The amended Pillar Two Law incorporates clarifications and technical provisions

At a glance

On 19 December 2024 the Luxembourg Chamber of Deputies voted for an updated law amending the Law of 22 December 2023, designed to implement the EU Council Directive 2022/2523 (“the amended Pillar Two Law”). This Directive establishes a jurisdictional minimum tax rate of 15% for multinational enterprise (MNE) groups and large domestic groups. Initially introduced on 12 June 2024 and revised on 31 October 2024, the amended Pillar Two Law incorporates clarifications and  technical provisions primarily based on OECD administrative guidance issued in December 2023 and June 2024.

A closer look
 

The amended Pillar Two Law incorporates several clarifications and revisions initially proposed on 12 June 2024. The key amendments outlined below are further detailed in our Pillar Two Alert dated 26 June 2024:

• Broadening the scope of excluded entities.
• Introduction of a definition for “turnover.”
• Guidance in case of accounting period discrepancies between the ultimate parent entity and one or more constituent entities within the group.
• Introduction of a limitation for the computation of the top-up tax as per Article 27 of the Law for a given low-tax jurisdiction.
• Clarification that certain expenses incurred by insurance companies are excluded for Pillar two purposes.
• Rewording of the equity investment inclusion election.
• Inclusion of certain tangible leased assets for purposes of the substance-based exclusion rules.
• Clarification for insurance investment entities that elect to be treated as a transparent entities.
• Clarifications with respect to the currency to be used for the computation of the Qualified Domestic Minimum Top-Up Tax (“QDMTT”).
• Guidance on the determination of the effective tax rate (ETR) computation.
• Minor clarifications of filing obligations.
• Various amendments to the transitional country-by-country (CbC) reporting safe harbor rules.

The following changes and clarifications, particularly concerning issues related to securitization vehicles and flow-through entities, were introduced on 31 October 2024:

• Clarification for the treatment of fiscally transparent and reverse hybrid entities:

- The classification of an intermediate transparent entity as either a fiscally transparent entity or a reverse hybrid entity must be determined based on the local tax rules of the jurisdiction where the reference entity is located. The reference entity is the one that owns securities of a constituent entity closest in the ownership chain to the intermediate transparent entity, and i) is not an intermediate transparent entity, or ii) if no entity as described in point i) exists, is an intermediate transparent entity that is an ultimate parent entity.

- The financial accounting net income or loss (FANIL) of a constituent entity that is a transparent intermediate entity (unless such entity is the ultimate parent entity or owned directly/indirectly through flow-through entities held by an ultimate parent entity) is reduced to the extent of the amount attributable to its owners who are not part of the same MNE group and hold their interests in this transparent intermediate entity directly or through a chain of fiscally transparent entities.

• Guidance on the allocation of the amount of covered taxes recorded in the financial statements of a fiscally transparent entity to its owners in different circumstances.
• Guidance on the allocation of the amount of covered taxes recorded in the financial statements of the direct or indirect owners of a reverse hybrid to that reverse hybrid entity.
• Clarification of the definition and guidance for the treatment of securitization vehicles. 

- A securitization vehicle in the sense of the Pillar Two Law needs to (i) only carry out securitization activities, (ii) extend guarantees or securities relating to the assets covered by the securitization transactions, (iii) make annual (or more frequent) distributions to its creditors (except for a contractual or reasonable amount cash to be retained).

- Securitization vehicles cannot be designated as a parent entity for QDMTT.

- Any top-up tax related to a Luxembourg securitization vehicle (included into the Pillar Two perimeter) is allocated to one or more other constituent entities (that are not a securitization vehicle) in Luxembourg for QDMTT purposes. If a MNE group has no other Luxembourg constituent entity than a securitization vehicle, QDMTT is imposed to the securitization vehicle itself.

Additionally, the amended text of the Pillar Two Law allows for a Grand Ducal Regulation to clarify items in the June 2024 OECD administrative guidance, including: (i) recapture of deferred tax liabilities, (ii) rules for deferred tax adjustments where the carrying value of assets or liabilities differs from the value prescribed for Pillar Two purposes, (iii) conditions under which foreign tax credits for the inclusion of foreign-source income may be treated as qualifying foreign tax credits for determining the total amount of the deferred tax adjustment, and (iv) allocation of cross-border current taxes and deferred taxes.

Next steps and implications
 

The final legislative steps (such as the publication in Luxembourg’s Official Gazette are expected by the end of the year). The Pillar Two Law is expected to come into effect upon its publication in Luxembourg's Official Gazette (Memorial) and will apply to fiscal years starting on or after 31 December 2023. Should the OECD issue new administrative guidance in the future, additional revisions may be made in 2025.