As published on: mondaq.com, Thursday 10 August, 2023.
On 4 August 2023, Luxembourg published a bill of law (the Luxembourg Bill) to transpose the EU directive implementing the minimum taxation (Pillar Two) (the Directive) into domestic law as per 31 December 2023.
Some guidelines and solutions released by the OECD after the adoption of the directive in December 2022 were taken into account, notably transitional safe harbours based on country-by-country reporting data. The bill also confirms that OECD guidance in connection with the OECD Model Rules is relevant.
The OECD's Pillar Two project aims to ensure that Multinational Enterprises (MNE) groups meeting the EUR 750 million consolidated revenue threshold are always subject to a minimum corporate taxation of 15%. Much progress has been made in the past 18 months:
On 20 December 2021, the OECD released its model rules for the income inclusion rule (IIR) and undertaxed profits rule (UTPR), also referred to together as the GloBE Rules (for more information, see ourTax Flash).
On 15 December 2022, the EU member states formally approved the EU directive setting out a harmonised implementation of the Pillar Two model rules in the EU (for more information, check our?Tax Flash?).
On 20 December 2022, the OECD released amongst others its "Guidance on Safe Harbours and Penalty Relief", which includes a transitional "CbCR Safe Harbour" for the initial three years (in most cases). Read our?Tax Flashfor more details.
On 1 February 2023, the OECD approved its first Administrative Guidance for the Pillar Two model rules.
On 17 July 2023, the OECD released additional reports regarding the Subject-to-Tax Rule (STTR) (see ourTax Flash), further Administrative Guidance (see ourTax Flash), and additional details concerning the GloBE Information Return (GIR) (see ourTax Flash).
Any term not defined here shall have the same meaning as defined by the EU Directive.
The Bill essentially reflects the Directive with a few additional elements. Below we set out some key considerations in respect of this Luxembourg bill.
The Bill implements the GloBE Rules into an autonomous law (i.e., separate from the regular income tax law), introduces a Qualified Domestic Minimum Tax (QDMTT) and transitional safe harbours based on country-by-country reporting data.
The commentary to the Bill confirms that Luxembourg corporate income tax, municipal business tax and net wealth tax are covered taxes for Pillar Two purposes.
The Bill confirms, for the avoidance of any doubt, that the IIR, UTPR and QDMTT are neither creditable against Luxembourg corporate and municipal taxes nor deductible from the Luxembourg corporate and municipal tax base.
Some open items
Where the OECD additional guidance goes beyond merely interpreting the model rules and actually complements the rules, the Bill of law has not yet integrated such elements. For example, the OECD has proposed an optional "Equity gain or loss inclusion election" to reduce mismatches between domestic participation exemption regimes and the GloBE participation exemption rules. The Bill does not reflect this approach.
The Bill does not deal with the implementation of the STTR, for which the OECD is preparing a model convention which would, in due course, be ratified by Luxembourg in a separate law.
Clarifications in the OECD's Administrative Guidance on the notion of deemed consolidation (in the definition of consolidated financial statements) are not explicitly taken over. It remains to be seen if this element of the Administrative Guidance is relevant when interpreting Luxembourg law.
Additional OECD guidance related to the interaction of the GloBE Rules with GILTI does not seem to be included.
The Bill does not reflect OECD guidance mitigating double taxation that may arise in case article 9.1.3 of the model rules applies (transfers of assets deemed for GloBE purposes to be performed at carrying value during the period from 1 December 2021 up to the beginning of the transition year). The OECD has proposed that, in case there is exit tax in the jurisdiction of the transferor, such exit tax gives rise to a deferred tax asset in the hands of the transferee. The Bill (including the commentary) does not reflect this possibility, which should preferably be included in the text of the law (rather than the commentary) for legal certainty.
The Bill at present also does not include certain clarifications concerning the application of the rule on intragroup financing arrangements (which requires disregarding deductions of interests under such arrangements in certain circumstances).
Introduction of a QDMTT
The QDMTT computation is aligned with GloBE Top-up Tax computations. It must be calculated on the basis of the GloBE tax base and the covered taxes for GloBE purposes of the Luxembourg constituent entities of an in-scope group. The relevant starting point is the financial statements of the Luxembourg constituent entities prepared in accordance with the Ultimate Parent Entity's qualifying financial accounting standard or IFRS.
The QDMTT is due to enter into force at the same time as IIR, i.e., as from 31 December 2023, whereas UTPR applies as from 31 December 2024.
GloBE and QDMTT compliance
Each Luxembourg constituent entity of an MNE or large-scale domestic group subject to Pillar Two rules must register with the Luxembourg Direct Tax Authorities no later than 15 months after the last day of the relevant fiscal year (or 18 months after the end of the transition year, i.e., the first year in which the group becomes subject to the GloBE Rules in Luxembourg). The form and procedures for registration, notification of changes and deregistration will be determined in a grand-ducal regulation (which itself is due to refer to procedures to be set by the Direct Tax Authorities).
The Information return must be filed by each Luxembourg constituent entity. A Luxembourg entity may be appointed to file such return with the Luxembourg Direct Tax Authorities on behalf of the other Luxembourg constituent entities of the same MNE or large-scale Luxembourg group.
The Luxembourg constituent entities may be exempt from such obligation if the UPE (or a designated entity) of an MNE Group located in another jurisdiction has filed the Information Top-up tax return in another jurisdiction with which Luxembourg has entered into an eligible agreement. In such case, the Luxembourg constituent entities shall notify the Luxembourg Direct Tax Authorities about the identity and location of the filing entity.
The Information return should be prepared in accordance with a standard template. Failure to comply with it may lead to fines of up to EUR 250,000.
A ten-year statute of limitation applies in respect to the obligations related to the Information return.
IIR, UTPR and QDMTT return and payment
In addition to the Information return, a tax return for IIR, UTPR and/or QDMTT should be filed in Luxembourg where such tax is to be paid.
Top-up Tax due is payable by Luxembourg parent entities. Each Luxembourg constituent entity of the same MNE or large-scale Luxembourg Group is jointly and severally liable for the Top-up Tax due by the parent entity, as well as for late payment interest, costs and penalties.
A top-tier Luxembourg constituent entity (entité constitutive faîtière) may be designated by the Ultimate Parent Entity or by all Luxembourg constituent entities of an MNE or large-scale Group to declare and pay the UTPR and QDMTT related to the Luxembourg entities of the group. In the absence of such designation, each Luxembourg constituent entity should be responsible for the payment and declaration. Each Luxembourg constituent entity of the same MNE or large-scale Luxembourg group are jointly liable for the UTPR and QDMTT due by the Luxembourg constituent entities, as well as for late payment interest, costs and penalties.
The IIR, UTPR and QDMTT return(s) shall be filed annually, no later than 15 months after the last day of the relevant fiscal year. Payments are due one month after filing.
In the absence of a declaration, amounts due will be determined by the Luxembourg tax Authorities.
A detailed review of the Bill is necessary to determine which elements of the guidance need to be implemented in the law to ensure appropriate legal certainty. Both members of parliament and the Luxembourg government could propose amendments to the Bill. In addition, the legislative process entails opinions from professional bodies (such as the Chamber of Commerce) and the Council of State.
The parliamentary examination of the Bill will be interrupted for a few weeks due to elections in October 2023, but the intention is to have the Bill adopted prior to year-end.