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Pillar Two draft law — Revised draft legislation released

24 November 2023

Luxembourg Tax Alert

At a glance


On 13 November 2023, the Luxembourg government submitted to the Luxembourg parliament proposed amendments to the draft law (“the draft”) published on 4 August 2023 for the implementation of EU Council Directive 2022/2523 of 14 December 2022 on ensuring a global minimum level of taxation (15%) for multinational enterprise (MNE) groups and large-scale domestic groups (“domestic groups” or “DGs”) within the EU (“Pillar Two directive” or “Pillar Two”). Those amendments transpose some of the administrative guidelines issued in February and July 2023 by the OECD that had not yet been included in the initial draft.


A closer look


The primary objective of the proposed amendments is to integrate key clarifications and technical points outlined by the OECD in its administrative guidelines of February and July 2023, notably pertaining to the computation of the qualified domestic minimum top-up tax (QDMTT) and the safe harbor provisions. 

This article summarizes the draft’s most important amendments.

Luxembourg QDMTT rules


The administrative guidance issued by the OECD in July 2023 has an important focus on QDMTT. A number of amendments to the draft are derived from that guidance.

Article 44 of the draft addresses the financial accounting standard to be applied for calculating the QDMTT. A new paragraph (paragraph 6) is added and specifies that, for the purpose of computing the Luxembourg QDMTT, the net qualifying income or loss should be computed based on an acceptable financial accounting standard applicable in Luxembourg (i.e., Luxembourg GAAP or IFRS), provided that:

  • The financial statements of all the constituent entities of the MNE group or DG located in Luxembourg are prepared on the basis of such standard for legal filing and publication purposes in Luxembourg; and
  • These financial statements are based on the same fiscal year as the consolidated financial statements of the MNE group or DG.

If the above conditions are not met, the Luxembourg QDMTT should be computed based on the accounting standard used for the ultimate parent entity’s (UPE’s) consolidated financial statements or another standard according to article 15.

If the constituent entities of the MNE group or DG situated in Luxembourg utilize multiple Luxembourg acceptable financial accounting standards, the computation of Luxembourg QDMTT should be based on IFRS.

An additional paragraph is added to article 44 (paragraph 7), aiming to exempt investment entities and insurance investment entities (as defined in the draft) from the application of the QDMTT rules.

Safe harbor provisions


The new draft clarifies the scope of application of the QDMTT safe harbor in line with the OECD guidance of July 2023 and covers two new safe harbor provisions.

Article 14 is supplemented by a new paragraph (paragraph 3), which intends to introduce the safe harbor developed by the OECD inclusive framework in its July 2023 administrative guidance on QDMTT. This new paragraph specifies that the QDMTT of a certain jurisdiction, in order to be eligible for the QDMTT safe harbor, must be considered as being in compliance with the OECD standards in that respect (i.e., fulfilling the conditions to be eligible for the QDMTT safe harbor as part of a peer review procedure at the level of the OECD inclusive framework). These conditions include compliance with the QDMTT accounting standard, the consistency standard, and the administration standard as detailed in the July OECD guidance. According to this new rule, a QDMTT could qualify for the QDMTT safe harbor even when it is not computed based on the UPE’s acceptable financial accounting standards but based on local financial accounting standards.

As a result of the QDMTT safe harbor, the Luxembourg constituent entities no longer would have to compute the top-up tax under article 27 in respect of the constituent entities belonging to the same group and that are located in the jurisdiction for which the benefit of this protection regime is invoked, turning off the income inclusion rule (IIR) and the undertaxed profit rule (UTPR).

This new provision would be subject to annual election by the relevant Luxembourg filing entity and could only apply on a jurisdictional basis. The new provision would not apply to entities (i) whose effective tax rate is calculated separately or (ii) that are subject to legal or regulatory restrictions for the application of that jurisdiction's QDMTT.

Article 32 paragraph 1, initially covering the transitional country-by-country safe harbor, which is now moved to a new article 59, is replaced with a completely new optional provision referred to as the permanent safe harbor (PSH). The PSH would allow the exclusion of an MNE group or DG’s operations in “lower-risk” countries from the preparation of a full Pillar Two calculation. It would be based on a simplified calculation method that still needs to be developed by the OECD’s inclusive framework and provides for a three-test approach (i.e., current profit test, de minimis test, and effective tax rate test) to determine whether a jurisdiction qualifies for an exclusion from the top-up tax computation.

Article 32 paragraph 2 also foresees a separate optional PSH, applicable on an entity-by-entity basis, in relation to constituent entities that are not included in the consolidated financial statements of the group solely because of their small size or relative importance.

An optional and temporary UTPR safe harbor is introduced in new article 58. According to this safe harbor, relief from the UTPR top-up tax could be provided in relation to low-tax constituent entities located in the UPE jurisdiction, provided the nominal statutory corporate income tax rate of this jurisdiction is at least 20%. The UTPR safe harbor would apply for fiscal years beginning before 1 January 2026 and ending before 31 December 2026.

Other elections


A number of new elections are introduced in the draft, all of which are based on the February 2023 OECD administrative guidance.

A new paragraph added to article 16 (paragraph 15) provides for an election to include certain equity gains or losses in the calculation of the net qualifying income or loss of a constituent entity. The equity gains and losses covered by this option must fall within the scenarios provided by the draft. The option is intended to align, to some extent, the Pillar Two rules with the treatment of constituent entities' participation under the local tax rules applicable in the jurisdiction where those constituent entities are located. This election is jurisdictional, meaning that it would apply to all participations held by the constituent entities in a jurisdiction. The election would apply for a minimum period of five years, unless revoked.

Another election is introduced in new paragraph 16 of article 16, allowing a constituent entity, under certain conditions, to treat foreign exchange gains or losses on hedging financial instruments as excluded equity gains or losses. This election intends to align the treatment of a net investment hedge with the treatment of the equity investment it is hedging. This election would apply for a minimum period of five years, unless revoked.

According to new paragraph 17 of article 16, an additional election is introduced to allow a constituent entity to include all dividends and distributions received or to be received related to portfolio securities in its computation of qualifying income or loss. The option, if exercised, would allow a constituent entity to no longer distinguish between portfolio securities held for more or less than a year on the date of distribution.

Article 21 paragraph 5 is supplemented to provide for a new election allowing constituent entities to consider as an excess negative tax expense the amount of the additional top-up tax determined in case of excessive loss position. This amount would not be considered in the amount of adjusted covered taxes in the fiscal year in which it is computed but would be carried forward to subsequent tax years. This mechanism would ensure that the amount carried forward could be used in the subsequent fiscal years to offset the amount of adjusted covered taxes. The option would have to be exercised for the fiscal year in which the event occurs, and its effects would be extended over subsequent fiscal years.

In addition, new paragraph 6 of article 21 would render the application of the excess negative tax expense compulsory in the situation where a constituent entity has recorded in a tax year a negative adjusted covered tax while having a positive qualifying income. That factual situation entails the determination of a percentage of the additional top-up tax for the jurisdiction in question that would be higher than the minimum tax rate. Contrary to paragraph 5, this would apply automatically without the exercise of an option.

Other additions and clarifications


Finally, a number of welcomed additions and clarifications are introduced in the draft based on the February or July 2023 OECD administrative guidance. These include, but are not limited to, the following topics.

Article 16 paragraph 5, is revised to include provisions allowing a Grand-Ducal regulation to outline the criteria governing the treatment of marketable and transferable tax credits as income when calculating the net qualifying income or loss. Additionally, a new paragraph 7 is introduced in article 21 to mirror these adjustments, specifically in relation to adjusted covered taxes. While these types of tax credits do not currently exist in Luxembourg, this provision could be relevant for Luxembourg entities holding foreign entities with such credits.

Article 22 paragraph 2 initially outlined the computation of the total deferred tax adjustment amount for a constituent entity based on its individual financial statements. This paragraph is now amended to include an alternative provision, allowing for the computation to be based on the deferred tax amount recorded in the consolidated financial statements prepared by the UPE and attributable to the specific constituent entity.

A new paragraph (paragraph 13 in article 16) is included to ensure the consistent classification of a financial instrument between the issuer and the holder. According to this new paragraph, a financial instrument issued by one constituent entity and held by another constituent entity in the same MNE group or DG would have to be classified as debt or equity consistently by both the issuer and the holder and accounted for accordingly in the computation of their qualifying income or loss. In case of inconsistent classification, the one adopted by the issuer would be applied also by the holder for Pillar Two purposes.

A new paragraph in article 16 (paragraph 14) is introduced to clarify the adjustment of an entity’s qualifying income or loss in respect of pension income or expense payable. The new paragraph takes into account the situation in which a pension fund is in a surplus situation. To this end, the new paragraph introduces a formula for determining the amount of pension income or expenses to be paid.

The new paragraphs added in article 28 aim to clarify that the substance-based carveout does not necessarily have to apply to the entire amount of eligible personnel costs or tangible assets but could be computed also based on part of them.

Furthermore, an additional clarification is provided in relation to the treatment of the net value of eligible tangible assets and the amount of eligible payroll costs that were not located during the entire period in the jurisdiction where the constituent entity is located. When eligible employees carry out more than 50% of their activities in the jurisdiction or when the eligible tangible assets are located during more than 50% of the relevant period in the jurisdiction, the full amount of both values would be considered for the carveout. On the contrary, when this percentage is equal to or lower than 50%, the amount to be considered would be proportional to the time in which the employees and the eligible tangible assets were present in the jurisdiction.

An anti-abuse rule is added to article 48 (elections) targeting the application of the safe harbors. In this respect, the QDMTT, transitional, and permanent safe harbors would not be applicable for a jurisdiction where specific facts and circumstances are likely to have materially affected the eligibility of the constituent entities for the safe harbors in the jurisdiction for which their benefits are requested, and where, without the application of the safe harbor, a top-up tax would have been allocated to a constituent entity of the same group located in Luxembourg. The application of the anti-abuse rule is subject to two additional conditions: (i) the entities that could fall within the scope of the anti-abuse rule should be notified, within 36 months after the filing of the Pillar Two (or GloBE) information return, of specific facts and circumstances that are likely to have significantly affected the safe harbor eligibility of the constituent entities of the same group located in the jurisdiction for which the benefit of the protection is sought, and (ii) if the notified entities are not able to show, within six months from the notification, that the facts and circumstances invoked did not significantly affect the application of the safe harbors.

Article 53 is revised to clarify that, in instances where entities avail themselves of a transitional country-by-country reporting safe harbor, the transition year for the entities would be the first year in which they no longer benefit from the transitional safe harbor.

An additional transitional provision is added in new article 57, clarifying the operation of the rule in article 24(3) in the context of a combined CFC regime for a limited period of time. For the purpose of the article, a combined CFC regime is defined as a regime that (i) aggregates all income, losses, and taxes of all CFCs for the purpose of determining their shareholder's tax liability, and (ii) applies a rate of less than 15%.

New article 57, based on the February 2023 OECD guidance, provides a formula for allocating those relevant taxes recorded in the financial statements of the owning entity to the constituent entities for tax years beginning before 1 January 2026 and ending before 1 July 2027.



While the amendments to the draft are welcome, there still remain some uncertainties regarding specific items that would require further clarification before the law is adopted. Nonetheless, it is crucial for any group within the scope of Pillar Two to gain a comprehensive understanding of the current draft rules and proposed amendments, and how these may potentially affect them.

Should you have any questions or need assistance in this respect, you may contact our tax professionals.

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