such asset. In cases where a tangible asset is the subject of an operational leasing contract, the carrying value of the tangible asset in the lessor’s books would typically be higher than the lessee’s right to use the asset. Therefore, there might be a residual value that could be taken into account by the lessor in its computation of substance-based income exclusion if that asset is located in the same jurisdiction as the lessor. In order to avoid double counting, the recognition of that tangible asset by the lessor would be made up of the amount of the difference between (i) the average of the carrying value at the level of the lessor and (ii) the average of the right to use the asset at the level of the lessee. If the lessor and the lessee belong to the same group and are located in the same jurisdiction, the lessee could not claim the right to use the asset in the carve-out. For the sake of clarity, the carrying value of an asset would be its acquisition cost less amortization and impairment, if any.
- If all the Luxembourg constituent entities of an MNE group or a large-scale domestic group determine their qualifying income or loss based on a financial accounting standard admissible in Luxembourg and use euros as their functional currency, the computations to determine the QDMTT would be required to be performed in euros.
- If all the Luxembourg constituent entities of an MNE group or a large-scale domestic group determine their qualifying income or loss based on a financial accounting standard admissible in Luxembourg and the functional currency of one or more constituent entities is a currency other than euro, an election would need to be made so that the computations to determine the QDMTT are either made using euro or the functional currency of the consolidated accounts of the ultimate parent entity. This election would be valid for a period of five years.
- If all the constituent entities of an MNE group or a large-scale domestic group determine their qualifying income or loss based on an eligible or authorized financial accounting standard that is not admissible in Luxembourg, the computations to determine the QDMTT would be required to be made using the functional currency of the consolidated accounts of the ultimate parent entity.
- A grand-ducal decree could clarify the above provisions on currencies to be used and the related conversion rules.
- For purposes of the computation of the ETR for the transition year and subsequent years, the opening balances of the deferred tax positions that have been reflected or disclosed in the financial accounts for the transition year would be required to be taken into account without the limitations of article 22 (5, letters a-d) and (7).
- Particular reference has also been made to deferred tax assets related to tax credits for which a simplified approach of recasting is foreseen through the application of the following standard formula:
- A tax return would be required to be filed for the IRR, undertaxed profits rule (UTPR), and QDMTT in accordance with a standard template in line with the GloBE information return template approved by the OECD/G20 Inclusive Framework on BEPS.
- It has been clarified that the deadlines for the filing obligations would not occur prior to 30 June 2026.
- Clarifications on qualifying financial statement requirements for CbC reporting when such financial statements are impacted by purchase price accounting.
- Confirmation that all the data used to assess safe harbor rules for one constituent entity would be required to come from the same qualified financial statements, with the exception of deferred taxes that might be imported from consolidated accounts.
- Confirmation that all the data used to assess safe harbor rules for all the constituent entities of one jurisdiction (with the exception of non-material entities or permanent establishments) would be required to come from qualified financial statements, being either the consolidated accounts of the ultimate parent entity or from all the separate accounts of each constituent entity.
- Except as otherwise stated in the Pillar Two law, no adjustments to the data extracted from the financial statements would be allowed.
- Payments made from one constituent entity to anther constituent entity that are booked as income and expenses in the financial statements of respectively the beneficiary and the payor, would be required to be taken into account in the turnover and the profit before tax of both entities, regardless of their respective local tax or CBC reporting treatments.
- If for any reason, an in-scope group for Pillar Two law purposes is not required to file a CbC report, the data to consider for the safe harbor rules would be the data that would be included in such report if the group was required to file a CbC report.
- In the absence of qualified separate financial statements for a permanent establishment, the portion of turnover and profit before tax that should be attributable to the permanent establishment would be determined based on the financial statement of the main entity. Similarly, the taxes to be levied by the jurisdiction of the permanent establishment would be determined based on the financial statement of the main entity.
- If controlled foreign companies (CFCs), foreign permanent establishments, or hybrid entities are located in jurisdictions where the CbC reporting safe harbor is not applicable, the taxes paid as per the CFC regulations would be attributed to the entity that makes the payment.
- Calculations for the CbC reporting safe harbor would be required to be conducted separately for joint ventures and joint venture groups, as if they were located in a distinct jurisdiction.
- Proposed inclusion of the December 2023 OECD administrative guidance related to the impact of an entity’s eligibility for the transitional CbC reporting safe harbor if it had entered into specific hybrid arbitrage arrangements entered into or amended after 18 December 2023 (as from the release of such OECD guidance).
The parliament will now review, potentially modify, and vote on the draft legislation. Since new administrative guidance was issued by the OECD on 17 June 2024, it is expected that further revisions may occur.